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Today the Government released the Henry Review into Australia's tax and transfer system, which it commissioned almost two years ago. More importantly it also released its response to the Henry Review which it was hoped would set out a blueprint for tax reform for the foreseeable future in Australia.

While the Henry Review report laid out a platform for comprehensive tax reform, the Government's response was far from a blueprint for the future.

The Government has announced changes to superannuation and State infrastructure funding (which were not recommended by the Henry Review), a small reduction in the company tax rate and some micro business reforms, particularly for small business, all of which are to be funded by a new Resource Super Profits Tax. None of these changes will take place before the 2013 tax year.

The Government foreshadowed further announcements in the next few months in relation to simplified compliance for individuals, savings incentives and revenue authority governance and transparency.

A changed landscape

At the time the Government commissioned the Henry Review, there was widespread support for a major overhaul of our tax system, albeit that different segments in the community had widely different priorities for reform. Since then Australia has successfully navigated the global financial crisis, but the landscape for tax reform is somewhat different. The global push by many economies to reduce tax rates has stalled, with many economies seeking to increase taxes to fund budget deficits. Indeed Australia's own budgetary position is quite different to two years ago, and the ability to abolish inefficient taxes is now much more limited. We are also approaching the middle of an election year, with a new opposition leader.

There has been endless speculation, particularly in the last twelve months, over what shape tax reform might take. As it has turned out, some of that speculation has been informed and some not so. It is important to remember that the Henry Review's recommendations, which total 138, have had a political lense applied to them by the Government. Of those 138 recommendations, five have been accepted, 29 wholly or partially rejected, and 114 will be subject to "mature tax debate" in the coming years. It is not clear what the agenda is to take forward this debate.

It is worth mentioning that much has been made of the inefficiency of 125 taxes in Australia - yet at this stage there is no commitment by the Government to get rid of any one of these taxes. Rather, a significant new $10 billion per annum tax is proposed on the mining industry.

Announced reforms

The reforms announced by the Government include:

• a new Resource Super Profits Tax of 40 per cent
• a reduction in corporate tax rate ultimately to 28 per cent, and
• an increase in superannuation guarantee contributions to
  12 per cent of income.

None of these reforms will take place before 2013. The main winners to emerge from the reforms announced are clearly the superannuation industry and small business.

Under consideration

Reforms recommended by the Henry Review, which have not been rejected, but are some way from implementation, include:

• taxation of capital income (savings)
• simplified tax returns for individuals
• fringe benefits tax reforms
• abolition of interest withholding tax on financial service industry borrowings
• abolition of insurance taxes
• broad based land tax
• new cash flow tax, to fund abolition of payroll tax and inefficient state taxes
• road usage taxation, and
• superannuation contribution taxation.

Rejected reforms

The reforms recommended by the Henry Review but rejected by Government, include:

• land tax on family home
• reforms to the not for profit sector, including fringe benefits tax
• housing-negative gearing, CGT discount
• reconsidering dividend imputation
• consideration of a "bequests" tax, and
• alcohol tax reform.

Now that the Henry Review framework for tax reform is public, we need a blueprint to take this framework forward. The Government's views on many issues that are far from decided and we need community debate on these issues urgently.

1. The company tax rate will be reduced to 29 per cent for the 2014 income year and 28 per cent for the 2015 income year. Small business will move to a 28 per cent corporate tax rate from the 2013 income year - The company tax rate reduction of ultimately two per cent will make Australia's corporate tax rate marginally more competitive but fails to bring the tax rate in line with the OECD average and the Henry recommendation of 25 per cent.

2. Companies should be allowed to carry back a revenue loss to offset against the prior year's taxable income, but with the amount of any refund limited to the franking account balance - Since the 1960's, there have been recommendations that Australia should have a loss carry back system. The Henry Review proposes a limited system of one year carry back equal to the available franking account balance. To a limited extent, this will provide neutrality in regard to the timing of the derivation of profits and losses by companies.

