Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2016-2017-2018
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
LOWER TAX BILL 2018
EXPLANATORY MEMORANDUM
(Circulated by authority of Senator Leyonhjelm)
LOWER TAX BILL 2018
OUTLINE
The Lower Tax Bill 2018 nearly halves annual Commonwealth Government taxation.
Tax should be kept to a minimum as it involves using coercion to take someone's property.
Accordingly, government spending funded by taxation should be limited to the provision of
'non-excludable' services like national defence and the regulation of air quality. Access to
the benefits of 'non-excludable' services cannot be confined to those who would pay for such
services voluntarily. As such, the private sector is not well suited to provide
'non-excludable' services.
Costings obtained by Senator Leyonhjelm and published on the Parliamentary Budget Office
website indicate that limiting government spending in this way would halve annual
Commonwealth Government spending. This would then allow a near-halving of
Commonwealth Government taxation, while still allowing considerable improvement in the
Commonwealth Government's budget and balance sheet.
The Lower Tax Bill 2018 nearly halves annual Commonwealth Government taxation by
abolishing various taxes and reducing the rates of other taxes.
A Parliamentary Budget Office costing of these tax changes is attached to this explanatory
memorandum.
The changes apply from the first 1 July following Royal Assent, other than changes to fringe
benefits tax, which apply from the first 1 April following Royal Assent.
It is the intention that, where a tax is abolished from the first 1 July following Royal Assent,
liabilities arising from before that 1 July will still need to be paid, and credits, rebates and
refunds arising from before that 1 July will still be available.
The Lower Tax Bill 2018 repeals various acts. Upon the passage of the Lower Tax Bill 2018,
separate legislation would be required to remove redundant references to these repealed acts
across the statute book.
The Lower Tax Bill 2018 significantly reduces personal income tax and fringe benefits tax
and abolishes the Medicare levy. It significantly reduces corporate income tax. It abolishes
import duties, tobacco duties, alcohol duties and wine equalisation tax, fuel duties and luxury
car tax, the passenger movement charge and the major bank levy.
Personal Income Tax, Fringe Benefits Tax and Medicare Levy
The Lower Tax Bill 2018 introduces a $40,000 tax free threshold, for both residents and
working holiday makers, and a uniform 20 per cent personal income tax rate. The Low
Income Tax Offset and the Low and Middle Income Tax Offset are abolished.
Overall this would mean that every taxpayer would pay markedly less personal income tax,
now and in the future, compared to currently legislated obligations -- with millions of
current taxpayers to pay no personal income tax.
1
The Lower Tax Bill 2018 also sets the fringe benefits tax rate at 20 per cent and repeals the
2% Medicare levy while retaining the Medicare levy surcharge for high-income Australians
without private health insurance.
Corporate Income Tax
The Lower Tax Bill 2018 reduces the company tax rate to 20 per cent for companies of all
sizes.
The company tax rate is the final rate of tax for a foreigner investing in Australian
companies. Reducing the company tax rate reduces the after-tax rate of return necessary to
attract foreign investment. This reduction in the cost of capital would increase investment in
Australia and boost employment and wages.
For Australians who invest in Australian companies, company tax is effectively a
withholding tax. Every dollar taken in company tax is a dollar that cannot be retained within
the company to earn a rate of return. This means that, when the company eventually decides
to distribute dividends, there is less money to distribute: both the dollar taken in company tax,
and the rate of return that could have been made on that dollar, are missing. Under dividend
imputation, when Australian investors receive dividends they are also provided a refund of
the company tax paid, but no compensation is provided for the missing rate of return.
Accordingly, company tax disadvantages Australians who invest in Australian equity, and
cutting the company tax rate reduces this disadvantage.
Import duties
The Lower Tax Bill 2018 abolishes import duties.
Without import duties, Australian business would tend to produce products with high world
prices.
When import duties are imposed on certain products, the prices in Australia of those products
rise. This prompts Australian business to produce more of those products and less of other
products.
As a consequence the value, at world prices, of total Australian production is lower. This
hurts both workers and business owners alike, reducing their real incomes and purchasing
power.
Abolishing import duties includes abolishing ad hoc duties imposed in response to dumping.
Dumping is the selling of products in Australia at below the price prevalent in the country of
origin. Such selling could be maintained indefinitely and could be the natural result of the
Australian market being more competitive than the market in the country of origin. Such
cheap imports are good for Australian consumers and should not be discouraged.
Tobacco duties
The Lower Tax Bill 2018 abolishes tobacco duties.
Smoking tobacco primarily hurts the smoker, while harms to non-smokers can be managed
through regulation.
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It is not the role of government to prevent self-harm by adults who have not been declared
mentally incompetent. Government is our servant, not our master, and many smokers do not
want the government to tax their smoking.
Tobacco smokers tend to receive less rather than more government-provided services than
non-smokers, particularly given that their deaths tend to be quick rather than drawn out, and
their early deaths are reflected in fewer years of eligibility to the age pension and aged care
subsidies.
