Essay Example on Australian Tax Law: A Complex System Explained

Introduction

Tax laws refer to the policies, rules, and guidelines that focus on overseeing the tax process within a given country. Tax laws guide aspects such as the charge on incomes, property, real estates, licenses, and other provisions provided by the government. In this case, the Australian tax law is somewhat complicated, and it encompasses of tax policies that govern various aspects such as the charge on capital gains, personal income, business revenues, and other fringe benefits. It is worth noting the Australian tax system is based on the basic principles of a good tax system which include equity, efficiency, simplicity, neutrality, and certainty (Trad & Freudenberg, 2018). In this case, any particular tax reforms proposals should have these fundamental qualities of a good taxation system (Heath, 2019). The paper, therefore, focuses on reviewing the changes proposed by the Australian Labor Party taxation as a significant aspect in the Australian tax law.

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Proposed Reforms by the Australian Labor on Franking Credits and Negative Gearing

The Franking credit also commonly known as the imputation credit refers to a type of tax credit that a company pays to its shareholders in addition to the dividend payments. In the Australian tax system, the Franking credit is used to minimize and eliminate possible chances of double taxation (Martin & O'Connell, 2018). Usually, a corporation pays taxes on the dividend that they distribute to the shareholders. As a result, the Franking credit allows these corporations to allocate a tax credit to their shareholders as a way to eliminate double taxations (Heath, 2019). Afterward, based on the tax position of the shareholders, they then receive either a tax refund or a reduction of the income taxes (Martin & O'Connell, 2018). Franking credits also helps a company to build a long term equity ownership, and it also promotes dividend payout to the investors (Li & Tran, 2019). It is worth noting that only Australian resident investors are entitled to the Franking credit benefits. Additionally, these investors should fall under the 0% to 30% tax bracket (Heath, 2019)

Negative gearing refers to the situation where an individual or a company borrows more funds to finance additional investments. Usually, a company is negatively geared in the income realized from the property investment is less than the sum of the interests on loan and other expenses therein. Essentially, if this happens, it means that the investment property is operating at a loss. For instance, if one borrowed funds to buy shares, the investment will be contrary geared if the divided accrued from the shares are less than the interest on the borrowed funds. While negative gearing appears to be a risky, it is also beneficial as it allows Australian companies to reduce their tax liability.

While both the Franking Credits and Negative Gearing seems to be creating tax benefits to Australian corporation, the Australian Labor party has proposed reforms to dump these policies as a way to alleviate the real estate business and make housing more affordable (Grant, Hayden & Laura de Zwaan, 2018). Precisely, the Australian Labor Party suggested that should they win the election, they not change the Franking credit policy but will reform the cash refunds paid to shareholders by the Australian Taxation Office (ATO) (Pinto & Sadiq, 2019). According to the Australian Labor Party, this strategy will help to reduce tax expenditure, and the subsequent tax savings will be used to finance social development projects (Hogan, 2019). Essentially, it will help in promoting personal tax cuts which will later focus on enhancing affordable housing in Australia. The reforms will have a significant impact on the operation of both Franking Credits and Negative Gearing since companies will no longer sue these policies as a way to reduce tax liability (Hogan, 2019).

Reasons why the Voting Public Rejected the Proposed Reforms

Led by Bill Shorten, the proposed reforms by the Australian Labor party lost in Australia's 2019 federal election. While there various attributes that contributed to the defeat, the proposed changes on both the Franking Credits and Negative Gearing were a critical factor that made the voting public cast votes against the reforms (Heath, 2019). Ideally, the Australian Labor party had proposed changes to eliminate the cash refunds provided by the Franking Credits as well as complicated cutting Negative Gearing by imposing restrictions. Precisely, the proposed restrictions would limit investors from enjoying negative gearing to purchase already existing home while allowing investors to use negative gearing for investors acquiring new homes.

It is also worth noting that the Australian Labor party also failed to convince the public the proposed reforms would focus on alleviating their material position. In this case, while the Australian Labor party argued that the prosed changes would help to reduce tax expenditure and instead create tax savings that would help in finding capital projects, it failed to realize the benefits that Franking Credits and Negative Gearing created to the investors. It is for this reason that the voting public was angry since by eliminating the Franking Credits and Negative Gearing, it meant that it would raise their tax liability and in turn affect their revenues. Besides, restricting negative gearing would make it difficult for investors to acquire funding for their investment projects.

