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Tax breaks on housing, shares and super distort behaviour, benefit the rich: Murray

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Nassim Khadem

The Murray inquiry recommends scrapping tax breaks for property.

The Murray inquiry recommends scrapping tax breaks for property. Photo: Louie Douvis

Tax breaks for housing, shares and superannuation could all be scrapped, and GST could apply more broadly if the Abbott government listens to the final recommendations of the financial systems inquiry.

The report by former Commonwealth Bank chief executive David Murray suggests a raft of tax breaks distort borrowing, including negative gearing, capital gains tax concessions and dividend imputation.

Mr Murray takes particular aim at tax breaks for housing, saying negative gearing and capital gains tax exemptions on the family home tends to encourage leveraged and speculative investment and is a potential source of systemic risk for the financial system and the economy.

Mr Murray pointed out capital gains concessions were a tax subsidy for the wealthy and reducing them would lead to a more efficient allocation of funding in the economy.

"All else being equal, the increase in the after-tax return is larger for individuals on higher marginal tax rates," he said.

While Mr Murray does not suggest outright scrapping them, his report puts them forward as concessions that distort behaviour and create risk, which increases the chance they will be examined in the upcoming tax white paper.

The federal government is expected to release this month an options paper, with suggestions for tax reform as part of that process.

Mr Murray reiterated his view that the case for retaining dividend imputation was less clear than in the past and suggested it could be replaced with a lower company tax rate.

Dividend imputation had removed the bias towards debt funding, but then pushed Australians and superannuation funds to invest in domestic shares, he said.

"The benefits of dividend imputation, particularly in lowering the cost of capital, may have declined as Australia's economy has become more open and connected to global capital markets.

"Imputation provides little benefit to non-residents that invest in Australian corporates."

That was a huge loss to government revenue, Mr Murray said. "For investors, including superannuation funds, subject to low tax rates, the value of imputation credits received may exceed tax payable," he said. "Unused credits are fully refundable to these investors, with negative consequences for government revenue."

Mr Murray also called for the end of generous concessions on superannuation, saying they had not been well targeted to achieve provision of retirement incomes but instead were being used to reduce tax.

Grattan Institute chief John Daley welcomed all of Mr Murray's tax-related recommendations, saying now there were two major reports to government confirming the rich were benefiting from super concessions.

"I didn't think David Murray or Tony Shepherd (who headed the government's Commission of Audit) could be described as card-carrying warriors for the left and yet here they are, both saying super concessions are too generous for the top income earners and need to change," Mr Daley said.

Association of Superannuation Funds of Australia (ASFA) chief executive Pauline Vamos agreed that tax concessions for superannuation were benefiting the wealthy and needed to stop. "There shouldn't be tax concessions going to wealthy people," she said.

Mr Murray said the fact that super earnings were taxed at 15 per cent in the accumulation phase, but were untaxed in the retirement phase could act as a barrier to funds offering "whole-of-life" superannuation products and increase costs in the superannuation system.

"Aligning the earnings tax rate between accumulation and retirement would reduce costs for funds, help to foster innovation in whole-of-life superannuation products, facilitate a seamless transition to retirement and reduce opportunities for tax arbitrage," he said.

Mr Murray also suggested GST could be levied on financial services. Currently financial service providers that did not charge GST still had to pay GST on inputs, but could not claim input tax credits, he said. "Providers pass this cost on to consumers in the form of higher prices. As a result, households could be over-consuming financial services, compared to what they would consume if GST was applied to these services."

Since businesses also could not claim input tax credits, that could result in businesses consuming fewer financial services than otherwise would be the case, he said.

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