Courtesy of the La Trobe Financial Investment Team

The last few months have seen some significant political and regulatory changes for investors. We have already discussed the Ripoll inquiry and the recommendations it made in respect of financial services. In a forthcoming edition of Investment News we will discuss the federal government's response to the Ripoll recommendations. In this edition, we will focus on the Henry review and will consider the federal government's response.

What was the Henry Review?

On 13 May 2008, Federal Treasurer Wayne Swan announced that the Rudd government would conduct a
"... comprehensive review of Australia's tax system to create a tax structure that positions us to deal with the demographic, social, economic and environmental challenges of the 21st century."

The review was said to arise out of the Australia 2020 summit and the chairman of the review panel was the Secretary to the Treasury, Dr Ken Henry.

How was it conducted?

From August 2008 through until November 2009, the review panel issued discussion papers, consulted with industry and other groups and took submissions. In December 2009 the panel submitted its final report to the Treasurer. The government considered its response and released the report in May 2010.

What are its recommendations?

The panel made 138 separate recommendations for possible changes to the taxation system. There are too many of them to discuss individually. However, the recommendations can be divided into broad themes as follows:

Basing taxation revenue on four tax bases

The panel recommended that future government revenues be generated from four key sources:

1. Comprehensive personal income tax with a flattened structure;
2. A growth oriented business income tax (reduced to 25% over the medium term and ultimately possibly replaced by a business expenditure tax);
3. A broad, simple consumption tax; and
4. Economic rents from natural resources and land.

Under this proposal, some taxes (such as payroll tax and stamp duty) would be abolished as inefficient. Other taxes, such as those on tobacco, gambling etc would be maintained only if they efficiently addressed social or economic costs.

Using the taxation system to support productivity, participation and growth

The panel recommended that the tax system be oriented towards encouraging productivity, participation and growth. This could be achieved by:

• reducing the company tax rate to 25% over the medium term;
• replacing company income tax with business expenditure tax in the long term;
• retaining dividend imputation for the short to medium term, but considering alternatives in the longer term;
• improving support for child care and building work incentives into income support payments; and
• adopting more efficient taxes for business and investment.

Personal income tax

The panel found that the current system was far too complex. It recommended that the tax free threshold be increased to $25,000, with a two-step scale applying thereafter. Further, income support and pensions would be tax free, standard deduction amounts would apply for work expenses and various tax offsets would be removed.

Addressing specific taxation issues

The panel also made recommendations in relation to a wide range of other taxation issues, including:

• the simplification of the capital gains tax regime by a removal of a number of exemptions and reductions;
• applying fringe benefits tax to the specific employee benefiting;
• reforming social security transfer payments to align the entire system to standardised means tests and indexation;
• streamlining the GST;
• adopting a resources rent tax and replacing current land tax with a land tax applying to all land, regardless of use; and
• adapting the superannuation system to encourage increased contributions.

What was the government's response?

It is fair to say that the panel recognised that its recommendations, even if adopted, would not be adopted immediately. In this, it was not disappointed. The federal government's response to date is to announce:

• that many of the recommendations have been specifically rejected and will not be implemented at any stage (including those relating to including the family home in means tests, introducing a further federal land tax, penalising single income families, requiring parents to work when their youngest child turns four, reducing the capital gains tax discount etc);
• that the company tax rate will be redued to 28%, with small companies receiving the lower rate from 1 July 2012;
• that small businesses will have expanded capital allowance deductions;
• that the compulsory superannuation contribution will be increased from 9% to 12% in a staged process ending on 1 July 2020;
• that the government will provide an annual contribution of up to $500 for individuals earning up to $37,000 - meaning that the employer contributions will effectively not be taxed; and
• that profits from exploration of Australia's non-renewable resources will be taxed at 40%.