@ 0reg 3r|lr 2010

Disclaimer: Tre raler|a| ard op|r|ors |r lr|s paper are lrose ol lre aulror ard rol lrose ol lre Taxal|or lrsl|lule ol Auslra||a. Tre Taxal|or
lrsl|lule ol Auslra||a d|d rol rev|eW lre corlerls ol lr|s paper ard does rol rave ary v|eW as lo |ls accuracy. Tre raler|a| ard op|r|ors |r lre paper
srou|d rol oe used or lrealed as proless|ora| adv|ce ard readers srou|d re|y or lre|r oWr erqu|r|es |r ra||rg ary dec|s|ors corcerr|rg lre|r oWr
|rleresls.
QLD Division
4 June 2010
Peppers Salt Resort & Spa,
Kingscliff


QUEENSLAND STATE
CONVENTION
Tax Reform:
After the Henry Review

Written & presented by:
Greg Smith
Panel for the Future Tax System Review (2008-09 chaired by
Ken Henry




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CONTENTS
1 Introduction .................................................................................................................................... 3
2 Key directions in the future tax system review ............................................................................. 3
2.1 The analytical approach ............................................................................................................. 3
2.2 Four efficient tax bases .............................................................................................................. 4
2.3 Consumption taxes .................................................................................................................... 5
2.4 Business taxation ....................................................................................................................... 5
2.5 Land and resource taxes ............................................................................................................ 6
2.6 Personal income and savings .................................................................................................... 7
2.7 The intergenerational challenge savings and retirement .......................................................... 7
2.8 The transfer system and other issues ......................................................................................... 8
3 Initial responses ............................................................................................................................. 8
3.1 Government responses before report release ............................................................................ 8
3.2 Government responses on and after release .............................................................................. 9
4 Future priorities, prospects and pathways .................................................................................. 11
4.1 Predicting the unpredictable ..................................................................................................... 11
4.2 Will initial responses alter long term changes? ......................................................................... 11
4.3 Overcoming future reform constraints ...................................................................................... 12
4.4 State reform ............................................................................................................................. 13
5 Consequences and opportunities for taxpayers and tax practice .............................................. 13
5.1 Can taxpayer experience fundamentally change? .................................................................... 13
5.2 Changing tax administration ..................................................................................................... 14
6 Concluding comments ................................................................................................................. 16
7 References .................................................................................................................................... 16
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1 INTRODUCTION
Australia has undertaken substantial tax reform over the past 25 years, but there has been continuing
interest in further reform. In 2008 the Government commissioned a new review of tax reform opportunities
for the 21
st
century.
The Review of Australias Future Tax System (hereafter the Review) was announced by the
Commonwealth Treasurer in the May 2008 Budget speech and its Report was delivered to Government in
December 2009. The Report was commissioned from a five member panel chaired by the Secretary of
the Treasury, Dr Ken Henry AC, and so is known generally as the Henry Review
1
.
The Review was comprehensive in most respects, covering taxation at all levels of government in
Australia and including consideration of the transfer payment system for working-age individuals, families
and retirees. However there were three main restrictions included in the terms of reference requiring the
Review to reflect the Governments policy not to increase the rate or broaden the base of the GST;
preserve tax free superannuation payments for the over 60s; and the announced aspirational personal
income tax goals.
The Government released the Report to the public on 2 May 2010, at the same time announcing an initial
response to the Review. Further measures were announced in the Budget on 11 May 2010.
This paper has been prepared by one member of the Henry Review panel, and sets out a broad survey
and assessment of the Report and responses to it. The views expressed in the paper are those of the
author alone.
2 KEY DIRECTIONS IN THE FUTURE TAX SYSTEM REVIEW
2.1 The analytical approach
Tax systems and options can be assessed using various analytical approaches, including in particular:
Axiomatic assessment: analysing performance by reference to the tax axioms, principally economic
efficiency (allocative, technical and dynamic), equity (vertical and horizontal), simplicity, certainty,
transparency and revenue adequacy and robustness.
Sometimes this analysis is done in purely theoretical terms while at other times it is possible to
apply empirical studies of the economic incidence and effects of taxes.
Comparative assessment: by comparing arrangements with international benchmarks; or/and
Strategic assessment: focusing on the implications of various drivers of change such as
demographic, technological, ecological and economic forces and trends.
It is arguable that past official tax reviews have relied heavily on theoretical discussion of the tax axioms,
particularly those relating to economic efficiency. These have tended to produce a strong emphasis on
promoting tax neutrality through broadening the tax bases and reducing tax rates.
The Henry Review differs to some degree from these past approaches in its greater emphasis on other
points of reference. In particular, it has paid greater attention to strategic factors, and in doing so has
drawn also upon empirical evidence that has emerged in recent years. This has partly shifted thinking
away from the earlier strong commitment to comprehensive tax bases, particularly income taxes. There is
a greater willingness to adapt tax design to reflect practical issues and to respond to varying conditions.