3. Dividend imputation should be retained in the short to medium term, but alternatives should be considered over the longer term - The retention of imputation will have a positive impact on corporate tax behaviour from a compliance perspective. Internationally integrated companies will be disappointed by the recommendation that credits are not provided for foreign taxes.

4. Current trust rules should be updated and rewritten to reduce complexity and uncertainty around their application - Such a rewrite has been sought by the courts for many years and probably reflects the ATO's unwillingness to accept the rules as they how seem to be understood. Nevertheless, current tax uncertainties involving closely held trust estates such as the ability to distribute capital gains and the interaction of Division 7A could be clarified as a result of any rewrite.

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1. A 40 per cent resource rent tax, termed a resources super profits tax, should be introduced for all non-renewable, natural resource projects - This is the principal revenue raising measure accepted by the Government. It appears destined to be the most controversial and contested of the measures, in both political and commercial terms - not least through its interaction with existing state revenues and the impact on the economics of existing and new mining projects. Henry recommended that the tax replace existing state royalty arrangements.

2. A refundable income tax offset should be introduced for expenditure incurred on exploration activity within Australia - The offset is to be introduced from 1 July 2011 and will provide an incentive for start-ups and junior explorers to increase domestic exploration, by allowing them early cash tax benefits from their exploration spend.

3. Australian and State Governments should consider using a cash bidding system to allocate exploration permits - This appears to be aimed at improving the competitiveness and fairness in the allocation process for mining and exploration permits.

4. The Australian and State Governments should abolish fees and stamp duties on the transfer of interests in a resource project, except those related to administrative costs - This would be a welcome move and would mitigate transaction costs on the transfer of interests in resources projects.

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1. Interest withholding tax should be removed for interest paid by Australian financial institutions to non residents - This should reduce the cost of financial institutions' offshore borrowings and the benefit may, in turn, flow through to their domestic customers.

2. Banking - a financial services tax could replace input taxation under the GST - This is a suggestion rather than a recommendation. The Henry Review indicates that financial services should be taxed in a way equivalent to other forms of consumption, rather than be input taxed under the GST regime. Separate to the Henry Review, the Treasury is currently undertaking a review of the application of GST to financial services.

3. The taxation of Australian managed funds and related services should be improved to provide greater certainty that foreign source income of non-residents will not be taxed in Australia - The current tax uncertainties in this area reduce the competitiveness of Australian fund managers in attracting foreign savings.

4. The capita! gains tax system should be simplified by rewriting the law to better integrate it into the income tax system - The complexity of the CGT law, exemptions and frequent changes has led to high administration and compliance costs. Many individual investors are not equipped to deal with this complexity.

5. All specific taxes on insurance products, including stamp duties and fire service levies, should be abolished - These taxes are widely considered to be inefficient taxes and a deterrent to adequate insurance. The agreement of the states will be necessary before these taxes can be abolished.

6. The Government should support the development of a longevity insurance market within the private sector - The further development of the longevity insurance market could help reduce the risk that self funded retirees will exhaust their superannuation balances and need to turn to Government pensions. As Henry recommends against making such products compulsory, it follows that they will be successful only if seen as financially attractive by retirees.

7. There should be no restrictions on the purchase of longevity products from a prudentially regulated entity - This could broaden the types of entities offering such products, providing further competition to life insurance companies.

8. The Government should consider offering an immediate annuity and deferred annuity product that would allow a person to purchase a lifetime annuity - This recommendation has the potential to intrude on the offerings of life insurance companies, but has been rejected by the Government.

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1. Australian Governments should accelerate the development of mass-distance-location pricing for heavy vehicles, to ensure that heavy vehicles pay for their specific marginal road wear costs - This is likely to increase heavy road haulage costs, with flow on effects throughout the economy. It may, however, also increase the accountability of road owners and authorities in their use of the monies so raised.

2. Heavy road vehicles should be subject to an additional charge on routes where they are in competition with rail operators that are required to recover their capita! costs - This should produce a more efficient allocation of heavy haulage, with some migration from road to rail to be expected.

3. Variable congestion taxes should be imposed on all registered vehicles that utilise existing toll roads and heavily congested parts of the non tolled road network - Businesses that use road transport could expect an increased cost of road usage, which will then cascade through the economy.

