Accessible transcript - Shaping the system

This is the accessible text transcript for Shaping the system.

Introduction

This interactive has three parts: Part 1 explains Australia's tax system; Part 2 explores how it developed, and Part 3 examines how it might look if different models and systems had been applied.

Part 1: The Australian taxation system

Australia's taxation system consists of three levels: Australian, state and territory, and local.

Although there are as many as 125 different taxes, they boil down to about 10 common taxes and most people will only have to pay a few of those.

Tax collection – Australian Government

So how is revenue collected? The Australian Government collects over 80% of all tax revenue. This comes from nearly 100 different taxes.

But only three of these account for about two-thirds of all the tax collected in Australia:

  • income tax for individuals
  • the goods and services tax
  • company tax.

Tax collection – state and territory governments

At the state and territory level, around 50% of their revenue comes as grants from the Australian Government.

Some of these grants are for specific purposes, like shared funding to build a new highway or a hospital, while the rest is added to general revenue.

State and territory governments top up their reserves with around 25 different taxes, including charges on property, payroll taxes and fees for the provision of services.

Tax collection – local governments

At the local level, 80% of local government tax revenue comes from rates paid by property owners. This is the only local government tax. It creates 4% of the total tax collected in Australia.

Local governments are also dependent on grants, receiving almost 20% of their tax revenue in grants from the Australian and state and territory governments.

Spending – Australian Government

So, what happens to all this money? The Australian Government distributes around one-third of all the tax it collects directly to the state and territory governments in grants and subsidies. Another third of Australian Government taxes is spent each year on social security and welfare payments, giving a direct personal benefit to households.

The remainder is used by the Australian Government to directly fund services such as health, education and our defence forces.

Let's examine how some of this revenue is put to use:

Federal funding flies high

If you drive across the Nullarbor, you'll be reminded repeatedly of Australia's health system – the Royal Flying Doctor Service (RFDS) has landing strips built on the Eyre Highway for its emergency use.

The Australian Government funds the RFDS, which conducts over 12,000 remote clinics and cares for over 200,000 patients annually. On average around 35,000 people require the RFDS emergency medical evacuation services each year.

The RFDS could not carry out this critically important work each year without funding from the Australian Government.

Spending – state and territory govenments

The state and territory governments also put their money to good use. They provide grants and subsidies to local governments, provide services such as building and maintaining social housing projects, looking after our roads, and helping to fund our public health system.

Let's examine how some of this revenue is put to use:

Buying bricks and mortar

Of the seven million dwellings in Australia, around 400,000 of them are social housing. That's almost 6% of all of Australia's dwellings – so you probably know someone benefiting from a state or territory government's funding of social housing.

This funding enables housing support for many Australians, helping to provide them with affordable accommodation that is matched to their household needs. Almost 60% of the people assisted by social housing are receiving either a government age pension or a disability support pension.

State and territory governments also fund around half of the cost of the Australian education system. About $41 billion every year. That's a lot of investment!

Spending – local governments

Closer to home, local governments use the rates paid by property owners, combined with the grants and subsidies they receive from the Australian and state and territory governments, to fund a range of services throughout your neighbourhood.

Local councils also help to fund transportation and infrastructure. This includes around $4 billion each year to build and maintain roads.

Let's examine how some of this revenue is put to use:

Roads through revenue

Australians have been building, improving and repairing roads since our very first road construction began in Sydney in May 1788. However, it might surprise you to discover that the first road between Western Australia and South Australia wasn't built until 1941, or that Perth didn't have a set of traffic signals until 1953.

Local roads make up 85% of Australia's vast 800,000-kilometre road network. Maintaining this infrastructure is a huge undertaking that costs local governments around $4 billion each year.

Tax working for you and your community

Australians can have a say in how taxation revenue is spent. In Australia we elect Australian Governments every three years, our state and territory governments at least every four years and our local governments every four years.

Issues such as taxation policies, government revenue and budgets are among the wide range of issues we consider when we vote. Your vote shows who you believe will best serve your community.

So why not take a look around the neighbourhood and see how your taxes are working for you.


Part 2: The development of Australia's taxation system

Australia's tax landscape has been shaped by a myriad of historical developments and government decisions.

The timeline has five stages in the development of Australia's tax system. During each period, key government decisions and social factors led to the introduction of new taxation policies and approaches.

Convicts, colonials and customs | 1788-1850

From early colonisation through to the mid-19th century, Australia was a heady mix of cultures and convictions.

  1. The First Fleet arrives in New South Wales to set up a penal colony, bringing with it a Royal Instruction to impose taxes as necessary. Soon after, wharfage fees and importation duties on wine, spirits and beer are imposed.

  2. The Rum Rebellion (the only armed takeover of an Australian government) sees the overthrow and arrest of Governor William Bligh, who was limiting the use of spirits as payment for commodities.