1
The Panel comprised Ken Henry (chair), Jeff Harmer, John Piggott, Heather Ridout and Greg Smith.
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It is important for effective strategic analysis to move beyond generalities to more specific understandings
of the forces involved. For example, longstanding concerns about ageing have been used to support
increased retirement incomes and superannuation savings, but these do not adequately comprehend the
more specific problems in the 21
st
century arising from the rapid ageing of the aged cohort itself. The
prescriptions of the 1980s, focused largely on improving post-retirement living standards, do not in
themselves address the faster growing problems of longevity, aged care and age-related disability.
Examples of the implications of the strategic approach are provided in Table 1.
Table 1: Some Implications of 21
st
century strategic drivers
0r|vers 21
st
century features |||ustrat|ve Heasures
Ecoror|c l|grer laclor roo|||ly parl|cu|ar|y ol l|rr
spec|l|c rerls ard cap|la|
l|grer lax or |ocal|or-spec|l|c rerls, |ess lax
or roo||e ous|ress cap|la|
0erograpr|c Nol jusl age|rg, |ale age|rg/surv|v|rg Furd|rg |orgev|ly ard r|gr care cosls
Tecrro|og|es 0|g|l|sed ous|ress |rlorral|or Pre-l|||ed relurrs, casr l|oW lax relrods
ralrer lrar paper/|rvo|ce syslers
3oc|a| Va|rla|r|rg |org-eslao||sred la|rress
oulcores
Vore r|gorous largel|rg ol |rcore ard lar||y
supporl ard address|rg r|gr|y adverse lrerds
|r rous|rg allordao|||ly, uroar lrarsporl cosls

2.2 Four efficient tax bases
On the basis of its assessment, the Review found that much of the existing architecture of the tax and
transfer system was working well, but it nonetheless produced a wide ranging report providing many
recommendations for improvements.
A foundational proposal was that Australia should concentrate its future tax system on four efficient tax
bases. Unless they serve particular purposes beyond revenue raising, all other taxes should be
abolished.
One key goal of this proposal is to maximise simplification at a systemic level. The four proposed major
bases are:
Comprehensive personal income
Comprehensive business income (at least in the short to medium term)
Broad private consumption
Location-based economic rents on both land and natural resources
The Review makes recommendations for a range of reforms to each of these major taxes, in part to
simplify, in part to make fairer, but mainly to further promote faster economic growth. Change in the
relative weighting of the four bases is also directed towards the promotion of faster economic growth. The
imperative for faster growth is driven by an expected need to increase tax revenues without necessarily
raising tax rates. This in turn is driven mainly by the increasing dependency ratio emerging from
demographic trends. There are likely to be a range of other heavy pressures for increased government
actions over the years ahead as well, although fortunately the Australian government has so far avoided
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the massive assumption of private sector risk and debts that other countries have experienced in recent
times.
The Review effectively suggests that in the longer term these four bases could be reduced to three in
that the business income base could be transformed also into an economic rent base broadly similar to
the rent tax base proposed to replace natural resource royalties.
The narrowly-based and inefficient taxes that would be abolished would mainly be state taxes such as
those on insurance, asset transfers and the existing narrow payroll tax. A range of other taxes were also
slated for abolition including the luxury car tax, the superannuation contributions tax and fuel and
registration taxes (if replaced by road user charges).
2.3 Consumption taxes
The Review anticipates competitive pressures on each of the first two bases personal and business
income. Labour and capital are increasingly internationally mobile factors of production. The Review
advocates a considerable rate cut for company taxes and overall reductions in the personal tax burden.
These relative reductions in the role of labour and capital income taxes are broadly offset by increases in
the role of rent taxes with these concentrated on the immobile factors of production of land and natural
resources. However, it is not anticipated that these taxes can deliver major revenues sufficient to fund the
abolition of most of the various inefficient, narrowly based taxes now levied by the States.
This basic line of thinking carries a clear consequence. The full delivery of tax reform at some time in the
future likely will require an effective increase in broad based consumption taxes, in order that these can
replace inefficient narrowly based taxes. The Review was precluded by its terms of reference from
actually proposing an increase in the GST. Instead it explored cash flow taxes which can essentially
cover the same base as the GST (or indeed, a broader and more efficient one if the various
idiosyncrasies of the GST base are avoided).
Clearly this is a longer term proposal. It could be delivered by increasing the role of the GST, by
replacing the GST with a cash flow tax alternative, or by a combination of both. Administrative simplicity
would favour the second. The cash flow options avoid the invoice based accounting methods developed
in the mid 20
th
century for the traditional value-added tax model. Electronic cash flow accounting systems
may be more practicable and deliver necessary compliance in the digitised information age of the 21
st

century.
Indeed, such a system could be administratively and operationally integrated with the tax on business
income (or a business expenditure tax) as well. Each of these taxes could use many common concepts
and measures, with:
The business income or expenditure tax imposed on an entity basis with deductions for labour costs
and appropriate treatment of capital costs;
The consumption (value added) tax base achieved by applying a destination basis (including imports
and excluding exports), net cash flow treatment of capital spending and bringing labour costs back
into the base.