Moreover, it is inappropriate for government to provide services to middle and high income
earners where those services could be provided by the private sector, as is the case with
healthcare. Accordingly, taxes raised to fund such services are unwarranted.
Alcohol duties and wine equalisation tax
The Lower Tax Bill 2018 abolishes alcohol duties and the wine equalisation tax.
Alcohol consumption need not involve harm. Where harm arises it is primarily the drinker
who is harmed, while harms to non-drinkers can be managed through regulation.
Abolishing alcohol duties and the wine equalisation tax will remove the current uneven and
inequitable taxation of alcohol. Uneven taxation encourages drinkers to drink products other
than those they would otherwise choose, and encourages suppliers to similarly skew their
offerings.
Fuel duties and luxury car tax
The Lower Tax Bill 2018 abolishes fuel duties and the luxury car tax.
The revenue from these taxes far exceeds the costs of road construction and maintenance.
Fuel duties predominantly apply to on-road use of fuel. Yet the amount of fuel duty paid
bears little relationship with how much roads are used by road users. Cyclists, electric
vehicle owners and certain business vehicles use roads and pay no fuel duty, while owners of
fuel efficient vehicles use roads just as much as owners of gas guzzlers but pay less fuel duty.
Luxury car tax is imposed on the value of new cars over $65,000. This tax was introduced to
protect the Australian car manufacturing industry, which predominantly produced cars valued
at under the threshold. With the departure of the Australian car manufacturing industry, this
motivation no longer applies. Luxury car tax is an ineffective way to tax high income
Australians, as some high income Australians buy cars below the luxury car tax threshold and
some lower income Australians buy cars above the luxury car tax threshold.
The abolition of fuel duties includes the abolition of the excise on the production of crude oil
and condensate. This production excise currently applies to production onshore and within
three nautical miles of the Australian coastline. Alternative arrangements, including royalties
legislated by State and Territory parliaments and the Petroleum Resource Rent Tax legislated
by the Commonwealth parliament, are better suited to balancing the objectives of extracting a
return to the Crown with respect to a Crown asset, and minimising the discouragement of
private sector extraction.
3
The abolition of fuel duties is coupled with the abolition of duties on petroleum-based oils
and greases that are not used as fuel. These duties are referred to collectively as the 'product
stewardship oil levy', with the associated revenues used to help fund the oil recycling
industry. The 'Australia's Future Tax System' Review (Final Report, 2010, page 350)
criticised this arrangement:
"The levy does not change the behaviour of oil consumers once the oil is purchased
(that is, once you have paid the tax there is no incentive not to dispose of the oil
inappropriately), nor is the associated program a cost-effective means of addressing
the issue of inappropriate oil disposal."
Passenger movement charge
The Lower Tax Bill 2018 abolishes the passenger movement charge, which is a tax imposed
on passengers departing Australia.
The tax discourages foreign tourists from coming to Australia, to the detriment of Australia's
tourism industry. The revenue from this tax is unrelated to the cost of government-provided
border services, and the tax is imposed on only a subset of the beneficiaries of
government-provided border services.
Major bank levy
The Lower Tax Bill 2018 abolishes the major bank levy.
The major bank levy is an unwarranted imposition on the shareholders, employees and
customers of major banks.
It potentially reduces lending by banks and skews this lending towards more risky lending.
The major bank levy is not justified by the social costs of banking. Such social costs are
limited given that the primary victims of a bank collapse need only be those who choose to
do business with that bank. Moreover, the important social benefits of banking considerably
outweigh such social costs.
The application of the major bank levy to only a handful of large banks is unwarranted as it
discourages smaller banks from growing, and it is not the role of government to encourage
people to invest in, work in and patronise banks of a particular size.
4
NOTES ON CLAUSES
Clause 1: Short Title
1. This clause provides for the Bill, when enacted, to be cited as the Lower Tax Bill
2018.
Clause 2: Commencement
2. This clause provides that the substantive provisions of the Bill commence on the
first 1 July after Royal Assent, other than Part 3 of Schedule 1 relating to fringe benefits tax,
which commences on the first 1 April after Royal Assent.
Clause 3: Schedules
3. Each Act specified in a Schedule to this Bill is amended or repealed as is set out in the
applicable items in the Schedule. Any other item in a Schedule to this Bill has effect
according to its terms.
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Schedule 1 -- Amendments
Part 1 -- Repeals
A New Tax System (Luxury Car Tax) Act 1999
A New Tax System (Luxury Car Tax Imposition -- Customs) Act 1999
A New Tax System (Luxury Car Tax Imposition -- Excise) Act 1999
A New Tax System (Luxury Car Tax Imposition -- General) Act 1999
Items 1 to 4
4. Items 1 to 4 abolish the Luxury Car Tax by repealing the A New Tax System (Luxury
Car Tax) Act 1999, which sets out the tax, and by repealing the three separate Acts that
impose the tax, namely the:
A New Tax System (Luxury Car Tax Imposition -- Customs) Act 1999,
A New Tax System (Luxury Car Tax Imposition -- Excise) Act 1999, and
A New Tax System (Luxury Car Tax Imposition -- General) Act 1999.
