Tax Policy Competition and
Awards 2015
Tax Policy Scholarship Charitable Trust
A schedular tax base for personal income
Proposal for reform of the personal income
tax base and rate structure
Jeremy Beckham
Introduction
What do we mean by a schedular tax base for personal income?
• Personal income tax base is an important component of government revenue.
• Tax system currently imposes tax on comprehensive income (one rate structure
applied to all income regardless of type).
• Could instead adopt a schedular tax base where tax system recognises there
are different types of receipts and applies separate tax treatment.
Composition of tax revenue (year end 31 March 2015)
13%
Individual income tax
40%
32%
Company income tax
Goods and services tax
Other
15%
Source: Treasury (Tax Outturn data)
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Tax system currently operates on progressive taxation
Combination of progressive taxation and comprehensive income
Progressive taxation provides for income redistribution between low income and
high income earners based on taxable income. Complex regimes are needed to
prevent income diversion and to support taxation at an individual’s marginal rates.
Proportionate taxation provides one fixed rate for income tax. Offers significant
potential over a progressive rate structure in terms of reducing complexity and
improving coherence by removing incentives to split or shift income.
Can we reach a middle ground between progressive and proportionate rate
structures using a schedular approach to the tax base?
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Design for a schedular tax base – active income
Progressive rate structure retained for active income
Tax rates applicable to schedular earned income:
Schedular earned income
Income tax rate
up to $14,000
10.5%
from $14,001 to $48,000
17.5%
from $48,001 to $70,000
28.0%
$70,000 and over
33.0%
• Will include mostly amounts received from business, employment or personal
exertion.
• Progressive taxation remains an equitable mechanism for income
redistribution as earned income is not associated with the accumulation of
wealth.
• Earned income is more difficult to shift between persons or entities.
• Quasi-alignment of second-from-top rate with company rate selected as good
fit under a schedular approach.
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Design for a schedular tax base – passive income
Proportionate taxation of savings income
Flat tax rate applicable to schedular savings income:
Schedular savings income
All income
Income tax rate
28.0%
• Will apply to most interest and dividend income derived by individuals or
trustees of any amount from domestic sources.
• A flat 28% savings rate will apply which is less than the top personal income
tax rate and aligned with the company tax rate. PIE income will also be taxed
at the 28% savings rate.
• RWT rules will be simplified so that tax is withheld from all payments at 28%
adjusted for the amount of imputation credits attached to dividends. Amounts
withheld will represent a final tax for non-filing taxpayers.
• Dividends received from companies that are not widely held and interest
derived from associated parties will be excluded.
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Design for a schedular tax base – passive income
28% savings rate selected as a deliberate savings incentive
Concessionary
rate for high
income earners
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Design for a schedular tax base – passive income
Taxation of other passive sources of income
Two-step rate applicable to schedular other income:
Schedular other income
Income tax rate
up to $70,000
28.0%
$70,000 and over
33.0%
• Defined prescriptively to include other sources of passive income e.g. rents,
royalties, attributed income from interests in foreign equity.
• Will include other types of passive income that are not eligible to be treated as
schedular savings income.
• Two-step rate is aligned with top two rates of the progressive rate structure
applicable to schedular earned income and shared quantum of income with
schedular earned income.
• Important integrity measure – it retains the top personal income tax rate while
ensuring minimum taxation of all passive income at 28%.
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Better targeting of taxpayer behaviour using the tax system
Persons at or near the age of retirement – less distortionary
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Achieving better redistributive outcomes
Use schedular approach to shift emphasis from imposition of taxes
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Questions?
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© 2013 Deloitte
Tax Policy Competition and
Awards 2015
Tax Policy Scholarship Charitable Trust