2.4 Business taxation
The Review considered that the income base should be retained for business taxation in the short and
medium term. This carries a consequence that the dividend imputation system could continue to deliver
value in the Australian tax system, notwithstanding the various biases, complexities and anomalies that
have developed for that system. One reason the system persists in Australia is that superannuation
funds obtain imputation credits a reason that also means that superannuation funds themselves
continue to be taxed on earnings. The abolition of both remains an obvious option for the longer term.
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In the longer term, particularly if international l trends support it, the business base may shift to a cash
flow expenditure tax model. This could be delivered by introducing an annual allowance for equity or
capital (the latter associated with removing the interest deduction). Dividend imputation, which is an
income tax concept, would not readily be integrated with that approach and would likely be replaced by
low rate taxes on dividends as it already has been in almost all other countries. The Review anticipated
that possibility in its design of a new lower rate savings tax system for individuals.
On the business income base, the Review proposed a 25% company tax rate which reflects the low end
of the range currently for other small-medium OECD countries. This is driven mainly by evidence that
lower company taxes will increase economic growth, in particular making Australia a more attractive
location for mobile firm specific rents (which often correspond to corporate creativity and dynamism). The
Review made limited recommendations concerning the business income base the main direction of
change was to provide a better treatment of risk, investment and foreign source borrowed funds. Again,
these are measured, pro-growth strategies. Its main recommendations were:
One year carry back of losses
Simplified capital allowance (and low value write-off) particularly for small business with the definition
of small business increased to a turnover of up to $5million.
A refundable tax offset for resource exploration expenditure
Simplified rewrite of capital gains tax and removal of the grandfathered exemption
Removal of IWT for financial institutions and for others through treaties.
2.5 Land and resource taxes
The Review accepted evidence that immobile factors of production should bear higher tax than income
accruing to mobile factors. Land taxes deliver this outcome as they are levied in addition to the taxation of
income derived from land. Similarly, natural resources can and should bear a higher rate of tax than
mobile investments (an additional factor being that the community owns the resources being extracted
and so should participate in profits from exploitation).
Until the late 1980s, the effective tax rate on natural resource industries in Australia was well over 50
percent with company tax rates of 46-49 percent, the further taxation of dividends before imputation,
and royalties. Combined effective rates often ranged between 55 to over 70 percent. Australias natural
resource industries shared in the tax cuts wrought by dividend imputation and substantial company rate
reductions over the past 20 years, even though the case for reductions for these sectors was weak or
non-existent once the distinction between mobile and immobile factors is considered.
The Review proposed a scheme whereby the effective tax rate on resource industries would range from
25 to 55 percent, depending on the rate of profitability. Royalties would be abolished or refunded.
Resource companies would enjoy the same reduction in company tax rates to 25% as other companies.
A rent tax set at 40 percent would claw back revenues although in effect net revenue gains (taking
account of the capital allowance set at the bond rate and the effective abolition of royalties) would arise
only where the rate of return on employed capital exceeded about 10-11 percent
2
.
The restoration of much, though not all, of the earlier tax/royalty revenue yield from the resources sector
is controversial, but was announced (with some variations from the Review recommendations) in the
Governments interim response on 2 May 2010. The case for the restoration of resource industry tax
revenues is strong if the rents being taxed are immobile and if economically rational investment behaviour
can be assumed to apply in the resource sector. Of course, non-economic or strategic behaviour may be
observed in coming months as the future of this measure will now depend on the 2010 election.

2
This is an approximation with the actual threshold varying with different circumstances in individual cases
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The Review proposed that a new approach to land taxation should be adopted in Australia. Existing
arrangements are inefficient as tax imposed depends on land use, and rates of tax often vary according
to the aggregate value of landholdings (penalising institutional investment, for example, in rental housing).
Similarly, taxes on land transfers are inefficient as they impede the optimal holding of land.
The model for land tax developed by the Review is one that would apply irrespective of land use but
where the rate of tax would be set by reference to the per square meter value of land. Low unit value land
such as most rural land would remain untaxed as its value per square meter would be below a threshold.
This model removes the tax distortions in land use decisions, but provides a sound basis for land tax to
make an appropriate contribution to the tax task. Although a long transition may be required, it would
facilitate the eventual abolition of stamp duties on land transfers. However, the political difficulty of taxing
owner-occupied housing is likely one of a number of political impediments to this reform, so it is probably
only possible if coupled with a wider package delivering some offsetting benefits.
2.6 Personal income and savings
Personal income taxes are the principal means for achieving income redistribution (progressivity)
through the tax system. The Review does not propose any major change in the overall progressivity of
the personal income tax. However, it recommends changes that would make the system much simpler
and more transparent, and which would produce a far more neutral treatment of different forms of
personal savings.
