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01_Brief_History of tax.pdf | Income Tax In The United States | Taxes
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Description: brief history of taxation
brief history of taxation
A brief history of Australia’s tax system
Sam Reinhardt and Lee Steel1
This paper was presented to the 22nd APEC Finance Ministers’ Technical Working Group Meeting in Khanh Hoa, Vietnam, on 15 June 2006. It provides an overview of Australian taxation history, identifying trends and discussing key reforms to Australia’s tax system at both federal and state levels of government.
The authors are from Tax Analysis Division, the Australian Treasury. The paper has benefited from contributions from Scott Bartley, Paul Dearlove, Shane Johnson and a number of other officers in Treasury’s Revenue Group. The views expressed in this paper are those of the authors and not necessarily those of the Australian Treasury. 1
At the end of the nineteenth century each of the six Australian colonies had distinct tax systems, which were almost entirely reliant on customs and excise duties. The design of these tax systems was largely driven by administrative concerns, rather than principles of equity or efficiency. Customs duties were also designed to act as trade barriers between the colonies. One of the significant results of Federation in 1901 was the removal of all duties on goods traded between Australian states. Consistent with most industrialised countries, Australia’s tax take (measured as the tax to GDP ratio) grew significantly over the twentieth century, in line with the expanding role of government (see Chart 1). At the time of Federation Australia’s tax to GDP ratio was around 5 per cent. This ratio remained reasonably constant until the introduction of the federal income tax in 1915, which was used to fund Australia’s war effort. Between the two World Wars, government expenditure and tax revenues grew significantly and by the beginning of the Second World War, Australia’s tax take was over 11 per cent of GDP. Chart 1: Tax to GDP 1902-2005
35 30 25 20 15 10 5 Commonwealth tax State tax Per cent of GDP Per cent of GDP 35 30 25 20 15 10 5
0 0 1902-03 1913-14 1924-25 1935-36 1946-47 1957-58 1968-69 1979-80 1990-91 2001-02
Between 1915 and 1942, income taxes were levied at both the state and federal level, leading to complexity and inequitable taxation of income across states. The Second World War saw fundamental changes to Australia’s taxation system. In 1942, income taxation was consolidated by the federal government to increase revenue as a war-time measure. As a result, the states’ tax base was reduced (see Chart 1), replaced by federal government grants. The states’ tax base was supplemented in 1971, when the then federal government ceded control of payroll taxes to the states.
for example. Chart 2: Federal government taxation revenue — by tax base 100 Proportion of tax revenue Proportion of tax revenue 100 Indirect taxes 80 80 60 Other direct taxes Company income tax 60 40 40 20 Personal income tax Income tax 20 0 1902-03 1913-14 1924-25 1935-36 1946-47 1957-58 1968-69 1979-80 1990-91 2001-02 0 Other key areas of tax reform over the past 25 years include the interaction between personal and business taxation and other reforms to business taxation. It then increased significantly between 1973 and 1975. 3 . changes to the taxation of retirement savings and incomes. federal government reliance on direct taxes as the primary tax base has increased (see Chart 2). all revenue from the goods and services tax is paid to the states. Although it was introduced by the federal government. The further increase in taxation largely reflected Australia’s involvement in the war and the introduction of government support programmes. largely as a result of increased funding for social programmes. Nevertheless. taxation revenue had grown to over 22 per cent of GDP. and the introduction of a broad based goods and services tax in 2000.A brief history of Australia’s tax system By the end of the Second World War. changes to the tax treatment of fringe benefits. similar to the experience of many other OECD countries. Tax revenues tended to fall in the middle of the twentieth century and by 1963-64 the tax take was around 18 per cent of GDP. The goods and services tax replaced a range of less efficient federal and state indirect taxes. The latter part of the twentieth century saw significant base broadening in the income tax system with. the introduction of a capital gains tax and the removal of accelerated depreciation. such as the widows’ pension in 1942 and unemployment relief in 1944. Australia’s tax to GDP ratio is currently the eighth lowest among the 30 OECD countries. Throughout the twentieth century. Base broadening in both personal and business taxation has been accompanied by declining rates of taxation. There has since been a modest rise in Australia’s tax take.
sugar. hospital equipment and building works around Sydney. for example in response to concern over the level of alcohol consumption in the colonies. Revenues were generally hypothecated in an attempt to draw support from the public. gaol. see Warburton and Hendy (2006). As demand for public expenditure increased. meal. At this stage in Australia’s development. Revenue needs were primarily met through an expansion in the range of indirect taxes. were also introduced early in the nineteenth century. meant that the poor shouldered a disproportionate share of the burden of early taxation. 2 For a detailed comparison of Australia’s tax system with other OECD countries. wool. rice. flour. Australia’s colonies operated as separate economies up until Federation in 1901. the colonies supplemented this revenue with fees for services and non-tax revenue from land sales. customs duties were imposed on major export products such as timber. customs duties had been extended beyond luxury goods to essential items such as tea. 4 . At the end of the eighteenth century. Early customs and excises duties on goods such as tobacco and alcohol were intended not only to raise revenue. Excise duties levied on locally produced goods. The main appeal of customs duties was that they were readily collected at the limited number of wharves where goods entered the colonies. relative to their income.2 Early taxation — excise and customs duties Established from late in the eighteenth century. excise duties provided much less revenue than customs duties.A brief history of Australia’s tax system Australia’s reliance on direct and indirect taxation is broadly consistent with other OECD countries. By 1840. for example funding an orphanage. but were also introduced as ‘sin taxes’. and seal skins. equivalent to the customs duties on imports. seal and whale oil. colonial administrators raised small amounts of revenue through wharfage fees and port entry and exit fees (effectively taxing imports). The reliance on these regressive taxes created significant issues in terms of perceived equity and economic prosperity between colonies. with additional duties on alcohol. The narrow base and the high consumption of these goods by poorer households. From 1813. being easy to administer and less likely to attract negative attention than direct forms of taxation. Levying customs duties and excises on necessities also ensured a relatively secure source of revenue. grain and pulses (see Mills 1925). partly because of the limited amount of manufactured goods produced in the colonies. Customs and excise duties were the primary sources of taxation.
