Henry Review Panel To Consider Australia's Taxation Of Savings

by Mary Swire, Tax-News.com, Hong Kong

06 October 2009

Ken Henry, Chair of Australia’s Tax Review Panel and Secretary to the Treasury, took the opportunity of a recent speech to the Australian Conference of Economists to address the present tax treatment of savings in the country.

In Australia, he noted that personal capital income taxation policy, and tax policy more broadly, had long been inspired by the ideal of comprehensive income taxation. “At face value, this argument is compelling,” he said. “Proponents of comprehensive income tax argue that it is unfair that things like capital gains are taxed less than paid work: it should all be treated as taxable income.”

However, he continued, the above ignores the effect of inflation on interest and capital gains. “Even under low rates of inflation, the real effective tax rate on capital income can be much higher than the statutory tax rate. Assuming a nominal return of 6% per annum and 2.5% inflation, the real effective tax rate would be around 51%, two-thirds higher than the statutory tax rate (of 30%).”

He also observed that “while many in Australia continue to see comprehensive income tax as the ideal, seminal reviews into taxation around the world in the last three decades have largely gone the other way.” He said that he was “not aware of any recent credible work that would suggest that taxing capital income at the same rate as labour is optimal, other than for administrative reasons.”

In any case, he was reminded that, in Australia, there still exists differing tax treatment of items considered to be personal capital income. For example, he said, “subject to certain conditions, individuals today include only 50% of the realised nominal capital gain from assets in their taxable income.” In addition, with regard to the taxation of superannuation, “the tax burden has been shifted away from the taxation of retirement benefits, with taxes being applied at the contributions and earnings level, but generally at concessional rates.”

He therefore concluded that Australia’s income tax system “resembles an ad hoc dual income tax — where capital income is generally treated separately and concessionally. However, unlike what may be considered a pure dual income tax model, different savings types are treated at a variety of different effective tax rates.”

Quoting the Australian Bureau of Statistics, he showed that the principal holdings of Australian households are: their own home (44% of household assets) which is untaxed through the income tax system; other property - including rental property (16%) which is lightly taxed; superannuation (13%) which is at most lightly taxed; shares and interests in trusts (12%) which are lightly to moderately taxed; personal use assets (11%) which are untaxed; and bank accounts and bonds (4%) which are fully taxed at marginal rates.

“Clearly we have a savings tax base,” he said, “that exempts the lion's share of savings (owner-occupied property, personal use assets), fully taxes a very small proportion of savings (returns from interest bearing deposits), and lightly to moderately taxes everything else at varying rates.”

He therefore went on to “enquire whether that particular allocation of savings - and the particular tax system applying to them - is in any sense optimal,” and if “we have a tax system for household saving that has not been calibrated to address the challenges of population ageing and the financing of unprecedented levels of business investment and infrastructure.”

“While we can see that we have a system that is ripe for reform,” he concluded, “we can also see a complex set of tradeoffs in respect of the choice of the savings base, the choice of rate and the forms in which such a tax might be levied. Judgement is required. Over the next couple of months, we (the tax panel) will be refining our judgements on these important issues as we finalise our report on the tax and transfer system.”

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