A New Tax System (Wine Equalisation Tax) Act 1999
A New Tax System (Wine Equalisation Tax Imposition -- Customs) Act 1999
A New Tax System (Wine Equalisation Tax Imposition -- Excise) Act 1999
A New Tax System (Wine Equalisation Tax Imposition -- General) Act 1999
Items 5 to 8
5. Items 5 to 8 abolish the Wine Equalisation Tax by repealing the A New Tax System
(Wine Equalisation Tax) Act 1999, which sets out the tax, and by repealing the three separate
Acts that impose the tax, namely the:
A New Tax System (Wine Equalisation Tax Imposition -- Customs) Act 1999,
A New Tax System (Wine Equalisation Tax Imposition -- Excise) Act 1999,
and
A New Tax System (Wine Equalisation Tax Imposition -- General) Act 1999.
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Customs Tariff Act 1995
Customs Tariff (Anti-Dumping) Act 1975
Excise Act 1901
Excise Tariff Act 1921
Fuel Tax Act 2006
Petroleum Excise (Prices) Act 1987
Product Stewardship (Oil) Act 2000
Tradex Duty Imposition (Customs) Act 1999
Tradex Duty Imposition (Excise) Act 1999
Tradex Duty Imposition (General) Act 1999
Tradex Scheme Act 1999
Items 9 to 13 and 16 to 21
6. Items 9 to 12 abolish the great bulk of customs and excise duties by repealing the:
Customs Tariff Act 1995 and Customs Tariff (Anti-Dumping) Act 1975, each
of which imposes customs duty, and
Excise Act 1901 and Excise Tariff Act 1921, each of which imposes excise
duty.
7. Item 13 repeals the Fuel Tax Act 2006, which provides fuel tax credits to reduce or
remove the incidence of fuel tax, but which is redundant given the abolition of the fuel
customs and excise duties that the fuel tax credits relate to.
8. Item 16 repeals the Petroleum Excise (Prices) Act 1987, which contributes to the
calculation of excise on the production of crude oil and condensate. This Act is redundant
given the abolition of this excise.
9. Item 17 abolishes subsidies for the use or sale of recycled oil by repealing the Product
Stewardship (Oil) Act 2000. The abolition of these subsidies corresponds to the abolition of
the duties that fund these subsidies, namely, duties on petroleum-based oils and greases.
10. Item 21 repeals the Tradex Scheme Act 1999, which establishes a scheme to negate
the imposition of customs duty under the Customs Tariff Act 1995 for various products. With
the repeal of the Customs Tariff Act 1995, the Tradex Scheme Act 1999 becomes redundant.
11. Items 18 to 20 repeal Acts that impose taxes set out in the Tradex Scheme Act 1999,
namely the:
Tradex Duty Imposition (Customs) Act 1999,
Tradex Duty Imposition (Excise) Act 1999, and
Tradex Duty Imposition (General) Act 1999.
12. The Lower Tax Bill 2018 retains taxes set out in the following Acts, even where such
taxes are classed as customs or excise duties:
Agricultural and Veterinary Chemical Products (Collection of Levy) Act 1994,
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A New Tax System (Goods and Services Tax) Act 1999, and other Acts classed
as being part of GST law,
Biosecurity Act 2015,
Customs Act 1901 (which sets out various charges for licences associated with
international trade),
Export Charges (Collection) Act 2015,
Imported Food Charges (Collection) Act 2015,
Industrial Chemicals (Notification and Assessment) Act 1989,
Great Barrier Reef Marine Park Act 1975,
National Residue Survey (Customs) Levy Act 1998,
National Residue Survey (Excise) Levy Act 1998,
Petroleum Resource Rent Tax Assessment Act 1987,
Primary Industries (Customs) Charges Act 1999,
Primary Industries (Excise) Levies Act 1999, and
Protection of the Sea (Oil Pollution Compensation Funds) Act 1993.
Major Bank Levy Act 2017
Item 14
13. Item 14 abolishes the major bank levy by repealing the Major Bank Levy Act 2017.
Passenger Movement Charge Act 1978
Item 15
14. Item 15 abolishes the passenger movement charge by repealing the Passenger
Movement Charge Act 1978.
8
Treasury Laws Amendment (Personal Income Tax Plan) Act 2018
Item 22
15. Item 22 repeals the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018,
which amends personal income tax legislation with respect to future income years, but which
still seeks to impose greater personal income tax than this Lower Tax Bill 2018.
Part 2 -- Income Tax and Medicare Levy Amendments
Income Tax Assessment Act 1936
Item 23 - Section 159N
16. Item 23 repeals section 159N. This repeal, in conjunction with item 25 below, serves
to abolish the low income tax offset.
Income Tax Assessment Act 1997
Item 24 - Section 13-1 (table item headed "low income earner")
17. Item 24 removes the low income tax offset and the low and middle income tax offset
from a list of allowable tax offsets.
Item 25 - Subdivision 61-D
18. Item 25 repeals Subdivision 61-D. This repeal, in conjunction with item 23 above,
serves to abolish the low income tax offset. The repeal of Subdivision 61-D also serves to
abolish the low and middle income tax offset.