These included: liquor retailing fees. and the availability of alternative revenue sources. For example. with some small scale alluvial miners making large amounts of money. contributing to its reliance on revenue from tariffs. which were easier to collect and more equitable (see Smith 1993). The licence fees were the trigger for a significant uprising by Victorian miners against the colonial authority — the Eureka Stockade. The primary reason for the uprising was the high level at which the licence fees were set. auction licence fees. probate fees (service charges for the issue of probates and letters of administration by public legal clerks and judges). 5 . but other contributing reasons included: that the fees had no link to gold discoveries of miners. and stock taxes. which in 1875 contributed half of the Colony’s revenue. the main political divide in Australia centred on colonial attitudes towards tariffs. however. often exceeding the cost of the services. Another significant early contributor to colonial revenue was fees on grants of land and leases. and demand for a greater role for government. rising wealth. which began in Australia in 1851. relying heavily on customs duties and tariffs. stamp duties. This revenue source (in particular land sales) was. The ‘gold rush’. New South Wales in particular relied heavily on revenue from land sales and rent. and about twice that from all sources of taxation. whereas New South Wales proudly declared itself a free-trade colony. Taxation and federalism By the time of Federation in 1901. Victoria and Western Australia were staunchly protectionist. These differences reflected ideological preferences. miners rarely saw any of the benefit of public expenditure. Victoria approached the limits of land sales as a revenue source much earlier than New South Wales. with unallocated lands increasingly less accessible and less fertile. Australia had evolved from frontier-style penal and migrant settlements to a modern economy with growing urban and rural populations. This was considered the most feasible option for collecting revenue because of the ease of administration. finite. gold licence fees were replaced with a gold export tax and a much reduced miner’s right. offered a new opportunity for governments to raise revenue. In the years leading up to Federation. Charges for these services were an additional source of revenue. and the inequity of the taxes compared with the light taxation of wealthy land owners. Following the riots and rebellion of the Eureka Stockade. New South Wales and Victoria introduced a gold licensing fee for the right to mine allotted sections.A brief history of Australia’s tax system The colonies also introduced a number of taxes on services. each colony’s economic development and consumption patterns.
it was expected that revenue from customs and excise duty would be more than sufficient and that only in an emergency would the federal government use its direct taxation powers. beer and spirits and some basic food and clothing. Although the states retained control of land and income taxes. the Constitution provided for a revenue sharing arrangement for the first ten years following Federation. Formerly dependent on hidden and regressive indirect taxes such as customs and excise duties. To resolve this fiscal imbalance. The rate of change to the tax bases varied between the colonies according to their stage of development. The states were left with a shortfall of funding for their constitutionally allocated expenditure. The states gave up customs and excise duties to secure interstate free trade and ensuring adequate protection for Australian industry (Groenewegen 1985). whereas customs and excise revenue exceeded the needs of the nascent federal government’s limited role. progressive taxes on land and income.A brief history of Australia’s tax system Social and demographic changes led to corresponding changes in taxation. Although the economic development of the Australian colonies was relatively homogenous compared with other federations. customs and excise duties were by far the greatest source of taxation revenue at the time of Federation. Section 51(ii)). They largely applied to the goods that had been taxed by the former colonies — tobacco products. As the federal government’s revenue needs were limited. their industrial strength and their policies to provoke some resistance to integration. along with any revenue that was surplus to federal government needs. the drafters of the Constitution adopted an ‘assumption of “convergence”: that Federation would bring about an equalisation of the states’ economies and fiscal capacities’ (Hancock and Smith 2001 page iv). The federal government retained one quarter of customs and excise duty revenue with the remainder distributed to the states. One of the challenges accompanying Federation was the creation of a two-tier system of government that centralised control of some functions. such as defence and foreign affairs. The Australian Constitution allocated the majority of expenditure responsibilities to the states. while allowing each state sufficient autonomy to meet the social preferences of its constituency. there were sufficiently large differences in the size of the colonial economies. 6 . Uniform federal tariff and excise duties were introduced in 1901. The expectation of the drafters of the Constitution was that the federal government would carry out functions that the states were not able to conduct efficiently themselves. late in the nineteenth century the colonies began to introduce direct. but so as not to discriminate between the States or parts of States’ (Australian Constitution. Based on views about common citizenship rights. Part 5. The federal parliament had power to make laws with respect to ‘taxation.
and competing for revenue from. The state and federal government taxing systems were kept separate. which had been its primary revenue source. A single income tax By Federation many of the colonies had introduced income taxes. Western Australia requested fiscal assistance to compensate for the loss of tariffs. The ideology of convergence has continued and strengthened over time. and administered separately by the different bureaucracies. In 1932. In 1936. Harmonisation of state and federal taxation and ensuring equity in the system of federal grants to the states were the focus of academic and political debate in the period between the World Wars. Tasmania was also a recipient of federal government grants. With reliance on income taxation rising at both the federal and state levels. in addition to existing state income taxes. The federal government rates were low and cut in at a high income threshold. there were a number of attempts to harmonise federal and state taxation. In 1919 the federal government offered to withdraw from income tax as an alternative to providing grants to the states. the Ferguson Royal Commission was appointed to suggest ways to harmonise systems. to finance involvement in the First World War. so that Australia has a very high level of fiscal equality between the states when compared with other federal systems. This situation became problematic following Federation due to increasing population and capital mobility between states. and South Australia became a recipient in the 1920s. the federal government continued to impose income tax.A brief history of Australia’s tax system It was not long after Federation that fiscal inequality between the states led to federal funding in support of fiscal equalisation. minimising double taxation. a common taxation base. meaning that two tiers of government were sharing. In 1910-11. federal government income tax revenue grew from 16 per cent to 44 per cent of total federal revenue. each with their own definition of assessable income and different rates applying to differing categories of income. Income taxation was further complicated by some jurisdictions taxing according to the taxpayer’s residency and others taxing according to where income was earned. As a result of the complexity and inconvenience of paying tax on the same base to two levels of government. Following the war. Between 1938-39 and 1941-42. 7 . horizontal fiscal equalisation was formalised with an independent body recommending distribution of federal government grants based on fiscal need. differences in state income taxes led to concern about the inequitable tax burdens between taxpayers in different states. Over time. A federal government income tax was introduced in 1915. In 1911-12. similar legislation was enacted in all jurisdictions but over time further changes eroded the uniformity. but this option was strongly rejected by some states. The federal government increased its income taxation in the early years of the Second World War to meet the costs of the war effort.
