The Seven Samurai of tax reform in the post-Covid-19 era

In 1954, Akira Kurasawa released his masterpiece, Seven Samurai, a story about seven rōnin (masterless) samurai hired by a small village of peasant farmers in 1586 (the Sengoku period of Japanese history) to fend off the annual post-harvest attack by a band of 40 bandits. The outnumbered samurai succeeded in their task but five died achieving victory.

            Australia faces the fate of the feudal peasants in Seven Samurai when the toll for their covid-19 economic salvation package must be paid by 26 million people unless they can enlist master swordsman to enable them to pay that toll with their meagre harvest. Yet there are seven rōnin available to provide such salvation if our government enlists their help.

            1. GST is the (white) elephant in the room. Our GST is, in truth, only a 5 percent consumption tax as it taxes less than half of all the goods and services we consume at a rate of 10 percent. The OECD average is 19.3 percent, UK 20 percent, New Zealand 15 percent.

           Our GST needs to be extended to all goods and services we consume and its rate increased to 15 percent initially, with an increase, within two years at most, to 20 percent. Australia’s social security system must also be reformed to “pick up the pieces” – the dire consequences for low income earners – rather than leaving this to a tax system which has no business providing social security by the back doors of tax exemptions and tax concessions.

            2. Federal-State relations need major reform, of which GST reform is the centrepiece and a fundamental further plank is serious constitutional financial reform by a referendum. Despite the very poor history of success of referenda in Australia, these are quite extraordinary times, so that the Australian electorate can be expected to undertake this extraordinary step of paying the price for a full year of Covid-19 pandemic misery and its impact on their economy. State taxes – except for an annual land tax – must all be repealed and GST make up the difference. Inefficient payroll taxes and stamp duties must become a thing of the past. The former impedes new employment; the latter impedes new transactions.

            3. Company tax is crying out for reform. 30 percent is too high. OECD average rates are lower. For example, the US is 21 percent, the UK is 19 percent and Canada is 15 percent. In 2003, Ireland reduced its tax rate to 12.5 percent. In the intervening 17 years it has seen an influx of foreign capital, a boost to its economy and an increase in employment.

            4. Individual tax rates are too high. Australia averages 22.7 to 34.4 percent for wage and salary earners above the threshold: 47 percent above $180,000 is a disincentive. Lateral thinking is required. For example, we have a large number of retired senior public servants, judges and executives receiving pensions over $180,000 per year. They have no dependent children and very few have mortgages. They have the capacity to pay more tax. Last month was the largest in history for luxury car sales. Many CGT land assets sold with a 50 percent CGT discount or principal residence exemption are, in truth, fully taxable . There is plenty of income in the economy. The trick is to find and tax it without creating hardship.

            5. R&D is the engine room of every modern economy because it is the source of its technology. The white-anting of R&D tax concessions by successive governments over the last two decades in the name of budget reform and deficit reduction must now be reversed.

            6. Employee share acquisition scheme taxation in Australia, introduced in 1995 by the Keating Government, took a big hit on 1 July 2009 in the aftermath of the GFC. Our entire employee share acquisition scheme needs to be re-invented. Much of the reform work here has been done by the Senate Economics References Committee Report into Employee Share Schemes of August 2009 and the Henry Tax Review of 2010. Talented young Australians will work for a nominal salary for start-ups if they receive “a slice of the pie”. But they will not do so if a half of their slice of the pie is then payable to the federal government before their ideas are proven or an employer’s technology is commercialised.

            7. Non-resident taxation was reformed in 2006 with the enactment of Division 855 of the 1997 Tax Act – in accordance with OECD guidelines to promote new foreign investment in Australia – to exempt from tax Australian capital gains in the hands of non-resident investors unless their gains are sourced in our land, our land-related investments (mining) or a permanent establishment of a foreign company located here. A recent Federal Court decision (Greensill v FCT) proves this Howard-era reform is not working as intended by the OECD. So our international tax arrangements need to be fundamentally reformed.

            In conclusion, there is no reason that the Morrison-Frydenberg Government cannot achieve in the field of across-the-board tax reform what was achieved in 1983-1996 by the Hawke-Keating Governments and in 1996-2007 by the Howard-Costello Government in achieving generational tax reform for our national economy by enlisting these "Seven Samurai". But, as Sir Humphrey Appleby would say, “it requires courage, Prime Minister”.

 Chris Bevan is a Sydney barrister practising in taxation law.