WITH an accumulation of 125 tax laws, which are set to collect more than A$320bil a year revenue, the Australian tax system is certainly comprehensive and rather complicated.
To make matters worse, an individual business person or a company operating in more than one jurisdiction could face as many as 160 different state levies or 259 federal taxes. Yet, the simple fact is that 90% of the total revenue is collected under 10 different taxes, including general and services tax (GST), which contributes 13%.
Apart from state levies on property, motor vehicles, insurance contracts and gambling, why are the other federal and state taxes still in the book? Should they not be abolished if they are no longer relevant?
It just seems incredible that so many tax laws have emerged since World War II, but none of the previous governments attempted to review and rectify the situation and reduce them into a smaller number with up-to-date legislation. Instead, there have been more new tax measures to collect more revenue for one thing or the other, though with some concessions.
Lawyers have complained that they have to look into hundreds of pages of law books to back up their cases even on a small - and what appears to be a simple - matter of contention.
The Rudd government realises the complexity of the situation and has appointed a five-member panel of experts, headed by Federal Treasury Secretary Dr Ken Henry, to review and make the system more competitive to foreign investments and to “reward the hard work of many Australians”.
Described as the most important task and most comprehensive review since the war in the mid-40s, it will deal with emerging challenges such as climate change and its associated costs as the world moves towards low-emission economy, and the increasing pressure for the tax system to be internationally competitive in an increasingly globalised world.
The review is part of the government’s broader efforts to modernise the economy and make it more productive, particularly encouraging people to work in a tight labour market. In the process, it will untangle the disincentives which are the results of complex interactions between the tax system and the welfare system, thereby simplifying the entire mechanism.
And because of its complexity, the government is seeking public submissions on a discussion paper, named Australia’s Future Tax System, which Dr Henry launched recently.
But, amazing as it seems, the discussion paper itself has 343 pages. How many community members or busy professionals would have the time, energy and the concentration needed to read through the report and respond with their comments?
No magic pudding
Henry explains that the document is descriptive and includes comments and observations about particular features of the tax system, and some people will find some of the observations “a little uncomfortable”. But he declines to say which particular observations are controversial and may be opposed by some groups.
However, Federal Treasurer Wayne Swan stresses that the aim of the review is to make the tax system simpler and more efficient. But he rightly warns that there is “no magic pudding” when it comes to tax reform.
The report sets out detailed architecture of the present tax and transfer system to provide for informed discussions but there are no recommendations about the future direction of the system.
What is important is a section identifying the economic, social and environmental challenges confronting Australia and pointing out the role of the tax and transfer system in responding to those challenges.
The report also provides international comparisons involving benchmarks against OECD standards and looks at the Australian system relative to those of regional neighbours.
Dr Henry says other countries have cut their corporate taxes over the past seven years, but it is difficult to analyse them. There has also been a lot of attention in Australia on the ratio of corporate tax collections to GDP (gross domestic products).
“We have highly profitable companies in this country and we have a very high profit share, historically high profit share, and there are two reasons why that sort of comparison is difficult,” he adds.
“Australia does raise a relatively high proportion of its total tax revenue from taxes on capital. In fact among OECD countries ... we would have the highest proportion of our total tax revenue raised from tax on capital.
“That’s obviously broader than the company income tax but, nevertheless, includes the company income tax.”
IN a somewhat surprising series of announcements, the Rudd government made known that it has acted swiftly and decisively to protect the robust Australian economy, the well-being of its citizens, their jobs and their residential investment activity against possible global recession.
The announcements, all of which are labelled under the A$10.4bil Economic Security Strategy for the Future, were made last week against a backdrop of strong balance sheets of Australia’s four major banks, which appeared to have suffered little effects from the recent financial turmoil in the United States and Europe.
However, most investors and economic observers were puzzled that Prime Minister Kevin Rudd found it necessary to also announce a three-year 100% guarantee on bank and credit society deposits after he himself had declared earlier that the banks were financially sound.
With apparent pride and assured confidence a day earlier, he had said that Australia was “better positioned than practically every other country in the world” to see its way through the global financial crisis that was affecting the confidence and real economy across the world.
And he added: “As you know, our economic regulators are the best in the world, our banks have the best balance sheets in the world, and our budget surplus is the envy of most countries across the world.”
Questioned about this in subsequent interviews, Rudd described the global financial crisis, the worst ever seen, as the equivalent of a “rolling national security crisis” that had now entered a “new, dangerous and damaging phase” affecting the real economy, growth and jobs.
For this reason, his government has decided to take decisive, responsible and early action in Australia’s interest. It will underpin the long-term stability of the Australian financial system.