Item 27 - Subdivision 63-10(1) (table item 17 and note 7)
19. Item 27 removes a reference to the low income tax offset from a table setting out the
order in which tax offsets should be applied. A note relating solely to this table item is also
removed.
Income Tax Rates Act 1986
Items 28 and 37 - Subsection 3(1) (definition of base rate entity) and Section 23AA
20. Section 23AA defines 'base rate entity' and subsection 3(1) refers readers to section
23AA for this definition. Yet the term 'base rate entity' is made redundant by items 30, 31,
33, 35, 36 and 37 of this bill. Accordingly, item 37 repeals section 23AA and item 28 repeals
the reference to 'base rate entity' in subsection 3(1).
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Item 29 - Subsection 3(1) (definition of tax-free threshold)
21. Item 29 changes the definition of tax-free threshold from $18,200 to $40,000.
Item 30 - Subsection 23(2)
22. Item 30 reduces the company tax rate to 20 per cent. Currently the rate is
27.5 per cent for base rate entities and 30 per cent for other entities.
Item 31 - Paragraph 23(3)(b)
23. A provider of a retirement savings account that is not a life insurance company is
currently subject to a 15 per cent tax on the 'retirement savings account component' of its
income, and a higher rate of tax on the 'standard component' of its income. Currently that
higher tax rate is 27.5 per cent for base rate entities and 30 per cent for other entities. Item 31
reduces these higher tax rates to a single rate of 20 per cent. The 15 per cent rate is
unchanged.
Items 32 to 33 - Subsection 23(4)
24. A company that becomes a pooled development fund during a year and is still a
pooled development fund at year end is currently subject to various tax rates on its income:
It is subject to a 15 per cent tax on the 'small and medium enterprises income
component' of its income.
It is subject to a 25 per cent tax on the 'unregulated investment component' of
its income.
With respect to its income that exceeds the 'pooled development fund
component', it is subject to a 27.5 per cent tax for base rate entities and
30 per cent tax for other entities.
25. This bill leaves the 15 per cent tax rate unchanged. Item 32 reduces the 25 per cent
tax rate to 20 per cent. And item 33 reduces the tax rates on income in excess of the 'pooled
development fund component' to a single rate of 20 per cent.
Item 34 - Paragraph 23(5)(b)
26. A company that is a pooled development fund all year is currently subject to a
15 per cent tax on the 'small and medium enterprises income component' of its income and a
25 per cent tax on the 'unregulated investment component' of its income. Item 34 reduces
the 25 per cent tax rate to 20 per cent. The 15 per cent rate is unchanged.
10
Item 35 - Paragraph 23(6)(b)
27. Non-profit companies pay:
no tax on the first $416 of income,
55 per cent tax on the next amount of income until the average tax paid (that
is, tax relative to total income) reflects the company tax rate, and
tax at the company tax rate thereafter.
28. For a non-profit company that is a base rate entity, subsection 23(6) currently
provides for:
no tax on the first $416 of income,
55 per cent tax on the next $416 of income (at which point the average tax
paid is 27.5 per cent of total income), and
tax at a rate of 27.5 per cent thereafter.
29. For a non-profit company that is not a base rate entity, subsection 23(6) currently
provides for:
no tax on the first $416 of income,
55 per cent tax on the next $499 of income (at which point the average tax
paid is 30 per cent of total income), and
tax at a rate of 30 per cent thereafter.
30. Item 35 amends subsection 23(6) in recognition of this bill's reduction in the
company tax rate to 20 per cent. For a non-profit company, the amended subsection 23(6)
will provide for:
no tax on the first $416 of income,
55 per cent tax on the next $237 of income (at which point the average tax
paid is 20 per cent of total income), and
tax at a rate of 20 per cent thereafter.
Item 36 - Subsection 23(7)
31. Credit unions with income of at least $50,000 but less than $150,000 are taxed on
their income over $49,999.
32. If such a credit union is a base rate entity, subsection 23(7) currently imposes a
41.25 per cent tax rate. This means that the tax paid by a base rate credit union with a total
income of $149,999 would be 27.5 per cent of total income.
11
33. If such a credit union is not a base rate entity, subsection 23(7) currently imposes a
45 per cent tax rate. This means that the tax paid by a credit union that is not a base rate
entity and that has a total income of $149,999 would be 30 per cent of total income.
34. Item 36 amends subsection 23(7) in recognition of this bill's reduction in the
company tax rate to 20 per cent. Credit unions with income of at least $50,000 but less than
$150,000 will continue to be taxed on their income over $49,999, but will be taxed at a rate
of 30 per cent. This will mean that the tax paid by a credit union with a total income of
$149,999 would be 20 per cent of total income.
Item 38 - Section 25
35. Item 38 reduces the tax rate on trustees of public trading trusts to 20 per cent.
Currently the rate is 27.5 per cent for base rate entities and 30 per cent for other entities.
