Factbox: Australian tax reforms that are too hot to handle

CANBERRA, May 2 (Reuters – Australia’s government unveiled a major shakeup of the tax system Sunday, but ruled out some proposals that could have upset voters in an election year. These unpopular ideas came from a two-year tax inquiry and, though rejected by the current government, will stimulate debate and may yet return to a future government’s agenda.

A similar inquiry in the 1970s made unpalatable recommendations, such as a consumption tax and fringe benefits tax, which were dismissed as impossible in their day and yet became reality in the decades that followed.

Treasurer Wayne Swan said Sunday that the latest tax review would underpin tax debate for the next decade and beyond. Here are today’s proposals that are too hot to handle:

FAMILY HOMES

Introduce a land tax on the family home, or include family homes in assets that must be declared to tax authorities when they determine eligibility for tax breaks. More assets mean less tax breaks. Australia has one of the rich world’s highest rates of home ownership, with 68 percent of people owning or buying the dwelling they live in. For people aged over 65, the rate is 82 percent. Changes in property taxation and rising interest rates are a critical issue that can swing election outcomes.

REMOVE DIVIDEND IMPUTATION

For companies, tax is paid on profits at the corporate level before earnings are distributed to shareholders. A tax or franking credit is given to individuals who receive dividends to reflect tax already paid, a process known as dividend imputation. Its loss would be a heavy blow to the stock market, especially high-yield favorites such as major banks that draw most of their income from onshore. These include Commonwealth Bank of Australia (CBA.AX: ), Westpac (WBC.AX: ), National Australia Bank (NAB.AX: ) and ANZ (ANZ.AX: ). The Henry review called for a long-term alternative to dividend imputation.

CONSUMPTION TAX INCREASE

The government said it would never increase or broaden the base of the country’s 10 percent consumption tax, known as the Goods and Services Tax, or GST. The multi-stage tax, introduced in July 2000 by the former ruling conservatives, exempts many basic supplies such as food, medical and education services, residential accommodation and financial services. GST revenue is distributed to states.

CHANGE CAPITAL GAINS TAX

The government ruled out reductions in Capital Gains Tax discounts, making any changes to “negative gearing” deductions or changing so-called grandfathering arrangements. The tax applies to the capital gain made on the sale of any assets, except for some specific exemptions like family homes. Negative gearing provisions allow property investors to offset net rental losses against tax liabilities due on other forms of income. This has fueled Australia’s long-running boom in house prices. GOVERNMENT ANNUITY, PENSION AGE

The government would never offer a life-time annuity product of its own. Such a state-backed annuity, partly funded by retirees’ own savings, would allow someone to buy a lifetime income, potentially exposing the government to “longevity risks” in an aging population forecast to almost double to 36 million within 40 years. It also ruled out an alignment of the age at which workers can access preserved retirement benefits, currently 55, and the age for access to pensions, which is increasing to 67.

CHARITIES

Many charities and not-for-profit entities rely on tax concessions to attract otherwise low-paid staff. The government ruled out changes to these arrangements.

PARENTING, FAMILIES AND WORK

The government said it would not accept a recommendation that would force parents to re-enter work when their youngest child turned 4. It also ruled out restrictions on family rent assistance and abolition of the Medicare levy on wages, which guarantees access to health care.

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Factbox: Australian tax reforms that are too hot to handle