BILLS DIGEST NO. 22, 2017–18              1 September 2017

Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017

Kali Sanyal
Economics Section 

Date introduced:  11 May 2017

House:  House of Representatives

Portfolio:  Treasury

Commencement: Progressively implemented from 1 July 2019

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at September 2017.

Glossary

Table 1: abbreviations and acronyms

Abbreviation or acronym

Definition

Combating Multinational Tax Avoidance Act

Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017

ETP Act

Treasury Laws Amendment (Enterprise Tax Plan) Act 2017

ETP Bill

Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016

ETP 2 Bill

Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2016

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

OECD

Organisation for Economic Co-operation and Development

PDF

Pooled Development Fund

Rates Act

Income Tax Rates Act 1986

RSA

Retirement Savings Account

The Bills Digest at a glance

Purpose of the Bill

•       The present Bill follows the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (ETP Bill 2016), which was passed by Parliament on 9 May 2017,[1] and received Royal Assent on 19 May 2017.

•       With the passage of this amended ETP Bill, instead of applying to all businesses, the reduced corporate tax rate of 27.5 per cent would only apply to businesses with an aggregated turnover of less than $50 million from the 2018–19 income year onwards.

•       The reduced tax rate of 27.5 per cent would be applied for businesses with an aggregated turnover of less than $10 million starting from the 2016–17 income year and businesses with an aggregated revenue less than $25 million starting from the 2017–18 income year.

•       The present Bill is a residual part of the previous ETP Bill, containing the provisions that did not pass the Parliament on 9 May 2017, and includes provisions to incorporate the reduced tax rates progressively within a specific timeframe.

•       The measures contained in the present Bill stipulate that the tax rate of 27.5 per cent will gradually apply to higher turnover thresholds over successive years, until it reaches $1 billion revenue threshold in the 2023–24 income year.

•       A uniform company tax rate of 27 per cent is to apply to all businesses from the 2024–25 income year; then lowered to 26 per cent in the 2025–26 income year, and remaining at 25 per cent from the 2026–27 income year onwards.

Policy rationale for reducing the company tax rate

The Government’s proposal to lower the company tax rate is based on several policy goals, among them:

•       to encourage growth and innovation (based on the assumption that small business activity is important in generating economic growth) and

•       to attract investment and grow the economy (based on the assumption that lower company tax rates will make Australia more competitive with other countries as a place to invest).

Note: A detailed analysis of the likely impact of the tax changes is contained in the Library Bills Digest on the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016.[2]

Purpose and structure of the Bill

Schedule 1 to this Bill proposes to amend the Income Tax Rates Act 1986 (the Rates Act) to progressively extend the lower 27.5 per cent corporate tax rate to all corporate tax entities by the 2023–24 income year. From the 2024–25 income year onwards, the tax rate will then be universally applied on all corporate entities according to the following schedule:

•       for the 2024-25 income year—27 per cent

•       for the 2025-26 income year—26 per cent and

•       for the 2026-27 income year and later income years—25 per cent.

Schedules 2 to 4 make consequential amendments to incorporate these changes in the income tax law.

Background

The proposed measures in the Bill seek to implement the 2016–17 Budget announcements that all corporate entities would be subject to a uniform tax rate of 25 per cent on their taxable income from the 2026–27 income year. The original legislation to implement the announced changes was introduced to the Parliament on 1 September 2016 as the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (ETP Bill 2016).

After a series of consultations and compromises between the government, minor parties and independent senators, the ETP Bill 2016 eventually passed the Senate on 31 March 2017, although it was subject to a number of modifications. The original Bill sought to reduce the corporate tax rate for all entities to a uniform 25 per cent from the 2026–27 income year. However, the Bill that passed both Houses only reduced the tax rate of business entities with an aggregated business turnover of less than $50 million to the 25 per cent rate, implemented in a staggered approach to allow declining rates starting from the 2016–17 income year.

Table 3 shows the application of a gradual reduction of the tax rate on the corporate entities as a consequence of the Senate amendments to the ETP Bill 2016.

Table 3: corporate tax rate from 2015–16 after Senate amendments to the ETP Bill on 9 May 2017

Income Year

Aggregated business turnover

Company tax rate (%)

2015–16

< $2 million

28.5

2016–17

< $10 million

27.5

2017–18

< $25 million

2018–19

< $50 million

2019–20

2020–21

2021–22

2022–23

2023–24

2024–25

< $50 million

27

2025–26

< $50 million

26

2026–27 onwards

< $50 million

25

Source: Parliamentary Library, based on data in the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017.

With the amended measures, the two-tier corporate tax rates will also be applied to certain types of entities, that deemed non-conventional corporate entities for the purpose of implementing the tax measures, from the 2017–18 income year:

•       the standard component of taxable income of companies (other than life insurance companies) that are retirement savings account (RSA) providers

•       the amount that exceeds the pooled development funds (PDFs, see definition in the footnote)[3] component of taxable income of companies that become PDFs during an income year

•       the ordinary class of taxable income of life insurance companies

•       the taxable income of public trading trusts

•       specific income streams of not-for-profit companies

•       specific income streams of recognised medium credit unions and

•       the non-arm’s length income of managed investment trusts.[4]

Small business tax offset and CGT concessions

Consistent with the changes in the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (ETP Act), the increase in the aggregated turnover threshold to $10 million will expand access to most small business entity (SBE) concessions, for example:

•       the $20,000 immediate write-off for depreciating assets

•       immediate deductions for certain prepaid expenditure and

•       the simplified depreciation rules to many more taxpayers.