Franking Credits as a Good Tax Principle

A good tax system should portray the five key principles, including equity, efficiency, simplicity, neutrality, and certainty. Equity provides that a good tax system should be fair regarding tax payment such that no part of the society is overburdened (Trad & Freudenberg, 2018). The principle, therefore, recommends the progressive tax procedure where the rich are taxed more while the poor are taxed less. While Franking credit does take the provision of a progressive tax, it portrays the canon of equity as it allows a fair distribution of resources (Hogan, 2019). In this case, all shareholders get a fair share of the dividends as well as a tax credit based on their proportion of investment. This procedure ensures that the dividend distribution process does not favor any investor in any case whatsoever (Li & Tran, 2019). Efficiency provides that a good tax system should focus on generating sufficient revenue for the country rather than affecting the productivity of the nation negatively. The Franking credit meets the canon of efficiency since by reducing the tax liability of the investors, it helps them to report higher revenues that help in expanding their investments therein.

Simplicity provides that a good system should be that which is easily understood by the people. The tax policy, methods, and other guidelines should be therefore laid in a clear and not sophisticated manner such that the taxpayers can easily read interpret ("Tax News - at a glance: July - what happened in tax?", 2019). The Franking credit follows the canon of simplicity since it is put in a transparent way that allows shareholders to understand the tax credit that is accrued in the investment companies. Neutrality provides that a good tax system should be developed based on the economic benefits that it will create to the nation rather than concentrating on its tax purposes. The Franking credit has more economic benefits than tax consideration since by eliminating double taxation, and it helps Australian corporations to generate more revenues that contribute to the economic development of the country (Lanis, Richardson & Taylor, 2019). Lastly, certainty provides that a good tax system is that which people are aware of the particular amount, time, and methods used to remit their tax payment (Loo, McKerchar & Hansford, 2018). The Franking credit achieves that principle of certainty as it clearly states that shareholders receive a tax credit as the company issues dividends. It also stipulates that the investors receive a tax refund depending on their tax position.

Discussion and Recommendations

In my opinion, I believe that these policies were rejected by voters since they focused on the general welfare of the country without taking into account the well-being of the individual investors. For instance, the proposed policies seem to focus on expanding the tax revenue to facilitate public capital projects within Australia. Nonetheless, the increase in tax savings would be achieved at the expense of the investors. By this, it means that restricting the Franking Credits and Negative Gearing would mean that investors would pay more taxes to finance the increase in tax savings. In this case, the voters rejected the policies as they were somewhat selfish and did not focus on alleviating their investments therein. This is because as investors pay more taxes, it reduces the revenues, which make it challenging to finance future investments yet negative gearing is restricted as well. Therefore, I agree with the voters' opinion to reject the policies as they would bring more harm than good to the ordinary investors that contribute positively to the Australian economic development.

Conclusion

The analysis above shows that Franking Credits and Negative Gearing policies focus on creating tax benefits for Australian investors. In this case, Franking Credits allows corporations to pay their shareholders dividends while providing tax credits that help to eliminate possible double taxation Martin & O'Connell, 2018). Further, depending on the tax position of the investors, they may receive a tax refund. Similarly, negative gearing also helps in reducing the tax liability of the investors, and it also allows them to borrow more funds to finance their investment projects. Although these policies seem to create immense benefits for the Australian investors, the Australian Labor party had proposed reforms to impose restrictions on both the Franking Credits and Negative Gearing, but it was rejected (Grant & Laura de Zwaan, 2018). This is because these reforms would prevent investors from enjoying the tax benefits they had previously.

Bibliography

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Hogan, Peter. 2019. "Removing The Refund Of Unused Franking Credits - What Does It Mean For SMSF Pensioners?."

Lanis, Roman, Grant Richardson, and Grantley Taylor. 2019. "Corporate Moral Ethics and Transfer Aggressiveness in Australia". AUSTRALIAN TAX FORUM 34.

Li, Xuerui (Estelle), and Alfred Tran. 2019. "The Australian Dividend Imputation System and Corporate Tax Avoidance". AUSTRALIAN TAX FORUM 34: 358-398.

Loo, Ern Chen, Margaret McKerchar, and Ann Hansford. 2018. "Findings on the Impact Of Self-Assessment On The Compliance Behaviour Of Individual Taxpayers In Malaysia: A Case Study Approach". Journal of Australian Taxation, 1-20.

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Pinto, Dale, and Kerrie Sadiq. 2019. "Another Election Year - More Promises of Tax Reform". Australian Tax Review, no. 48 AT Rev 3.

"Tax News - At A Glance: July - What Happened In Tax?". 2019. TAXATION IN AUSTRALIA 54 (2): 53-60.

Trad, Barbara, and Brett Freudenberg. 2018. "A Dual Income Tax System For Australian Small Business: Achieving Greater Tax Neutrality?". Journal of Australian Taxation 20: 95-120.