Despite growing consensus in financial circles that Australia and New Zealand require long-overdue tax reforms, one hurdle looms large – a lack of political will.

Rapid election cycles and the risk of voter backlash have for many years resulted in governments in both countries shunning major changes to tax regimes. Michael Croker CA, Australia’s tax leader at CA ANZ, says the need to fund fast-growing payments areas, including in aged care, defence, disability and government debtservicing obligations, has put the spotlight on national revenue collection and spending. At the same time, cost-of-living pressures mean the major political parties are reluctant to broach taxation changes.

“Politically, this is very difficult,” Croker admits. “But there’s not even an appetite to have some intelligent people playing in the sandpit to generate proposals. Meanwhile, the go-to strategy remains over reliance on the personal tax base.”

In New Zealand, too, there is a view that it is time to refresh tax policies, many of which are still aligned with much-praised reforms from the mid-1980s. Scott Mason FCA, senior tax advisory partner at Findex financial advisory and accounting firm and chair of CA ANZ’s New Zealand Tax Advisory Group, is hoping the major political parties can have “mature conversations” on tax changes “without getting beaten up by the other side”.

“This is the real question that we face,” he says. “How can we have a conversation that’s bipartisan?” Too often, Mason suggests, political parties pull short-term tax levers that create confusion in the market. For example, recent government incentives for electric vehicles, while worthy, have created disincentives for diesel vehicles that have had negative flow-on effects for some farmers.

Such a scenario underlines the imperative of considered, long-term decision-making. “It’s going to require somebody with the courage to say, ‘Actually, this is what’s best for New Zealand and let’s start the journey’, while framing it so people can come on the journey,” Mason says.

Time for a different approach

With many taxpayers being slugged by excessive rates because of bracket creep in Australia and New Zealand – and with digitisation potentially changing the business tax landscape – the calls for change are getting louder.

Susan Franks, CA ANZ’s senior tax advocate in Australia, says it is clear the nation needs a long-term reform plan to build a sustainable tax base for the nation’s future needs. An ageing population is increasing pressure to find smarter ways of funding critical national health services, among others.

The Intergenerational Report 2023 forecasts that, as the population grows and ages, Australian Government payments as a share of GDP will rise from 24.8% now to 28.6% in 2062–2063. “And we don’t have receipts increasing at the same rate,” Franks says.

The report also indicates that, in the absence of policy change, personal income tax receipts are projected to grow from 50.5% of total tax receipts in 2022–2023 to 58.4% in 2062–2063.

“That is particularly concerning because the intergenerational report is saying that the number of people who are working and earning wages will decrease during this period due to the ageing population,” Franks says. “As a result, there will be a much heavier burden on salary and wage earners.”

She says there are also implications for SMEs, as the ATO rolls out an increasingly digitised taxation platform that seeks greater tax collection from smaller businesses.

“The ATO is rethinking its model. It realises that the small business market has traditionally been very difficult to audit.”

This change in approach from the ATO includes targeting more reporting, compliance and revenue from the sharing economy – that is, economic activity such as ridesharing, food deliveries and job services that are conducted on a digital platform. “But it’s one thing to report the income – you also need to collect tax from the income, and there’s about A$100 billion of tax that’s outstanding in Australia,” Franks says.

In New Zealand, Mason acknowledges the progressive political environment in 1985 that led to the introduction of a world-leading income tax policy and a “really pure GST”. However, he says a new tax reform round is due, given that the structure of the New Zealand economy is very different almost four decades on. “What needs to happen with any tax system on a periodic basis is a reset,” he says.

FBT on the radar in New Zealand

Part of the reset in New Zealand should involve updating the FBT regime, according to John Cuthbertson FCA, New Zealand’s tax leader at CA ANZ.

“We’re advocating very strongly for that at CA ANZ and we’re getting some cutthrough with the political parties and Inland Revenue,” he says.

In 2022, IR released a report, Fringe Benefit Tax: Regulatory Stewardship Review, acknowledging that FBT needs a review. The tax is “complex and imposes a high administrative and compliance burden on taxpayers relative to the amount of tax that is payable”.

Cuthbertson says the key is to “rightsize” the FBT and simplify rules relating to it. For all its complexity, he points out that the FBT is “not a big revenue earner”, generating only about NZ$600 million a year. The FBT should be limited to in-kind remuneration and modernised to reflect the fact that, in a post-COVID environment, working from home is now the normal model for many employees.

“We’ve had an exemption from FBT for on-premises type activities, but a lot of things are done away from the office now, so it’s diluted the effectiveness of that exemption,” Cuthbertson says.