However, this new small business threshold of $10 million will not be applied in case of the Small Business Income Tax Offset (SBITO), also known as the unincorporated small business tax discount, and the Small Business CGT concessions (CGT SBCs).

Small Business tax offset (SBITO)

Non-corporate small business entities were allowed a tax discount to complement the reduction in the company tax rate from 30 per cent to 28.5 per cent under Subdivision 328-F of the Income Tax Assessment Act 1997 (ITAA 1997) from income years commencing on or after 1 July 2015 (i.e. the 2015–16 and later income years for an entity that balances at 30 June).[5]

The concession is available to individuals (sole traders) who are small business entities, individuals who are partners in a partnership that is a small business entity, and individuals who are beneficiaries of a trust that is a small business entity.[6]

The offset generally reduces the tax payment by up to $1,000 each year.

The offset, which is worked out on the proportion of tax payable on a business income, is:

•       8 per cent for the 2016–17 income year onwards

•       5 per cent for the 2015–16 income year.

The offset, which is available under Subdivision 328-F of the ITAA 1997, will increase to 10 per cent in 2024–25, to 13 per cent in 2025–26, and to 16 per cent in 2026–27.[7]

It is, however, worth considering that the business turnover threshold change will not apply with respect to the SBITO.

In order to avail of the tax concessions in the form of SBITO the small business must have an aggregated turnover less than:

$5 million for the 2016–17 income year onwards

$2 million for the 2015–16 income year.[8]

Importantly, for the purposes of the CGT SBCs, the aggregated turnover threshold will remain at $2 million, although taxpayers may still seek to satisfy the $6 million maximum net assets test as an alternative method of obtaining access to these concessions.[9]

Dividend imputations

With the passage of the ETP Bill on 9 May 2017, changes in the business turnover threshold will also apply to align the maximum franking credits (that can be attached to frankable distributions) to the rate of tax paid by a corporate entity:

For the 2016 (2015–16) income year, SBE companies paid tax on their taxable income at 28.5%, whilst still being able to pass on franking credits to their shareholders at a rate of 30%, subject to there being available franking credits (or risk being exposed to the franking deficit tax).

However, with effect from 1 July 2016 (i.e., the 2017 income year), the maximum franking credit that can be allocated to a frankable distribution paid by a company will be based on the tax rate that is applicable to the company.

This is achieved by limiting a company’s ‘maximum franking credit’ for a distribution to its ‘corporate tax rate for imputation purposes for that year’, which is worked out based on what income tax rate would apply to the company in the current year, assuming its aggregated turnover for the current income year is equal to its aggregated turnover for the previous income year.[10]

Proposed measures in the Bill

The Treasurer announced on 27 April 2017 that the Government would re-submit certain parts of the Government’s ten-year Enterprise Tax Plan to eventually reduce the company tax rate to 25 per cent for all companies.[11]

The current Bill classifies a ‘base rate entity’ according to whether it carries on a business and has an aggregated turnover, as postulated under section 328-115 of the ITAA 1997,(for an explanation of this term see footnote)[12] of less than:

•       $25 million for the income year 2017–18 or

•       $50 million for the income year 2018–19.[13]

This ‘base rate entity’ classification will be progressively applied in subsequent years when aggregated business turnover threshold reaches:

•       $100 million in the income year 2019–20

•       $250 million in the income year 2020–21

•       $500 million in the income year 2021–22 and

•       $1 billion in the income year 2022–23.[14]

The Bill proposes to incorporate the following changes subsequent to the amended measures passed by the Parliament on 9 May 2017.

As stated above in the classification of ‘base rate entity’, the corporate tax rate will be as follows:

•       a company tax rate of 27.5 per cent will be progressively applied to businesses with higher threshold in successive years until it reaches $1 billion revenue threshold in the 2022–23 income year

•       in the income year 2023–24, the aggregated turnover threshold for this concessional rate of 27.5 per cent will be removed altogether. Instead, the rate will be applied uniformly for all businesses

•       a uniform company tax rate of 27 per cent will be applied for all businesses in the 2024–25 income year, 26 per cent in the 2025–26 income year, and 25 per cent in 2026–27 income year and later years.[15]

The summary of the proposed measures are presented in Table 4.

Table 4: proposed measures in the Bill starting from the 2019–20 income year

Income year

Aggregated business turnover

Company tax rate (%)

Aggregated business turnover

Company tax rate (%)

2019–20

< $100 million

27.5

≥ $100 million

30

2020–21

< $250 million

≥ $250 million

2021–22

< $500 million

≥ $500 million

2022–23

< $1 billion

≥ $1 billion

2023–24

No threshold

27.5

2024–25

No threshold

27

2025–26

No threshold

26

2026–27 and onwards

No threshold

25

Source: Parliamentary Library, based on the data in the Explanatory Memorandum.

History of company tax rate changes in Australia

The taxation of companies as separate entities in Australia first commenced in 1922.[16] The company tax rate has been reduced over time, decreasing from a high of 49 per cent in 1986 to the current general rate of 30 per cent.[17] A summary by the Treasury noted that company tax rate reductions largely corresponded with base broadening measures (please see the explanation in the footnote),[18] such as the removal of accelerated depreciation (Table 5).

