Slash income tax, lift it on assets: Spender’s plan for tax reform

Working Australians would share in almost $30 billion worth of tax cuts under a plan from teal independent Allegra Spender that would drive up the tax paid by asset-rich residents, including many from her own wealthy electorate in Sydney’s eastern suburbs.

Spender, in the first tax white paper from an individual MP this century, said a person on $100,000 would be $1643 a year better off (almost $32 a week) under her proposals, which would slice 2.5 percentage points from each personal income tax rate.

But to pay for the ambitious plan, Spender has proposed overhauling capital gains tax and negative gearing while introducing a minimum tax rate aimed specifically at family trusts, which are often used to minimise income taxes.

Unveiling the proposal at the National Press Club on Wednesday afternoon, Spender will say the current tax system was broken, with working people paying much more tax than those who relied on assets.

“In our country, people are paying more tax when they are less wealthy – when they are working, when they are more likely to rent, to be saving for a deposit, to have young children, and to still have a HELP debt,” she will say, according to an advance copy of her speech.

“People are paying less tax on the same income when they are older, more likely to own their own home outright, and more likely to have significant wealth.

“We need to rebalance the tax system to a time in life when people have the greatest capacity to pay. And we need to set up the system for the long term.”

The last time a government started a tax white paper process was under then prime minister Tony Abbott in 2015. But it was abandoned before a set of proposals was made public.

Spender started her own discussion process with some of the nation’s top tax and budget experts more than a year ago, prompted by concern over the state of the tax system.

Under her proposal, the tax-free threshold of $18,200 would remain. The bottom tax rate of 16 cents in the dollar would be sliced to 13 cents. Every other rate would be cut by 2.5 percentage points, with the 30 per cent rate – which covers incomes of between $45,000 and $135,000 – reduced to 27.5 per cent.

In its first year of operation, workers would pay $28 billion less in personal income tax. Over their first four years, the savings would be almost $130 billion.

To pay for the changes, Spender proposes reducing the 50 per cent capital gains tax discount to 30 per cent. Landlords would be prevented from claiming tax deductions against all of their income from losses on their property holdings.

Income from all investments, including those held in family trusts, would be taxed at 27.5 per cent. At present, income from trusts is taxed at much lower rates.

Across superannuation, nest eggs between $1 million and $2 million would be taxed at 15 per cent, while those between $2 million and $3 million would be taxed at 22 per cent. The tax rate on balances over $3 million would be increased to 40 per cent.

Spender said tax reform had been avoided by the major parties because there had to be winners and losers from any change to the tax system.

She denied her proposals were about penalising wealth or an attack on older, asset-holding generations.

“People have simply responded appropriately to the tax system that they found, trying to do their best for themselves and their families,” she said.

“But I believe we need to be honest about the impact of our current system, and in my mind, recognise that some of the outcomes we are getting from it are not what we actually want.”

Treasurer Jim Chalmers is considering changes to capital gains tax and electric vehicle subsidies as part of the May 12 budget, which is expected to contain spending cuts and policies aimed at lifting the pace at which the economy can grow.

But senior research fellow at the right-leaning Centre for Independent Studies, Robert Carling, warned that mooted changes to CGT would achieve little.

Carling said that while advocates for reducing the discount argued it would have a measurable impact on house prices, the evidence was scant while proposals to cut or even abolish the discount would drive up the tax rate on any given transaction by between 34 per cent and 100 per cent.

“Capital gains tax is frequently portrayed as a simple lever that can fix housing affordability, inequality and the budget all at once. But the economic reality is far more complex,” he said.

“Investment, innovation and risk-taking are essential to productivity growth. Increasing the tax burden on capital gains would work in the opposite direction.”

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