A brief history of Australia’s tax system In 1942 the federal government introduced legislation that increased the federal government income tax rates to raise more revenue. In practice. and wealth was held in more diverse forms. The tax applied as a 2. The uniform taxation arrangements were initially only meant to apply for the duration of the Second World War and one year thereafter. land taxes became less effective over time as the productivity base of the economy diversified from being mostly agrarian at the beginning of the twentieth century. Land taxes Land taxes were first introduced by state administrations in the late nineteenth century after a long period of debate and blocking of such taxes by parliaments dominated by wealthy landowners. such as the value of mortgage debt. Land tax revenue became less stable. based on unimproved value. Post-war changes to the state tax base The centralisation of income tax was followed by further changes to the state and federal tax bases during the post-war period.5 per cent levy on payrolls. accounting for 24 per cent of state and local government revenue in 2003-04 (Australian Bureau of Statistics 2006). In most states land was taxed at progressive rates. the states lobbied for access to 8 . while the federal land tax was introduced as a flat rate tax. Land taxes were also introduced at the federal level in 1910 as a form of wealth tax and as a means to break up large tracts of under-utilised land. susceptible to the fluctuations of town property markets. Payroll taxes The federal government introduced payroll tax in 1941 to finance a national scheme for child endowment. At the end of the War. this prevented the states from continuing to levy their own income taxes. Land taxes were also unpopular as the federal and state taxes were not well integrated with income taxes. restricting the application of land tax to urban property. With the federal government assuming control of the income tax base. Although a state could legally continue to impose its income tax. but still operate at the state and local level. The legislation provided for reimbursement grants to the states provided that they ceased to levy their own income taxes. land taxes were applied taking no account of net property wealth. As a form of wealth tax. doing so would impose an increased burden on its residents and also disqualify that state from receiving federal government grants. In 1952. In addition to having no regard to other forms of wealth. the states sought to regain their income taxing powers but were unsuccessful. By the middle of the twentieth century wealthy primary producers and large landholders had also been largely excluded from land tax requirements through exemptions granted to land used for primary production. land taxes were abolished at the federal level.
By 1901 estate taxes had been adopted by all of the colonies.5 per cent to 5 per cent. By the 1970s pressure for estate duty concessions had gradually reduced the tax base. By the late 1960s and into the early 1970s. Having not been adjusted since the 1940s. The rates were progressive and based on the value of the estate. In general. Tax competition between states and lobbying by individual employers and employer groups for exemptions has reduced the payroll tax base to less than half of the comprehensive labour income tax base (Freebairn 2005). acknowledging that this tax represented the sole possible growth tax available to the states (Mathews and Grewal 1997). both state and federal.A brief history of Australia’s tax system payroll tax and in 1971 the federal government handed over payroll taxes to the states. estate duties became more costly to administer. with reasonably high exemption thresholds. State payroll taxes are now levied at rates ranging between 4. The federal government also abolished its estate and gift duties in 1979. accounting for between 24 and 36 per cent of each state’s total revenue. After Queensland dispensed with its tax in 1977. state and federal governments were coming under increasing pressure to amend or remove estate duties. By 1984 all estate duties had been removed. In 1914. This 9 . In the end.85 per cent. Nevertheless. With the increasing impost on smaller estates. estate duties were relatively low cost to administer and. the federal government also introduced a progressive system of estate taxes to help fund wartime expenses. Estate taxes (death duties) Estate taxes were first introduced in the form of probate duties (a tax on property passing by will) charged by courts in the early part of the nineteenth century in New South Wales. individuals with relatively modest levels of wealth were becoming subject to estate duties. state tax competition led to the abrupt demise of estate duties. when introduced. the uniformity of state payroll tax rates has been eroded as has the base to which they are applied. At the same time more wealthy individuals were seen to be avoiding the tax through effective estate planning (Groenewegen 1985). thus limiting the impact on small estates.75 per cent and 6. The duties were an important source of state revenue from the end of the nineteenth century through the first part of the twentieth century. Over time. Rural producers and small business owners also objected to the taxes on the basis that they impeded business succession. were more readily accepted than a wealth tax. levied throughout a taxpayer’s life. Gift duties aimed to ensure that estate duties were not circumvented. there was concern in other states about emigration of residents and capital and the potential impact of the tax on electoral outcomes (Pedrick 1981). During the following three years the states uniformly increased the rate from 2. payroll taxes are still an important source of tax revenue for the states.