Table 5: company income tax changes, 1915 to 2001

Year

Company tax rate (%)

Notes on tax base

1915

7.4

A company was taxed on its undistributed profits (allowing a deduction for income distributed to shareholders).

1922

Tax applied to all profits (not just undistributed profits). Rebate provided to all dividends.

1940

All rebates for distributions of profits to shareholders were removed.

47.5

Public company

45

Private company

1948–72

47.5; 45; 42.5

Lower rate (42.5) applied to initial income (first $10,000 of profits in 1974)

1973–77

45

Private and public company income tax rates aligned.

1979

46

1986

49

Company tax rate aligned with top individual marginal tax rate.

Foreign tax credit system replaced the general exemption for foreign earnings. Credit allowed for foreign tax paid on foreign income up to the amount of Australian tax payable on the foreign income.

1987

The classical system of company taxation replaced by dividend imputation.

1988

39

1993

33

1995

36

1999

Removal of accelerated depreciation

2000

34

Refundable imputation credits introduced.

2001

30

Source: S Reinhardt and L Steel, ‘A brief history of Australia’s tax system’, op. cit.

In an analysis of income tax reform and broadening the tax base in Australia, Professor John Freebairn argued:

Broadening the income tax base, or taxable sum, by removing special exemptions and deductions has been a characteristic of many tax reform programs in Australia and overseas. Usually the stick of a larger tax base is matched by the carrot of lower tax rates that can be funded in a roughly revenue neutral package. In addition, such a tax reform package contributes to greater tax neutrality and then increased economy-wide productivity, it simplifies the tax system and lowers costs of tax administration and compliance, and arguably the reform package contributes to greater horizontal tax equity. Introduction of the fringe benefits tax (FBT), capital gains tax (GST) and some other base broadening measures in Australia in 1985 helped fund large tax rate reductions, including a drop in the top 60% rate to 49%.

Replacing accelerated depreciation with depreciation over the economic life of plant, equipment and buildings in 2001 funded most of the drop in the Australian corporate tax rate from 39% to 30%.[19]

Building on the 2014–15 Budget changes to tax rates for small business

In the 2015–16 Budget, the Abbott Government included a number of changes to tax arrangements for small business (defined as those entities with an aggregated turnover of less than $2 million), including a 1.5 percentage point cut in the company tax rate, from 30 per cent to 28.5 per cent, which would take effect from 1 July 2015.[20]

This measure was enacted in the Tax Laws Amendment (Small Business Measures No. 1) Act 2015. The measure passed the Parliament with bipartisan support, although the Leader of the Opposition argued in his 2015–16 Budget reply for a larger reduction:

A 1½ per cent cut for small businesses might be enough to generate a headline but it is not enough to generate the long-term confidence and growth our economy needs. Tonight I say: let’s go further—let’s give small businesses the sustainable boost to confidence that they deserve, the confidence to create jobs. I invite you to work with me on a fair and fiscally responsible plan to reduce the tax rate for Australian small business from 30 to 25 per cent—not a 1½ per cent cut; a five per cent cut. That is the future. That is confidence.

I understand that this will not be easy, and it may take longer than the life of one parliament.[21]

Part of the rationale for the reduction in the company tax rate was a recognition that not all small businesses were companies. The 1.5 per cent reduction was designed to be equivalent to the recently enacted ‘tax discount’ for unincorporated small businesses. This treatment of unincorporated small businesses was implemented by the Tax Laws Amendment (Small Business Measures No. 3) Act 2015, which also commenced from 1 July 2015.

Policy momentum for a lower company tax rate or changes to the small business turnover threshold

The proposal for a lower general company tax rate or for changes to the small business turnover threshold has been included in a number of reviews over the past few decades.

Howard Government

The review of business taxation (the Ralph Review) concentrated on the compliance cost impact on small business and recommended simplified taxation arrangements for small business (with an annual turnover of less than $1 million).[22] The Ralph Review also included recommendations relating to alternative capital gains tax arrangements and a simplified depreciation regime.[23]

Rudd–Gillard Government

The most recently completed tax review, known as the Henry Tax Review, recommended increasing the turnover threshold from $2 million to $5 million for access to the existing small business tax concessions as well as a general reduction in the company tax rate to 25 per cent.[24]

On 2 May 2010, as part of its response to the Henry Tax Review, the Rudd Government announced that it would cut the company tax rate to 28 per cent, with the reduction being phased in from 2012–13 for small businesses—one year earlier than for other companies.[25] This announcement also included plans for the Resource Super Profits Tax and an increase in the instant write‐off threshold from $1,000 to $5,000.[26]

On 2 July 2010, the Gillard Government altered the company tax cut proposal as part of an amended mining tax—the Minerals Resource Rent Tax (MRRT). The alteration was necessary due to reduced revenue. That being the case, the Government announced:

… the company tax rate will continue to be cut to 29 per cent from 2013–14 but will not be further reduced under current fiscal conditions. Small companies will benefit from an early cut to the company tax rate to 29 per cent from 2012–13.[27]

Although the legislation to implement the MRRT passed through both Houses of the Parliament in early 2012, by the time the 2012–13 Budget was delivered, the proposal for a company tax cut was abandoned.[28]

One of the reasons for this was that an across-the-board company tax rate reduction was not supported by the Australian Greens (the Greens). Their support was limited to a company tax rate cut for incorporated small businesses only.[29]

Abbott Government

A 2014 review of tax impediments facing small business by the Board of Taxation examined whether the $2 million turnover threshold remained appropriate.[30] The Board recommended that the threshold be increased to at least $3 million and that the increase to $5 million be ‘investigated’ largely based on the view that only relatively small numbers of additional businesses would benefit:

The Board considers that the small business entity concessions provide important assistance to small businesses but agrees with stakeholders that eligibility thresholds need to be monitored to ensure that the concessions remain current and appropriately targeted.

