Henry Review Summary continued...

Recommendations rejected by Government

Including the family home in means tests
Introducing land tax on the family home
Requiring parents to work when their youngest child turns 4
Means testing single income families
Restricting eligibility to rent assistance for families
Making any changes to the tax system that harm the not-for-profit sector, including removing the benefit of tax concessions; raising the gift deductibility threshold or changing income tax arrangements for clubs
Reducing overall remuneration to members of the Defence Forces
Reducing the CGT discount, applying a discount to negative gearing deductions or changing grandfathering arrangements for GST
Removing the Medicare levy
Reducing indexation of the age pension
Removing the benefits of dividend imputation
Hitting pensioner and low income concessions for utilities, transport and other essential services
Introducing a bequests tax
Aligning the preservation age with the pension age
Offering a Government annuity product
Asking the States to charge market rents to public housing recipients
Indexing the fuel tax to the consumer price index (CPI)
Changing alcohol tax, that is, all alcoholic beverages should be taxed on a volumetric basis.

In addition the Prime Minister and Treasurer reaffirmed that the current Government will never increase the rate or broaden the base of GST, or remove tax-free superannuation payments for those over 60 years of age.

Recommendations neither adopted nor rejected

The Prime Minister and the Treasurer said that many recommendations of the Henry Report were not Government policy and will be the subject of debate in the coming years.

Company and other investment taxes

Structure of company taxes should be retained in its present form, but overseas reform trends should be monitored.
Capital allowance rules should be revised to closer match rates of economic depreciation and reduce administration and compliance costs. This would include: (i) immediate write-off of low-value assets (i.e. less than $1,000); and (ii) reviewing agricultural and statutory effective life caps and other concessional write-off provisions.
Small business capital allowance rules should be revised to: (i) allow depreciating assets costing less than $10,000 to be immediately written-off; and (ii) allow all other depreciating assets (except buildings) to be pooled together, with the value of the pool depreciated at a single declining balance rate.
Companies should be allowed to carry back a revenue loss to offset it against the prior year's taxable income, with the amount of any refund limited to a company's franking account balance.
If earlier access to tax benefits from exploration expenses (relative to other expenses) is to be provided, it should take the form of a refundable tax offset at the company level for exploration expenses incurred by Australian small listed exploration companies, with the offset set at the company income tax rate.
Financial institutions operating in Australia should generally not be subject to interest withholding tax on interest paid to foreign residents.
Consideration should be given to negotiating in future tax treaties a reduction in interest withholding tax to zero, so long as there are appropriate safeguards to limit tax avoidance.
Taxation arrangements applying to Australian managed funds should be improved to provide greater certainty that conduit income will not be subject to Australian tax.

Business entities and their owners

The current trust rules should be updated and rewritten to "reduce complexity and uncertainty".
A flow-through entity regime for closely held companies and fixed trusts should not be adopted for now. However, consideration should be given if there is a move away from dividend imputation in the long term.
Imputation credits should continue to be provided only for Australian company income tax. Dividend streaming and franking credit trading practices should, in general, continue to be prohibited.
A broad examination of the appropriate degree of harmonisation of business income tax arrangements between Australia and New Zealand should be undertaken if increased integration is desired.

CGT

The CGT regime should be simplified by:

Rationalising and streamlining the current small business capital gains tax concessions by removing the active asset 50% reduction and 15-year exemption concessions, increasing the lifetime limit of the retirement exemption (by permanently aligning it with the CGT cap for contributions to a superannuation fund) and allowing taxpayers who sell a share in a company or an interest in a trust to access the concessions via the turnover test.
Increasing the exemption threshold for collectables and exempting all personal use assets.

GST

Consider making greater use of GST-free business-to-business transactions or reverse charging, provided the potential compliance cost savings outweigh the additional complexity costs and risks to revenue.

Not-for-profit organisations

Categories of NFP organisations that currently receive income tax or GST concessions should retain these concessions. NFP organisations should be permitted to apply their income tax concessions to their commercial activities.

