The Financial System Inquiry (FSI) report had some surprising things to say about tax — notwithstanding that the FSI committee had not really been charged with reviewing tax specifically (although they were certainly tasked with looking at superannuation, and the tax aspects thereof).
Tax is of course an integral part of any financial system, however the FSI report states that it identified a number of taxes that “distort” outcomes in the financial system.
Dividend imputation, for example, has been singled out to be axed. The FSI views franked dividends as a virtual “subsidy to domestic equity holders”, and states that for many investors the value of imputation credits received may exceed tax payable.
Also, while GST is not levied on most financial services at present, the FSI committee has strongly recommended investigating an alternative. It said financial service providers may not charge GST, but still have to pay GST on other inputs, therefore passing these costs on to consumers.
Tax on interest income on bank deposits has also been indicated as requiring a fresh look, with the committee recommending a more favourable tax treatment to fix another “distortion” and direct savings to more productive outcomes.
Another distorting influence in the incumbent tax system, and which needs to change the report said, is the capital gains tax concession for assets held more than a year. Not only that, but the tax treatment for leveraged investments (that is, negative gearing) is strongly recommended for reconsideration.
There are additional tax-specific recommendations made by the FSI committee, including a reduction in interest withholding tax, the tax treatment of funds management vehicles, tax concessions for superannuation earnings (taxing earnings in pension phase at the same rate as in accumulation phase), reducing insurance products taxes and rationalising the tax treatment of “legacy” financial products (those that are outdated but still held).
Mark Chapman, Head of Tax with Taxpayers Australia, commented on Murray’s unexpected incursion into the tax reform debate. “Hats off to Murray and his colleagues,” Chapman said. “Many expected this report to be a whitewash, giving a clean bill of health to the status quo, but what Murray has delivered is a surprisingly thoughtful package which will give both the government and the financial institutions a few sleepless nights as they consider whether to implement some of Murray’s more radical ideas.”
“Of course, his tax analysis is necessarily quite shallow – this isn’t a tax report after all – but some of his ideas feed into the wider discussion around the future of some of the more generous tax reliefs around superannuation and capital gains tax, and no doubt Murray’s thoughts will help to shape the outcome of the forthcoming tax White Paper.”
