The smell of tax change is in the air

Can you smell it? The prevailing winds at this time of year come from the direction of Canberra as the Government and public servants in the departments of Treasury and Tax work out the policy changes that will form part of the Budget night speech by the Treasurer in early May. When I turn my nose towards Canberra, I can definitely detect the smell of tax changes.

The federal Government executive works feverishly ahead of the Budget in formulating ideas for policy change. Sometimes, the ideas are good, sometimes they are not so good and sometimes they are positively barmy. The work rate is high and the stuffiness in the office air in Canberra gets worse as each day moves into night and the deodorants applied that morning have long ago given up the good fight. At this point, the officials can open the windows or turn up the air conditioners. Usually, it is in the office where the policy idea might be considered by Sir Humphrey as ‘courageous’ that the window is opened. This lets the smell of the idea waft out into voterland and the reaction of voters is a guide to Government as to the acceptability of the idea. In other offices, the windows remain tightly shut and no whiff of the idea gets out until shortly after 7:30pm on the night of the Treasurer’s Budget speech.

Right now, the tax changes under serious consideration, judging by the air wafting from Canberra, include changes to franked dividends, age pension eligibility and negative gearing.Negative gearing as used to invest in residential property allows investment expenses to be deducted from totally unrelated income. It is of dubious tax policy design. Clearly, it is a tax policy not a housing policy and the politics around the issue are fierce. While the window was briefly opened last week, I think the Treasurer has firmly closed it again. The electorate is not ready for a change yet, even if some restriction would have merit.

The other two changes are sensible, overdue and almost certain to get Senate approval. Firstly, reduce the ability of very wealthy citizens to claim the taxpayer funded age pension. It is unjustifiable that people with their own home (often worth over $1m) and with another $1m in their superannuation fund can also be in receipt of the age pension. The eligibility test must be toughened up significantly to cut out that rort. Secondly, when superannuation funds are paying out benefits to retirees, the income on the assets is free of income tax. Allowing those funds to claim back tax from franked Company dividends means their effective tax rate is negative. The original justification for dividend imputation did not envisage this unintended consequence. A scale back to cut out that rort is overdue.

No doubt there are other rooms with their windows sealed in which policy changes are being formulated, to emerge on Budget night and they will surprise us. But at least in the areas of tax and pensions described above, the answer is already there and blowing in the wind.