rather than the British schedular tax system. to reducing tax system complexity. The recommendations relating to capital gains and fringe benefits taxation were adopted following the Draft White Paper but there was insufficient support for the implementation of a broad based consumption tax at that time. Since the 1980s. The end of the 1990s also marked the start of a number of important initiatives. increased attention has been paid to reforming the tax system to improve equity and efficiency and. or are in the process of being replaced. A key theme of the Asprey Report was the need to broaden the tax base to improve equity and efficiency. the Draft White Paper recommended a broadening of the tax base through the adoption of a broad based consumption tax. In 1985. Up until the 1970s. Other taxes During the latter part of the twentieth century. reform to the business tax system. a review of Australia’s international taxation arrangements and the 2006 Budget proposal to reform the taxation of retirement savings. more recently. Income tax Tax base At its inception. The catalyst for this reform was a growing concern about the equity of the taxation system. the introduction of a capital gains tax and comprehensive taxation of fringe benefits (Australian Government 1985). including the introduction of a goods and services tax. 10 . the states supplemented their revenues with a range of transaction based taxes. the federal income tax was modelled on the income tax systems applying in the Australian states and the United States example of a global income tax system. Many of these taxes have since been replaced. efficiency and simplicity of the tax. as part of the reforms to federal financial relations associated with the introduction of the goods and services tax. Key developments in federal taxation Developments in federal taxation can be broadly classified into two periods. the focus of significant changes to the tax system was on expanding the revenue base to fund expenditure programmes. applying to all forms of income. the revenue from which is paid to the states.A brief history of Australia’s tax system occurred despite various tax review committees recommending refinements to improve the equity. In the late 1980s there were also fundamental changes to the taxation of corporate income and the taxation of retirement savings. which led to the establishment of the Taxation Review Committee in the early 1970s (Asprey et al 1975).
based on equity grounds. the lack of a capital gains tax created incentives for companies to retain profits. Amounts originally identified by the courts and administrators are now known as ‘ordinary income’. the most important was that applying to gains from property held for less than one year. never been a comprehensive definition of ‘income’ for the purpose of taxation in Australia. Of the capital gains taxes that were in operation. with most capital gains excluded from the income tax base. The concept of ‘ordinary income’ was developed both on the form of payment and whether the income could be traced to a source such as labour activities. salaries. it was argued that the lack of a capital gains tax distorted investment towards assets providing returns in the form of capital gains. In particular. In 1985 a capital gains tax was introduced and in 1986 the fringe benefits tax was introduced. income tax was an Australian source-only tax and did not apply to the foreign source income of residents. it was argued that. Certain classes of assets are exempt from capital gains tax. From its introduction in 1915. potentially resulting in less efficient investment choices from an economy wide perspective.A brief history of Australia’s tax system There has. In the post-war period. interest or dividends. In 1985. the income tax base had been gradually broadened. At its inception. which was introduced in the early 1970s. they should be included in any comprehensive definition of income’ (Australian Government 1985 page 77). income tax base broadening was limited until the implementation of some of the recommendations included in the 1985 Draft White Paper (Australian Government 1985). From 1985 to 1999. Ordinary income is distinguished from ‘capital receipts’. which had led to growth in tax avoidance and evasion activity. It was also argued that. The capital gains tax arrangements introduced in 1985 applied to realised gains and losses on assets acquired after 19 September 1985. The meaning of these constructs derives largely from English equity. In 1999 the removal of accelerated depreciation and a range of other base broadening measures were introduced as part of a broad programme of business tax reform. such as owner occupied homes. The Draft White Paper and tax academics also argued for taxing capital gains to improve economic efficiency and reduce tax avoidance. ‘because real capital gains represent an increase in purchasing power similar to real increases in wages. Capital gains tax Prior to 1985. business activities or use of property. rather than income streams. however. combined with the classical taxation of dividends (discussed below). The primary motivation behind these base broadening measures was to address gaps in the income tax base. and provided an incentive to convert income into capital gains. an 11 . Australia had no general tax on capital gains.
A brief history of Australia’s tax system indexation system applied. In recognition of the growing trend of remunerating employees with non-cash business benefits (particularly for those employees on higher incomes).5 per cent of taxable income. individuals and the beneficiaries of trusts pay tax at normal rates on only half of any capital gain realised on an asset held for at least twelve months. the explicit taxation of fringe benefits was proposed in the Draft White Paper (Australian Government 1985). gains were taxed. in practice there was an almost universal non-inclusion of most fringe benefits in assessable income by employees (Australian Government 1985). rather than employees. The indexation and averaging provisions were removed for assets acquired after 30 September 1999. Fringe benefits tax was subsequently introduced in 1986. non-cash benefits provided to employees in addition to wages or salary) have been legally taxable in Australia since the inception of the federal income tax. 12 . so that only real. Fringe benefits tax is levied on employers. Under the discount. An averaging system was also in place to reduce the impact of the progressive income tax on realised gains accrued over a period of years. and applies above a threshold that excludes low-income earners. public and not-for-profit hospitals. In 1999 a capital gains discount was introduced to promote more efficient asset management and improve capital mobility. Fringe benefits are taxed at the top personal tax rate plus the Medicare levy3 (currently 46. Because of difficulties in determining the value of fringe benefits and for a range of other administrative and related reasons. charitable institutions. and not nominal. Superannuation funds receive a one-third discount. It also provides for concessional treatment of benefits provided to employees of particular types of organisations. trade unions and religious institutions. The most radical was the adoption of 3 The Medicare levy is imposed at 1. and to make Australia’s capital gains tax internationally competitive. The fringe benefits tax regime contains a number of specific exemptions and concessions for particular types of benefits such as work-related items and remote area fringe benefits.5 per cent). including scientific and public educational institutions. Fringe benefits tax Fringe benefits (indirect. by reducing the tax bias towards asset retention. Depreciation Australia has had various forms of accelerated depreciation and investment credits/deductions for much of its tax history. to simplify compliance and administration.