…

The statistics show that there may be considerable scope to increase the turnover threshold without significantly increasing the number of businesses that can access the concessions. Importantly, this is likely to reduce the number of businesses that are at or near the turnover threshold and therefore face the greatest uncertainty. It would also assist those businesses that operate on a low margin and therefore consider themselves disadvantaged by the test.[31]

In March 2015, the Government published a discussion paper that raises some specific tax issues relating to small businesses. These include compliance costs, choice of business structure and complexity.[32] In relation to a single lower tax rate for small businesses, the discussion paper included a proposition that a lower single rate (or zero tax rate) could be put in place to replace multiple tax concessions:

The reasoning behind this proposition is that a lower rate replacing multiple specific concessions could encourage small businesses to spend their resources by expanding their business, rather than managing their tax affairs.[33]

The discussion paper also noted the high economic costs associated with company tax and that many countries—including the United Kingdom and Canada—had reduced their company tax rate in recent years.[34] The Government’s view, as expressed in the discussion paper, was that there were broader economic benefits associated with a reduction in the company tax rate:

Reducing Australia’s corporate tax rate would increase Australia’s appeal as a place to do business. It would encourage higher levels of investment in Australia and lead to capital deepening, which promotes growth in productivity, innovation, employment and wages. In the near term, lower taxes would provide an increased incentive for non-residents to invest in Australia. In the long run, increased investment would benefit all Australians.[35]

Committee consideration

Senate Standing Committee for the Selection of Bills

On 14 June 2017, the Senate Standing Committee for Selection of Bills considered the Bill and recommended that the bill not be referred to committees.[36]

Senate Standing Committee for the Scrutiny of Bills

On 14 June 2017, the Senate Standing Committee for the Scrutiny of Bills made no comment on the Bill.[37]

Policy position of non-government parties/independents

Policy position of non-government parties/independents and interest groups:

In his budget reply speech after the 2016–17 Budget, the leader of the opposition stated that the ALP would oppose the reduction in the company tax rate, but that it would support a reduction in the rate to 27.5 per cent rate from 1 July 2016 for small businesses with a turnover less than $2 million.[38] Mr Shorten noted:

Last year, from this dispatch box, I invited the government to cooperate on cutting the tax rate for Australian small businesses to 25 per cent. We meant it then and we stand by it now. Labor will support a tax cut for small businesses with a turnover of less than $2 million a year—because that is what a small businesses. We will deliver tax relief for small businesses representing 83 per cent of all Australian companies.

But billion-dollar businesses are not small businesses—never have been, never will be. Coles is not a small business. The Commonwealth Bank is not a small business. Goldman Sachs is not a small business. As important as they are to our economy, they do not need a taxpayer subsidy which Australia cannot afford to pay, especially when our imputation system means a cut in the corporate tax rate delivers no meaningful benefit for mum and dad investors. The only shareholders who will win out of this live overseas. Labor will support a tax cut for small business but, unlike the Prime Minister, we will not use this as a camouflage for a massive tax cut to big multinationals.[39]

2016 election policies on taxation measures

The Coalition: The Coalition announced a plans to cut the corporate tax rate from 30 per cent to 25 per cent by 2026-27, and the tax rate for small businesses from 28.5 per cent to 25 Per cent by 2026-27. It hoped the move would boost GDP, profits, jobs and wages. Workers earning more than $80,000—the top 25 per cent of income earners—would get a tax cut as the government would move the threshold for the 37 per cent tax rate up to $87,000. The cut was supposed to be worth about $315 a year for most higher income families.[40]

Australian Labor Party: The Australian Labor Party (ALP) expressed their willingness to support the Coalition’s first tax cut for small business to 27.5 per cent but not for big businesses. It would not support the Coalition’s plan to change the definition of small business to include businesses with a turnover of up to $1 billion. According to the ALP, these are not small-businesses, Labor says. It also wanted multinational corporations to ‘pay their fair share of tax’.[41]

A Parliamentary Budget Office (PBO) costing of the ALP policy to ‘not proceed with big company tax cuts’ was included in the PBO’s post-election report of 2016 election commitments. This PBO costing, covering the period to 2019–20 put savings associated with the policy (which does not include the small business company tax reduction to 27.5 per cent from 1 July 2016 and the equivalent increase in the tax discount for unincorporated small businesses) at around at $4.4 billion in cash terms.[42]

The 2013 election policies of the ALP did not include any proposals to change the general company tax rate.[43] However, policies directed specifically towards small business included increasing the instant asset write-off threshold from $6,500 to $10,000 for eligible assets purchased between 8 September 2013 and 30 June 2015.[44]