4. Fuel tax should be replaced with more efficient broad-based taxes, but if fuel tax is maintained it should be calculated according to its energy content, and indexed to the CPl - The Government has rejected the recommendation to index fuel tax to CPI.

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1. There should be a major widening of what gets taxed as wages and salaries to include most fringe benefits, education subsidies, defence remuneration, personal services businesses, together with the introduction of a 'standard deduction' for most employees and ATO pre-filled tax returns - Whilst the aim is that most employees would not need to engage a tax agent to prepare their returns, the cost for many will be that more income is taxed, and fewer deductions able to be claimed.

2. Replace state stamp duties with a broader land tax, including on the family home - For now, there will be a continuation of stamp duty, which is an unpopular and distortionary tax on property transactions, however the Government sees this as a state tax issue.

3. Introduce a bequest tax - There is no major tax on the inter-generational transfer of wealth, notwithstanding the numerous treasury reports which have pointed to the huge wealth transfers which will occur over the next 25 years.

4. Introduce a 40 per cent discount for tax on investment income such as interest, rental income and dividends, but subject to the Government deciding on new approaches to housing assistance and affordability eligibility - The Government has decided against any immediate changes, so the current 50 per cent CGT discount and full negative gearing rules remain in place.

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1. Independent of the Henry Review recommendations, the Government has announced a number of superannuation related changes:

• increasing the superannuation guarantee rate to 12 per cent
• a superannuation contribution up to $500 for low income earners, and
• concessional contributions caps.

The Government has reaffirmed its promise to never "remove tax-free superannuation payments for the over 60s' - These proposals will have a positive impact for the superannuation industry and individuals. It is anticipated that they will increase Australia's pool of superannuation savings by $85 billion over 10 years. There will be a cost to employers through the one third increase in contributions by 2019/20.

2. The tax on superannuation contributions should be abolished and employer contributions should be taxed in the hands of the individual - This recommendation would ease the administrative burden on super funds but may create complexity for individuals. For higher income earners, the recommendation would result in the tax concessions on contributions being lower than the present 31.5 per cent for those on the top marginal tax rate.

3. The tax rate on superannuation earnings should reduce from 15 per cent to 7.5 per cent. Capital gains would be taxed without a discount and earnings from assets supporting pensions should become taxable - This is broadly beneficial for super funds except for the taxation of earnings from assets supporting pensions. As the portion of assets supporting pensions increase as the population ages, there will be an increase in the tax paid by super funds. Individuals drawing a superannuation pension will no longer enjoy tax free earnings in the fund.

4. Enhancing people's awareness of superannuation such as paying contributions concurrently with wages and reported to employees when paid - The purpose is to improve understanding of the superannuation system. Any actions by the Government that enhance the education and awareness of people around superannuation will be beneficial to the industry and broader population.

5. The preservation age should be increased to align with the prescribed retirement age - This recommendation has been rejected by the Government.

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1. The capital allowance arrangements for small business should be streamlined and simplified by:

• allowing depreciating assets costing less than $10,000 to be immediately written off, and
• allowing all other depreciating assets (except buildings) to be pooled together, with the value of the pool depreciated as a single declining balance rate.

This recommendation has been accepted by the Government allowing small businesses to write-off assets valued at under $5,000 (not $10,000 as recommended) and creating the one pool write off at the rate of 30 per cent. This should have a positive impact on small businesses by bringing forward income tax deductions and possibly reducing compliance costs in years subsequent to relevant asset purchases.

2. Rationalise and streamline the current small business CGT concessions by:

• removing the active asset 50 per cent reduction and the 15-year exemption concessions
• increasing the lifetime limit of the retirement exemption by permanently aligning it with the capital gains tax cap for contributions to a superannuation fund, and
• allowing taxpayers who sell a share in a company or an interest in a trust to access the concessions via the turnover test.

While eligibility for the small business concessions may increase (see below), this recommendation would result in higher income tax on the disposal of small businesses as existing concessions would be reduced significantly.

