Do not hold your breath for a cut in the company tax rate. The mandate from the Government is that savings from within the business tax system must offset the cost of reducing the company tax rate. In other words, it must be a revenue-neutral outcome. It means the left hand feeding the right hand, so the overall tax burden on business stays the same. Suddenly, most corporate taxpayers may have lost interest in pushing for a cut in the company tax rate.
Whether you are a winner or loser will depend on which of the existing tax concessions you will lose in the process. The discussion paper prepared by the Business Tax Working Group (BTWG) on the Government’s behalf discusses the benefits of reducing the company tax rate and the options to pay for it. These would involve broadening the business tax base by reducing or removing various tax concessions.
Broadly, the three categories of tax concessions identified are: interest deductibility (including thin capitalisation); depreciating assets and capital expenditure (including capped effective lives); and the R&D tax incentive for turnovers in excess of $20 million.
What makes things even worse is that some of the funding options extend beyond corporate taxpayers. These are the reduction or removal of some long-standing tax concessions that will impact non-corporate taxpayers, such as individuals, partnerships and trusts. In other words, such taxpayers could be funding a cut in the corporate tax rate without any offsetting benefits – a real double whammy.
What is the IPA’s stance?
The IPA has made a formal submission to the BTWG, which can be summarised as follows:
Effectiveness of a revenue-neutral mandate
The potential benefits to the economy of lowering the corporate tax rate will be put at risk if the cut is funded solely from within the business tax system.
Broadening the tax base to fund company tax rate reduction may have limited impact in terms of making Australia more attractive to entrepreneurs. We also question the need for a cost-neutral outcome if a company tax rate reduction improves both the quantity and quality of investments over time. A cut in the corporate tax rate on its own represents a very piecemeal approach to what the Government portrays as a genuine initiative, which is designed to improve the tax system.
No GST mandate
Wider changes to the tax mix are required to realise potential benefits from a cut in the corporate tax rate. We believe the terms of reference for the funding options need to look at a wider mix of taxes as part of the solution for reducing the burden of business taxes. The inclusion of the GST would provide more flexibility with the funding options.
Concessions affecting non-corporate taxpayers
Some of the proposed funding options under consideration will impact non-corporate taxpayers, who will not benefit from a cut in the company tax rate. Instead, they face the prospect of a reduction in some of their long-standing tax concessions without any offsetting benefits.
As well as individuals, this inequitable situation applies to two-thirds of the 2.5 million small businesses in Australia that do not use a corporate structure.
Accelerated depreciation
The IPA believes that the accelerated depreciation rationale still holds true and should be maintained at current levels. The diminishing value method more closely aligns depreciation rates with the actual decline in the value of assets, but we do acknowledge that this alignment can vary across different asset groups.
Research and development
The IPA supports genuine productivity-enhancing R&D and notes that tax rules in this area were recently tightened. The funding options under consideration only involve denying some of the benefits to companies with a turnover greater than $20 million, so the impacts on small business will be minimal.
Building depreciation
The proposition in the discussion paper that buildings do not depreciate is strongly rejected. Buildings have economic lives like other productive assets. Taxpayers would be discouraged from undertaking capital improvements if building depreciation was abolished. Similarly, initiatives such as the ‘greening of buildings’ to take advantage of technological advances would be discouraged if the tax system penalised taxpayers for undertaking such capital works. Economic lives of buildings are getting shorter, primarily due to technological advancements. The greening of buildings and increased regulations support the need for higher rates of depreciation than are currently allowed. Any move to a less generous building depreciation regime can be expected to affect investor sentiment, as it will raise effective marginal tax rates on investments by a range of businesses, including residential investors.
It will be interesting to see what the Government will do, given the resistance by most stakeholders to give up existing tax concessions in order to pay for a cut in the corporate tax rate.
Only time will tell which way the Government will move, but one very likely scenario will be that, given the lack of consensus, it decides status quo may be the best short-term option.