The Review envisages a personal tax with a simple high threshold indicatively around $25,000, and then
two rates of tax around 35 and 45 percent. Payments to households through the transfer system would all
be tax free (with simplified means tests doing the work of targeting these payments). These features
would replace the current complex array of rates, levies and tax offsets, and complex mixture of taxable
and non-taxable transfer payments.
Taxable income would include the major fringe benefits and employer superannuation contributions, so
that these too would become part of the progressive system. Fringe benefits would be simplified with a
single statutory formula for cars instead of the current multiple rates based on odometer readings. A flat-
rate offset would provide the same tax advantages to all superannuation contributions within the annual
cap there would no longer be multiple classes of contribution, or the need to arrange salary sacrifice
schemes to benefit from voluntary personal contributions.
The biggest reform proposal relates to personal savings, with interest income, interest deductions, and
capital gains all subject to the same discount (40 percent). This arrangement would create a more even
tax effect on savings through investment in shares, interest bearing assets and real estate. The impact on
negative gearing led the review to suggest that this reform should not be pursued before substantial
reforms in housing supply policies are pursued.
2.7 The intergenerational challenge savings and retirement
The Review found that the existing superannuation arrangements were not simple, nor fair, nor well
targeted. It therefore proposed reforms that would create a single class of tax assisted contributions, a
flat rate of assistance rather than the current regressive rates, halve the earnings tax rate, reduce or
remove the availability of superannuation for early retirement, and promote means for increasing the use
of retirement savings for longevity purposes. A further effect of these proposals was to shift tax from the
fund to the contributor, with the effect that total savings would increase. It was of course, anticipated that
this reform would not occur except in the context of further personal tax relief.
Not much of this is popular. It is far more popular to simply provide more of the same in compulsory
superannuation (and higher age pensions). The superannuation industry gets bigger if there are more
contributions. People feel richer if they are led to believe that their lifestyle in retirement will be more
comfortable. Imposing contribution obligations on employers hides the effects of the system on take-
home wages.
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The current system also suffers from the fact that it does not cover everyone. The Review anticipated that
at some time in the future the high costs of late age care and age related disability will require a new tax
levy of some kind. This should be universal, unlike the superannuation guarantee, because the needs it
addresses are likely to affect everyone.
Retirement income and security reform will come of necessity at some time, and the key issue is whether
changes in policy in the interim make those changes harder or easier. If policies raise expectations about
retirement incomes without addressing the high cost late ageing needs that are coming and the burdens
on workers that will arise from rising dependency, it is likely that expected benefits will not in the end be
delivered. As in other countries that have over-promised retirement lifestyles and early retirement, future
adjustments (perhaps future consumption taxes, tougher means tests or other measures) will be applied
to deliver what is necessary.
The approach of the Review was to promote public understanding of these issues earlier rather than later,
and to offer a blueprint for a simpler, fairer and better targeted system for earlier rather than later
adoption. The review proposals were directed more at redistributing the tax concessions rather than
increasing the level and cost of the existing schemes.
2.8 The transfer system and other issues
Reform directions for the transfer system are directed particularly at ensuring:
The adequacy of payments for those in need (critical issues are emerging for example in the area of
rental housing assistance which is currently well short of needs in the face of collapsing housing
affordability);
The tighter targeting of payments to sustain affordability; and
The careful design of payments to ensure that workforce participation is encouraged for those who
are work-capable.
The Review intensively explored the possibility of integrating the tax and transfer systems, but ultimately
concluded that this could not be attained. A key driver of this decision was the household basis of the
transfer system and the individual basis for the tax system. There is however, a wide range of
opportunities for better coordination of the two systems. There is also scope to prevent the tax system
from becoming a more complicated amalgam of the two systems. The application of family basis means
tests to tax concessions is an example of policy design that leads to considerable system complexity
the Review considers such features to be limited to the transfer system.
3 INITIAL RESPONSES
3.1 Government responses before report release
In May 2009 the Review provided an initial report on The Retirement Income System: Strategic Issues, as
a companion to the Harmer Pension Review. This set out strategic findings and recommendations which
underpinned some Government announcements in the 2009 Budget, including:
Raising the rates of age pension, particularly for singles;
Reforming the pension structure and tightening pension means tests;
Gradually increasing the qualifying age for the Age pension from 65 to 67 by 2023
An early announcement was also made on 29 April 2010 to increase tobacco excise by 25 percent. The
Review had recommended a substantial increase in this tax. Interestingly the Government made no
mention of the Reviews recommendation that the duty free allowance for international travellers entering
Australia be abolished.
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3.2 Government responses on and after release
The Review provided no specific pathway to reform no suggested timetable nor packaged steps for
announcements. This reflected the decision of the Panel to focus on a long term vision for the future tax
system, and its judgement that future Governments would need to craft their steps towards reform in the
light of wider fiscal and other circumstances that cannot be predicted in advance. It also recognised that
reform proposals dealing with all levels of Government would mean that there would be long timescales in
future negotiations between the Commonwealth and the States. It is very likely that if the Review had
attempted to construct detailed reform pathways that it would have had to be constrained in the vision
that it presented.