Items 39 to 40 - Clause 1 of Part I of Schedule 7
36. Currently clause 1 of Part I includes a statement that the tax rates on the ordinary
taxable income of resident taxpayers are as specified in various tables.
37. Item 39 removes this statement and inserts in its place a statement that the tax rate on
the ordinary taxable income of resident taxpayers is 20 per cent for each part of the ordinary
taxable income that exceeds the tax-free threshold (which item 29 raises to $40,000).
38. Item 40 repeals the various tables, which item 39 renders redundant.
Items 41 to 42 - Clause 4 of Part I of Schedule 7
39. Currently clause 4 of Part I provides that, if a resident taxpayer is a working holiday
maker at any time in the year, the working holiday taxable income is not taxed as ordinary
taxable income but is still counted as the first part of the taxpayer's ordinary taxable income
(which has the effect of using up the taxpayer's tax-free threshold).
40. Items 41 and 42 maintain this arrangement, and merely update the references to the
taxation of ordinary taxable income so that they reflect the amendments of items 39 and 40.
41. Part III of Schedule 7 provides for the taxation of working holiday taxable income,
quite apart from the taxation of ordinary taxable income. Item 47 amends those separate
arrangements.
Items 43 to 44 - Clause 1 of Part II of Schedule 7
42. Currently clause 1 of Part II includes a statement that the tax rates on the ordinary
taxable income of non-resident taxpayers are as specified in various tables. These tables
provide for taxation at rates of 32.5 per cent and higher, with no tax-free threshold.
43. Item 43 removes this statement and inserts in its place a statement that the tax rate on
the ordinary taxable income of non-resident taxpayers is 20 per cent, with no tax-free
threshold.
44. Item 44 repeals the various tables, which item 43 renders redundant.
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Items 45 to 46 - Clause 4 of Part II of Schedule 7
45. Currently clause 4 of Part II provides that, if a non-resident taxpayer is a working
holiday maker at any time in the year, the working holiday taxable income is not taxed as
ordinary taxable income but is still counted as the first part of the taxpayer's ordinary taxable
income.
46. Items 45 and 46 maintain this arrangement, and merely update the references to the
taxation of ordinary taxable income so that they reflect the amendments of items 43 and 44.
47. Part III of Schedule 7 provides for the taxation of working holiday taxable income,
quite apart from the taxation of ordinary taxable income. Item 47 amends those separate
arrangements.
Item 47 - Clause 1 of Part III of Schedule 7
48. Currently clause 1 of Part III provides that working holiday taxable income is taxed
from the first dollar at rates starting at 15 per cent and rising to 45 per cent.
49. Item 47 amends clause 1 of Part III so that only the working holiday taxable income
in excess of the tax-free threshold is taxed, and only at a single rate of 20 per cent. Item 29
raises the tax-free threshold to $40,000. This means that the taxation of a taxpayer's working
holiday taxable income under this bill will be considerably less than taxation under current
law, regardless of the amount of working holiday taxable income.
Medicare Levy Act 1986
Items 48 to 49 - Sections 6 and 7
50. Currently, no Medicare levy is payable for incomes below a certain threshold. For
income above that threshold but below a second threshold, Medicare levy is payable at a rate
of 10 per cent. For income above the second threshold, Medicare levy is payable at a rate of
2 per cent.
51. Item 48 reduces the 2 per cent rate to 0 per cent. Item 49 reduces the 10 per cent rate
to 0 per cent. This will effectively abolish the Medicare levy.
52. The bill leaves the Medicare levy surcharge unchanged.
13
Part 3 -- Fringe Benefits Tax Amendments
Fringe Benefits Tax Act 1986
Item 50 - Section 6
53. Item 50 reduces the fringe benefits tax rate from 47 per cent to 20 per cent.
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Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
LOWER TAX BILL 2018
This Bill has little direct relevance to the peculiar list of human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011.
Overview of the Bill
The Bill nearly halves annual Commonwealth Government taxation by abolishing various
taxes and reducing others.
Human rights implications
The Bill protects the right to keep your own money. Property rights are fundamental to the
human condition. The things we own are important to us and should not be taken away.
A right to keep your own money is not explicitly recognised in the international instruments
listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Instead, those instruments explicitly recognise rights to other people's money, such as in the
form of welfare payments.
The closest those instruments come to recognising the right to keep your own money is in the
International Covenant on Economic, Social and Cultural Rights, which states that:
"All peoples have the right of self-determination. By virtue of that right they ... freely
pursue their economic, social and cultural development.
All peoples may, for their own ends, freely dispose of their natural wealth and
resources ... In no case may a people be deprived of its own means of subsistence."
Conclusion
The Bill is compatible with human rights because it enhances the right to keep your own
money.
Senator Leyonhjelm
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Policy costing
Liberal Democrats' tax policy
Person/party requesting the costing: Senator David Leyonhjelm, Liberal Democratic Party
Date costing completed: 12 September 2018
Expiry date of the costing: Release of the next economic and fiscal outlook report.
Status at time of request: Submitted outside the caretaker period
☒ Confidential □ Not confidential
Summary of proposal:
The proposal would make the following changes.
