‘This is not how good tax policy should be developed’: The Tax Institute slams tax reform process

The Tax Institute’s submission covers Treasury’s consultation on CGT adjustments, apportionment method, negative gearing amendments, and definition of a “new residential dwelling”, and negative gearing activity exemptions.

While welcoming the government’s announcement that it would address the ‘widow’s tax’ and ‘divorce tax’, The Tax Institute said that the need for these amendments so soon after the first tranche of legislation passed parliament demonstrates broader concerns about the process used to develop changes of this magnitude.

It said given the significance of these economy-wide tax changes that impact millions of Australians, a more comprehensive consultation process before the first tranche was passed could have identified these issues earlier and avoided several rounds of legislative amendments.

“These amendments also raise an important question: if a number of significant problems have already emerged and required correction, what other unintended consequences remain undiscovered?” the submission asked.

“That question is particularly pressing, given that Treasury has already flagged that further tranches of legislation will be required to address unresolved issues. This is not how good tax policy should be developed, and it adds to the uncertainty and cost that taxpayers and advisers already face in adapting to changes of this scale.”

Further, The Tax Institute pointed out that many of the measures outlined in the second tranche of the exposure draft bills are not new policy initiatives, but rather amendments to unintended outcomes, technical deficiencies, and design issues that stakeholders and the government pointed out only after legislation had already passed.

Better targeting of minimum 30 per cent CGT needed

Among the key issues and recommendations in its submission, the institute said it is concerned that the 30 per cent minimum tax on capital gains could have a more detrimental impact on small-scale and first-time investors than on more established and wealthier investors.

“We recognise that the design of the 30 per cent minimum tax on capital gains is not itself the subject of this consultation. However, as this tranche introduces targeted exemptions for testamentary trusts, deceased estates and special disability trusts, it is also an opportunity to consider whether further targeting measures are warranted to ensure the minimum tax operates consistently with its stated distributional objectives,” the submission read.

The minimum tax could sometimes affect taxpayers with modest levels of ordinary income compared to those who realise much larger capital gains because it imposes a top-up amount where the tax otherwise payable on a capital gain is less than 30 per cent of that gain.

“The minimum tax is driven not only by the size of the capital gain, but also by the interaction between that gain and the taxpayer's broader income position. As a result, taxpayers with relatively modest levels of non-capital-gain income may be more likely to be affected by the top-up tax than taxpayers realising significantly larger gains,” the submission read.

Small-scale investors with a single established residential property may not be able to offset a quarantined rental loss against profits or gains from other properties, unlike an investor with a diversified property portfolio. This could mean they feel a disproportionate impact of these changes relative to their ability to pay.

“This is difficult to reconcile with the stated objective of improving equity within the tax system,” the submission read.

As such, the Tax Institute recommended that Treasury consider whether a “de minimis” threshold, based on a taxpayer’s income or the amount of investment they hold, would better target the minimum tax on capital gains toward wealthier and more sophisticated investors, in line with the measure's goal.

“If such a threshold is not adopted as part of this tranche, Treasury should consider the distributional impact of the minimum tax on small-scale investors in further tranches or in any post-implementation review of the CGT reforms,” the submission read.

Multiple consultations raise web of complexity

The submission also criticised the government for the timing and sequencing of the consultation process across multiple measures, arguing that this exposes the same underlying issues.

It noted consultations opened and closed successively on the minimum tax on discretionary trusts, Tax Practitioners Board sanction reforms, CGT and negative gearing tranche 2 legislation, as well as the Innovative Business CGT Concession, among other aspects of the second tranche.

“Each of these measures is significant on its own and involves many of the same stakeholders, advisers and representative bodies. Running multiple major consultations simultaneously limits stakeholders' ability to thoroughly analyse the proposals, engage with their own stakeholders, including members, and provide considered feedback on each proposal.”