Personal Income Tax

Progressivity in the tax and transfer system should be delivered through the personal income tax rates scale and transfer payments.
The primary unit in the personal tax system should continue to be the individual, although there could be a case for optional couple assessment for people of late retirement age.
Income support and supplementary payments (eg family assistance and scholarships) should be tax-exempt.
The existing dependant offsets should be replaced with a single dependant tax offset where the dependant is unable to work due to disability or carer responsibilities, or either the taxpayer or dependant has reached Age Pension age.
The mature age worker, employment termination payment, overseas civilian, entrepreneurs' and notional tax offsets should be removed and the education tax refund should be replaced as part of the single family payment (but as a back-to-school lump-sum amount). The overseas forces tax offset should be replaced by adjusting remuneration to maintain net incomes. The zone tax offset should be reviewed.
Averaging tax offsets for primary producers, the offset for "special professionals" and the lump sum payment in arrears tax offset should be retained to minimise the extent to which the timing of such income influences tax liability.
The medical expenses tax offset should be removed following a review of the scope and structure of health safety net arrangements. The Medicare levy surcharge and assistance for private health insurance should be reviewed. Assistance, if retained, for private health insurance should be provided exclusively as a direct premium reduction.
All forms of wages and salary for Australian resident taxpayers should be taxable on an equivalent basis and without exemptions.
Fringe benefits that are readily valued and attributable to individual employees should be taxed in the hands of employees through the PAYG system. Other fringe benefits, including those incidental to an individual's employment, should remain taxed to employers at the top marginal rate (and non-reportable for employees). Market value should generally be used to value fringe benefits (with an appropriate adjustment for employee contributions) and the current formula for valuing car fringe benefits should be replaced with a single statutory rate of 20 per cent, regardless of the kilometres travelled.
All FBT exemptions should be reviewed to determine their continuing appropriateness and the not-for-profit entities' FBT concessions should be reconfigured.
Consideration should be given to a revised regime to prevent the alienation of personal services income that would extend to all entities earning a significant proportion of their business income from the personal services of their owner-managers, whether in employee-like or non-employee-like cases.
A standard deduction should be introduced to cover work-related expenses and the cost of managing tax affairs to simplify personal tax for most taxpayers. Taxpayers should be able to choose either to take a standard deduction or to claim actual expenses where they are above the claims threshold, with full substantiation.
There should be a tighter nexus between the deductibility of the expense and its role in producing income.
Provision of a 40% savings income discount to individuals for non-business related net interest income; net residential rental income, including related interest expenses; capital gains and losses; and interest expenses related to listed shares held as non-business investments.

Retirement incomes

The tax rate of super fund earnings should be halved to 7.5%, which would also apply to capital gains and the earnings from assets supporting super income streams. Superannuation funds should retain their access to imputation credits.
The Government should support the development of a longevity insurance market within the private sector through: (i) issuing government long-term securities; (ii) providing the data needed to create and maintain a longevity index to assist product providers to hedge longevity risk; and (iii) removing rules in the Superannuation Industry (Supervision) Regulations 1994 relating to income streams that restrict product innovation.
Awareness in super should be increased by the Government: (i) linking superannuation records and client identifiers (eg TFNs) to assist people to manage their superannuation and (ii) establishing a superannuation portal where people can interact with government agencies and get information on retirement incomes should be developed.
Service pensioner preservation age should remain at 60.

Income support payments

There should be 3 categories of income support payments: (i) A pension category for people who are not expected to support themselves through paid work; (ii) A participation category for people of working age who are expected to support themselves through paid work now or in the near future; (iii) A student assistance category for people engaged in full-time study.
There should be a more consistent approach to payment relativities within each of the 3 above categories of payment based on the single to couple pension relativity.
People with disability who have a partial capacity to work, excluding people receiving Disability Support Pension (DSP), should have a part-time work requirement.
Students should have access to an income test that facilitates significant part-time work at a level that does not compromise educational outcomes. Adults requiring additional income should be able to borrow to top up their student rate of income support to the level of the participation payment rate.

