Speak to any Big4 accounting firm employee and they’re likely to tell you that the handing down of the Henry Review yesterday was an epochal moment in Australia’s tax history.
Having had the opportunity to check it out, the team here at FS aren’t quite so sure. While we wouldn’t care to bother our readers with the finer points of the Review, the government’s response and the likely impact, there was however one issue which immediately caught our eye. We have extracted the following passage from the Tax Policy Statement accompanying the Review:
“a simpler tax and transfer system means people have to spend less time complying with their tax obligations and working out their entitlements. Time spent interacting with the tax and transfer system is a “deadweight cost” on society. In particular, time and resources wasted on tax compliance and administration could be better spent in other ways.
These costs are ultimately built into the price of goods and services sold in the community, making us all worse off… Some complexity in the tax and transfer system is unavidable… however, some types of complexity can beboth unfair and inefficient. For example, those with access to innovative tax advice can claim deductions than those with limited means…
Australia’s tax system is also complex because of the number of taxes levied by many different levels of government… Such a complex system makes tax reform a difficult process. It is, however, a very important one for Australia’s economic future. Some studies have estimated the costs of taxpayers complying with their taxation obligations to be in the order of 1 to 2 per cent of GDP. That is, 1 to 2 per cent of everything produced on Australia in any one year is spent by taxpayers on simply ensuring they pay the right amount of tax.
Compliance costs are an ongoing cost, borne every year. If we were able to reduce this cost by one third, even using the more conservative estimates we would succeed in releasing around $4 billion every year. This could be spent on more productive activities… The government is considering further changes … that will lower compliance costs for taxpayers.”
It is a truly remarkable proposition that, according to conservative estimates, between 1 & 2 per cent of GDP is bound up in tax compliance costs. However, when one considers the combined revenue of Australia’s Big4 accounting firms it quickly becomes clear that these estimates are likely correct. Moreover, in 2008/2009 it was reported that the combined revenue of the Big4 was in excess of $4 billion; a figure eerily similar to that which the government wishes to wipe off the nation’s tax bill.
If the government has as part of its tax policy agenda a view that ‘deadweight costs’ ought to be reduced by at least a third of the conservative view of tax compliance costs, what impact will this have on the profitablity of major accounting firms in the future? If a significant amount of complexity is removed from tax compliance, will it remove the need for sophosticated tax advice? Will it lead to the redundancy of some of accounting firm big shots?
In recent weeks we have reported on the remarkable exodus of employees from Big4 accounting firms PwC and KPMG as well as major departures from Deloitte, as well as the report from News.com.au that a more general “mass exodus” of workers from accounting firms is looming.
Are we witnessing the first signs that accounting firm employees no longer see partnership as a lucrative future option? Assuming this is the case, how will accounting firms need to re-shape to stem the tide of losses of disaffected workers?
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I think you would tend to find that there would be an increase in work arrising from the regulatory changes.
Perhaps in the short term, but once that peters out it’s an open question whether there’ll be as much money in complex tax advices.