Treasury chief suggests new cashflow tax system

Treasury secretary Ken Henry has suggested Australia may abandon tax returns and move to simpler forms of business taxation, including a tax system based on cashflow.

Treasury secretary Ken Henry has suggested Australia may abandon tax returns and move to simpler forms of business taxation, including a tax system based on cashflow.

In a speech to the National Press Club yesterday, Henry said businesses are suffering under the excessive volume of tax legislation.

Henry, chair of the Australia’s Future Tax System review panel, attacked the complexity of the tax system citing the fact that 73% of tax returns are completed by tax agents. In New Zealand, that number is just 30%.

“This system’s complexity acts like an additional tax, but the worst kind of tax; a tax that provides no revenue, is indiscriminate in whom it affects, and serves little social value.

“As it happens, there’s a lot of academic discourse on the merits of a ‘cashflow’ tax as one way to simplify the tax system… and so without endorsing it, this proposal is clearly one of a number the panel will need to consider.”

A “cashflow” tax is imposed on net cashflow, whereby businesses would pay tax on the difference between sales and expenses. Interest, dividends and capital gains would be disregarded and not allowed as deductions or income.

But reception to the proposal has been tepid.

Taxation Institute of Australia senior counsel Michael Dirkis says, “the devil is in the detail”.

“You have to approach something like this with a degree of scepticism, but that’s not to say you don’t have an open mind. You have to balance what are simple clear tax laws with the need to make sure we haven’t gone so far tax doesn’t make sense.”

Dirkis says the danger of a “cashflow” tax comes when it moves away from internationally accepted norms, which may scare away foreign investors.

“We haven’t ruled it out, and think it should be part of the mix – we just have a little bit of concern about things that are a bit left field.”

Frank Drenth, executive director of the Corporate Tax Association, says the move to a cashflow tax system would need to be “as simple as possible”.

“I’m not saying it wouldn’t work, put sometimes it may have strange outcomes and that would have a major impact on the Government’s revenue.”

Proponents of a cashflow tax argue the system would be much simpler, and would result in less avoidance, but Drenth says implementing the system would not be so easy.

“It certainly would be simpler,” Drenth says, “but there’s a few wrinkles to it.”

The announcement comes as a Board of Taxation study finds SMEs are struggling to deal with complexity within the tax system. Its small business tax compliance costs study argues the time and effort needed to meet tax expenses has grown considerably, and smaller firms are feeling the most impact.

It also says any reductions in compliance costs for firms will be gradual, and the complexity of tax legislation is due to taxpayers’ need for certainty.

“The provision of a range of choices, concessions and thresholds for small businesses in the tax system adds to complexity and encourages small businesses to seek professional advice, which increases their monetary compliance costs,” the study reports.

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