For example, if individuals don't quote their TFN to employers and financial institutions then they may have tax deducted from their income or interest payments at the highest marginal rate. The TFN Rule only applies to the TFN information of individuals and does not apply to TFN information about other legal entities such as corporations, partnerships, superannuation funds and trusts.
The TFN Rule is legally binding. See Rec 47—2. Effectiveness of current regulation Stay informed with all of the latest news from the ALRC.
Sign up to received email updates. Fringe benefits tax was subsequently introduced in Fringe benefits tax is levied on employers, rather than employees, to simplify compliance and administration.
Fringe benefits are taxed at the top personal tax rate plus the Medicare levy 3 currently The fringe benefits taxregime contains a number of specific exemptions and concessions for particular types of benefits such as work-related items and remote area fringe benefits. It also provides for concessional treatment of benefits provided to employees of particular types of organisations, including scientific and public educational institutions, charitable institutions, public and not-for-profit hospitals, trade unions and religious institutions.
This change met two broad policy objectives: it removed tax-induced distortions to investment decisions and substantially funded a reduction in the corporate tax rate. In , the federal income tax was introduced as a tax on Australian source income, consistent with the state income taxes, other than Tasmania Harris In Australia moved to a residence based taxation system, bringing income of residents from foreign sources into the taxation base.
At the request of the United Kingdom, Australia agreed to exempt income derived from the United Kingdom, where it had already been taxed. Following a subsequent request from the United States for similar treatment, in the government decided that all foreign source income would be exempted where it had already been taxed abroad.
Between and , Australia operated a bifurcated system, where foreign tax credits were provided for tax paid on dividends from portfolio investments, while income from direct foreign investments of residents was exempt. In the foreign tax credit arrangements were expanded to cover most foreign income. Shortly after the Second World War, Australia signed its first tax treaty with the United Kingdom, which limited its taxing rights over income derived by non-residents.
A treaty with the United States followed and later one was signed with Canada and another with New Zealand. In the s, Australia began to expand its treaty network and did so with vigour in the s and s. Australia now has close to 50 treaties signed or under negotiation.
Treaties often limit the amount of foreign tax that may be imposed on the income of Australian residents. Under Australian tax treaties, Australia is required to give relief for foreign tax imposed in accordance with the treaty. Although the treaties only provide for relief by credit, double taxation can also be relieved by unilaterally exempting the foreign source income, for example, under domestic law.
With the reduction in the Australian company tax rate, it was considered that there was little to be gained in taxing foreign source dividends where the foreign country had a similar tax system to tha t in Australia.
As a result, the foreign tax credit system was scaled back significantly in , with dividends from non-portfolio interests 6 and the profits of branches of Australian companies flowing from comparable tax jurisdictions 7 excluded from the income tax base. The federal income tax was levied on individual taxpayers at progressive rates. A relatively high income threshold exempted most wage and salary earners. The rates of tax imposed ranged from 3 per cent through to 25 per cent.
Individuals in the top income quintile accounted for the vast majority of personal income tax paid. This system allowed income tax collection from wage earners in lower income groups, which had been impracticable without a system of taxation at source. The PAYE system was more convenient for taxpayers, created a more even flow of revenue for government, and improved compliance as evasion was more difficult with income taxed at source Groenewegen Following the assumption of income tax powers and introduction of the PAYE system by the federal government in , the scope of the personal income tax was progressively broadened such that by the early s the share of personal income tax paid by the top income quintile had fallen to around half, a level that has since been broadly maintained.
This expansion in the scope of the income tax base has generally coincided with a reduction in marginal tax rates applying at higher levels of income. From its origins, the basic tax unit in Australia for income tax purposes has been the individual, although, as is the case today, the early income tax systems did recognise family circumstances with a series of deductions later replaced by credits for taxpayers supporting dependants.