  3. Customs duties are introduced on the export of timber, wool, seal and whale oil, and seal skins.

  4. Taxation revenue is used to fund hospital equipment and building works, as well as the construction of a gaol and an orphanage in Sydney.

Riches, rules and rebellion | 1851–1900

Gold is discovered, and Australia's colonies begin to expand.

  1. Death duties are levied in the colony of New South Wales.

  2. The Eureka Stockade rebellion sees armed conflict on the Victorian goldfields against a gold licensing fee, which is seen as 'taxation without representation'. The licences were replaced by a Miner's Right.

  3. New South Wales introduces the first land tax, with the other colonies soon following.

  4. Tasmania establishes an income tax on its citizens, and all the other colonies progressively follow.

Constitution, currencies and conflict | 1901–1940

Australia becomes a unified nation, with a baptism of fire.

  1. The Federation of Australia brings in the Australian Government customs and excise system and provides the constitutional authority for an Australian Government income tax.

  2. The Australian Government land tax system is introduced to fund age pensions, break up large landholdings and tax pastoral leases.

  3. A new bank note tax means private currencies (issued by banks) are replaced by federally-issued notes in denominations of 10 shillings, £1, £5, £10, and any multiple of £10.

  4. The Australian Government introduces income and estate taxes to help fund Australia's involvement in World War I.

Toil, trade and tariffs | 1941–1960

War makes way for manufacturing and significant cultural events.

  1. To help pay for the war effort, uniform tax laws are introduced in Australia, adding extensive powers to the Australian Government and greatly reducing the autonomy of the states.

  2. Holden produces its first Australian-designed motor car, supported by Australian Government tariffs on imported motor vehicles and parts.

  3. The Australian Government scraps its land tax, which provided significant revenue for over 40 years.

  4. The Australian Government charges payroll tax to fund a national child endowment scheme, which lasted for 30 years before this became a state and territory tax.

Health, holiday homes and hamburgers | 1961–2000

Modern Australia thrives as the population pushes out to 20 million.

  1. Medibank is replaced by Medicare as Australia's healthcare system, supported by Medicare levy funding.

  2. A national goods and services tax (GST) of 10% is introduced to Australia.

  3. The Australian Government brings in a capital gains tax and a fringe benefits tax commences the following year.

  4. Business activity statements become part of the collection system behind Australia's new goods and services tax (GST).


Part 3: Tax models

There are many forms of taxation in Australia. Individuals and businesses in Australia may be required to pay taxes or charges to all levels of government: local, state and territory, and federal. Taxes are collected to pay for services to benefit you and the rest of Australia.

What if this 'tax landscape' were to change? What if we applied a different taxation model to our society but still had to maintain the same level of services?

Who might benefit? Who might pay more, or less?

Let's find out.

A flat rate of tax

With a flat 10% rate of tax for individuals, everyone pays tax at the same rate on all of their income no matter how much they earn. This is an example of a proportional tax.

What if we applied this taxation model to our society but still had to maintain the same level of services?

  1. With a flat 10% rate of tax for individuals, many people who currently pay no individual income tax would have to start paying it.

  2. With a flat 10% rate of tax for individuals, higher income earners would be impacted the most through having to pay a higher rate of tax on all of their income.

  3. With a flat 10% rate of tax for individuals, middle-income earners would need to receive higher government benefits to compensate for their reduced disposable income.

The correct answer is (a).

With a flat 10% rate of tax for individuals, many people who currently pay no individual income tax would have to start paying it. Under a flat rate of tax, people pay tax on every dollar they earn because there is no tax-free threshold.

With the flat 10% rate of tax creating a funding deficit of 23% of total collections, you're going to have to find additional funding from somewhere else to maintain the current level of spending. In this model, collections are balanced by increasing company tax to 32% of total revenue and increasing GST to 28% of total revenue.

The result?

People who invest in the share market would find that the extra company tax would mean lower investment returns. This would also affect super funds that often invest heavily in shares.

With GST increased to make up the balance, everyday goods and services would be more expensive, particularly affecting lower income earners.

No individual income tax

Income tax makes up over 40% of all the revenue collected in Australia - so it is funding a large proportion of the services we see around us.

What if we applied this taxation model to our society but still had to maintain the same level of services?

  1. If we removed income tax for individuals, salaries would have to be increased to allow for the reduction in disposable income.

  2. If we removed income tax for individuals, the overall level of revenue collection would not change significantly.

  3. If we removed income tax for individuals, most people would have more disposable income to spend on general consumer goods and luxury items.

The correct answer is (c).

If individual income tax was removed, most people would have more disposable income to spend on general consumer goods and luxury items.