The Panel anticipated that the Government would not substantively respond to most of its
recommendations in its initial response. This expectation was reinforced by an initial understanding that
the Report would be released soon after it was provided to the Government. However, the long delay of
the release raised some community expectations of a wide-ranging response but this did not occur.
Rather, the Government released the report with a small number of policy announcements shortly in
advance of the Budget (2 May 2010), and then included a further handful of announcements in the
Budget itself (11 May 2010).
Like the earlier tobacco announcement, the overall effect of the announced measures contributed
significant positive net revenues to the governments budget in the forward estimates years. However, the
net revenue effect is likely to become more neutral in later years as the announced measures take full
effect.
The key announced elements were as follows.
a. A resource rent tax from 1 July 2012. Most key features of this tax the 40% rate, group
transferability and ultimate refundability of deductions, the capital allowance design, and the bond-
rate uplift for carrying forward expenses were taken from the Review. The crediting of State
royalties also was one option canvassed in the Review. Other features such as the particular
transition rules for existing projects, the treatment of projects subject to the Petroleum Resource Rent
Tax, the inclusion of low value products, and the name the Resource Super Profits Tax were not
from the Review.
b. Phased reduction in the company tax rate from 30 percent to 28 percent, commencing 2013-14, with
an early reduction for small companies. The Review recommended a 25 percent company tax rate,
and did not canvass the differential timing for rate reductions by company size.
c. Slowly phased increase in the superannuation guarantee to 12 percent by 2019, together with in
increase to age 75 in the coverage of the SG, a zero effective contributions tax for low income
contributors and retention of the existing $50,000 contribution cap for those aged 50 and over if their
superannuation balances are below $500,000. This was not taken from the Review, which instead
proposes quite a different strategy for superannuation reform.
d. Tax concessions for small business capital expenditure, including immediate write-off for purchases
up to $5,000 and a single 30 percent declining balance pool for most other investments. These
measures go partway toward the larger steps proposed by the Review;
e. A refundable offset for resource exploration expenses this matches the Review proposal (made in
preference to a pass through arrangement) but is extended to all companies rather than restricted to
small Australian explorers.
f. Phasing in a discount of 50 percent in the deposit interest included in taxable income, capped at
interest of $1000 per annum. This is a small step towards the Review proposal for a much wider,
uncapped discount (at 40%) for a range of savings vehicles.
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g. Phasing in a standard deduction for work related expenses, again ultimately $1000 and again a
partial step towards the arrangements proposed by the Review. The standard deduction also covers
the cost of managing tax affairs.
h. The Review proposed abolition of the medical expenses tax offset the Government announced that
its threshold would rise to $2000.
The Government has stated that the whole package depends on the commencement of the resource rent
tax. The Opposition has stated that it will oppose the rent tax. Thus, whether or not the package is
ultimately introduced depends on political outcomes in the 2010 Federal Election.
Table 2 provides a presentation of the budget forward year revenue effects of Government decisions
taken since the final Report of the Review was received. Measures are included in the table if they deal
with matters that were also the subject of Review recommendations (this differs somewhat from the
various presentations by the Government). The considerable revenue gains from these announcements
in these years are clear in this presentation.
The revenue gains include a fiscal dividend from tax reform the addition to revenues arising from higher
economic growth. Strangely this had been omitted from the initial announcement of the response, but
was identified in the subsequent budget papers.
Table 2: Revenue Effects of 2010 Measures related to Review Recommendations ($million)
Heasure 2011-12 2012-13 2013-14
Resource 3uper Prol|ls Tax 3000 9000
LoWer corpary lax rales -50 -00 -2200
3uperarrual|or reasures -515 -1855
Tooacco Exc|se 1285 1320 1380
3ra|| ous|ress |rveslrerl -1030
0epos|l lrleresl d|scourl -1Z0 -180
wor| re|aled experses -110
Ved|ca| experses lax ollsel 95 115 110
0roWlr d|v|derd 200 100
T0TAL REvENuE EFFECT3 (ga|r) 1330 3020 1915
Source: Australian Government Budget Paper No.1 page 5-15
It is important to note that the revenue effects will be quite different in later years:
The projected long run yield of the RSPT is $12 billion per annum (actual yield depends on production
and prices which could change significantly over time);
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The company tax cut will cost somewhat more, perhaps around $4 billion, as the figures in 2013-14
mainly reflect a 29 percent rate rather than 28 percent for large companies;
The superannuation measures will in later years cost well over $4 billion per annum (the 2013-14
figure here reflects only an SG rate of 9.25% costing $240m in that year).

4 FUTURE PRIORITIES, PROSPECTS AND PATHWAYS
4.1 Predicting the unpredictable
Apart from the already announced policies of the Government, whose prospects for implementation will
be decided in the context of the 2010 election, it seems likely that future tax reform will occur over a
reasonably long timeframe. Although the future cannot be predicted with any confidence, one possibility
is that the reforms will fall into different groupings, with some more likely to occur earlier than others.