bringing income of residents from foreign sources into the taxation base. could instead be written off at a rate of 20 per cent (5 year write-off). 13 . consistent with the state income taxes. In 1930 Australia moved to a residence based taxation system. Under Australian tax treaties. Although the treaties only provide for relief by credit. eligible plant that could otherwise be depreciated at a rate in excess of 20 per cent using a straight line method. including foreign source employment income. Australia operated a bifurcated system. In 1986 the foreign tax credit arrangements were expanded to cover most foreign income. 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 1999.A brief history of Australia’s tax system ‘5/3’ depreciation. the accelerated depreciation arrangements were removed and depreciation rates aligned to an asset’s effective life. although loadings were reintroduced at times. Following a subsequent request from the United States for similar treatment. where it had already been taxed. Australia now has close to 50 treaties signed or under negotiation. Australia agreed to exempt income derived from the United Kingdom. 4 5 Under 5/3 depreciation.4 This arrangement was gradually wound back in the 1980s. At the request of the United Kingdom. other than Tasmania (Harris 2002). double taxation can also be relieved by unilaterally exempting the foreign source income. in 1947 the government decided that all foreign source income would be exempted where it had already been taxed abroad. Australia signed its first tax treaty with the United Kingdom. remained exempt subject to time requirements. could instead be written off at a rate of 33 1/3 per cent (3 year write-off). In the 1970s. Australia began to expand its treaty network and did so with vigour in the 1980s and 1990s. Australia is required to give relief for foreign tax imposed in accordance with the treaty. Some direct income. A treaty with the United States followed and later one was signed with Canada and another with New Zealand.5 Shortly after the Second World War. where foreign tax credits were provided for tax paid on dividends from portfolio investments. Eligible plant otherwise depreciable at a rate of 20 per cent or less. for example. Between 1947 and 1986. Treaties often limit the amount of foreign tax that may be imposed on the income of Australian residents. which limited its taxing rights over income derived by non-residents. the federal income tax was introduced as a tax on Australian source income. under domestic law. while income from direct foreign investments of residents was exempt. Source and residency based taxation In 1915. following the Review of Business Taxation (Ralph et al 1999).
A brief history of Australia’s tax system With the 1988 reduction in the Australian company tax rate. a comparable tax jurisdiction was a foreign country regarded as having an income tax system comparable to Australia’s with roughly comparable tax rates. 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. 6 7 That is interests of 10 per cent or greater in a company. created a more even flow of revenue for government. a level that has since been broadly maintained. with dividends from non-portfolio interests6 and the profits of branches of Australian companies flowing from comparable tax jurisdictions7 excluded from the income tax base. 14 . the scope of the personal income tax was progressively broadened such that by the early 1980s the share of personal income tax paid by the top income quintile had fallen to around half. The PAYE system was more convenient for taxpayers. Notwithstanding the increase in the proportion of personal income tax paid by lower income quintiles. which had been impracticable without a system of taxation at source.5 per cent (including the Medicare levy) as of 1 July 2006 (see Chart 3). A relatively high income threshold exempted most wage and salary earners. Australia’s average effective tax rate on the income of a range of household types is in the lowest eight out of the 30 OECD countries (Warburton and Hendy 2006). where employers deduct tax from employees’ pay. As a result. the foreign tax credit system was scaled back significantly in 1990. 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 that in Australia. This system allowed income tax collection from wage earners in lower income groups. was introduced by the South Australian government during the depression and universalised by the federal government in 1942. The Pay-As-You-Earn (PAYE) system. Following the assumption of income tax powers and introduction of the PAYE system by the federal government in 1942. and improved compliance as evasion was more difficult with income taxed at source (Groenewegen 1985). A list of such countries was included in the law. Broadly. Personal income tax The 1915 federal income tax was levied on individual taxpayers at progressive rates. Australia’s top marginal tax rate has decreased over the past 50 years from over 75 per cent in the 1950s to 46. 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.
income taxes and social services taxes were amalgamated allowing a substantial simplification of the income tax return. In 1945 a ‘Social Services Contribution’ was introduced. the early income tax systems did recognise family circumstances with a series of deductions (later replaced by credits) for taxpayers supporting dependants. rather than as a means to separate out social security contributions from general taxation (Mathews and Jay 1972). the basic tax unit in Australia for income tax purposes has been the individual. More recently there has been a greater focus on the overall impact of taxation and benefits on household incomes. requiring extensive record keeping. This system was administratively cumbersome. after credit for tax instalments. In the early 1950s. Australia has had no specific tax levied to pay for social security benefits. a refund was due or a further amount payable. 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. Where dividends were paid out of accumulated profits. companies were taxed on their profits after deduction of dividends (that is only on retained profits). which hypothecated a part of income tax revenue for social welfare. The public responded well to the simplified form. unlike most other OECD countries. although. as is the case today. particularly those of families. Since that time. The new form allowed taxpayers to assess their tax liability and determine if.A brief history of Australia’s tax system Chart 3: Personal income tax top marginal rate 80 75 70 65 60 55 50 45 40 35 30 1951-52 1956-57 1961-62 1966-67 1971-72 1976-77 1981-82 1986-87 1991-92 1996-97 2001-02 2006-07 Per cent Per cent 80 75 70 65 60 55 50 45 40 35 30 From its origins. 15 . The primary motivation for the distinction was to make increases in income tax more palatable. Company income tax When income tax was first introduced in 1915.
distorted corporate financing decisions by providing a bias towards debt and. Under the imputation system.A brief history of Australia’s tax system 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 1974). the company tax rate. Where the resident shareholder’s marginal tax rate is below the company tax rate. The non-refundable rebate system was retained and applied to all dividends. provided an incentive for companies to retain profits. Under Australia’s imputation system. Australia maintained this classical company taxation system. 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 1974). Full refundability of excess tax credits for resident shareholders was introduced to the Australian imputation system in 2000. so that individuals with higher marginal tax rates received a full rebate for company tax paid. a system of taxing all company profits was introduced. the excess credit can be used to offset other taxes (for example. against taxes on wages and salary). and as a final tax on (primarily Australian source) income earned by non-residents through an Australian resident company or permanent establishment in Australia. The rate reductions have largely corresponded with base broadening measures. The classical system resulted in both equity and efficiency problems (Australian Government 1985). In 1922. it provided a disincentive to incorporate. The company tax rate was increased and an undistributed profits tax was imposed on public companies. Australia introduced an imputation system. thereby eliminating double taxation of dividends. such as the removal of accelerated depreciation. the rebate of tax on dividends received by individual shareholders and non-resident companies was removed. From 1940 to 1986. In 1940. under which profits were taxed at the company rate and at personal rates when distributed. Individuals on lower marginal tax rates did not receive a rebate for the difference between their marginal tax rate and the company tax rate. As shown in Table 1. Australia’s company income tax system operates as a withholding tax on the income Australian residents earn through Australian resident companies. resident shareholders receive a credit for tax paid at the company level. For example. decreasing from a high of 49 per cent in 1986 to the current rate of 30 per cent. with additional revenue needed to fund Australia’s involvement in the Second World War. Prior to this there had long been calls from business to remove what was seen as double taxation under the two tier classical system. In 1987. has been progressively reduced in recent times. combined with the absence of a capital gains tax. 16 . like personal income tax rates.