He also hopes FBT will be simplified regarding the use of motor vehicles. As it stands, a vehicle is exempt from the tax only on days it is not available for private use, or if it is used for essential work purposes. That means if a car is driven for private use for part of the day, the whole day counts for FBT purposes. “That’s quite draconian,” Cuthbertson says. Superannuation in the mix Some analysts favour a broadening of the base and rate of GST to relieve strain on the Australian income tax system, while others advocate the collection of more revenue from efficient tax bases such as land, resource rents and road-user charges.

For its part, CA ANZ believes the benefits of environmental taxes should also be investigated. The equity of the tax system, especially intergenerational equity, also needs to be considered to help support the costs associated with an ageing population.

With the Australian Parliamentary Budget Office estimating that the cost of aged care will climb by almost A$29 billion to A$63.6 billion in 2033–2034, there is conjecture in some quarters that the Australian Government could seek to draw more on the superannuation system as part of the funding solution.

The Australian Government has published draft legislation that, from 2025–2026, proposes a 30% tax on superannuation balances over A$3 million.

Tony Negline CA, superannuation and financial services leader at CA ANZ, says Australia’s “dependency problem”, whereby a diminishing number of taxpaying workers support a growing number of retirees, leaves the government tough decisions to make on revenue-raising. CA ANZ does not support the tax hike on larger super balances because of issues around taxing unrealised capital gains, and concerns over the treatment of unrealised capital losses and defined benefit pensions.

The other objection is that the new tax would “shift the goalposts”.

“For many, many years people have been encouraged to put money into super, and some have been very good at investing money and making outstanding returns through super. They shouldn’t be retrospectively penalised for that,” Negline says.

KiwiSaver, New Zealand’s voluntary retirement savings scheme, is also under the microscope. Last year, government plans to charge GST on fees paid on KiwiSaver accounts were put on hold because of public pushback. The move would net about NZ$225 million a year.

Cuthbertson says governments tread carefully with potential tax policy and social engagement changes “because they tend to get very political”.

“Efforts to introduce a capital gains tax are a case in point,” he says. “Any party that suggests having a comprehensive CGT or raising the age of entitlement to superannuation, it’s pretty much the end of its election hopes.”

“Any party that suggests having a comprehensive CGT or raising the age of entitlement to superannuation, it’s pretty much the end of its election hopes.”

Getting down to business

On the business front, Franks says CA ANZ advocates streamlining Australian state taxes, which would particularly benefit SMEs by minimising red tape. It also supports government initiatives which could assist this process, including more payroll tax harmonisation, the National Business Simplification Initiative and extending Single Touch Payroll to more categories of payments for services.

Digitisation can also improve SME tax compliance, according to Franks. “The ATO is rethinking its model,” she says. “It realises that the small business market has traditionally been very difficult to audit, so it’s got to come up with smart ways of educating and getting businesses into new tax-compliance circular economy models.”

Other tax-related measures are on the table for Australian businesses, including draft legislation to introduce a small business energy incentive. Businesses with aggregated annual turnover of less than A$50 million would have access to a bonus 20% tax deduction for the cost of eligible depreciating assets that support electrification and more efficient use of energy.

One of the most pressing problems with Australia’s tax system, according to Croker, is its complexity. The tax code has numerous deductions, exemptions and credits that can be confusing, especially for SMEs and individuals. To address this, CA ANZ suggests reducing the number of tax brackets, consolidating various tax offsets and streamlining reporting requirements.

Croker believes the government could offer a trade-off to taxpayers. “Instead of going through the compliance minefield of work-from-home deductions, car logbooks, work-related travel and self-education claims, why not offer the alternative of a standard deduction that would alleviate the need for many workers to lodge an annual income-tax return?”

The way ahead

As New Zealand contemplates possible tax reforms, Cuthbertson says the appropriate use of digital systems within the payroll reporting regime provides a possible blueprint for some other elements of business and tax transformation. Those systems have lightened the reporting and compliance burden for business, while also giving IR better data and information.

“That’s the endgame here,” he says. “You want to increase administration and compliance efficiency and reduce the ability for errors – making it easy for those that want to comply and harder for those that aren’t so inclined.”

Mason endorses a proposed ‘report card’ idea that details tax people pay for the support they get from government through taxation, and how government spends tax revenue.

“People are too disconnected from government and our levels of financial literacy are really, really poor. To me, the principle of citizens being more connected to their government drives transparency – and one of the greatest areas of dissatisfaction in New Zealand at the moment is the view that there’s a lot of tax being collected, but that it’s being wasted.”

In that vein, Negline urges Australia to consider ways to address the lack of availability of quality financial advice, noting that the number of financial advisers across the country has dropped from about 30,000 to 15,000 in the past five years. “And there’s the additional concern that the high cost of financial advice discourages people from going to get advice,” he says.