Means testing social security payments

The current income and asset tests for income support payments should be replaced with a comprehensive means test based on a combined measure of employment income, business income and deemed income on assets.
Means testing for family assistance payments should be based on the same measure of taxable income as for income tax, including fringe benefits. However, payments should not be reduced as a result of the inclusion of compulsory superannuation contributions in taxable income.

Family and youth assistance payments

Current family payments, including Family Tax Benefit Parts A and B, should be replaced by a single family payment.
The direct cost of children component of family assistance should be a per child payment. Rates of payment should increase with the age of the children to recognise the higher costs of older children. The Baby Bonus should be abolished and a small supplementary payment, reflecting the direct costs of a new-born baby, should be paid over the first 3 months; a shared-care rate to recognise the higher costs of separated families should be considered, and additional payments for larger families, including the Large Family Supplement, the Multiple Birth Allowance for children over one year, and higher thresholds for larger families should be reconsidered as the case for these payments is not strong.
For couples with children aged 6 or older, a parental supplement at the same rate as for single parents should be paid through the income support system.
Assistance for families should also recognise that there are specific circumstances, such as parents caring for disabled children and foster care children with higher needs, for which additional support beyond the early years is appropriate.
The total amount of family assistance should be withdrawn with a single means test to avoid cumulative withdrawal rates which create unnecessarily high disincentives for working. A single low withdrawal rate of 15-20% would be appropriate to minimise workforce disincentives.
While family payments should be the main form of assistance for families with children up to the end of secondary school, or the school year in which they turn 18 (the earlier of the 2), youth payments should be available to older children in some circumstances:.
Youth payments should be the main form of income support from the age of 18 until the age of independence.

Child care assistance

The Child Care Benefit and Child Care Rebate should be combined into a single payment to parents (or to child care centres) in respect of each child based on a percentage of child care costs.
The child care payment should be means tested down to the base rate of assistance based on family income and should have regard to the interaction with other means tested payments (income support and family payments) and marginal tax rates.
The fringe benefits tax exemption for child care facilities provided on an employer's business premises for the benefit of employees should be removed.

Housing assistance

The maximum rate of Rent Assistance should be increased to assist renters to afford an adequate standard of dwelling.
Mechanisms should be developed to extend Rent Assistance equitably to public housing tenants along with removing income-linked rent setting in public housing.
A high-need housing payment should be paid to social housing providers for their tenants who have high or special housing needs or who may face discrimination in the private market.

State taxes and local government

There should be no stamp duties in a modern Australian tax system. Instead, land tax should be levied on as broad a base as possible (eventually to include all land). However, there would be a threshold so that low-value land (such as most agricultural land) would not be subject to tax. Land tax should apply per land holding and not on an entity's total holding. The Government has said that these are issues for the States and Territories.
Payroll tax should eventually be replaced with revenue from more efficient broad-based taxes that capture the value-add of labour.
Reforms to State taxes should be coordinated through intergovernmental agreements between the Australian government and the States to provide the States with revenue stability and to facilitate good policy outcomes.
States should allow local governments a substantial degree of autonomy to set the tax rate applicable to property within their municipality.
Over time, State land tax and local government rates should be more integrated. This could involve: (i) moving to a joint billing arrangement so that taxpayers receive a single assessment (but are able to identify the separate State and local component); and (ii) using the same valuation method to calculate the base for local government rates and land tax (with this method being consistent across the State).

Environmental-related taxes

If a Carbon Pollution Reduction Scheme (CPRS) is operational, additional measures which seek to reduce emissions (in sectors covered by the CPRS), and which are not justified on other grounds, should be phased out.
Any CPRS industry assistance arrangements should be transitional. The Productivity Commission should be asked to undertake and publish an annual review of CPRS-related assistance arrangements for the life of the CPRS to provide a basis for future decisions on assistance policy.
All tax concessions aimed at supporting environmental outcomes should be monitored and possibly replaced with targeted spending programs.

