How badly do you want a company tax rate reduction?

By Tony Greco, senior tax adviser, Institute of Public Accountants

The issue is discussed in a paper prepared by the Business Tax Working Group (BTWG) on the government’s behalf. Generally speaking, funding a cut would involve broadening the business tax base by reducing or removing tax concessions. The three categories of concession 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.

With some options extending beyond corporate taxpayers, the reduction or removal of some long-standing tax concessions would impact non-corporate taxpayers such as individuals, partnerships and trusts. In other words, these taxpayers could be funding a cut in the corporate rate without any offsetting benefits – a real double whammy.

The Institute of Public Accountants (IPA) has made a formal submission to the BTWG which can be summarised as follows:

• Effectiveness of a revenue-neutral mandate – Funding a cut in the corporate tax rate solely from within the business tax system puts at risk the potential benefits of lowering the corporate tax rate. Broadening the tax base may have a 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. On its own, a cut represents a very piecemeal approach to what the government portrays as a genuine initiative 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 on business. Inclusion of the GST would provide more flexibility with the funding options.
• Concessions affecting non-corporate – Non-corporate entities will not benefit directly from company tax cuts, but do face the prospect of a reduction in some of their existing tax concessions without any offsetting benefit. This appears inequitable to all businesses that do not use a corporate structure. Only a third of small businesses in Australia are incorporated.
• Accelerated depreciation - The IPA believes 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 acknowledge this alignment can vary across different asset groups).
• Research and development (R&D) – The IPA supports genuine productivity-enhancing R & D. Funding options under consideration only involve denying some of the benefits to companies with a turnover above $20 million, so the impacts on small business would be minimal.
• Building depreciation – The IPA strongly rejects the discussion paper’s proposition that buildings do not depreciate. Taxpayers would be discouraged from undertaking capital improvements if building depreciation were abolished. Initiatives such as the ‘greening’ of buildings to take advantage of technological advances would be discouraged if the tax system penalised such capital works. The economic lives of buildings are getting shorter, primarily due to technological advancements. The greening of buildings, as well as increased regulations, supports the need for higher rates of depreciation than are currently allowed.

The BTWG final report could not recommend a revenue-neutral outcome, which was the overriding mandate it had to work to. It was, as predicted, met with a barrage of resistance by most stakeholders who were asked to give up existing tax concessions in order to pay for a cut in the corporate tax rate.

Given the lack of consensus, the government will most likely maintain the status quo as the best short-term option to protect its surplus commitment. It looks like any meaningful tax reform has stalled, given the revenue-neutral mandate hurdle which places unrealistic constraints on any recommendations.