Unknown to even the Federal Opposition, who kept attacking the Prime Minister as “Kevin 747” for his frequent flights overseas to meet world leaders as the global financial crisis began to unfold, Rudd has kept his fingers close to the pulse of world economies through the Financial Stability Forum.
He and his ministers, particularly Federal Treasurer Wayne Swan, have sought to anticipate the crunch and to decide what course of action to take to soften its effects on Australia’s economy.
Swan returned to Australia last week after talking to leaders of the International Monetary Fund, G7 and G20 in New York and Washington where they agreed to stimulate the world banking systems with nearly US$2tril.
Hence, the new measures in Australia, which took many people by surprise in view of the nation’s robust economy and financial system, are based on recent IMF data that show a significant drop in the global economic outlook and forecast as a result of the crisis.
There is also evidence of price declining for Australian commodities on the international markets.
Of the A$10.4bil in the stimulus package, nearly half of the amount will benefit more than three million pensioners who are hit hardest by increasing costs of living due to higher food prices and petrol price hikes. Unfortunately, the benefit does not extend to self-funded retirees who have lost between 30% and 50% of their money in superannuation funds.
Each pensioner couple will receive a lump sum of A$2,100 and a single pensioner A$1,400. Their fortnightly pensions of A$939 and A$562 respectively will be reviewed by the middle of next year when the Hamer Committee of Inquiry finishes its study and makes its recommendations.
Those who currently receive support through family tax concessions will get a one-off payment of A$1,000 for each eligible child.
There are now 3.8 million such children in the country.
The government has allocated A$3.9bil to support low- and middle-income families.
But it is also concerned about the softening demands in the housing sector, which is critical in terms of overall performance of the nation’s economy.
To boost this sector, it will increase the current A$7,000 grant for eligible first home buyers to A$21,000 if they buy newly-constructed houses. This is estimated to cost the government A$1.5bil.
At the same time, A$187mil will be spent to create a further 56,000 new training places this financial year to double its existing intakes.
In addition, the government will bring forward its nation-building agenda in a comprehensive statement to be released in December with a list of priority projects for education, health and hospitals.
All this means that the Rudd government has prepared well ahead to provide a strong buffer to deal with possible continuing effects of the global financial meltdown.
It is determined to take whatever action is necessary to continue to maintain the stability of the Australian financial system and to underpin positive growth in the future.
“It is really important to understand the world has changed,” Rudd explained. “It changed dramatically in the last couple of weeks.
“If we are to learn anything from the economic history, it is this: at a time when the (global) economies need support, don’t leave it (till it’s) too late. Act decisively, act responsibly, and act early.”
ALL eyes will be on a new Defence White Paper, which will certainly take into consideration the challenges facing Australia from what seems to be an emerging arms race in the Asia-Pacific Region.
The white paper was to be released next month, but it has been delayed until early next year. It is expected to contain Australia’s response to the arms build-up in Asia and will be preceded by a National Security Statement, to be published within the next two weeks.
There is no doubt that Prime Minister Kevin Rudd is concerned about the “explosion” of defence spending in an intensified strategic competition for primacy between China and the United States. The concern is what would lie ahead in the relatively calm and peaceful region of the past four decades if the financially-stricken US failed to come out on top of this unprecedented contest.
No one can be certain of it at this point in time. However, the head of the Strategic and Defence Studies Centre at the Australian National University, Prof Hugh White, believes that China does not really have to wait to compete for supremacy in the rapidly changing region.
China already has the potential to challenge US power in Asia, particularly in a Taiwan contingency, he says.
He also claims that Beijing is “sharpening its capability to target American carriers”.
Rudd, however, is confident that the US would remain the world’s only superpower and maintain its global leadership role until the middle of this century.
This apart, an interesting revelation is that Australian and American military experts and defence personnel have cast serious doubts on the capacity and performance of the US Joint Strike Fighter F35 used recently in a war game in Hawaii. They claim that jet fighters used by China and Russia, and probably by some other countries in Asia, appear to be more superior to the F35.
Although neither the US nor its allies, including Australia, could do anything about it, their main worry certainly is the warning by their intelligence agencies that China is believed to be building an underground naval base in Sunya on Hainan Island.
The Chinese navy now has at least 55 submarines, of which eight are nuclear-powered. Many are reported to be equipped with Yingi-8 anti-ship cruise missiles that can be launched from underwater.
The arms build-up is part of China’s expanded defence budget, which was lifted this year by a record 19.4% to A$63bil.
Similarly, India and other Asian countries in the region, probably concerned by China’s rapid build-up of its arsenal, are also increasing their defence budgets.
All this is happening in a region where tensions continue to exist over the China-Taiwan sovereignty issue, unresolved border disputes between various countries, and between China and India and its maritime neighbours in the South China Sea.