There are reasonable prospects for the main components of the Review to be further considered and
developed as reform proposals over the next decade. It may take about a decade for all of these to find
suitable fiscal and political circumstances. Into this category particularly might be placed:
The business income tax recommendations (completing lower rate and base reforms)
The personal tax system reforms, possibly including the personal savings reforms
The reforms to the transfer system
Other reforms may well occur but are more likely to be deferred until the 2020s. The reason is mainly that
these will not appear to have the immediate benefits and urgency of the other measures and so will likely
have lesser political priority (even though they would generate very considerable long term benefits). This
will particularly be so if widespread financial and economic turmoil continues to unfold through coming
years, and/or if other crises (security, environmental) further develop in this period.
Longer term reforms may include:
Replacement of inefficient state taxes with broader land and consumption taxes, probably using cash-
flow tax models
Transformation of the current business income tax and imputation systems into a business
expenditure tax system and more complete dual tax system (taxing individual savings at a
systematically lower rate)
Some reforms are particularly unpredictable. Into this third category, if the increase in the SG proceeds,
must now be placed most retirement income and superannuation reforms, as the attractions of more of
the same policies coupled with further tinkering may for many years exceed awareness of the growing
need for more complete reform. Similar considerations apply to reform in other areas where problems
evolve relentlessly but slowly. These include problems in alcohol taxation, in housing affordability, in the
way we fund and support the not-for-profit sector, and in the failing roads and urban transport systems.
Reform is bound to come in all of these areas, but it is impossible to predict the critical moments when
political resolve and deeper public understanding will emerge.
4.2 Will initial responses alter long term changes?
The long run prospects for change will unfold if the underlying drivers facing our economy and society
turn out to resemble those explored by the Review. As with other documents of this kind, the probability
is that the Review will serve as a future reference for such developments by articulating strategies in
advance it will hopefully make future change more readily achievable and understood at the time it
occurs.
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All that political leaders (whether in government or opposition) can do at any moment in time is to
interpret their own capacity to build and carry messages for longer term change. It has been a feature of
Australian politics at least since the 1980s that there has been at least some political reward for such
efforts, but it obviously can be testing for most.
However, initial responses could have effects on future preferred approaches to long term policy change.
At the very least they can affect the timing of reforms. Things that are said to be never ever will often be
slower happening than other things (although the GST was announced and introduced only a few years
after it was decisively ruled out).
Similarly, initial packages change the fiscal position and hence carry the opportunity cost of reduced
potential for other reforms.
Tax reform, like most change, is almost certainly path contingent. This means that changes in one
direction or area will affect the preferred path and form of change in others. There have already been
some examples of this.
The Henry Review was conducted on the presumption of the introduction of the carbon pollution reduction
scheme but this has been at least deferred. This would potentially change recommendations about
alternative environmental taxes and measures.
The increase in the superannuation guarantee to 12 percent could also change what is desirable in
retirement policy. The considerable fiscal cost of this change, if it occurs, could lead to a preference for a
future government to retain or even increase the contributions tax rate. The proposed rebate of the
contributions tax for low income earners re-establishes the administrative link between income and
contributions tax that was previously established for the purposes of the superannuation contribution tax
surcharge. This raises the possibility that superannuation tax fairness could again readily be achieved by
linking contribution tax rates to income at other points in the distribution.
Certainly, superannuation is likely to undergo continuing policy change for as long as it remains in its
present structural form.
4.3 Overcoming future reform constraints
Tax reform is difficult when fiscal pressures are high, as they have become in the current recession. At
the same time, economic difficulty makes reform that promotes growth all the more necessary and
compelling. It is a political challenge to take reform opportunity from this difficulty.
It is not possible to predict now the circumstances that might lead to future reform, and that is one key
reason why the Review did not seek to establish a detailed pathway or top define future reform packages.
Rather the objective of the Review was to produce a broad vision of possible future arrangements. On the
one hand these sit patiently as potential blueprints for future action. On the other hand they may present
aspirations that exert pressure for change in their own right.
The Review gave some consideration to the best way to promote future reform. Many reviews and
inquiries recommend that they be repeated at a later time. The Henry panel was more inclined to propose
a more open and effective standing process for the continuing development of tax and transfer systems.
Implicitly, in making these recommendations the Review criticises its own conduct (for example where a
draft report was not released to inform and promote debate on options). In the future, the review
proposes that governments that are committed to reform would do better to strengthen the systems that
inform the public about the tax and transfer systems. It proposed the periodic publication of a tax and
transfer analysis statement (greatly extending existing publication of the tax expenditure statement),
independent development of tax information reporting standards, systematic collection and dissemination
of tax and transfer data, and support for independent policy research.
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These are all intended to increase community understanding and participation in tax policy issues.
Without this, tax reform as a periodic political foray could remain relatively vulnerable to misrepresentation
and misunderstanding.
