What does the future hold for tax and super post-COVID-19?

The future of the economy post-pandemic? It’s in the hands of our tax system and superannuation regime. But are they up to it? Not without massive reform, according to our Live Tax Q&A Forum’s expert panellists who share here their unique and bold predictions, cautions and big ideas for the future.

Tony Greco, General Manager Technical Policy, Institute of Public Accountants

Death and Taxes are the only two certainties in life. One thing that COVID-19 has taught me is that during times of upheaval, changes can happen easily and quite quickly. We have seen many examples, Corporations Act (solvency & disclosure), ASIC (accountants providing super advice), and Fair Work, to name a few with little or no consultation.

An optimist would say that this is the circuit breaker which could break the inertia against pursuing a wide-ranging reform agenda with tax in the mix. The pessimist would argue that once the pandemic settles down that the government will revert to a narrow reform agenda and continue with piecemeal reforms.

What we do know is that our tax system was not fit for purpose before the pandemic hit and it will not serve the government well in the post-COVID-19 recovery. Its two principal sources of revenue, namely personal tax and company tax which account for 60 per cent of the total tax take, have been adversely impacted and will take years to recover to pre-COVID-19 levels. Unemployment, low wage growth and company losses will significantly lower the tax take for years to come.

Many are now urging the government to pull the reform trigger as time is running out to undertake significant tax reform. Most of the analysis for a future roadmap has been done courtesy of many reviews (ie, the Henry Review).

What is required is the political will and a huge amount of courage to convince the electorate why it is important to reform our tax base.

Robyn Jacobson, Senior Advocate, The Tax Institute

Budget predictions

  • The government could seek to bring forward stages 2 and/or 3 of the personal income tax cuts from their legislated start dates of 1 July 2022 and 1 July 2024, to 1 July 2021. While this would detract from government revenue sooner rather than later, it would place more money in the hands of middle to high income earners who will be relied upon to increase their spending in the economic recovery post-COVID-19.
  • We will likely see an extension of the instant asset-write off beyond 31 December 2020, given its proven effectiveness and popularity, and the trend to keep extending the measure since 2017.
  • Given the increased lockdown in Victoria, and the reality of employees working from home for what will inevitably be extended periods, the shortcut rate for 80 cents should be extended beyond 30 September 2020.

Long-term predictions

We need to take a different approach on tax reform. What are we trying to achieve?

  • Fairness
  • Improved administration and compliance
  • Generate investment and jobs

We need the tax system to be designed around these key priorities.

Around 50% of taxpayers don’t pay any net tax — they may pay tax, but this is more than offset by transfer payments such as family tax benefit, tax offsets and other forms of assistance. Yet the perception is likely that “we pay too much tax”.

This prompts some fundamental questions:

  • Is this the right outcome?
  • What causes these taxpayers not to pay tax?
  • What role should the transfer system play in the tax system?

The design of the social security system is based on the family unit, yet the tax system is based on the individual taxpayer. Should we adopt a family-style tax return like the US does?

Blueprints like the Henry Review are a reflection of the economy at the time. But the economy has changed since then. COVID-19 has dramatically changed things. The US tax system and the OECD models have also changed things. So our system must also change.

We need a thorough and genuine review of our tax system so it can be redesigned to sustain us in the future.

Tony Negline, Superannuation Leader, Chartered Accountants ANZ

One of the stated purposes of compulsory super was that it was needed to increase national savings which in the late 80s and early 90s was quite low.

Another reason was to ensure fewer retirees relied on the government’s aged pension as the overall population aged.

Have these objectives been met? Hopefully we’ll get an answer in the Retirement Income Review which the government will release soon.

This review should acknowledge that superannuation serves lower income earners poorly. They must save in a vehicle which is taxed more heavily than they personally pay. Although these lower income earners will retire from the workforce with a lump sum of money via superannuation, they still qualify for the maximum government aged pension.

The income threshold before an employer must pay super needs to be increased dramatically.

And higher income earners, say earning more than $200,000 a year, will save anyway so employer super should be made voluntary for that small cohort.

For everyone else we need to have an argument about the rate of compulsory super. Do we really need 12%?

Given the economic damage being caused by extended lockdowns, surely focusing on reducing employment on-costs will aid recovery and encourage greater employment.  It might be anathema to suggest it, but perhaps a two-year employer compulsory super holiday should be considered.

Over one million super accounts have been raided because of Covid-19. In my view many are saying if they had a choice, they wouldn’t have compulsory super. The super industry needs to take stock as to what this might mean long term.

Nathan Lynch, Asia-Pacific Manager, Regulatory Intelligence, Thomson Reuters 

The unprecedented government stimulus programs during the pandemic have been driven by urgency, rather than a nuanced approach to policy design and risk management. It’s a similar dynamic to what we saw during the financial crisis, where speed-of-stimulus was the overriding objective. It was all about getting money quickly into people’s pockets to avoid a procyclical economic disaster. 

Unfortunately, this has been exploited by large numbers of people, from organised crime groups through to individual taxpayers. 

I expect we’re going to see a much closer alliance between tax authorities and the world of financial intelligence as a result of the lessons from the COVID-19 stimulus. Sophisticated data analytics will be the backbone of this program to prevent the abuse of the generous and urgent government fiscal interventions. 

A good example is the “early release of superannuation” program. Within days of the $10,000 drawdown being announced, organised fraud syndicates had used fake ID to steal more than A$120 million from super funds through rollover requests. From a financial intelligence perspective, this was entirely predictable. 

On the plus side, the close working relationship between the major banks, AUSTRAC and the ATO meant that this could be detected and disrupted very quickly. Within days the vulnerability was identified and the program was suspended. Without that partnership approach the losses would have been much higher.   

Looking ahead, I predict that sophisticated data analytics and greater collaboration between the public and private sectors will be one of the enduring results of this “pandemic” experience. All of the major players, across government and the financial sector, have a common objective when it comes to tackling financial crime. 

Australia’s world-leading Fintel Alliance is likely to be the hub for this collaboration, but the lessons and intelligence on criminal typologies will spread out much more widely. This is bad news for financial criminals. But it’s also a clarion call to individual taxpayers and businesses who will be subject to much more sophisticated use of big data, cohort analysis and transaction monitoring. 

When the dust settles on COVID-19, the ATO, AUSTRAC and other agencies are likely to do some deep analytics on the abuse of these stimulus programs.  

One of the key take-aways is that tax advisers need to ensure their clients are aware that they’re operating in a new environment, with unprecedented cooperation between the public and private sectors. The AUSTRAC money laundering cases against Commonwealth Bank and Westpac have been another major driver. These are the biggest civil enforcement actions in Australian corporate history. They’ve been a game changer in driving awareness of money laundering and financial crime risks across the financial services sector. 

As a result, banks are spending hundreds of millions of dollars on better financial crime controls. The ATO, as the country’s biggest user of financial intelligence, will be the primary beneficiary of this shift in focus. 

Looking ahead, taxpayers and their advisers need to be mindful that these trends are only accelerating — with far greater information sharing, both domestically and across borders. 

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