• Change personal income tax by:
- abolishing the Medicare levy (but not the Medicare levy surcharge), the low income tax offset,
and the low and middle income tax offset
- increasing the tax-free threshold to $40,000
- reducing the marginal tax rate for taxable income above the tax-free threshold to 20 per cent.
• Reduce the fringe benefits tax (FBT) rate to 20 per cent.
• Set the company tax rate for all entities, including trustees and life insurers, to 20 per cent.
• Abolish the following indirect taxes:
- tobacco, alcohol and fuel excise
- customs duties
- passenger movement charge
- wine equalisation tax
- luxury car tax
- major bank levy.
All changes, except those to FBT, would have effect from 1 July 2019. The changes to FBT would have
effect from 1 April 2020. The policy would be announced on 1 July 2019.
Costing overview
The proposal would decrease the fiscal balance and the underlying cash balance by $622,760 million over
the 2018-19 Budget forward estimates period. The fiscal balance impact reflects a decrease in revenue of
$661,000 million and a decrease in expenses of $38,240 million over this period.
PBO reference PR18/00436 Page 1 of 7
The proposal would have an ongoing impact beyond the 2018-19 Budget forward estimates period. A
breakdown of the financial implications over the period to 2028-29 is provided at Attachment A.
The proposal would be expected to decrease departmental expenses by $240 million over the
2018-19 Budget forward estimates period and this decrease would be ongoing. This decrease reflects
the initial expenses in 2018-19 required to implement the proposal, including system changes and
information campaigns, and a subsequent decrease in the ongoing costs to administer the programs to
be abolished under this proposal.
There is a difference between the fiscal and underlying cash balance impact as there is a timing
difference between when liabilities for goods and service tax (GST) revenue, fuel tax credit expenses and
refundable research and development tax offset expenses are recognised and when these payments
are made.
On 22 August 2018, the Commonwealth Government announced that they will not proceed with the
unlegislated portions of the 2016-17 Budget measure Ten Year Enterprise Tax Plan - reduce the
company tax rate to 25 per cent. 1 This change does not form part of the current budget baseline, and
would be expected to be included in the budget baseline at the release of the next economic and fiscal
update. In the absence of any offsetting tax measures, this proposal would be expected to result in a
larger reduction in the fiscal and underlying cash balances after the next economic and fiscal update
than shown in this costing.
Estimates of this proposal have a very significant impact on a number of different revenue heads and
expense programs.
• The impact on personal income tax revenue includes the changes to personal income tax, the
reduction to the FBT rate and the effect of the reduction in company tax rate on franking credits to
individuals.
• The impact on company tax revenue includes the reduction in the company tax rate, the effect of
this reduction on refunds of franking credits to charities, and the increase in company tax due to
the flow-on impact to fuel tax credits due to the abolition of fuel excise.
• The impact on other indirect tax revenue includes the effects of the abolition of tobacco, alcohol
and fuel excise, customs duties, the passenger movement charge, the wine equalisation tax, the
luxury car tax, and the major bank levy.
• The GST revenue impact reflects the reduction to the retail price of goods whose retail prices
include the cost of indirect taxes abolished under the proposal.
• The impact on superannuation tax revenue is due to the effect of the reduction in the company tax
rate on refunds of franking credits to superannuation funds.
• The GST expense impact reflects the reduction in payments of GST revenue to the states and
territories.
• The fuel tax credit expense impact is due to the abolition of fuel taxes removing eligibility for this
program.
• The refundable research and development tax offset expense impact is due to the linkage of this
rate with the corporate tax rate.
1
https://www.financeminister.gov.au/media-release/2018/08/22/labor-abandons-australian-businesses-and-workers
Page 2 of 7
This costing does not include any allowance for broader economic impacts from decreasing taxes. While
the 2016-17 Budget Papers note that a reduction in the company tax rate is expected to increase the
level of gross domestic product over time, the costing presented in the 2016-17 Budget did not include
this effect. A further decrease in the company tax rate would be expected to have a positive impact on
business investment and the total level of economic activity. This impact would otherwise be expected
to result in higher revenues from other taxes such as personal income tax, and lower payments for
programs such as working age benefits. However the magnitude and timing of these impacts is too
uncertain to estimate, including because it depends on how the reduction to tax revenue is to be funded.
The costing is subject to uncertainties around the key economic parameters.2 Given the magnitude and
scale of the proposed change in tax rates there is also substantial uncertainty around the behavioural
responses to the proposal. Changes to these assumptions could significantly alter the costing estimates.
Table 1: Liberal Democrats' tax policy - Financial implications ($m)(a)(b)
Total to
2018-19 2019-20 2020-21 2021-22
2021-22
Fiscal balance -100 -186,890 -214,890 -221,890 -622,760
Underlying cash balance -100 -187,980 -214,890 -220,890 -622,760
(a) A positive number represents an increase in the relevant budget balance; a negative number represents a
decrease.
(b) Figures may not sum to totals due to rounding.
Key assumptions
The Parliamentary Budget Office has made the following assumptions.