4.4 State reform
The Review provides a long term prospect for the States to obtain two robust tax bases a broad land
tax and a broad consumption tax. The latter could be a destination-based business cash-flow tax or
(outside the Review terms of reference) an increase in the rate or base of the GST. These could replace
most of the existing narrowly based and inefficient State taxes. Although no major change in vertical
fiscal imbalance is implied by the Review proposals, these changes may serve to sustain some ongoing
elements of State autonomy and competitive federalism in Australia.
In contrast, recent decisions have continued the long-running trend away from financial autonomy for the
States. Australia is increasingly shifting from a US-style federation of independent states towards a
German-style contractual federation, where the centre collects most revenue and contracts for service
provision from lower tiers. In Australia as well, these lower tiers are increasingly outside even state
management with the Commonwealth funding non-government and quasi-government education,
welfare and health services often in competition with state services.
The decision of the Commonwealth earlier this year to take 60 percent funding responsibility for public
hospitals carries with it a loss by the States of one third of GST revenues. In essence one third of the
GST was converted from general purpose revenue to specific purpose revenue, subject to
Commonwealth terms and conditions. While of little practical significance, this change is yet another step
toward financial dependency for the States.
The decision of the Commonwealth to provide a refundable credit for State resource royalties in its
resource super profits tax arrangements probably has the advantage for the Commonwealth of not
requiring it to negotiate a revenue share from the RSPT for the States. In practice, this again reduces
potential state revenue autonomy. Instead they have obtained a commitment for some ongoing
infrastructure funding. It will be interesting to see the terms and conditions of these payments, and
whether they become a device for the Commonwealth to prevent the States from imposing additional
royalties beyond those for which it has offered RSPT credit. Beyond that, it will also be interesting to see
how long the additional administrative and compliance cost of collecting a refunded tax will prevail.
It seems unlikely that the States will take up material tax reform without Commonwealth leadership and
participation. The indirect tax base in particular requires Commonwealth participation as the collecting
level of government. Similarly, reform in many other areas including road funding and changes to
housing policy will depend on intergovernmental cooperation at levels we have yet to see in these
fields.
5 CONSEQUENCES AND OPPORTUNITIES FOR TAXPAYERS AND TAX PRACTICE
5.1 Can taxpayer experience fundamentally change?
Achievement of the full vision for the tax system set out by the Review could substantially transform
taxpayer (and adviser) experience of the tax system. There are three broad types of change that could
deliver these outcomes.
First, many of the changes contribute to simplification through fundamental structural changes in the
system. The main examples of these include:
Simplification through abolition of several minor taxes. The abolition of taxes is probably the only fully
reliable way to simplify tax systems.
Simplification for large numbers of taxpayers through removing the itemisation of work related
expenses and the rationalisation of tax offsets and deductions.
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If cash-flow taxes are introduced, substantial integration of the concepts and systems underpinning
both the business tax base and the consumption tax base. Cash flow consumption taxation is
potentially vastly simpler than the invoice-based GST.
If the longer term options for superannuation, savings and business income are adopted, it would be
possible to remove most of the complications of the dividend imputation system and the varying
treatments of superannuation contributions and earnings.
Second, a range of design measures that would more directly address taxpayer (and transfer recipient)
experience are also proposed. These include the adoption of a single means test base in the income
support system, the development of common terms and definitions, and rewriting of complex provisions in
areas such as the capital gains tax and trusts. In addition, a key feature of these reforms is to make the
system more transparent. For example, nearly everyone can understand ideas like a tax threshold and a
tax rate. But the current system completely obfuscates these concepts by use of complex tax offsets,
means tested tax benefits, additional levies on their own base, and complex variations in the tax status of
different types of income. The Review vision is to return to simplicity almost all income is treated the
same (in the case of transfers, by exemption), offsets and levies are largely abolished, and the rates and
thresholds are straightforward and simple.
Thirdly, tax simplification could come from new operating systems. The vision here is for processes that
are sufficiently simple, transparent and understandable that most people feel that they can deal with them
without requiring agent assistance. The benchmark is probably the existing relationship that exists in
Australia for bank customers. While office/branch/phone assistance is sometimes required and is
available, most transactions can be done online or through other simple and readily accessible systems,
usually on a 24/7 basis.
Clearly this requires the structural and design features noted above. But it also requires new
technologies and new systems, a client centred focus, and the provision of a single simple tax account for
everyone to monitor and operate their tax and transfer affairs.
This vision is not without its exceptions. Some features of the future system will mean that some
complexity remains unavoidable. A key example of this problem is the family basis for assessing means
(or the need for assistance) and the individual basis for assessing income (or capacity to pay). This
distinction frustrates simplification, but has a deep policy basis (based on fiscal, equity and workforce
participation considerations) that the Review has accepted.
At the same time, some recommendations will generate more complexity, particularly in the transitional
processes envisaged in some areas. A broad land tax is more demanding to administer than a narrow
one, and the assignment of fringe benefits to recipients may require more work than employer
assessment. Discounts for savings are more complicated than no discount. There are also new taxes.