It is in this context that Rudd recently gave a blunt warning at the National Congress of the Returned Services League that Australia must prepare to enhance its naval capability so that it can protect its sea lanes and support its land forces as they are being deployed.
He wants to ensure that the Australian Defence Force is prepared to “answer the call if it is needed”. And he wants an air force that can support combat roles and “deter, defeat and provide assistance” to land and maritime forces.
His warning may sound somewhat dramatic or a sort of knee-jerk reaction, but the truth is Australia’s defence has indeed been overstretched for a long time.
At least some 4,000 Australian troops are still on military operations in Iraq and Afghanistan and on special missions in Timor-Leste and the Solomon Islands.
With these widespread obligations and commitments, it would not be surprising that a sense of uneasiness would arise from some defence officials as they watch the arms build-up in Asia. But the Rudd government’s commitment to extend the real growth of the defence budget by 3% a year until 2018 is not enough for the type of aircraft and naval capabilities that it envisages for Australia.
So he has a plan: to use his skill as a former diplomat and as a fluent Mandarin speaker to play the role of middle-power diplomacy.
MUCH of the stability of the Australian economy in these difficult and worrying times following the financial meltdown in the United States depends on the continuing growth of exports to China.
But it is not just because of the iron ore exports to the world’s second biggest economy that would provide a buffer for Australia against possible recession as most people believe.
Iron ore and coal exports, which are currently fetching record prices, account for less than 20% of Australia’s total exports - or just 7% of the GDP (gross domestic products) - although more iron ore goes to China than to the rest of the world.
They are more visible, of course, but in reality, they have not risen much more than the outputs of two decades ago.
What makes Australia’s economy strong is the expansion of its exports of other minerals, metals, natural gas, wheat, wool, meat and other commodities.
Equally important are the exports of elaborately transformed manufactures and services and increasing rate of direct investment in Australia, which is almost equal to the nation’s direct investment abroad.
However, Australia’s exports of goods to China, which will probably become the world’s biggest economy in the next 20 years, have grown six-fold compared to what they were a decade ago.
Australian exports to China are three times more than to Britain, twice as much to the US and much more than to the European countries.
Fortunately, despite the rising of small periods of bear markets in the past, Australia is now in the 17th year of uninterrupted expansion as a result of economic and industrial reforms of the 1980s and early 1990s.
According to the latest available statistics, exports to China in the 12 months to April this year were worth A$25.1bil, the second biggest after Japan (A$32.4bil), followed by South Korea (A$13.4bil) and the US (A$10.3bil).
Resources of all kinds and manufactured export volumes continued to expand strongly over the same period with the services sector also contributing substantially.
Despite the financial turbulence that has spread from the US to Europe and most parts of Asia in the last two weeks, and with the exception of a possible global recession, Australia’s commodity export earnings are expected to increase by 40% to A$212bil in the 2008-2009 financial year.
Exports from the mineral and energy sectors alone are expected to grow by 48% to A$178bil.
These are the underlying figures which probably gave Prime Minister Kevin Rudd and Federal Treasurer Wayne Swan the confidence and assurance that Australia would be relatively safe from a possible global recession.
Australia’s four major banks, which are among the 20 double-A rated banks in the world, are fundamentally sound. Representing 85% of the Australian banking system, they were praised in the latest report of the International Monetary Fund as “in good order”.
“That they are weathering the (US) financial crisis well,” the report says. “That they are well-regulated and they are well-capitalised. That remains the situation.”
And Rudd remarked: “Our responsibility as a government is to ensure the stability of the economic system and the financial system. That’s the absolute core of the well-being which flows to Australian families.
“This is a difficult task given the global financial factors that are involved.
“The bottom line is this. Strong regulation, the best regulatory system in the world, strong balance sheets on the part of our banks, as well as a strong Budget situation on the part of the government means that Australia’s situation in this period of global financial turbulence is the best that you could have against what is being experienced by other countries and economies around the world.”
However, Rudd is also very concerned about the flow-on impact of the US financial crisis.
This is natural, of course, because a global recession will affect any country no matter how well the economy may seem and how well the banks are regulated.
China, with an economy growing in double digit annually, will certainly review its growth prospects and might subsequently slash down its imports of Australian resources and commodities should such a catastrophic event as recession take place in the weeks ahead.
To most business people now, this month of October is an ominous one: It was in October that the Great Market Crash of 1929 occurred, and so did the Crash of 1987.
Could this month be the blackest Black October yet?
Financial experts say that even with Congress approving the US$700bil repackaged bailout proposal, it would not be enough to stop the US from going into recession.
Hence, the threat of global recession is probably just behind the black clouds.
Thus, it is not surprising that the Rudd government considers the relationship with China of great importance to Australia.