The Federal Government's Business Tax Working Group has released its Draft Final Report considering options for cutting the corporate tax rate. The Working Group had been delegated a mandate to explore revenue neutral options for funding such a rate cut. In short, the Report concludes that the Working Group is "unable to recommend a revenue neutral package to lower the company tax rate". Certain industries will be relieved that the Working Group has not recommended any of the options considered in its earlier Discussion Paper. But as a whole business should be asking, where to from here for business tax reform?
History and context of the Report
To give some background, the Report was preceded by a Discussion Paper (issued on 13 August 2012) had flagged changes to three areas of the tax law in order to broaden the tax base.
- It suggested changing the thin capitalisation rules, which can limit interest deductions for multinational companies. Broadly, the rules deny debt deductions where a corporate group's debt to assets ratio exceeds 3:1. The Discussion Paper suggested changing this ratio to 1.5:1 for most entities, which would have seen more companies denied debt deductions for their interest expenses.
- It also suggested limiting capital allowance deductions, and changing some deductions for capital expenditure undertaken by miners. The capital allowance changes discussed would have limited building depreciation deductions, which would have significantly impacted the property industry. The mining capital expenditure proposal would have removed the immediate write-off companies currently obtain for acquiring exploration or prospecting rights.
- Finally, it discussed removing or reducing the current refundable tax offset some companies can obtain for undertaking research and development.
The Discussion Paper had also flagged the possibility of introducing an allowance for corporate equity; a fundamental change which would have seen companies taxed only when they achieved an above normal rate of return.
The Draft Final Report's findings
The Draft Final Report has not endorsed any of these changes as options for funding a company tax rate cut. Instead, it has found that:
- A reduction in the tax rate would provide a net benefit to the Australian economy. A 1% reduction in the corporate tax rate would deliver a positive impact on gross domestic product and real wages of about 0.2%. The Working Group believes a cut of two to three percentage points is necessary to drive a significant investment response.
- Despite the benefits of a cut, there is a lack of agreement in the business community over whether the benefits are sufficient to justify removing the tax concessions outlined in the Discussion Paper. Because of this, the Working Group was unable to recommend any revenue neutral rate cut package.
- An allowance for corporate equity should not be pursued in the short-term, but may be worthy of further consideration.
What does this mean for the future?
On one level the Working Group's conclusion is not too surprising. It confirms that the Australian business income tax system already has a fairly broad base, with little 'fat' left to cut. But its decision not to endorse any change flagged by the Discussion Paper should be seen as a lack of appetite for changes, rather than a final verdict on the merits of those changes. For example, the proposals concerning capital allowances and mining capital expenditure had previously been endorsed by the Henry Review, which believed that current rules provided an unfair advantage to certain industries. Further, Australia's thin capitalisation rules are fairly generous by international standards. Given this, and the tight budgetary environment, we anticipate that the Discussion Paper's proposals may well be revisited at some point in the future.
The key challenge for the Government and business is to ensure that the Working Group's conclusion does not dampen the community's appetite for broader business tax reform. While perhaps unknown to the general public, there continues to be a pipeline of various reform proposals at a Federal level. These include the re-write of the trust tax rules, the introduction of a managed investment trusts regime and the Board of Taxation's post implementation review of the consolidation regime. None of these proposals have as broad a mandate as the Working Group, but each merits serious consideration. We believe that tax reform discussions will now focus on these individual measures, and away from considering big picture, "root and branch" reform proposals.
This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.