Australian Greens: The Greens announced the introduction of a ’buffett rule’ to limit the deductions that the top one per cent of income earners can claim. The measure would only apply to people who have a total income of $300,000 or more a year. The party announced that it would oppose the government’s plans to cut the corporate tax rate. It also wants to clamp down on multinational tax.[45] Before the 2013 election, the Greens were the only major party to advocate a lower company tax rate that would apply only to small business. This policy proposed a reduction in the company tax rate to 28 per cent from 1 July 2014 for companies with a turnover of under $2 million.[46] The policy intent was to ‘to promote the vitality of the sector and to encourage more Australians to enter into small businesses’.[47] Part of the policy was also to increase the instant asset write off threshold from $6,500 to $10,000.[48]

In later period, the Greens announced that they did not support corporate tax cuts and were ‘refusing to join a tax cuts arms race that will undermine public education, health and welfare’.[49]

The Nick Xenophon Team’s Policy principles include a policy of supporting a lift in the small business turnover threshold from $2 million to $10 million ‘to encourage agricultural businesses to grow as agricultural output expands from individual businesses’.[50]

Position of major interest groups

Business groups

Business groups have generally welcomed the Government’s proposed company tax rate reductions.

In March 2016, the Business Council of Australia (BCA) proposed a ‘strategy for growth enhancing tax reform’ in a report on tax arrangements that included a move to a uniform company tax rate of 28.5 per cent in the short term, a rate of 25 per cent by 2020 and then a further reduction to 22 per cent by 2025.[51] The BCA’s proposed company tax rate reductions were framed around making the tax system globally competitive and the benefits that would accrue from a cut to the economy and workers (through higher real wages).[52]

Following the 2016–17 Budget, the BCA noted that ‘durable budget repair will not be achieved by increasing the overall tax burden’.[53] In relation to how the rate reduction would be implemented, the BCA noted:

The government’s 10-year enterprise tax plan is the signal that Australia’s businesses need to drive greater investment, and create more jobs, better jobs and higher paid jobs.

It’s an immediate reduction for the small and medium business that need relief now.

For big business, which operates on longer investment cycles, it’s an important signal that their investment will be more competitive down the track.[54]

In their pre-budget submission in February 2016, the Australian Chamber of Commerce and Industry (ACCI) considered that as part of tax reform ‘both sides of politics must commit to lowering the corporate tax rate to an internationally competitive level (currently 25 per cent but potentially lower in the future) by an agreed date’.[55] Following the 2016–17 Budget, the ACCI considered that the announced changes were positive, noting:

With an election looming, this Budget demonstrates that good policy can also be good politics.

The glide path to a company tax rate of 25 per cent by 2026–27 will make Australia a more appealing destination for international investors and will encourage Australians to develop their enterprises at home. The improved productivity from these new investments will create more and better paying jobs, ensuring that much of the benefit will flow to households.[56]

The Australian Industry Group (AIG) welcomed the proposed changes following the 2016–17 Budget, stating:

In an important boost to the capacity of businesses to invest and create jobs, the Budget sets a gradual path to restore the competitiveness of Australia's company tax system. While the two-tiered company tax system will continue for a number of years and it will be a decade before the company tax rate will reach 25%, many small to medium-sized businesses will see more immediate benefits and face improved incentives to invest. The clear risk involved in such a gradual phase down is that the international competitiveness benchmark could well be closer to 20% by 2026-27.[57]

In a separate budget-related media release, the AIG supported the increase in the small business eligibility threshold to $10 million, although they had advocated for a $20 million threshold prior to the Budget.[58]

The Council of Small Business Australia (COSBOA) also supports raising the turnover eligibility threshold to $10 million:

This creates a change immediately for government support actions around tax breaks, instant tax write offs and other initiatives. This gives more businesses access to the $20,000 instant tax write off announced in last year’s budget. There is also another tax decrease for these businesses. This means that tax has decreased 2.5% in 2 years. A good message to send to businesses who want to grow and employ, or start to export and take advantage of the global economy.[59]

Other groups

The Tax Institute supported the announcement of a reduction in the company tax rate to 25 per cent following the 2016–17 Budget as well as the lifting of the small business turnover eligibility threshold.[60] In its pre-budget submission, the Tax Institute expressed its support for a reduction in the company tax rate over the medium term to 25 per cent.[61] In making this proposal, the Institute stated:

A wealth of reliable evidence indicates that the incidence of company tax falls on employees. This means that reducing the burden of company tax is expected to result in companies passing on the benefits to their employees either in the form of increased wages or additional recruitment – increasing productivity and employment.

A cut in the company tax rate would also reduce taxes on investment, increasing the incentives for savings and capital as well as innovation and entrepreneurship – all outcomes that are indisputably in the interests of all Australians. Such a cut would also reduce the incentive for profit shifting out of Australia, allowing us to retain a greater share of the profits generated here in Australia.[62]

The Australian Council of Trade Unions (ACTU) was critical of the proposed company tax changes in the
2016–17 Budget, arguing:

A corporate tax cut is not a jobs plan.

It provides breadcrumbs for youth unemployment which is in double digit figures—12 per cent nationally and above 15 per cent in some local communities like the NSW Central Coast, parts of south-west Sydney, Townsville and all of South Australia.