Road transport taxes

Congestion charges should apply to all registered vehicles using congested roads.
The development of mass-distance-location pricing for heavy vehicles should be accelerated, to ensure that heavy vehicles pay for their specific marginal road-wear costs.
States should improve compulsory third party insurance to better reflect individual risks.
On routes where road freight is in direct competition with rail that is required to recover its capital costs, heavy vehicles should face an additional charge on a comparable basis, where this improves the efficient allocation of freight between transport modes.
The revenue-raising component of State taxes on motor vehicle ownership and use should be made explicit, and over time only be used to recover those costs related to road provision. The administrative costs of providing government services should be recovered through user charges where applicable. Quantity limits on taxi licences should be phased out.
Governments should continue to reform road infrastructure provision, applying economic assessment to investments comparable to that for other forms of infrastructure.
A National Road Transport Agreement should be established to determine objectives, outcomes, outputs and incentives to guide governments in the use and supply of road infrastructure. COAG should nominate a single institution to lead road tax reform, and ensure implementation of this agreement.

Funding aged care

There is considerable scope to align aged care assistance with the principles of user-directed funding to provide assistance in line with recipients' needs, enable their choice of care and support the fiscal sustainability of the aged care sector.
The Productivity Commission will be inquiring into the disability insurance scheme, and its consideration of aged care should include the potential for insurance to play a role in helping to fund aged care as Australia's population ages.

Housing affordability

Governments should review institutional arrangements (including administration) to ensure zoning and planning does not unnecessarily inhibit housing supply and housing affordability.
Infrastructure charges (or developer charges) should be reviewed to ensure they appropriately price infrastructure provided in housing developments. This should establish practical means to ensure that these changes are set appropriately to reflect the avoidable costs of development, necessary steps to improve the transparency of charging and any consequential reductions in regulations.

Productivity Commission

The Productivity Commission should examine the principles of public service delivery and the mechanisms that are available to governments to deliver public services and their implications for financial arrangements in the federation.

Other taxes

A common alcohol tax should be introduced and accompanied by a review of the administration of alcohol tax, to ensure that alcohol taxpayers do not face redundant compliance obligations.
The existing regime for tobacco taxation in Australia should be retained, with the rates of tax substantially increased, depending on further evidence on the costs of harm from tobacco smoking.
Tobacco excise should be indexed to a broad measure of wages rather than CPI.
There should be no duty free allowance on tobacco for international travellers entering Australia.
Gambling taxes should be reviewed to ensure that they are focused on recouping economic rent generated by government restrictions on the supply of gambling services or are being used efficiently to impose such restrictions.
Governments should eliminate gambling tax concessions for particular types of gambling business, such as clubs. If governments wish to subsidise particular types of businesses, they should do so through direct expenditures.
Governments should consider the allocation of responsibilities for the regulation and taxation of gambling, with a view to minimising conflicts in policy-making between revenue-raising and addressing problem gambling.
All specific taxes on insurance products, including the fire services levy, should be abolished. Insurance products should be treated like most other services consumed within Australia and be subject to only one broad-based tax on consumption.
Governments should undertake a systematic review of existing and potential user charges and minor taxes against the principles set out in this report. This should be coordinated with the recommended introduction of the system wide Tax and Transfer Analysis Statement.