Public company Private company Lower rate (42.4 Notes on tax base A company was taxed on its undistributed profits (allowing a deduction for income distributed to shareholders). Taxation of retirement savings When the federal government first imposed income tax in 1915. Credit allowed for foreign tax paid on foreign income up to the amount of Australian tax payable on the foreign income. Rebate provided to all dividends. p 225. The classical system of company taxation replaced by dividend imputation. 2001 30 Source: Australian Treasury (1974) pp 39-41. 42. Asprey et al (1975). 2000 34 Refundable imputation credits introduced. Prior to 1983.5) applied to initial income (first $10. with only 5 per cent of the lump sum included in assessable income and taxed at marginal rates.5.A brief history of Australia’s tax system Table 1: Company income tax rates since 1915 Year 1915 1922 1940 47. Foreign tax credit system replaced the general exemption for foreign earnings. Company tax rate aligned with top individual marginal tax rate.5 45 46 49 Company tax rate (%) 7. Lump sum benefits were taxed very concessionally. while a capped concessional deduction was allowed for personal superannuation contributions. annuities were taxed at marginal rates (with an exemption for contributions made from post-tax monies). the taxation levied on end benefits depended on whether they were paid out as a lump sum or an annuity. Krever (1986) notes that the taxation applied to superannuation prior to 1 July 1983 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 1983 to address concerns that individuals whose remuneration package included superannuation contributions were accessing lower effective marginal tax 17 . 1948-72 1973-77 1979 1986 1987 1988 39 1993 33 1995 36 1999 Removal of accelerated depreciation. superannuation funds were exempt from paying tax on their earnings provided the fund was set up for the benefit of employees in any business.5 45 47. All rebates for distributions of profits to shareholders were removed. At that time. In contrast. Tax applied to all profits (not just undistributed profits). unlimited deductions were allowed for employer contributions to a superannuation fund for employees. Private and public company income tax rates aligned. 45.000 of profits in 1974).
These include the Government co-contribution for low income workers. the Government introduced a 15 per cent rebate when benefits were paid to the individual. the Government reduced the tax rate on the taxed element of lump sum superannuation benefits. While the initiative successfully increased superannuation coverage to approximately two thirds of the population. To compensate for these changes. Contributions and earnings remained untaxed and the taxation of annuities was largely unchanged. provides for a percentage of an eligible employee’s remuneration to be directed into a superannuation fund by means of a compulsory employer contribution. superannuation splitting for eligible couples and the introduction of choice of fund. In recent years. particularly with respect to the monitoring and enforcement of employer compliance. The motivation for the SG was twofold: to provide a mechanism through which employer contributions could be increased gradually. while the pre-1983 arrangements were ‘grandfathered’. Further revisions to the taxation of superannuation benefits were announced in 1988. Amounts above this threshold were taxed at the reduced rate of 15 per cent. The reforms were applied to service after 1 July 1983. when the Government imposed a 15 per cent tax rate on both contributions and earnings. administration and implementation problems were rife. The SG rate was phased up from 3 per cent to 9 per cent between 1992 and 2002. The Industrial Relations Commission cited these problems as the basis for its refusal of an application to increase the provision by a further 3 per cent in 1991. Although the rate of taxation is higher today than before the first suite of reforms were introduced in 1983. Productivity Award Superannuation was created in 1986 under industrial agreements which provided for up to 3 per cent of wage increases to be contributed to approved superannuation funds. While annuities remained taxed at marginal rates. 18 . superannuation is still a highly concessional savings vehicle. introduced in 1992. the Government has introduced a number of policies designed to encourage individuals to make greater voluntary personal superannuation contributions. The rate was reduced from 15 per cent to zero (provided the benefit was preserved until age 55) for amounts up to the low rate threshold.A brief history of Australia’s tax system rates than those individuals who received their remuneration exclusively as salary and wages. The Superannuation Guarantee (SG). consistent with the Government’s retirement income policy objectives and the economy’s capacity to pay. The taxation on lump sum payments was raised to 15 per cent for amounts below a specified threshold. and to extend superannuation coverage to a larger proportion of the population. Superannuation coverage has broadened to about 90 per cent of employees under the Superannuation Guarantee. with amounts above this threshold taxed at 30 per cent.
largely in response to increasing revenue demands brought about by periodic events. has increased (see Chart 4). The myriad of changes to the superannuation taxation arrangements has led to considerable complexity. This is to be achieved principally through the removal of taxation on end benefits received by most individuals aged 60 or older. and the increasing role played by the public sector. such as two world wars and the 1930s Depression. with Australia’s reliance on customs duties declining gradually. In the 2006-07 Budget. while the importance of alternative indirect taxes. promoting growth through workforce participation and increased provision for retirement. the Australian Government announced a proposal to simplify superannuation dramatically and improve retirement incomes. particularly excises and more broadly based consumption taxes. The proposals would improve the incentives to work and save. Chart 4: Evolution of indirect taxes in Australia since Federation 9 8 7 6 5 4 3 2 1 0 Excise duty Customs duty Sales tax Per cent of GDP Per cent of GDP 9 8 7 6 5 4 3 2 1 0 GST 1902-03 1913-14 1924-25 1935-36 1946-47 1957-58 1968-69 1979-80 1990-91 2001-02 S l T 19 .A brief history of Australia’s tax system Recent amendments to portability legislation have complemented these initiatives. Indirect taxes Indirect taxes have grown relative to economic activity. The composition of indirect taxes has changed considerably over the past 100 years. but streamlined arrangements would apply. Taxation arrangements are to remain unchanged where an end benefit is taken prior to age 60. both of which are an important part of Australia’s strategy for addressing the demographic challenges of an ageing population. making it easier for individuals to consolidate their superannuation benefits into a single fund.