The Government’s own budget papers project negative or zero total business investment over the forward estimates. Where are the jobs coming from?

The Government seems to think providing tax cuts to big corporations is magically going to create investment or stimulate the economy. This ‘trickle-down’ logic is a fantasy.[63]

In a March 2016 policy paper, the ACTU did not support cuts to company tax rates and was also critical of arguments based on the competitiveness of Australia’s company tax rate:

World-class worker and management skills, infrastructure, innovation, technology, legal systems and education and training are more powerful drivers of investment and jobs growth in Australia than corporate tax rates and all of these rely on revenue from the tax system.

…

Much of the new foreign investment entering Australia originates in China and other regional nations with low company tax rates. Australia’s 30 per cent company tax rate has not deterred these investments. In a world awash with investible funds and with record low interest rates, there is no compelling evidence that a further reduction in the cost of foreign capital through a reduction in the company tax rate would cause the surge in investment that proponents claim for it.[64]

Instead, the ACTU’s corporate tax proposals focussed on ‘repairing’ the company tax base to deal with base erosion and profit shifting by multinationals, better targeting of a research and development tax concession and improved tax transparency through tax reporting of all companies with annual turnover of more than $100 million.[65]

Tax professionals have stated their frustration about rushing of the dividend imputation system for the small business sector through the ETP Bill:

It is unfortunate that the Government has not taken the sensible approach of delaying the start of this amendment, given three quarters of the 2017 income year had already lapsed and corporate entities may have already paid dividends to their shareholders.[66]

Financial implications

The Treasury notes that the proposed measures in the Bill will result in $600 million less revenue over the period from 2016–17 to 2020–21 (Table 6).[67]

Table 6: financial impact of measures proposed by the Bill, 2016–17 to 2020–21 ($ million)

2016–17

2017–18

2018–19

2019–20

2020–21

$0

$0

$0

-$100

-$500

Source: Explanatory Memorandum, op. cit., p. 3.

While there is no direct analysis available on the revenue impact by analysts on the tax cuts of the proposed measures in the Bill, a Victoria University paper highlighted three concerns associated with the measures in a broader context:

The first is that foregone taxation revenue will add to government deficits, creating pressure for spending to be cut or alternative taxes to be raised. The second is that the cost of additional capital stock will add to the current account deficit, and should not be treated as manna from heaven. This leads to our final concern, which is our finding that despite the expected increase in GDP, real national income will fall under a cut to company tax.[68]

In discussing about the possible impact of the overall measures in the Bill, Senator Katy Gallagher (Shadow Minister for Small Business and Financial Services) questioned the veracity of the claim of the Government:

Treasury’s own modelling exposes the underwhelming case for the government’s plan. In its analysis of the most recent budget entitled ‘Economywide modelling for the 2016-17 Budget,’ the Treasury has estimated the impact of the government’s corporate tax giveaway on Australia’s projected economic growth. The key take-out from this modelling is that over 20 years the proposed cut in company tax from 30 per cent to 25 percent for all businesses would increase GDP by only 1.2 per cent.

I really think that deserves to be repeated: over 20 years—that is, six terms of the federal parliament—Treasury expects this bill will only boost our GDP by 1.2 per cent. And that is the headline growth rate. When you drill down into that figure, it reveals just how lacklustre that result is when you consider what it means for Australian households. As my colleague Andrew Leigh succinctly put it: ‘Treasury’s most likely scenario is that a company tax cut delivers an extra month of household income growth—in the 2030s.’[69]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[70]

Main provisions

Schedule 1—Reducing the corporate tax rate

Schedule 1 comprises nine parts, with each part largely arranged in a chronological fashion to implement the relevant changes for each year over the period 2019 to 2026.

The proposed amendments contained in Schedule 1 of the Bill will cause the concessional corporate income tax rate of 27.5 per cent (as approved by the Parliament on 9 May 2017), to be uniformly applied to all business entities by the 2023–24 income year.

The Bill achieves this by introducing an annual increase in the aggregated business threshold so that all corporate entities are incorporated into the definition of a ‘base rate entity’. For the purpose of corporate income tax provisions, the legislative definition of ‘small business entity’ has already been changed to ‘base rate entity’ as a result of the enactment of the provisions contained in the ETP Bill 2016, starting from 1 July 2017.

Items 1 to 4 (Parts 1 to 4) of Schedule 1 amends paragraph 23AA(b) of the Rates Act by replacing the current values of $50 million, $100 million, $250 million and $500 million with the annual aggregated turnover rates of $100 million, $250 million, $500 million and $1 billion respectively in successive years, starting from 1 July 2019.

Part 5, which is to commence from 1 July 2023, includes amendments required to move to a single company tax rate of 27.5 per cent for all entities for the financial year 2023–24. This involves repealing the definition ‘base rate entity’ in the Rates Act. Items 5 and 12 (Part 5) makes consequential changes by removing the definition of ‘base rate entity’ in subsection 3(1) and repealing section 23AA of the Rates Act.

Parts 6 to 8, contain provisions that apply from 1 July 2024, including amendments that reduce the single company tax rate of 27.5 per cent to 27 per cent for all entities for the financial year 2024–25; then to 26 per cent in 2025–26 and to 25 per cent from 2026–27 onwards.

