Wednesday, January 18, 2006

No tax but they're not happy, Pete

Imagine that you were able to (legally) pay no income tax. You'd feel pretty happy, right? Apparently not. This year an astonishing 38 per cent of Australian families will pay nothing to the Government in net terms, and there's plenty of evidence to suggest they're anything but happy.

Let me explain what I mean by no tax "in net terms". Those families will, of course, have tax collected from their pay packets through the PAYE system in the same way most of us do, but they will get all of that money back and more in the form of Commonwealth Government payments - in particular the family tax benefit and the new child-care tax rebate. The income levels at which this can happen are quite extraordinary.

Labor's Senator Chris Evans has had the Parliamentary Library do the calculations for a family on a single income with one child in school and another in child care for 20 hours a week. As reported in The Australian Financial Review, from the middle of this year when the new tax cuts come into effect, such a family could earn more than $53,000 and still pay no net income tax.

(The family will, of course, pay GST, which is formally a state tax, and a number of other government charges.)

Naturally it is an offer only available to Australians with children. A childless couple on the same money would pay $13,000 in tax. The position for such couples has actually worsened in recent years as cost-of-living pay rises have pushed more of their income into higher tax brackets.

But are these childless Australians on average incomes who actually pay tax about to be rewarded? It seems not. The Treasurer, Peter Costello, has promised that the upcoming budget will focus once again on families; in his words: "the people that need help in contributing the greatest gift to the future of our society - children".

Why should they need even more help? It could be because of the extraordinarily ham fisted way in which the help to date has been delivered...

Obtaining the family tax benefit, worth $10,000 a year to many parents, has become an exercise in humiliation. New parents whose financial circumstances are in the process of changing are asked to estimate their likely income one year in advance.

Millions get it wrong and are hounded like cheats. First there are polite letters comparing their actual income with their estimate and asking that some of the benefit be repaid. Then there are urgent letters demanding that the parents phone the "recovery staff" straight away. Then high-pressure sales techniques from the recovery staff along the lines of "don't tell anyone I told you this, but just for you I can start the repayments at the low rate of" and "this offer is only available today. If you ring back tomorrow you will be dealing with someone else and will have to go back to scratch."

And then there are letters from Dunn & Bradstreet collection services threatening unspecified action unless the debt is immediately settled.

There is no doubt that the Government knows that it has antagonised the people it is trying to help. It tried to paper over the problem with an extra $600 payment just before the last election.

But it didn't learn from its mistake. The new child-care tax rebate announced during the election campaign is in some ways even worse. In the words of the Coalition's Jackie Kelly, it appears to be "designed by people who don't use it".

If your child is in care during this financial year you are meant to hang on to your receipts. But the Tax Office says you won't be able to use them to claim the rebate until the end of the following tax year, half way through 2007.

This means that many parents won't get the money when they actually need it, while their child is in care.

Instead they will get it later, when their child has left child care to go to school. Research conducted for last year's Child Support Task Force found that the cost of caring for a child halves as a result of the transition to school.

Someone in the Government has designed a system that withholds money from parents at time when their expenses are high and gives it back when their expenses are lower.

On Sunday in Los Angeles an apparently oblivious Peter Costello defended the system saying he expected the fuss to die down. "I think once they do claim that 30 per cent rebate, that's going to make a lot of difference to the cost of child care."

Poor design appears not to worry the Government in another area of financial policy as well. An estimated 5 million superannuation accounts are "lost" - they have been dormant for years and the mail addressed to their owners is marked "return to sender".

Last week the Labor Party put forward a plan to trace the owners of the lost money using tax file numbers.

The Assistant Treasurer, Mal Brough, rejected the plan, saying: "This Government prefers to encourage Australians to take a strong interest in their retirement savings, rather than seeking to disengage Australians by making important decisions on their behalf."

It is as if our Government is trying to make life difficult for us, even in the midst of generosity.

More than 300 years ago a French minister for finance, Jean-Baptiste Colbert, defined taxation as the art of "so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing". Whether through incompetence or indifference, the Australian Government seems to have designed things so as to maximise the hissing. Even when it is giving money back.

It is little wonder that even those Australians who pay nothing whatsoever to the Federal Government are upset.