Australians on high incomes will confront a special sort of anguish when filling out their tax returns next year thanks to the Gillard government’s proposed flood levy. Because if there’s one thing Australians love more than helping out a mate whose house has been flooded, it’s gaming the tax system.
”It’s a getting-something-from-the-government logic,” says Professor Neil Warren from the Australian school of taxation and business law at UNSW.
Of the 12.6 million individuals who filed a tax return in 2007-08, a total of $33.6 billion in deductions were claimed, meaning an average deductions claim of $2667.
Some accountants are already tipping that some taxpayers will look to reduce their exposure to the federal government’s flood levy by bringing forward deductions to minimise their taxable income in the year of the levy.
”There is little doubt that the introduction of any new tax really gives greater incentive for people to consider if they can bring any deductions forward, so they can reduce their taxable income and therefore reduce their tax,” says Andrew Gardiner, a spokesman for the National Tax & Accountants’ Association.
High-income earners – the target of the Gillard levy – are potentially in the best position to explore reducing their taxable income, Gardiner says, possibly by the early payments of interest on eligible loans.
Applying to taxable income above $50,000 in the 2011-12 financial year, the proposed levy is aimed squarely at middle- to high-income earners. Unlike the Medicare levy, which applies to every dollar of income, this levy will apply only to money earned in excess of the $50,000 threshold. For people with a taxable income between $50,000 and $100,000, they will pay an extra half a cent on every dollar they earn above $50,000.
For those with a taxable income above $100,000, they will be charged half a cent for every dollar of income between $50,000 and $100,000, that is $250, plus 1¢ on every dollar they earn above $100,000. Someone earning $150,000 will pay $750.
Employers are being instructed to increase the amount of tax they withhold from high-income earners’ fortnightly pay packets to ensure they do not receive a big tax bill at the end of the year.
However, by claiming deductions at the end of the year, taxpayers could potentially minimise what they have to pay.
But Roger Timms, the head of tax at Taxpayers Australia, says these taxpayers will be emotionally conflicted, wanting to reduce their tax but also wanting to be doing their part to help rebuilding efforts after the floods. ”I think a lot of people will think of this in the context of wanting to make a contribution.”
LEVIES have proved a popular trick for Australian governments seeking to rally support and raise funding for specific projects. In 1996 the Howard government funded its gun buyback scheme by introducing a one-off 0.2 per cent increase to the Medicare levy.
It raised half a billion dollars. Later, Howard proposed to fund troop deployments in East Timor by again increasing the Medicare levy by 0.5 per cent, but this was never applied thanks to a better than expected budget bottom line.
Other federal levies have been applied: the Ansett levy, a $10 increase on all plane tickets between September 2001 and June 2003; the 11¢ a litre levy on milk to help dairy farmers adjust to the removal of price support mechanism; and a similar 3¢ a kilogram levy on sugar to help growers.
State and territory budgets are also littered with levies, including the parking space levy, save the river Murray levy, gaming machine levy, health insurance levy, waste management levy and the racing bets levy.
While Australians might enjoy minimising tax where they can, levies have proven a fruitful method of raising revenue.
Sinclair Davidson, a professor of institutional economics at RMIT, says levies are popular with governments and taxpayers because they create a ”fiscal illusion” that the money will actually be spent on a specific purpose. ”People think that they’re paying for something specific but very often it actually hides the real cost of programs,” he says.
For example, the Medicare levy raises just one fifth of the cost of healthcare. Davidson says such levies are pure trickery. ”If you look at the Australian constitution, it actually requires that all government revenue goes into consolidated revenue. So it’s just increasing tax.”
Warren agrees: ”Most economists would say we don’t really support these kinds of measures because they typically get over-utilised because of the ability to draw a link between the expenditure and the outlay, and that makes them politically attractive but also means they tend to be overused.
”Quite often you will find them raising more revenue than we need, or being used as a stalking horse, or being used and not reflecting the cost.”
The Ken Henry review of taxes recommended the entire Medicare levy be scrapped and the cost instead built into the personal income tax scales in the name of increasing the transparency and simplicity of the tax system.
The executive director of the Council of Small Business Organisations of Australia, Peter Strong, says small changes to tax levels, including the flood levy, create headaches for the 1.2 million small-business owners who will have to adjust how much tax they withhold from employees.
”We hate red tape and this is just an example of small business being asked to do extra work.” Every time tax rates change, Strong says, small businesses must pay for add-ons to their payroll software, such as MYOB, to reflect the new scales. ”It’s something you’ve got to go and do. These extra costs highlight the fact that we really need to stop and think about the impact on small business of all these sorts of changes.”
Strong warns that some employers may simply forget or be unaware of when the flood levy applies, meaning some employees may get a nasty shock when they end up with a tax bill at tax time.
The government has advised worried taxpayers to consult their employers to make sure they are withholding the right amount of tax. Taxpayers affected by the flooding will not have to pay and should check their employer knows this and does not deduct the levy.
Warren says while this flood levy may be relatively small compared with government revenue, the increasing reliance on such measures was cause for concern. ”We need to take a long, hard look at what we’re doing with these hypothecated taxes. We need to because there’s now a very long list of [them].”