the government’s debt servicing costs had increased significantly due to a large spending programme in the late 1920s. 1999-2000 Commonwealth Budget Paper 1. primary produce and some primary industry inputs (Smith 1999). with an increasing share of consumption expenditure directed towards services. Statement 6. This contributed to complexity. Raising indirect taxes was favoured because the incidence was disguised. and by 1940 the rate had been further increased and a multiple rate structure introduced (see Table 2).5 27.5 1980 5 2.5 1999 6 12. Faced with a large budget shortfall.A brief history of Australia’s tax system Wholesale sales tax The onset of the 1930s Great Depression had a significant impact on the (then) federal government’s ability to raise revenue. Table 2: Wholesale sales tax rates and schedules Year Number of rates schedules Lower rate(a) Top rate 1930 1 2. In addition to falling revenues. uncertainty and taxpayer disputes. The WST was levied on many classes of consumables. 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).0 45. Source: Groenewegen (1983). Cascading of the WST through the production chain reduced economic efficiency and export competitiveness by increasing the cost 20 . The previously clear lines between wholesalers and retailers became blurred. the WST base averaged 32 per cent of private consumption.3 1970 3 2. a notional WST value had to be determined.5 27. making the tax more politically palatable. The WST was levied at the wholesale level to minimise the number of taxing points.5 2.5 per cent. the government introduced the wholesale sales tax (WST) in 1930. Over time the WST base declined as a proportion of consumption. particularly as rates were increased (Groenewegen 1983).5 1950 4 10. The narrow base and differential rate structure created distortions to production and consumption decisions in favour of low taxed or untaxed goods or services. By 1995. particularly through customs duties. but within a year the rate had been increased to 6 per cent. Goods and services tax The WST was neither an efficient nor simple tax. pp 25-26. the share of private consumption subject to the WST had fallen to 22 per cent. It was introduced at a rate of 2. The multiple rate structure also contributed to compliance and administration costs and to the incentives for avoidance.0 (a) A rate of zero per cent also applied to excluded items. In its first two years of operation.0 33. but provided preferential treatment for food. Where goods were sold directly by manufacturers or importers to retailers.
as part of a broader package of taxation reform. providing them with a stable and growing source of revenue and removing their reliance on general assistance grants from the federal government. debentures and other loan securities. pensioners and low income earners. The Australian Tax Office adopted a flexible administrative approach in the transition period regarding lodgment deadlines. several compromises were made to the scope of the GST base. instalment purchase arrangements and rental (hiring) agreements. The GST replaced the WST and a range of inefficient state taxes. the introduction of a broad based consumption tax in Australia proved difficult. In July 2000. the federal government introduced a goods and services tax (GST). abolished include Financial Institutions Duty. information and support programmes for businesses (including visits by field officers.A brief history of Australia’s tax system of production in Australia. with unsuccessful attempts to introduce such a tax in 1985 and in 1993. The most notable of these was the removal of basic food and personal products from the GST base. stamp duties on mortgages. bonds. education programmes for consumers. Revenue from the GST is paid to the states and territories. Like the WST. However. call centre assistance and web sites to provide information and assistance). This part of the package included significant reductions in personal income taxes and large increases in government payments to families. and monitoring by the Australian Competition and Consumer Commission to ensure the introduction of the tax was not used as an opportunity for profiteering. payment arrangements and taxpayer mistakes as well 21 . conveyancing duties on business property. Adjustments were also made to excise taxes and some specific indirect taxes to adjust for the removal of the WST and imposition of the GST. stamp duty on marketable securities. or are in the process of being. increasing production costs. The state taxes that were. A broad based consumption tax was proposed in the findings of the Asprey Committee (Asprey et al 1975). stamp duties on leases. and accommodation taxes. The introduction of the GST was also accompanied by significant changes to personal income taxes and social security payments. based on the value-added tax (VAT) model. these taxes distort economic decisions and can cascade through the production chain. Effective implementation of the tax was critical to its success. bills of exchange and promissory notes. stamp duties on cheques. The arbitrary range of WST tax rates and exemptions imposed significant costs in terms of complexity and compliance. Some of the tools used in Australia were extensive education. debits tax. in conjunction with reforms to federal financial relations. stamp duties on credit arrangements. In order to achieve passage through Parliament.
There is. Current Australian excises are typically applied to goods with a relatively inelastic demand and where the number of manufacturers is limited.8 Equivalent duties on identical imported products are imposed through customs duty. while in 2003-04 they accounted for 8. issuing permissions that govern dealings with the goods and the classification of those goods (where classification determines the rate of excise liability). on an ad valorem basis. Monitoring compliance is aided where production of the good is concentrated at a few production points and cannot be readily undertaken by other agents. the hallmark of an efficient tax. In 1909 they accounted for three quarters of total tax revenue.A brief history of Australia’s tax system as an ongoing openness to reducing compliance costs for businesses where possible (Australian Treasury 2003). These controls provide high levels of compliance. Excise and customs duties have remained relatively steady as a revenue source. the wine equalisation tax (WET). an increased incentive to avoid taxation. Australian tariff levels have been substantially reduced across a wide range of import competing industries since the early 1970s to improve economic efficiency in the Australian economy. Inelastic demand means that excise taxes can be applied without creating undue distortions to consumption decisions. Excise controls in Australia include licensing of parties that are engaged in the manufacture of excisable goods. tobacco and alcohol excise. however. certain biofuels. along with tariffs imposed on imported goods for the purpose of protecting domestically produced goods. alcoholic beverages other than wine. customs duties have declined in importance in comparison to excise duties. the number of taxing points is very low for the revenue raised for petroleum. excise duty is imposed on the domestic manufacture of petroleum fuels. This is normally at the point of passage into the 8 Wine is taxed under a specific scheme. making these administratively efficient taxes to collect. 22 . tobacco products. As with excises. For example. Over this period. a fundamental design element of the administration of customs duties is the control by the revenue authority over dutiable goods until such time that they are dealt with in accordance with the legislation. reflecting both increased domestic production of goods and a decline in the rates of duty applied to imports. crude oil and oils and lubricants. Modern customs and excise duties Under current Australian law. but have declined in importance as a proportion of tax revenue over the last century (see Chart 4).5 per cent of tax revenue.
