Australian lessons in tax devolution
A trip to Edinburgh to visit ICAS provided unexpected insights into the devolution of taxing powers for Michael Croker, from Chartered Accountants Australia & New Zealand.
The Australian model for sharing tax powers between the Federal and State governments is far from perfect, admits Michael Croker, Tax Australia Leader at Chartered Accountants Australia and New Zealand (pictured above with ICAS Director of Taxation Charlotte Barbour). The nation has grappled with the problem since Federation in 1901, just as Westminster and Holyrood are doing right now.
The tax reform debate in Australia, particularly around the Goods and Services Tax (GST), coincides with a debate on Federalism, with both major topics of discussion as new Prime Minister Malcolm Turnbull settles in. So Australian policy-makers are facing a similar challenge, albeit from a different angle. The UK and Australia may have much to learn from one another.
When Charlotte Barbour invited Michael to attend tax devolution discussions in Edinburgh, he jumped at the chance. We spoke with him about the thorny issue of devolution.
How did Australian Federal and State taxation powers develop?
Until 1901 Australia only had State governments. Then the States agreed to a federal structure. They kept a lot of powers, but under the new constitution gave certain powers to the Federal Government. Over time the Federal Government’s powers grew, particularly during the World Wars when income tax powers that hadn’t originally been given to the Federal Government were handed over.
That has given rise to a model whereby the Federal Government shares some revenue, including all of the GST, back to the States. The formula for sharing is highly contentious, with few State Premiers ever satisfied with the outcome. After all, it’s the States that have prime responsibility for delivering high cost services such as police, hospitals, education and public transport.
What struck you about the meetings in Scotland?
The Advocate General said the UK Government and the Scottish Government were learning from other countries where there is a sharing of tax powers, from jurisdictions like Australia. My ears pricked up. Do you really want to use Australia as a model? It’s such a problem here.
I’m a babe in the woods in terms of understanding the politics behind the Scottish independence vote, but my thoughts were around the administrative trouble that can be caused when you have two jurisdictions trying to co-design and implement tax rights and laws, with total control over other types of taxes.
The formula for sharing is highly contentious, with few State Premiers ever satisfied with the outcome. After all, it’s the States that have prime responsibility for delivering high cost services such as police, hospitals, education and public transport.
What sorts of problems are we talking about?
Scotland is not going to become independent in a revenue sense. There is a 40% (tax), 60% (spending) split. The UK is only devolving some of the tax powers and in other cases they are sharing some of the tax received. So for example, if there’s a natural disaster in Scotland and there are insufficient emergency funds available, Westminster would no doubt be expected to contribute. This is not a financial separation, it is a sharing model where some taxes are earmarked for the Scottish Parliament to spend.
Does experience tell you that it can’t work smoothly?
I remember sitting in that Edinburgh meeting and thinking that there’s a lot of goodwill on both sides, but wondering if they really see the problems that have to be ironed out during the years ahead. It’s not just a tax issue. In Australia, there is often a sense that the various tiers of Government neither budget nor spend wisely, and there is unnecessary duplication of effort.
That sometimes translates into a blame game between State and Federal Governments. And more prosperous States complain that they subsidise less prosperous States by virtue of the revenue sharing formula – something that might become a familiar refrain in the United Kingdom, given that devolution is also of interest to Wales and Northern Ireland.
Is there a perfect tax model?
I think the policy makers have been wise not to devolve corporation tax. The company tax rate is one of the determinants of where to locate investment and, by extrapolation, employment opportunities. But there is an ultra tax-competitive Ireland just a short distance away.
Mobile labour may be a challenge for sharing income tax on earnings. ‘Where is your home?’ sounds like a simple question but can be difficult in practice. And should Scotland set different thresholds and rates on labour income?
The world of tax is a competitive one and with modern digital business models these days the tax base is far less reliable. So I don’t expect devolution of taxing powers will be a ‘set and forget’ issue.
Tax competition may occur with lesser known devolved taxes. Lower Air Passenger Duty rates at Edinburgh and Glasgow airports may entice airlines away from Heathrow and boost Scottish tourism.
These and many other practical policy issues will no doubt be figured out by minds greater than mine.
Could it make life more difficult for businesses?
This is an important issue for businesses which always hate red tape. A good working relationship between HMRC and Revenue Scotland is vital to ensure that businesses enjoy streamlined compliance procedures. In Australia, a business operating nationally must interact with the Australian Taxation Office and Offices of State Revenue in all six States and two Territories. It’s horrendous and unnecessary because it reflects 1901 thinking.
For organisations that have operations throughout the British Isles I imagine devolution will make life a little bit more complicated and CAs will have a role to play in making sure the relevant laws are complied with.
Are there other complications?
There are a lot of pressures in the UK, just as there are in Australia, in areas such as national health and the cost of helping the elderly. Governments are always scratching around for money to provide the services that citizens expect and raising taxes is unpopular. But the world of tax is a competitive one and with modern digital business models these days the tax base is far less reliable. So I don’t expect devolution of taxing powers will be a ‘set and forget’ issue. I’m pretty sure this will be an on-going advocacy topic for ICAS.
Culture is also an issue. I learned from ICAS colleagues that Scotland didn’t embrace student loans but English universities did. Scottish people pride themselves on enabling their young people to be educated for free. That’s good, but universities are very expensive to run. So how does that system continue on? There’ll be ongoing issues in many areas other than tax.
Are there positives?
There are many! It’s fascinating to see a young Parliament in a very old country coming back into existence and re-gaining some of the powers and responsibilities it once had. Millions of people around the world with Scottish heritage are watching devolution with great interest and much pride. It just has to be done as carefully as possible.
...and the view from Charlotte Barbour
The meeting with Michael was so informative. We have much in common and for ICAS members it was useful to receive a non-domestic perspective on the devolution of tax powers, which we have focused heavily on in the last few years. Michael was invited to ICAS following a Global Accounting Alliance tax directors' meeting earlier this year. This is a positive and valuable forum in which to share and learn from common experiences.
About the author
Chris Sheedy is one of Australia’s busiest and most successful freelance writers. He has been published regularly in the Sydney Morning Herald, Virgin Australia Voyeur, The Australian Magazine, GQ, In The Black, Cadillac, Management Today, Men’s Fitness and countless other big-brand publications. He is frequently commissioned to carry out copywriting and corporate writing projects for organisations, including banks, universities, television networks, restaurant chains and major charities, through his business The Hard Word.