General
• As the proposal would be announced and have effect from the same day, there would be no
behavioural response by individuals or entities in relation to the start date.
Changes to personal income taxes
• A behavioural response has been included to account for changes in investment decisions and tax
planning arrangements by high-income earners.
- Individuals with incomes in excess of $180,000 are assumed to have a taxable income
elasticity of 0.2.3 Individuals with taxable incomes in excess of $1 million are expected to
have a taxable income elasticity of 0.35.4
2
There are inherent uncertainties in all policy costings, regardless of who produces them. For a more detailed discussion of
the nature and sources of these uncertainties, see PBO information paper no. 01/2017, Factors influencing the reliability of
policy proposal costings.
3
A taxable income elasticity is a measure of the responsiveness of taxable income to changes in tax rates. It measures the
proportional change in declared taxable income resulting from a proportional change in the net-of-tax rate (one minus the
marginal tax rate). An elasticity of 0.2 means that if an increase in a marginal tax rate leads to a 1 per cent decrease in the
net of tax rate, there will be a 0.2 per cent decrease in taxable income.
Page 3 of 7
- The behavioural response has been adjusted to reflect that the ability of individuals to increase
their taxable income is likely to be limited, and diminishes as marginal tax rates reduce. The
elasticities are assumed to reduce to zero for marginal tax rates less than 30 per cent.
Lower-income earners are likely to have less scope to realise additional income in response
to lower marginal tax rates. As a result, any behavioural response from these individuals is
not expected to be significant.
Company tax rate reduction
• Companies with foreign operations would not seek to increase their taxable incomes in response
to the proposed decrease in company tax rate by recognising more profits in Australia, as the rate
under this proposal is not lower than that in many existing low-tax jurisdictions.
• Company income, deductions and offsets will grow in line with estimated growth in gross
operating surplus for all companies.
• The number of companies liable to pay company tax in Australia will increase in line with historical
growth in the number of companies liable to pay company tax in Australia.
• Companies will continue to pay the same proportion of their after-tax income as dividends.
Abolition of indirect taxes
• The retail prices for products for which customs, excises and other indirect taxes are included will
be reduced by the full amount of customs, excises and other indirect taxes currently applied,
leading to a commensurate reduction in GST revenue and expenses.
Methodology
Changes to personal income taxes
The costing was estimated using a 16 per cent sample of de-identified personal income tax and
superannuation returns for 2014-15 provided by the Australian Taxation Office (ATO). The data was
used to estimate the change in tax payable under each option. Behavioural responses were
incorporated, reflecting the assumptions above.
Company tax rate reduction
The impact of the proposal on company tax, dividend payments, imputation credits and refundable
tax offset expenses was calculated using a microsimulation model of company tax as at the
2018-19 Budget, developed by the PBO. This model estimated the company tax liabilities for all
companies over the period to 2028-29 under the current and proposed settings, based on company
tax data for the 2015-16 financial year (including benchmarking to aggregate company tax revenue
estimates), growth in gross operating surplus, and taking into account the effect of the imputation
system. The estimates take account of a 'clawback' of tax from resident shareholders as a result of a
4
These elasticities are applied consistently across PBO personal income tax costings. The values are consistent with the
wider empirical literature across advanced economies, where the average estimate of taxable income elasticities is close to
0.2, with higher elasticities estimated for higher income earners; see for instance, Klemm, A, Liu, L, Mylonas, V. and
Wingender, P., 2018, Are Elasticities of Taxable Income Rising?, International Monetary Fund.
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reduction in the value of imputation credits arising from a lower company tax rate. This clawback
is included in the 'personal income taxes' and 'superannuation fund taxes' revenue lines in
Attachment A.
Abolition of indirect taxes
The amount of forgone indirect taxation revenue and the resultant reduction in fuel tax credit
scheme expenses was estimated based on 2018-19 Budget estimates. Departmental savings reflect
the estimated ongoing savings from the abolition of these taxes and include the estimated costs of
winding down these programs.
The change in GST revenue and expense due to abolishing excise and import duties was estimated
based on the estimated change in consumption expenditure.
General
The modelling has taken into account the timing of tax collections and expense payments.
Revenue and administered expense estimates have been rounded to the nearest $1,000 million.
Departmental expense estimates have been rounded to the nearest $10 million.
Data sources
The ATO provided a 16 per cent sample of personal income tax and superannuation returns from
the 2014-15 tax year and de-identified company tax return data for the 2015-16 financial year.
Treasury provided economic forecasts for the personal income, company, superannuation
and indirect taxes as at the 2018-19 Budget.
Senator the Hon Mathias Cormann, 2018. Labor Abandons Australian Businesses and Workers.
Australian Taxation Office, 2018. Taxation Statistics 2015-16, Canberra: Commonwealth of Australia.
