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The 2010 Henry Review into Australia's future tax system
recommended the introduction of a resource rent tax be coupled with
a 5% reduction in the corporate tax rate from 30% to 25%, being the
average for small to medium size OECD economies.
In response to the Henry Review, the Government initially opted
for a 28% target which was revised to 29% and then abandoned in the
May 2012 Federal Budget. Admittedly, the Henry Review recommended a
40% resource rent tax on all non-renewable resources and it ended
up being a 22.5% tax on coal and iron ore only. But a deteriorating
economic and fiscal outlook is no doubt also to blame.
The Government however remains committed to cutting the
corporate tax rate. But the commitment comes with the catch that it
must be funded by equivalent savings found elsewhere in the
business tax system. Some may say this does not amount to a tax cut
at all but of course the various rules apply in different ways to
companies in different situations. So the outcome for a particular
company may be a tax cut, a tax increase or it may be tax
neutral.
The Treasurer charged the Business Tax Working Group with
finding the savings necessary to fund a tax cut. The Group released
a Discussion Paper on 13 August 2012 which estimates the cost of a
5% rate cut at $26 billion over the forward estimates. The
Discussion Paper then outlines potential savings that add up to
around $10 billion. So a 5% cut is really out of the question. The
Australian Financial Review described such a cut as "dead on
arrival" of the Discussion Paper. A 1% or 2% cut looks to be
more achievable.
The Government wants the cut funded from the business tax system
in order to preserve a budget surplus. The other side of the
argument is that a lower rate should boost productivity leading to
higher tax collections (that is, more income taxed at a lower rate
may equal more tax). Both sides of the argument have merit.
One difficulty is that Australia is looking to achieve a lower
rate by eliminating concessions so we can compete with economies
that have a lower rate and still have concessions. Put another way,
Australia could end up with a lower rate and still not get a
competitive advantage.
Another difficulty is that many of the potential savings would
hit the energy and resources sector. Such potential savings relate
to:
the deductibility of interest on debt finance;
the depreciation of plant and equipment, especially in the oil
and gas sector; and
the treatment of expenditure on exploration.
The Discussion Paper provides a number of alternatives for each
area of potential savings. In the case of debt finance, the
alternatives include reducing the safe harbour debt to equity ratio
from 3:1 to 1.5:1 (that is, a halving of the permitted level of
debt) or capping interest deductions at a percentage of EBITDA.
In the area of depreciation, the alternatives include reducing
the rates of depreciation under the "diminishing value"
method and removing statutory caps on the effective life of certain
assets. Both would impact the ability to depreciate assets on an
accelerated basis.
In relation to exploration expenditure, the alternatives involve
a shift from an immediate deduction to a deduction over 5 years or
the effective life of the project. Another alternative is to
exclude feasibility studies from exploration expenditure.
The energy and resources sector has been propping up the
economy. The Discussion Paper notes the level of capital
expenditure in the sector has gone through the roof over the last
10 years while capital expenditure in the manufacturing and other
sectors has declined.
A willingness to take risks with the energy and resources sector
assumes that Australia's resources will be exploited because
they are immovable. That may be true over the long term. But in the
short to medium term multinational resources companies have to make
investment decisions about projects in different parts of the
world. Even local resources companies are increasingly looking at
projects in Africa. Australia could miss out in the process if it
is not careful.
Cutting the company tax rate involves making tough decisions.
There will be winners and losers.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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