KPMG: How the Australian tax system will develop to 2025

How the Australian tax system will develop to 2025

Reduced company and personal taxes are on the cards for Australia over the next ten years – but ‘user-charges’ will make up a much bigger slice of the national revenue. These are some of the changes forecast by KPMG Australia in a paper on the future of taxation issued today.

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The report Tax 2025, argues that developments in technology, notably the increased use of cognitive intelligence, will change the nature of both the corporate tax function and national revenue authorities.

David Linke, KPMG National Managing Partner – Tax, said: “Tax reform has currently slipped off the domestic political agenda despite the Base Erosion and Profit Shifting (BEPS) initiative placing huge scrutiny on the international tax system in recent years. But this is only a temporary pause because technological, economic and societal changes will force change in our tax system and policymakers will have to respond. How far they go will have a major bearing on Australia’s competitiveness and prosperity in the medium-term. Our fear is that the response will not be as great as it will need to be.”

Some of the key developments forecast by KPMG Australia are:

  • Internationally, for most small to medium-sized economies, company tax rates will settle between 17 percent and 25 percent. It is likely that in Australia – a mid-size economy - efforts to reduce the corporate tax rate to within this band will remain, but domestic political realities suggest it may not be achieved by 2025. 
  • Changes to the definition of a permanent establishment – a key part of the BEPS agenda – is likely to diminish Australia’s corporate tax base with more of the profits of our major exporters being taxed by overseas revenue authorities.
  • Transfer pricing will become ever more complex and there will be increasing tension between China/India and most developed countries on the location of value associated with intellectual property in the future. The debate over whether that taxable value is where the IP is registered or where the goods are increasingly sold (into the Asian middle classes) become more intense. 
  • While there will be an international move to higher indirect taxes, domestic political difficulties will see Australia with the same low consumption tax base and rate in 2025. This will be further diminished as expenditure patterns change towards increased health, which is substantially GST-free. 
  • The rise of the ‘gig’ economy - a highly educated group of people globally willing to provide services through the internet for lower cost – will diminish our personal tax base by pushing down our high marginal rates from 49 percent to the mid-40s percent? 
  • There will be a drive to user-charges as a source of revenue rather than through taxation. This will be politically difficult but technology may assist in ensuring that such charges are more efficiently collected.
    • By 2025, more states will have joined ACT on the path from stamp duty top land taxes. But Australia will continue to resist calls for wealth and estate duty taxes. ‘Sin’ taxes and financial transaction taxes will increase in rates and usage.
  • Revenue authorities will have fewer staff but will become far more precise in their targeting and enforcement. They will be have direct access to companies’ General Ledgers (GL) and run various mechanistic and cognitive intelligence-based analyses to test systems controls and precisely target tax risk. 
  • Tax in 2025 may well see the application of artificial intelligence to the preparation of tax returns. AI may be used to discern the likely tax treatment of GL items within a high range of certainty, based on learning experiences from previous analyses. One of the major changes for the tax function will be the ready availability of relatively sophisticated methods of data analysis.

David Linke said: “While the current community and stakeholder interest in companies’ tax affairs will have grown still further over the next 10 years, we do hope the political debate will have begun to appreciate the importance of locally based multinationals. They are becoming rarer but produce a disproportionate benefit to our local economy in terms of skills within the corporate function and insights into the geopolitical framework within which the multinational operates. An increasing concern is that we will become too insular in our policy settings to allow our own multinationals to thrive. If this fear is realised, 2025 will see us more like a distribution centre for other multinationals. This would be of concern to retention of talented people in Australia.”

One issue which KPMG sees as increasing in importance by 2025 is generational inequity.

Grant Wardell-Johnson, Head of KPMG Australia Tax Centre said: “Our pensions and tax concessions for retirement incomes are significant and ballooning health expenditure largely benefits the aged. These are largely borne by younger generations. This is exacerbated by our structural deficit which is a borrowing of the current generation from the future. Also the younger generations are unlikely to experience the very substantial rise in wealth experienced by the baby boomers emanating from the increase in property values.

“As a result, there will be rising concern for inter-generational equity. Policymakers will have to respond as the issue becomes more transparent and younger generations become more assertive. This will feed into a broader mindset that people will want to work into their 70s and 80s in the future. Work for older people will be a large, and positive, cultural shift.”

He added: “Tax has always been an art rather than a science, but it will be more so in the future. It will involve a greater number of dilemmas, require balancing a larger number of stakeholders, and in an environment of more substantial technical complexities. An essential feature of being a good tax leader in the future will be good judgment in terms of discerning not only the options and consequences in the current environment, but how they will be judged in five years’ time. This will be as true in 2025 as it is now.”

Further information

Ian Welch
Senior Communications Manager, KPMG
T: 02 9335 7765 / 0400 818 891
E: iwelch@kpmg.com.au

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