More recently there has been a greater focus on the overall impact of taxation and benefits on household incomes, particularly those of families. The primary motivation for the distinction was to make increases in income tax more palatable, rather than as a means to separate out social security contributions from general taxation Mathews and Jay In the early s, income taxes and social services taxes were amalgamated allowing a substantial simplification of the income tax return.
The new form allowed taxpayers to assess their tax liability and determine if, after credit for tax instalments, a refund was due or a further amount payable. The public responded well to the simplified form. Since that time, Australia has had no specific tax levied to pay for social security benefits, unlike most other OECD countries. When income tax was first introduced in , companies were taxed on their profits after deduction of dividends that is only on retained profits.
Where dividends were paid out of accumulated profits, shareholders were entitled to a rebate of tax at the lesser of the company tax rate or their personal rate to compensate for tax already paid. This system was administratively cumbersome, requiring extensive record keeping, particularly as the company tax rates changed over time and rebates depended on the company tax rate at the time profits were accrued Australian Treasury In , a system of taxing all company profits was introduced.
The non-refundable rebate system was retained and applied to all dividends, so that individuals with higher marginal tax rates received a full rebate for company tax paid. Individuals on lower marginal tax rates did not receive a rebate for the difference between their marginal tax rate and the company tax rate.
The company tax rate was increased and an undistributed profits tax was imposed on public companies. The removal of the rebate was not intended to remain a permanent feature of the system but remained in place well past the end of the war Australian Treasury From to , Australia maintained this classical company taxation system, under which profits were taxed at the company rate and at personal rates when distributed.
In , Australia introduced an imputation system. Prior to this there had long been calls from business to remove what was seen as double taxation under the two tier classical system.
The classical system resulted in both equity and efficiency problems Australian Government For example, it provided a disincentive to incorporate, distorted corporate financing decisions by providing a bias towards debt and, combined with the absence of a capital gains tax, provided an incentive for companies to retain profits.
Full refundability of excess tax credits for resident shareholders was introduced to the Australian imputation system in As shown in Table 1, the company tax rate, like personal income tax rates, has been progressively reduced in recent times, decreasing from a high of 49 per cent in to the current rate of 30per cent.
The rate reductions have largely corresponded with base broadening measures, such as the removal of accelerated depreciation.
When the federal government first imposed income tax in , superannuation funds were exempt from paying tax on their earnings provided the fund was set up for the benefit of employees in any business. At that time, unlimited deductions were allowed for employer contributions to a superannuation fund for employees, while a capped concessional deduction was allowed for personal superannuation contributions. Prior to , the taxation levied on end benefits depended on whether they were paid out as a lump sum or an annuity.
Lump sum benefits were taxed very concessionally, with only 5 per cent of the lump sum included in assessable income a nd taxed at marginal rates. In contrast, annuities were taxed at marginal rates with an exemption for contributions made from post-tax monies. Krever notes that the taxation applied to superannuation prior to 1July created a significant incentive for taxpayers to convert employment income to lump sum retirement payments. Reforms to the taxation of superannuation benefits were introduced in to address concerns that individuals whose remuneration package included superannuation contributions were accessing lower effective marginal tax rates than those individuals who received their remuneration exclusively as salary and wages.
The taxation on lump sum payments was raised to 15 per cent for amounts below a specified threshold, with amounts above this threshold taxed at 30percent. Contributions and earnings remained untaxed and the taxation of annuities was largely unchanged. Further revisions to the taxation of superannuation benefits were announced in , when the Government imposed a 15 per cent tax rate on both contributions and earnings. To compensate for these changes, the Government reduced the tax rate on the taxed element of lump sum superannuation benefits.
The rate was reduced from 15percent to zero provided the benefit was preserved until age 55 for amounts up to the low rate threshold. Amounts above this threshold were taxed at the reduced rate of 15percent. While annuities remained taxed at marginal rates, the Government introduced a 15 per cent rebate when benefits were paid to the individual. Productivity Award Superannuation was created in under industrial agreements which provided for up to 3 per cent of wage increases to be contributed to approved superannuation funds.