Consequential amendments

Schedules 2 to 4 of the Bill contain consequential amendments required to give effect to the changes contained in Schedule 1. In essence, consequential amendments will be made to existing provisions of the ITAA 1936 and the ITAA 1997:

•       provisions relating to the operation of the imputation system

•       provisions relating to the tax offset available to life insurance policyholders

•       provisions relating to the operation of the carry forward tax offset rules

•       examples which illustrate the operation of various provisions in the income tax law and

•       the definition of ‘standard corporate tax rate’ for the purposes of the operation of the diverted profits tax.[71]

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[1].              S Morrison (Treasurer), ‘Second reading speech: Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017’, House of Representatives, Debates, 11 May 2017, p. 4315.

[2].              K Swoboda, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, Bills digest, 24, 2016–17, Parliamentary Library, Canberra, 2016, pp. 20–25.

[3].              Pooled development funds (PDFs) are venture capital funds that raise capital and make equity investments in small and medium-sized Australian companies (total assets not greater than $50 million). PDFs are taxed on their taxable income, calculated in the same way as for companies generally, but at a concessional rate (source: R Deutsch, M Friezer, I Fullerton, P Hanley and T Snape, ‘PDFs: introduction’, Australian Tax Handbook 2017, Thomson Reuters, Sydney, 2017, [11 500]).

[4].              Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017, pp. 10–15.

[5].              Deutsch et al, ‘PDFs: introduction’, Australian Tax Handbook 2017, op. cit., [25 250].

[6].              Ibid.

[7].              See the amendments to subsection 328-360(1) of the ITAA 1997 made by item 1 to 4 of Schedule 2 to the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017. At the time of writing this Digest the amendments had yet to be incorporated in the ITAA 1997 on the Federal Register of Legislation. See also: Australian Taxation Office (ATO), ‘Small business income tax offset’, ATO website, 16 August 2017.

[8].              Ibid.

[9].              National Tax and Accountants Association (NTAA), ‘Company tax cuts pass the Senate with amendments’, Client advisory, NTAA website, May 2017.

[10].              Ibid.

[11].              S Morrison (Treasurer), Turnbull government committed to driving jobs and higher wages for Australians through business tax relief, media release, 27 April 2017.

[12].              Aggregated turnover is generally the annual turnover of a small business (main business) plus the annual turnover of any business ‘connected’ and ‘affiliated ‘with the main business. Annual turnover includes all ordinary income the entity earned in the ordinary course of business for the income year. Annual turnover means gross income, not net profit. If the entity operates multiple business activities, either as a sole trader or within the same business structure, it must include the income from all the activities when working out its annual turnover. For example, a sole trader operating a part-time consultancy and a retail shop would include the income from both business activities when working out annual turnover. Usually, these items are included in the ordinary income—trading stock sales, fees for services provided, Interest from business bank accounts, and amounts received to replace something that would have had the character of business income. (Source: ATO, ‘Aggregation’, ATO website.)

[13].              Explanatory Memorandum, op. cit., p. 10.

[14].              Ibid.

[15].              Ibid.

[16].              S Reinhardt and L Steel, ‘A brief history of Australia’s tax system’, Economic Roundup, Winter 2006, 4 September 2006, p. 17.

[17].              Ibid.

[18].              ‘Base broadening measure’ is a concept that implies income taxes on ‘broader bases’ with ‘lower rates’. It is not a concept of lower tax rates exclusively. Taxation measures that are also applicable on greater number of economic activities are part of the principle. Given the constraint in the Commonwealth spending cuts because of the commitment of the successive governments, it is argued that the only practical way to cut tax rates without increasing the deficit is by broadening the tax base—increasing the amount of economic activity subject to full taxation. In practice, significant portions of national economic activity (such as consumption of health and education services) are not included in the tax base. In addition there are a host of arbitrary deductions, exclusions, and other preferential tax treatments for certain segments of society. Broadening the tax base consists of ending these tax preferences to raise revenue. When enacted correctly, measures to broaden the tax base can have several positive effects. Broadening the tax base creates a simpler and more equitable tax code, by ending preferential tax treatment for certain economic activities. By eliminating distortionary provisions, base broadening can encourage a more efficient allocation of resources. Most importantly, broadening the tax base can raise the necessary revenue to cut tax rates without increasing the deficit. (Adapted from a note by S Greenberg, Options for broadening the U.S. tax base, Tax Foundation, Washington, D.C., 24 November 2015.)

[19].              J Freebairn, ‘Income tax reform: base broadening to fund lower rates’, paper presented to the Melbourne Institute’s Economic and Social Outlook Conference, Melbourne, 31 March and 1 April 2005.

[20].              Australian Government, ‘Part 1: revenue measures’, Budget measures: budget paper no. 2, 2015–16, pp. 19–20.

[21].              B Shorten (Leader of the Opposition), ‘Second reading speech: Appropriation Bill 2015–2016’, House of Representatives, Debates, 14 May 2015, p. 4185.

[22].              J Ralph, A tax system redesigned: more certain, equitable and durable, (the Ralph Review), Review of Business Taxation, Canberra, 1999, pp. 573–89.

[23].              Ibid.

[24].              K Henry, Australia’s future tax system: report to the treasurer, (Henry Tax Review), pt 2, vol. 1, December 2009, pp. 167 and 174.