Whether the resource rent tax is more complex than the royalty regimes it replaces is yet to be seen.
Overall, however, the Henry vision is inspired by the goal of radical simplification
5.2 Changing tax administration
The Review broadly took a favourable view of tax administration in Australia. It endorsed the
independence of the tax authorities (meaning independence from the influence of political forces, which
by extension means taxpayer groups as well). With this independence come strong accountability
requirements and the Review sought only to enhance existing arrangements rather than to make any
fundamental changes.
The ATO has had its difficulties with implementing organisational and technological changes and the
Review considers that an advisory board with wide expertise could assist in better planning and execution
of this type of change. To minimise insularity it proposed that this board be appointed by the Government.
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Beyond this the Review considered that the external setting of the ATO provides more potent and long-
lasting incentives for improved performance than would recommendations for internal change. It made
recommendations for some strengthening of the roles of existing institutions the Inspector-General of
Taxation, the Australian National Audit Office, the Commonwealth Ombudsman and the Parliamentary
Joint Committee of Public Accounts and Audit.
Beyond these directions, a range of other recommendations would change the relationships between
taxpayers and tax authorities. Many of these depend on structural change to tax arrangements, for
example:
The Review ultimately anticipates a common tax administration for local government rates and land
taxes;
A fundamental shift towards business cash-flow taxation could facilitate much closer integration of
consumption taxes and business taxes;
Reform and simplification of personal taxes facilitates return pre-filling or even return free systems.
The Review made an attempt to find ways to substantially improve, integrate and simplify what it called
client experience of the tax and transfer system but it probably could be said to have made only limited
progress in this direction. A fundamental barrier exists between the tax and transfer systems, both in
terms of the historical separation of administrations (and their cultures) and in terms of fundamental
structural features such as the family basis for transfers and the individual basis for personal taxation.
The Review drew back from integration but instead called for continuing efforts at closer coordination
between the two systems.
The basic vision is one where most individuals can undertake most of their interactions with government
without requiring assistance from agents or other third parties. It is difficult to be optimistic about this
because governments (no doubt reflecting political interests) show negligible interest in simplification
ideas. Measure after measure is tailor made and given complex objectives on the false assumption that
new technologies can solve almost any administrative compliance problem. Nonetheless, a range of
recommendations are made that propose continuing valiant efforts against the tide.
The elements of this future vision include:
A capacity for people to directly access the key information held about their tax and transfer situation
by government through an on-line accounting system and to use this information to make
decisions.
A presumption that government will pre-fill forms delivering taxpayer information gathered from third
parties to assist taxpayers rather than just setting up data matching compliance tests
Building common information standards, terms and definitions and linking of records across tax and
transfer systems, using a modernised privacy and secrecy framework.
The hope is that by building a working citizen-centric system there would be strong disciplines against
continuing ad-hocery in future policy changes and design. The Review recognised that there is limited
commitment to these goals in existing agencies and even less interest in coordination between them. It
proposed that a high level taskforce led by a central agency (Prime Minister, Treasury or possibly
Finance) should take on the required leadership role.

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6 CONCLUDING COMMENTS
The Henry Review was conceived in the heady days of a new Government and economic boom in
Australia. A tax review was proposed at the Governments Australia 2020 Summit
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and announced soon
afterwards in the 2008 Budget. But circumstances changed very quickly. Within days a raging debate
about the adequacy of pensions had begun, and within months the Global Financial Crisis transformed
the fiscal landscape, driving Budgets back into deficit.
The Review panel took these developments to mean that its work should serve as a longer term
reference. It aimed to consider the architecture of a future tax system looking well forward in time. It
pulled back from providing comprehensive reform packages and timetables, or excessive precision in its
design of recommendations. However, it considered that the future approach to reform should be robust.
It would be consistent with that view that most of its directions could be pursued within the next decade
subject to the return of the world economy to a more normal growth path and more stable financial
conditions.
The Review has already been drawn upon for several announcements, but the test of the review must be
much longer term. In many of the fields addressed only a broad prescription is outlined and further work is
needed. That is why the Review has proposed that an open and transparent process of tax analysis and
debate continue in coming years, with active community participation supported by the resources of
government. There is no crisis in Australias tax and transfer system, but the vision of a new system
provided by the Review suggests that a steadfast commitment to reform could bring considerable
rewards.
7 REFERENCES
Australian Government 2010, Australias Future Tax System: Report to the Treasurer December 2009,
Commonwealth of Australia, Canberra
Australian Government 2010, 2010-11 Budget Paper No.1, Commonwealth of Australia, Canberra
Australian Government 2010, Stronger Fairer Simpler, a Tax Plan for Our Future, Commonwealth of
Australia, Canberra
Australian Government 1975, Taxation Review Committee Full Report, Commonwealth of Australia,
Canberra

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A wide ranging futures convention held 19-20 April 2008