3. The small business entity turnover threshold should be increased from $2 million to $5 million, and adjustments to the $6 million net asset test should be considered - The recommendation would make many more businesses eligible for the relevant concessions.

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1. Retain the existing regime for tobacco taxation, but increase taxation rates substantially, based on evidence of costs of harm from tobacco smoking - Largely adopted in the policy announcement last Friday of a substantial increase in tax on tobacco products.

2. Review of gambling taxes to ensure they are focused on recouping economic rent generated by government restrictions or are being used to impose such restrictions - May give rise to difficult political issues in relation to state revenues.

3. Eliminate gambling tax concessions for certain types of gambling businesses such as clubs. If there is a desire to subsidise particular activities, do so through direct expenditures rather than gambling concessions - This would likely generate significant opposition from clubs that use gambling concessions to subsidise sporting, social and other activities.

4. The introduction of a common tax on alcoholic beverages on a volumetric basis, to converge over time to a single rate. A low-alcohol threshold to be introduced to all products - This has been rejected on the basis that there is a wine glut and an industry restructure underway.

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1. Remuneration related fringe benefits should be taxed through the PAYG system, while other fringe benefits should continue to be taxed under an employer FBT system and be non-reportable by employees - The greatest change needed for FBT is administrative simplicity. While this recommendation aims at creating a more equitable taxation system, through the application of employee marginal tax rates on remuneration-related benefits and the removal of reportable fringe benefit implications for non-remuneration related fringe benefits, if adopted, this recommendation would likely increase the administrative burden on employers and employees alike.

2. Introduce a flat 20 per cent statutory rate for valuing car fringe benefits - There has been a strong environmental push to alter the statutory formula calculation for car fringe benefits, to remove the tax benefit obtained by travelling higher kilometres.

3. Not-for-profit FBT concessions to be phased out over ten years and replaced with direct government funding - Organisations in the not-for-profit sector often rely upon FBT concessions to provide competitive employee remuneration. These concessions are entrenched in remuneration structures, agreements and even awards. This is a highly emotive area and a costly structure for the Government to unwind by direct funding.

4. Payroll Tax should eventually be replaced with revenue from more efficient broad-based taxes that capture the value add of labour - Payroll tax is a relatively narrow and inefficient tax, with negative impact on employment. Replacing it will, however be a politically challenging exercise.

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1. Conveyancing stamp duties on property, particularly commercial and industrial property, should be abolished and replaced by a more efficient, broad based land tax - Although the Government did not respond directly to this recommendation, it did reject the notion of a land tax on the family home and suggested that stamp duty is a matter for the states.

2. Other state taxes such as insurance duties should be abolished and replaced with more efficient taxes -The lack of Government response in respect of stamp duties, in particular property conveyancing duties and insurance duties, means that the long-standing debate for the abolition of I these state taxes looks set to continue.

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1. Following the introduction of the Carbon Pollution Reduction Scheme (CPRS), measures which seek to reduce emissions should be phased out and other environmental incentives should be replaced with targeted spending programs - The delay to the CPRS scheme effectively makes these proposals a post 2013 issue. There is a question as to whether the Government will consider moving to a targeted spending approach before introduction of a CPRS.

1. Consideration should be given to making greater use of GST-free business-to-business transactions or reverse charging - The likely costs and benefits of this recommendation should be further considered before any decision is made on whether or not to proceed. The changes may cause additional compliance complexities for businesses as it will introduce additional GST classification issues.

1. Wide ranging changes be made to the tax administration, including:

• strengthening the powers and reformulating the membership of the Board of Taxation and giving it additional resources
• establishing an independent board to advise the Commissioner of Taxation on the general organisation and management of the Australian Taxation Office.
• bolstering the role of the Inspector General of Taxation and the Commonwealth Ombudsman in relation to the fairness of the tax system
• improving the "client experience" by enhancing the electronic interface between taxpayers and the ATO, and
• introducing systems to collect data, monitor and report on the Australian tax and transfer system.

These recommendations would be an improvement to transparency and governance and will be well received by taxpayers.

© Super Matters, Australia 2009