[25].              K Rudd (Prime Minister), Stronger, fairer, simpler: a tax plan for our future, media release, 2 May 2010.

[26].              Ibid.

[27].              J Gillard (Prime Minister), W Swan (Treasurer) and M Ferguson (Minister for Resources and Energy), Breakthrough agreement with industry on improvements to resources taxation, joint media release, 2 July 2010.

[28].              Minerals Resource Rent Tax Act 2012; and Australian Government, Budget measures: budget paper no. 2: 2012–13, p. 22.

[29].              P Coorey, ‘Eyes on Wilkie over company tax cuts’, The Sydney Morning Herald, 2 May 2012, p. 6; M Grattan, ‘No hope of tax cut for big business: Milne’, The Age, 16 April 2012, p. 3.

[30].              The Board of Taxation, Review of tax impediments facing small business: a report to the government, Board of Taxation, Canberra, August 2014, pp. 40–43.

[31].              Ibid., p. 42.

[32].              Australian Government, Re:think: tax discussion paper: better tax system, better Australia, Treasury, Canberra, March 2015, pp. 105–120.

[33].              Ibid., p. 119.

[34].              Ibid., p. 26.

[35].              Ibid., p. 78.

[36].              Senate Standing Committee for Selection of Bills, Report, 6, 2017, 15 June 2017.

[37].              Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 6, 2017, 14 June 2017.

[38].              B Shorten (Leader of the Opposition), Second reading speech: Appropriation Bill (No. 1) 2016–2017, House of Representatives, Debates, 5 May 2016, p. 4620.

[39].              Ibid.

[40].              P Karp and G Hutchens, ‘The 10 big issues of election 2016: how Coalition, Labor and Greens policies compare’, The Guardian, (online edition), 11 May 2016.

[41].              Ibid.

[42].              Parliamentary Budget Office (PBO), Post-election report of election commitments: 2016 general election, PBO, Canberra, 5 August 2016, p. 21.

[43].              Prime Minister Rudd did, however, announce a proposal for the creation of a ‘Northern Special Economic Zone’ for which tax incentives would apply ‘with the objective of reducing the company tax rate for Northern Territory-based companies in five years’ (K Rudd (Prime Minister of Australia), Growing the north: a plan for Northern Australia, media release, 15 August 2013).

[44].              Australian Labor Party, Boosting investment by small business, Australian Labor Party policy document, Election 2013, p. 2.

[45].              Ibid.

[46].              Australian Greens, Standing up for small business: lower taxes: the Greens’ plan to ease the pressure on small business, Australian Greens policy document, August 2013.

[47].              P Karp and G Hutchens, op. cit.

[48].              Australian Greens, Greens focus on small business, media release, 8 August 2013.

[49].              Australian Greens, Budget principles: our approach to the 2016 budget and election, Australian Greens policy document, Election 2016, n.d., p. 1.

[50].              Nick Xenophon Team, ‘Policy principles’, Nick Xenophon Team policy document, Election 2016, n.d., p. 2.

[51].              Business Council of Australia (BCA), Realising our full potential: tax directions for a transitioning economy, BCA, Melbourne, March 2016, p. 25.

[52].              Ibid., pp. 44–45.

[53].              Business Council of Australia (BCA), BCA statement on the 2016–17 federal budget, media release, 3 May 2016.

[54].              Ibid.

[55].              Australian Chamber of Commerce and Industry, Submission to Federal Government, 2016–17 Australian Chamber pre-budget submissions, February 2016, p. 9.

[56].              Australian Chamber of Commerce and Industry, Enterprise budget fuels the engine room of the economy, media release, 3 May 2016.

[57].              The Australian Industry Group, A good for business budget, media release, 3 May 2016.

[58].              Australian Industry Group, Tax changes will help grow Australian scale in manufacturing, media release, 3 May 2016.

[59].              Council of Small Business Australia, Small business budget II: more than a sequel, media release, 4 May 2016.

[60].              The Tax Institute, A budget for now and the future, media release, 3 May 2016.

[61].              The Tax Institute, Submission to Treasury, 2016–17 pre-budget submissions, 8 February 2016, p. 8.

[62].              Ibid.

[63].              Australian Council of Trade Unions (ACTU), Fudge it budget: Turnbull fails working Australians and gives golden handshake to big corporations, media release, 3 May 2016.

[64].              ACTU, Tax reform for a fairer society and stronger economy, ACTU, Melbourne, 8 March 2016.

[65].              Ibid., p. 30.

[66].              NTAA Australia, op. cit.

[67].              Explanatory Memorandum, op. cit., p. 3.

[68].              JM Dixon and J Nassios, ‘Modelling the Impacts of a Cut to Company Tax in Australia’, Centre of Policy Studies Working Paper, No. G-260, April 2016, p. 1, Centre of Policy Studies, Victoria University.

[69].              K Gallagher, ‘Second reading speech: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016’, Senate, Debates, 29 March 2017, pp. 2520–2521.

[70].              The Statement of Compatibility with Human Rights can be found at pages 23–24 of the Explanatory Memorandum to the Bill.

[71].              CCH Australia, ‘[363] company tax no 2 bill introduced, 12 May 2017’, Australian Tax Week, (online version), iss. 19, CCH Australia, Sydney, 12 May 2017.