While the initiative successfully increased superannuation coverage to approximately two thirds of the population, administration and implementation problems were rife, particularly with respect to the monitoring and enforcement of employer compliance. The Industrial Relations Commission cited these problems as the basis for its refusal of an application to increase the provision by a further 3percent in The SG rate was phased up from 3 per cent to 9percent between and Superannuation coverage has broadened to about 90percent of employees under the Superannuation Guarantee.
Although the rate of taxation is higher today than before the first suite of reforms were introduced in , superannuation is still a highly concessional savings vehicle. In recent years, the Government has introduced a number of policies designed to encourage individuals to make greater voluntary personal superannuation contributions. These include the Government co-contribution for low income workers, superannuation splitting for eligible couples and the introduction of choice of fund.
Recent amendments to portability legislation have complemented these initiatives, making it easier for individuals to consolidate their superannuation benefits into a single fund.
The myriad of changes to the superannuation taxation arrangements has led to considerable complexity. In the Budget, the Australian Government announced a proposal to simplify superannuation dramatically and improve retirement incomes. This is to be achieved principally through the removal of taxation on end benefits received by most individuals aged 60 or older.
Taxation arrangements are to remain unchanged where an end benefit is taken prior to age 60, but streamlined arrangements would apply. Indirect taxes have grown relative to economic activity, largely in response to increasing revenue demands brought about by periodic events, such as two world wars and the s Depression, and the increasing role played by the public sector. Chart 4: Evolution of indirect taxes in Australia since Federation. Faced with a large budget shortfall, the government introduced the wholesale sales tax WST in Raising indirect taxes was favoured because the incidence was disguised, making the tax more politically palatable.
It was also argued at the time that such taxes had a smaller impact on labour supply decisions than income taxes although income taxes were also raised to some degree in the same period. The WST was levied at the wholesale level to minimise the number of taxing points. It was introduced at a rate of 2. The WST was levied on many classes of consumables, but provided preferential treatment for food, primary produce and some primary industry inputs Smith In its first two years of operation, the WST base averaged 32 per cent of private consumption.
Over time the WST base declined as a proportion of consumption, with an increasing share of consumption expenditure directed towards services. By , the share of private consumption subject to the WST had fallen to 22 per cent. The previously clear lines between wholesalers and retailers became blurred. Where goods were sold directly by manufacturers or importers to retailers, a notional WST value had to be determined.
This contributed to complexity, uncertainty and taxpayer disputes. The multiple rate structure also contributed to compliance and administration costs and to the incentives for avoidance, particularly as rates were increased Groenewegen The WST was neither an efficient nor simple tax. The narrow base and differential rate structure created distortions to production and consumption decisions in favour of low taxed or unt axed goods or services.
Cascading of the WST through the production chain reduced economic efficiency and export competitiveness by increasing the cost of production in Australia. The arbitrary range of WST tax rates and exemptions imposed significant costs in terms of complexity and compliance. A broad based consumption tax was proposed in the findings of the Asprey Committee Asprey et al However, the introduction of a broad based consumption tax in Australia proved difficult, with unsuccessful attempts to introduce such a tax in and in In July , the federal government introduced a goods and services tax GST , based on the value-added tax VAT model, as part of a broader package of taxation reform.
The GST replaced the WST and a range of inefficient state taxes, in conjunction with reforms to federal financial relations. Revenue from the GST is paid to the states and territories, providing them with a stable and growing source of revenue and removing their reliance on general assistance grants from the federal government. The state taxes that were, or are in the process of being, abolished include Financial Institutions Duty; debits tax; stamp duty on marketable securities, conveyancing duties on business property; stamp duties on credit arrangements, instalment purchase arrangements and rental hiring agreements; stamp duties on leases; stamp duties on mortgages, bonds, debentures and other loan securities; stamp duties on cheques, bills of exchange and promissory notes; and accommodation taxes.
Like the WST, these taxes distort economic decisions and can cascade through the production chain, increasing production costs.
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