A responsive and accountable tax system

The Government should establish a more transparent means of dealing with community ideas about the tax system by extending the Tax Issues Entry System website and further developing its use.
The Government should commit to a principles-based approach to tax law design as a way of addressing the growing volume and complexity of tax legislation, and as a way of helping those laws to be interpreted consistently with their policy objectives.
The Board of Taxation should be empowered to initiate its own reviews of how current tax policies and laws are operating, in consultation with the government. This would be in addition to reviewing matters referred to it by the government, though it should not engage in substantive policy development unless requested by the government.
Information or advice provided by Treasury to assist the ATO in determining the purpose or object of the law, or materials used by the ATO to determine policy intent (other than correspondence with or from government) should be made public.
A board should be established to advise the Commissioner on the general organisation and management of the ATO. The board would not be a decision-making body and would have no role in interpreting the tax laws or examining individual taxpayer issues. The government would appoint members to the board.
The Government should clarify that the role of the Inspector-General of Taxation is to examine systemic tax administration issues that affect businesses.
The Government should ensure that sufficient resources are devoted to the functions of the Inspector-General of Taxation, the Australian National Audit Office and the Commonwealth Ombudsman.
The Joint Committee of Public Accounts and Audit should examine reports of the Inspector-General of Taxation and the Commonwealth Ombudsman, and monitor the ATO's implementation of the recommendations in those reports.

Customer service: tax and social security

A tax and transfer client account should be developed, based on customer research and with customer input into its design. The account should include at least the following features: up-to-date presentation of income earned from all sources, taxes withheld, tax liabilities incurred, transfers received and information flows from third parties; complete information from past periods; an optional single point for updating personal information, undertaking transactions, and reporting information or making applications, with extensive pre-filling of forms based on information previously provided; and the ability to test the impact of hypothetical changes in circumstances.
Pre-filled personal income tax returns should be provided to most personal taxpayers as a default method of settling their tax affairs each year.
Existing tax and transfer provisions should be reformed to support improvements in client experience, including greater alignment of income definitions and reporting, rationalising of personal tax deductions and offsets, and streamlining of mandatory administrative requirements. Future new policy proposals should be subject to comprehensive, published expected impact assessments on client experience systems and outcomes.
Where possible, information required for determining tax liabilities and transfer entitlements should be collected from third parties, including employers, government agencies, financial institutions, and share and property registries. Over time, electronic provision of this information by third parties should be made mandatory. To reduce current and minimise new compliance costs, reporting obligations should as far as possible be aligned with existing information concepts and systems of third parties, and facilitated through electronic interaction with information held in the "natural systems" of those entities.
Further approaches (extension to and approaches which build on Standard Business Reporting) should be pursued to reduce the compliance costs associated with business interactions with government.
The Government should assist small businesses to be "business ready" when they begin business. This could be achieved through education and financial assistance, which may include assistance to small business to get ready for Standard Business Reporting (SBR).
Common information standards, leveraging from the standards and governance put in place by the SBR Program, be developed and adopted to support system interoperability between tax and transfer agencies, and between those agencies and third parties, such as employers.
A modern privacy and secrecy framework be developed and adopted that maintains and streamlines protection of personal information held by government agencies, and facilitates exchange of information (other than an individual's health information) between agencies to support improved client experience of the tax and transfer system.
A method of linking records, eg by linking existing client identifiers, be developed to facilitate development of a single client account for tax and transfer financial information.
A high level taskforce should be established, under central agency leadership, to progress a whole of government approach to improving the client experience of the tax and transfer system. The taskforce should develop, consult, oversee and regularly report to government and Parliament on a whole-of-system reform of the administrative arrangements and technologies that deliver the client experience of the tax and transfer system.

Monitoring the tax system

The Henry Report made various recommendations on monitoring the tax system, including:

The Australian Government should publish every 5 years a statement that analyses and reports on the overall performance and impact of the system, including estimates of efficiency costs and distributional impacts.
The Australian and the State governments should systematically collect data on aspects of existing taxes and transfers.
The Australian Government should ensure that the rules governing the development of the Budget encourage trade-offs between tax expenditures and spending programs.
The Government should ensure that reporting standards are independently developed for the identification and measurement of tax expenditures in the Tax Expenditures Statement; and
The Council of Australian Governments should examine the ways in which the States could uniformly report tax expenditures annually according to those reporting standards.

Henry Review Summary continued...

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