such as liquefaction of natural gas. In 1987. the petroleum resource rent tax (PRRT) was introduced to generate an equitable return to society from its offshore petroleum resources. Downstream processing or value adding activities. Resource taxation The federal government’s responsibility for the extraction of resources is generally limited to waters between three and two hundred nautical miles seaward of the low water line along the coast. are not subject to PRRT. a flat per barrel crude oil excise was introduced. its value is compounded at an annual rate intended to broadly reflect the required rate of return for undertaking such expenditure. existing taxation arrangements were grandfathered. condensate. Taxable profits are defined to be net of the recovery of all project related exploration. crude oil. petroleum royalties were also the main instrument for accruing a return to society for the extraction of offshore petroleum resources. In essence. In the period up to 1975.A brief history of Australia’s tax system market (known as entry or delivery for home consumption) or export (in which case excise is not payable). The PRRT is a tax on ‘above normal’ profits derived from upstream petroleum production. resource taxation occurs by way of royalty. In the former case. the federal government introduced progressive rates of excise based on total production from a field. being highest for exploration and least for general overhead expenditure. It was recognised that even this approach could result in some deposits not being developed because the net return to the investor after the imposition of the excise would not be sufficient to warrant the investment. defined by the point at which a saleable commodity is first produced (for example. The North West Shelf and the Joint Petroleum Development Area in the Timor Sea are the only offshore areas which are not subject to the PRRT regime. natural gas. while also reducing potential distortions to offshore petroleum exploration and development. Where the federal and relevant state governments have a joint interest in a petroleum resource. 23 . and methane). Later. A gas transfer pricing formula has been developed to establish the upstream value of gas produced and consumed in an integrated gas to liquids project. In 1975. a project will only become PRRT assessable once the owners have earned a ‘normal’ rate of return. The states own most resources on land and within the coastal boundary and impose taxes and charges on the extraction of those resources using a variety of mechanisms. in an effort to encourage exploration and production in new and remote areas. while the taxation arrangements in the latter case reflect the joint production agreement between Australia and Timor-Leste. development and operating expenditures. Where expenditure is carried forward to be offset against future income. These compounding rates vary according to the type of expenditure incurred.
A brief history of Australia’s tax system As a tax on ‘above normal’ profits. Payments of PRRT are deductible for company income tax purposes in the year assessed. 24 . PRRT is levied at a relatively high but constant rate of 40 per cent.
Hancock. B 1997. Harris. Melbourne Institute Working Paper. Adelaide. S 1925. Melbourne. Australian Tax Research Foundation. Australian Treasury 1974. London. Australian Government Publishing Service. Centre for Strategic Economic Studies. The Public Sector in Jeopardy: Australian Fiscal Federalism from Whitlam to Keating. Lloyd. R and Wood. Everyone’s Guide to Taxation in Australia. Sydney. R 1986. Australian Wholesale Sales Tax in Perspective.0. Mathews. Mills. Treasury Taxation Paper. J and Smith. 34(2). Federal Finance: Intergovernmental Financial Relations in Australia since Federation.A brief history of Australia’s tax system References Asprey K (Chairman). Sydney. Full Report. ‘A comparison of alternative tax bases’. Canberra. South Australian Centre for Economic Studies. Research Study No. J 2001. pp 1-49. Freebairn. Economic Roundup. Catalogue 1350. Parsons. Groenewegen. Taxation in Australia. Australian Economic Indicators. Thomas Nelson. Mathews. W R C 1972. K 1975. ‘Tax reform in Australia: base broadening down under’ Canadian Tax Journal. Krever. Groenewegen. Australian Tax Research Foundation. Taxation Review Committee. Australian Treasury 2003. March-April. P 1985. November. No. Melbourne. Australian Government 1985. Australian Government Publishing Service. Reform of the Australian Tax System: Draft White Paper Australian Government Publishing Service. Metamorphosis of the Australasian Income Tax: 1866-1922. ‘A preliminary assessment of the impact of The New Tax System’. pp 346-394. P 1983. Canberra. Victoria University. 9. ‘Company income tax systems’. Autumn. P A 2002. Allen and Unwin. 11/05. Canberra. 25 . R L and Grewal. Financing the Federation. 37. Canberra. Australian Bureau of Statistics (ABS) 2006. R L and Jay. No. J 2005. MacMillan. J.
J 1999. R F E and Hendy. 398. Commonwealth of Australia. Canberra. ANU. Review of Business Taxation: A Tax System Redesigned. R and Joss. Canberra. Ralph. Oh! To Die Down Under! Abolition of Death and Gift Duties in Australia. P W 2006. Canberra. 26 . Discussion Paper No. Warburton. Smith. Smith. ANU. B 1999. W H 1981. ‘Is the only good tax and old tax? A historical perspective on the GST debate’. 1). More Certain. Taxing Popularity: The Story of Taxation in Australia. Research School of Social Sciences. July. ANU (Reprint from Tax Lawyer. J. J 1993. No. International Comparison of Australia’s Taxes. Vol 35. Federalism Research Centre.A brief history of Australia’s tax system Pedrick. Centre for Research on Federal Financial Relations. Equitable and Durable. Allert.
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