Page 5 of 7
Attachment A - Liberal Democrats' tax policy - financial implications
Table A1: Liberal Democrats' tax policy - Fiscal balance ($m)(a)(b)
2018- 2019- 2020- 2021- 2022- 2023- 2024- 2025- 2026- 2027- 2028- Total to Total to
19 20 21 22 23 24 25 26 27 28 29 2021-22 2028-29
Revenue
Personal income taxes - -128,000 -147,000 -152,000 -151,000 -160,000 -164,000 -171,000 -181,000 -193,000 -205,000 -426,000 -1,651,000
Company tax -18,000 -30,000 -31,000 -31,000 -30,000 -30,000 -28,000 -26,000 -27,000 -29,000 -79,000 -280,000
GST revenue -5,000 -4,000 -5,000 -5,000 -5,000 -5,000 -6,000 -6,000 -6,000 -6,000 -14,000 -53,000
Other indirect tax - -48,000 -48,000 -50,000 -52,000 -54,000 -57,000 -59,000 -62,000 -65,000 -68,000 -146,000 -563,000
Superannuation fund taxes - - 1,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 4,000 18,000
Total - revenue - -199,000 -228,000 -236,000 -237,000 -247,000 -254,000 -262,000 -273,000 -289,000 -306,000 -661,000 -2,529,000
Expenses
Administered
GST expense - 4,000 4,000 5,000 5,000 5,000 5,000 6,000 6,000 6,000 6,000 13,000 52,000
Fuel tax credit - 7,000 8,000 8,000 9,000 9,000 10,000 10,000 11,000 12,000 12,000 23,000 96,000
Research and development refundable tax offset - 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 2,000 6,000
Total - administered - 12,000 13,000 14,000 15,000 15,000 16,000 17,000 18,000 19,000 19,000 38,000 154,000
Departmental
Australian Taxation Office -60 60 60 60 60 60 60 60 60 60 60 130 570
Department of Home Affairs -40 50 50 50 50 50 50 50 50 40 40 110 430
Total - departmental -100 110 110 110 110 110 110 110 110 100 100 240 1,000
Total - expenses -100 12,110 13,110 14,110 15,110 15,110 16,110 17,110 18,110 19,100 19,100 38,240 155,000
Total -100 -186,890 -214,890 -221,890 -221,890 -231,890 -237,890 -244,890 -254,890 -269,900 -286,900 -622,760 -2,374,000
(a) A positive number for the fiscal balance indicates an increase in revenue or a decrease in expenses or net capital investment in accrual terms. A negative number for the fiscal balance indicates a decrease in revenue or
an increase in expenses or net capital investment in accrual terms.
(b) Figures may not sum to totals due to rounding.
- Indicates nil.
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Table A2: Liberal Democrats' tax policy - Underlying cash balance ($m)(a)(b)
2018- 2019- 2020- 2021- 2022- 2023- 2024- 2025- 2026- 2027- 2028- Total to Total to
19 20 21 22 23 24 25 26 27 28 29 2021-22 2028-29
Receipts
Personal income taxes - -128,000 -147,000 -152,000 -151,000 -160,000 -164,000 -171,000 -181,000 -193,000 -205,000 -426,000 -1,651,000
Company tax - -18,000 -30,000 -31,000 -31,000 -30,000 -30,000 -28,000 -26,000 -27,000 -29,000 -79,000 -280,000
GST receipts - -4,000 -4,000 -5,000 -5,000 -5,000 -5,000 -6,000 -6,000 -6,000 -6,000 -13,000 -52,000
Other indirect tax - -48,000 -48,000 -49,000 -52,000 -54,000 -57,000 -59,000 -62,000 -65,000 -68,000 -145,000 -562,000
Superannuation fund taxes - - 1,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 4,000 18,000
Total - receipts - -198,000 -228,000 -235,000 -237,000 -247,000 -254,000 -262,000 -273,000 -289,000 -306,000 -659,000 -2,527,000
Payments
Administered
GST expense - 4,000 4,000 5,000 5,000 5,000 5,000 6,000 6,000 6,000 6,000 13,000 52,000
Fuel tax credit - 6,000 8,000 8,000 9,000 9,000 10,000 10,000 11,000 12,000 12,000 22,000 94,000
Research and development refundable tax offset - .. 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 6,000
Total - administered - 10,000 13,000 14,000 15,000 15,000 16,000 17,000 18,000 19,000 19,000 36,000 152,000
Departmental
Australian Taxation Office -60 60 60 60 60 60 60 60 60 60 60 130 570
Department of Home Affairs -40 50 50 50 50 50 50 50 50 40 40 110 430
Total - departmental -100 110 110 110 110 110 110 110 110 100 100 240 1,000
Total - payments -100 10,110 13,110 14,110 15,110 15,110 16,110 17,110 18,110 19,100 19,100 36,240 153,000
Total -100 -187,890 -214,890 -220,890 -221,890 -231,890 -237,890 -244,890 -254,890 -269,900 -286,900 -622,760 -2,374,000
(a) A positive number for the underlying cash balance indicates an increase in receipts or a decrease in payments or net capital investment in cash terms. A negative number for the underlying cash balance indicates a
decrease in receipts or an increase in payments or net capital investment in cash terms.
(b) Figures may not sum to totals due to rounding.
.. Not zero but rounded to zero.
- Indicates nil.
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