Monday, May 03, 2010

Earn $25,000 tax-free. You would in Henry's fast-fading world

Or earn up to $40,000 in bank interest tax free

Mostly cast aside by Wayne Swan but enthusiastically promoted by Ken
Henry is a revolution that would tax the working income of all but a
tiny proportion of Australians at one simple flat rate and tax bank
interest at even less. Gone would be the Medicare Levy and all sorts
of tax offsets including those for seniors, pensioners and low-income

The committee says an illustration no worker would pay tax on their
first $25,000 earned. After that right up until an income of $180,000
tax would be flat at the rate of 35 cents in the dollar. Only the
very small proportion of Australians earning more than $180,000 would
face the higher rate of 45 per cent.

Although the system would seem to tax Australians on quite low wages
at the same rate as those on quite high incomes the review includes a
graph to show that the very generous $25,000 tax-free threshold would
have the effect of making the average tax rate progressive in a more
simple way than at present.

Australians moving from unemployment to low wage jobs would find the
zero tax rate attractive without the need for complicated rebates and

"By taking more income support recipients out of the tax system, it
could also reduce the number of people who have to deal with both
systems at the same time," the report says.

The simplicity wouldn't stop there. Fringe benefits would taxed as
income on the tax returns of the workers who received them instead of
as expenses of employers, even for workers employed by charities who
are at present exempt from Fringe Benefits Tax. The government would
pay money directly to charities to allow them to compensate their
workers for the change.

Treasurer Swan yesterday has specifically ruled out ever imposing FBT
on charity workers, although he left open the possibility of treating
fringe benefits as ordinary income for others.

Income paid in the form of compulsory superannuation would also be
taxed on returns as ordinary income if the review had its way with the
government explicitly subsidising super accounts rather than
concessionally taxing contributions.

Tax returns would be made simple and effectively optional by giving
everyone a automatic standard deduction for work expenses, freeing
most employees from the need to prepare a return, "instead allowing
them to lodge a default return prepared by the Tax Office".

Taxpayers who wanted to claim more "would still have the option" of
submitting receipts.

Wayne Swan said yesterday he was "attracted to the idea" of making tax
returns simpler and hinted he would announce changes soon.

In an Australian first, all income from savings would be taxed at a
lower rate than income from working in recognition of the committee's
view that bank interest is overtaxed when inflation is taken into

The committee recommends applying tax to only 6 out of every 10
dollars earned from bank accounts leaving the rest tax free, a formula
it believes would roughly compensate for inflation. It would do the
same for rental income and for capital gains, a move which would
effectively penalise capital gains whcih are at present only half
taxed. The Treasurer ruled out the capital gains recommendation.

Published in today's SMH and Age

Related Posts

. Don't confuse the Swan's tax moves with Henry's Tax Review

. It's time to properly tax super, and the 50% discount for capital gains looks silly as well - Henry

. What to expect from Ken Henry