When the stage three tax cuts were originally designed back in 2018 by Scott Morrison’s government, a major motivation was cracking down on tax-avoiding tradies.
That’s the view of finance expert and leading commentator Alan Kohler, who offered a fascinating insight into how millions of Aussies get around high tax rates.
In analysis published in The New Daily, Mr Kohler revealed how the original reforms were partly about addressing tax avoidance, although that wasn’t part of the discussion then – and still isn’t now.
“The architect of stage three in 2018 was not Scott Morrison or Treasurer Josh Frydenberg, but Maryanne Mrakovcic, the then-head of Treasury’s Revenue Group, who retired last year,” he explained in the piece.
“She has never spoken publicly about her thinking, but I understand she thought the personal income tax scales, especially the 37 per cent rate, provided too much incentive for tax avoidance, by shifting income to corporate structures and paying company tax instead of income tax.
“She apparently thought that was especially a problem with tradies, who have become adept at setting up company and trust structures.”
In a nutshell, her design of stage three would dramatically reduce the incentive of high earners – like tradies – to dodge tax.
That’s a feature now removed in a big way with Labor’s changes, and something that could cost the government dearly.
Those efforts have been eroded
In 2018, the tax rate for companies with a turnover of less than $25 million was 26 per cent – an incredibly generous rate.
Now, it’s down to 25 per cent, but the threshold has been lifted to $50 million. For larger firms, it remains 30 per cent. By comparison, someone on a high-income paying purely income tax would be slugged 47 cents in the dollar.
A lot of spending and savings “can be kept within the company” or trust structures, making it an appealing way of avoiding tax.
“Ms Mrakovcic apparently knew she was never going to get an increase in the company tax rate past the Coalition, so she proposed cutting the personal income tax rate for most people to 30 per cent,” Mr Kohler wrote.
“[That is] the same as the company tax rate for big firms, and closer to the 26 per cent that corporatised tradies paid.”
With Labor’s tinkering of stage three, Mr Kohler believes “tax avoidance through company structures will continue”.
Many in the accounting world agree.
In an impassioned post on Facebook, Sydney firm Atlas Chartered Accountants wrote: “Salary earners [on] $200,000 have to cop it at 47 per cent, business owners earning the same amount can reduce trust distributions and salaries from their entities and park the rest in bucket companies at 30 per cent.”
As a result, the government loses out on 17 per cent of taxation revenue.
“There’s a reason why the government never gets the tax revenue they forecast,” the post continued.
Brian Marlow, president of the Australian Taxpayers’ Alliance, quoted the late billionaire media magnate Kerry Packer, who once said: “If anybody in this country doesn’t minimise their tax, they want their head read.”
“People respond to incentives and if it makes sense, they will start to reorganise their affairs to minimise how much they have to pay,” Mr Marlow said.
“As a result of these changes, there’s a risk the government won’t raise the revenue they project because people will react and make changes to avoid tax where they can.”
Tradies ‘the most aspirational Aussies’
Prime Minister Anthony Albanese’s address at the National Press Club in Canberra on Thursday attempts to justify the broken election commitment by reframing the purpose of stage three.
“Our plan will more than double the benefit for Australians on the average income,” Mr Albanese insists.
“And it will look after low-income earners and part-time workers as well. So, someone working at Australia’s largest employer, Woolworths, earning $40,000 will now get a tax cut of over $650.
“Under Scott Morrison’s plan, they would have got nothing.”
The government’s change will direct tax cuts “fairly and squarely … on ‘Middle Australia’.”
It’s a talking point repeated by Treasurer Him Chalmers, who told media on Thursday that the revised design of stage street “will be better for Middle Australia”.
Dr Chalmers insisted it would also be “better for women and workforce participation, better for nurses and teachers and truckies”.
The framing of the changes as only impacting the ‘rich’ is a claim that should be challenged, Mr Marlow said.
“I don’t think we’d consider your average tradie a rich person,” he said.
“A lot of tradies are people that tend to support a single-income household, or if they have a partner who’s raising the kids, that partner might only work part-time, and our single-income tax structure is probably one of the most punitive in the Western world.
“So, I don’t blame them for trying to structure their affairs in a way that they try to avoid getting creamed by the tax office.”
They’re also likely to be bearing the brunt of higher interest rates and the cost-of-living crisis, he added.
“Most of your tradies out in Western Sydney, they’re the people you need to actually really grow Australia, right? But they’re the people that are still trying to go out there and buy a house and have kids and raise a family and do all these things that are becoming increasingly harder.
“That’s especially the case in our major cities, where if you’re on $160,000 a year working as a wage earner, but you’re trying to raise a family and pay a mortgage in Sydney, you’re getting annihilated.”
He described tradies as “perhaps the most aspirational people in Australia”.
“Even though they don’t end up working to be corporates and whatnot, they’re the kinds of people that understand that if you put in a lot of hard work and bust your ass, you can actually make a decent life for yourself and your family.
“So, if they’ve wisened up and realised, ‘oh, actually, I can pay just a local accountant to help me out and make sure that I’m not getting annihilated, not only on personal income tax, but also company tax, more power to them.”