Tax reform

In July 1984 Keating took options to reduce personal income tax rates to Cabinet, noting that the ACTU demanded substantial income tax relief for low and middle-income earners to ensure the survival of the Prices and Incomes Accord. The ACTU favoured a tax cut of between $7.50 and $8.50 per week for taxpayers earning between $12,000 and $25,000 annually, which would cost between $1.3 and $1.5 billion. However there was no easy option for providing tax relief. Inflation had resulted in taxpayers who received only average weekly earnings paying a marginal tax rate of 46 cents in the dollar. A total of 44 per cent of taxpayers were in the lower or middle-income groups earning between $10,000 and $20,000 per year, so that even a modest reduction in their tax obligation would result in a substantial loss of revenue. This loss could not be recouped from high-income earners because there were not enough of them. One option would be to raise the tax-free threshold, but this was an expensive way to assist the genuinely needy and would also benefit some part-time workers who were not genuinely needy. Cabinet agreed to replace the existing three income tax scales (30, 46 and 60 per cent) with five scales (25, 30, 46, 48 and 60 per cent), and this was announced in the budget speech on 21 August. The amended scales would save the majority of taxpayers $7.60 per week, costing the government $2.1 billion in a full year.

On 30 October 1984, in the course of the national election campaign, Prime Minister Hawke announced that if re-elected, the government would hold a national tax summit to seek consensus on ways of reforming the tax system. This defused tax policy as a contentious election issue, but left the government with the formidable challenge of achieving consensus on worthwhile reform in a notoriously difficult and divisive area. On 12 May 1985 Cabinet considered a 414-page draft White Paper on options for tax reform prepared by a task force chaired by Treasury. The paper argued that the 'muddle through' or 'potholing' approach to tax reform was no longer viable. Many tax loopholes had been closed, but often only when they had become outrageous. In any case old loopholes were merely replaced with new ones, aided by the High Court's generally lenient decisions on tax cases between the mid-1960s and early 1980s. Legislative amendments by the Hawke government had prevented more than $2 billion of revenue being lost, but this approach was not a lasting solution.

The draft White Paper recommended careful consideration of a range of reforms, the centrepiece of which was a reduction in marginal income tax rates, to be offset by a broad-based consumption tax. The rationale for the consumption tax was that the present taxable income base accessed less than half of household income due to a combination of exemptions and evasions; in contrast, a consumption tax would come much closer to accessing total household income. The White Paper also recommended the introduction of fringe benefits and capital gains taxes, and a tightening of tax provisions in areas such as negative gearing of investment properties, primary production losses, gold mining, forestry and film productions. It also proposed the introduction of a system of national identity cards to counter fraud and evasion. Cabinet broadly endorsed the White Paper on 12 May, but directed that it be revised to read less dogmatically and to show the effects of various options, ranging from merely broadening the income tax base to introducing a broad-based consumption tax.

The draft White Paper was released on 4 June 1985 and the Tax Summit was held in Canberra in the first week of July. Keating briefed Cabinet on its outcomes on 8 July. He noted that the Prime Minister had indicated at the final session of the Summit that there seemed to be general support for a number of broad positions, including a crackdown on tax evasion, some extension of the direct and indirect tax base (including a consumption tax on services), adequate compensation for the needy, a possible replacement of the income tax threshold with tax rebates, changes to the dependent spouse rebate and the possible introduction of dividend imputation, aligning company tax rates with the top personal rate. Keating noted that some participants had queried the extent of consensus reached, but that there was widespread endorsement of the view that the government should develop a final package around these broad positions. Substantial further work was necessary on issues such as rationalising and broadening the scope of the wholesale sales tax, a consumption tax on services and tightening tax exemptions. Work was also needed on compensation for the needy, the introduction of full dividend imputation, aligning the top personal tax rate and the company tax rate at 48 per cent, and substantially reducing the present 46 per cent tax rate.

On 12 August 1985 Cabinet noted Treasury advice that revenue from a tax on services and a major extension of wholesale sales taxes would be insufficient to fund compensation for low-income earners and to make a satisfactory contribution to cuts in income tax. The Treasurer would therefore announce as soon as possible (which he did the following day) that the government would not give further consideration to a tax on services or a major extension of wholesale sales taxes.

Keating announced the final package in the House of Representatives on 19 September, stressing that they aimed 'to substantially lighten the heavy weight of high marginal tax rates on honest taxpayers and to restore fairness to the operation of the taxation system'. He also suggested that:

…few of the people in the top bracket have paid the 60 cents in the dollar asked of them. They have arranged their affairs to evade, avoid or minimise that liability. Instead their share of the burden has been carried by ordinary middle income Australians.

There were to be new taxes on fringe benefits and capital gains, the wholesale sales tax was to be streamlined, and the tax regime in areas such as farm losses, water conservation, forestry and film production was to be tightened. Income from foreign sources would be taxed in Australia, with an allowance for foreign tax already paid. These and other measures were expected to raise $1.7 billion in 1987–88, but the revenue gains would be far outweighed by tax cuts worth $4.5 billion, the difference between the gains and the cuts being covered by rigorous control of government spending. The income tax reforms reduced (in stages) the 60 cent rate to 49 cents and the 48 and 46 cent rates to 40 cents, with smaller reductions for rates below 40 cents. Welfare benefits would be adjusted to alleviate 'poverty traps' and give pensioners and other beneficiaries more incentive to earn extra income.

Selected documents

Copyright National Archives of Australia 2019