With the removal of individual income tax creating a huge funding deficit of 43% of total collections, you're going to have to find a lot of additional funding from somewhere else to maintain the current level of spending. In this model, the deficit is recovered by increasing company tax to 42% of total revenue, increasing GST to 32% of total revenue and increasing import/export duty to 16% of total revenue.

What would this mean?

People who invest in the share market would receive far less investment income because of the extra company tax being collected. Super funds would see their income levels fall and this would affect the retirement benefits of their members.

With GST increased, everyday goods and services would be more expensive, particularly affecting lower income earners who currently pay low rates of income tax. For example, a loaf of bread costing $3.30 would go up to around $3.60. Many industries would see a massive downturn in trade and imported goods would be more expensive to buy because of the increase in import and export duty.

No GST

The goods and services tax is collected from Australians when they purchase most of their goods and services. The net revenue from this collection is passed to the state and territory governments to fund the services they provide.

What if we applied this taxation model to our society but still had to maintain the same level of services?

  1. If there was no goods and services tax, the state and territory governments would need to adjust for the loss of the major source of funding for their projects and the various community services they provide.

  2. If there was no goods and services tax, the state and territory governments would be able to increase their investments in projects and the various community services they provide.

  3. If there was no goods and services tax, pensioners would have to pay much more for many of the services they receive from the government.

The correct answer is (a).

If there was no goods and services tax, the state and territory governments would need to adjust for the loss of the major source of funding for their projects and the various community services they provide.

With the removal of GST creating a funding deficit of 16% of total collections, you're going to have to find additional funding from somewhere else to maintain the current level of spending. In this model, the funding is made up by increasing individual income tax to 53% of total revenue and increasing company tax to 27% of total revenue.

What would be the outcome?

With no GST, goods and services would become cheaper but the increased income tax for individuals would leave employees with less disposable income. While a loaf of bread would drop from $3.30 to $3, people would have less money to spend in the first place.

With an increase in company tax, middle and higher income earners and people who rely on share investment income would be hit hardest. Those with share investment income, like self-funded retirees, would not only pay more income tax but would also see a decrease in the amount of income they receive because of the increase in company tax.

Increased import/export duty

Import duty affects the cost of goods and services that are brought into Australia and export duty affects the cost of selling Australian goods and services overseas.

What if we applied this taxation model to our society but still had to maintain the same level of services?

  1. If Australia increases its import and export duty, Australia would see a dramatic increase in the importation of expensive goods coming from overseas and it would reduce manufacturing in Australia.

  2. If Australia increases its import and export duty, goods imported into Australia would be more expensive to buy.

  3. If Australia increases its import and export duty, Australian mining companies would need to substantially increase production rates to cope with increased demand for resources from overseas.

The correct answer is (b).

If Australia increased its import and export duty, electronic goods imported into Australia would be more expensive to buy.

With an increase in import and export duty to three times the current rate creating a funding surplus of 20% of total collections, you now have additional funding and can reduce another tax while still maintaining the current level of spending. To balance collections in this model, individual income tax is reduced to 23% of total revenue.

What would be the effect?

While employees would see an increase in their disposable income from the reduced individual income tax, the significantly increased import/export duty would mean Australians would find it very expensive to buy goods from overseas but there would be a boost to local manufacturing. For example, imported digital cameras and smart phones would jump in price but locally made building and construction materials would become cheaper.

With export duty so high, Australian businesses would lose some of their competitiveness with other exporting countries on the international market and other taxes might have to increase just to maintain current revenue collection levels.


Summary

Over the past two centuries, Australia's tax system has been shaped by a multitude of historical events, policies and government decisions.

You've discovered how Australia's tax system is shaped by our democratic processes and witnessed how it was altered and expanded at different stages of our country's development.

You've also seen how all tax systems, no matter what their structure, can have significant impacts both on the economy and population.

The Australian taxation system

In Part 1, you learnt that the Australian taxation system is made up of three key sectors; local, state and territory, and the Australian Government. Each sector has the right to collect revenue and is responsible for funding different services within the community.

The development of Australia's taxation system

In Part 2, you learnt about the development of the Australian taxation system, from its earliest stages during the establishment of the colonies, through to the production of the first Australian-designed car and the introduction of the goods and services tax.

Tax models

Finally in Part 3, you evaluated different tax models and saw how the key to a fair and effective system is balance. Achieving this balance is a difficult and ongoing task, forming one of the key responsibilities of all levels of government.

We hope you've enjoyed Shaping the system.

  • Fact 22

    The changeover to decimal currency in 1966 created a massive amount of work for the ATO. In NSW alone, staff manually converted 200,000 accounts worth $450 million.

Fringe benefits tax (FBT)

A tax payable on a non-salary benefit to an employee. The employer pays the tax, not the employee.

read more glossary terms