As well as providing greater financial literacy and transparency around the tax system, Negline says quality financial advice would lead to better long-term investment decisions that boost retirement incomes and relieve some of the payment burdens on government.

As he drives the argument for tax reform, Croker has no doubt that changes are essential to create a fairer, more efficient and growth-oriented tax system. He believes strongly in reducing the compliance burden on SMEs and individual taxpayers, and says government should continually evaluate and adjust the tax system to make it more efficient, with minimal ATO engagement required for the majority of taxpayers.

“So many countries do this really well – why can’t Australia?”

To that end, he hopes governments of all persuasions will have the courage to raise bold tax-reform ideas and discontinue the constant “tweaking of the existing tax system”.

“The lack of action on tax reform is just creating paralysis.”

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State of the nations

1. Average weekly full-time salary Australia:
A$1838
New Zealand: NZ$1273

2. Median weekly rent
Australia: A$588
New Zealand: NZ$620

3. Average weekly cost of groceries
Australia: A$207
New Zealand: NZ$427

4. Retirement age
Australia: 67
New Zealand: 65

Sources:
1. Australian Bureau of Statistics (May 2023); Stats NZ Labour Market Statistics (Income) (June 2023)
2. CoreLogic Quarterly Rental Review (October 2023); Trade Me Rental Price Index (July 2023)
3. CANSTAR Blue (August 2023); Stats NZ
4. Department of Social Services; New Zealand Government.

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Tax brackets

Australian income tax rates for residents (AUD)

Income	Tax rate	Tax paid
$0–$18,200	0%	0
$18,201–$45,000	19%	19c for each $1 over $18,200
$45,001–$120,000	32.5%	$5092 plus 32.5c for each $1 over $45,000
$120,001–$180,000	37%	$29,467 plus 37c for each $1 over $120,000
$180,000+	45%	$51,667 plus 45c for each $1 over $180,000

New Zealand income tax rates for residents (NZD)

Income	Tax rate	Tax paid
$0–$14,000	10.5%	10.5% of taxable income
$14,001–$48,000	17.50%	$1470 plus 17.5% of the amount over $14,000
$48,001–$70,000	30%	$7420 plus 30% of the amount over $48,000
$70,001–$180,000	33%	$14,020 plus 33% of the amount over $70,000
$180,000+	39%	$50,320 plus 39% of the amount over $180,000

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What a drag

The impact of bracket creep, also known as fiscal drag, on taxpayers is real in Australia and New Zealand. Analysis by The Australian Financial Review indicates most taxpayers are hit with higher income tax than a decade ago because of entrenched bracket creep, costing a worker earning A$100,000 a year almost A$1500 more, compared with 2011–2012.

In New Zealand, Deloitte notes that bracket creep has contributed to an increase in government tax revenue from NZ$97.4 billion in 2021 to NZ$107.9 billion in 2022, and a forecast of NZ$117.4 billion in 2023.

John Cuthbertson FCA, New Zealand tax leader for CA ANZ, says governments not raising tax bracket thresholds has boosted tax revenue – through bracket creep – without the need to raise tax rates.

The Australian Government used bracket creep to increase revenue

Clicl image to enlarge. Source: Bracket Creep and Its Fiscal Impact by Cameron Chisholm, Parliamentary Budget Office (July 2022).

The impact of bracket creep in New Zealand

Click image to enlarge. Data source: New Zealand Taxpayers’ Union calculator

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Fair play

One of the big cases for implementing tax reforms is to help create a more equitable society.

The Australian Council of Social Service (ACOSS) urged federal and state governments to “get real” about tax reform to raise more revenue for community needs, with CEO Cassandra Goldie commenting in a media release that it is time to “close the loopholes and shelters that allow people and businesses who have the ability to pay to avoid their obligations”.

ACOSS believes superannuation, capital gains tax, private trusts and mining resource taxes must be on the tax reform agenda, especially if spending is to meet needs in areas such as health and care services as the population ages. Goldie also argues that “Australia can’t afford to forgo A$20 billion a year for high-end tax cuts, or lower the company tax rate” at a time when income support payments for the disadvantaged are “woefully inadequate”.

CA ANZ’s Susan Franks agrees that tax reforms should “not just be about efficiency, but also equity”.

In New Zealand, there are also concerns about generating sufficient tax income to pay for the future requirements of the nation. Findex’s Scott Mason FCA says a broad-base, low-rate capital gains tax should ideally be part of the discussion. “Because, ultimately, if you don’t tax that income off capital, the wealth inequality just continues to grow,” he says.

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Take aways

Looking for the latest in tax? Check out CA Library’s regularly updated tax reading lists – a selection of recent articles and new release titles relevant to tax practitioners in Australia or New Zealand.