Introduction

1.1        The Coalition members of the Senate Economics (References) Committee (‘the Committee’) consider the Committee’s Report on the Inquiry into the ‘Commitment to the Senate’ issued by the Business Council of Australia (‘the Inquiry’) to be inaccurate and do not support its recommendations. The Report mischaracterises significant elements of the Enterprise Tax Plan, does not reflect a balanced view of the evidence provided to the committee and fails to provide sufficient evidence for its recommendations.

Committee Report’s Description of the Enterprise Tax Plan

1.2        Coalition Senators note that the Committee’s Report description of the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (“ETP Bill”) is not correct. The description fails to mention that under legislation, corporate tax entities with turnover of $50 million or less will have their corporate tax rate further reduced from 27.5 per cent in stages, so that by the 2026-27 financial year, their rate will be 25 per cent. As a result, the report’s description of the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 (ETP No. 2 Bill) is also wrong.

1.3        The Committee’s Report also incorrectly states that the corporate tax rate will reduce to 27.5 per cent for businesses with a turnover of up to $1 billion in 2023-24. This is incorrect. The Government’s legislation clearly states that under the fully implemented Enterprise Tax Plan the corporate tax rate for all businesses will reduce to 27.5 per cent from 2023-24.

Headline corporate tax rate in Australia

1.4        Coalition Senators acknowledge that the Committee’s Report accurately states that Australia’s corporate tax rate has remained at 30 per cent for almost 17 years and that it is currently the 3rd highest in the industrialised world, behind Portugal and France.  Coalition Senators are, however, disappointed that the Committee chose to downplay this crucial evidence when reaching their final recommendation. Importantly, France[1] has already legislated to reduce its corporate tax rate from 33 per cent to 25 per cent by 2022.

1.5        Headline or statutory rates do not always provide an accurate picture of the full impact of corporate taxes on investment.  Two commonly used measures which account for differences in depreciation allowances and tax base definitions are the effective average tax rate (EATR) and the effective marginal tax rate (EMTR). 

1.6        The Oxford University Centre for Business Taxation maintains an up to date international database on both of these measures.[2]  According to this data, in 2017 Australia had the seventh highest EATR in the OECD, and the eighth highest EMTR in the OECD. This figure is before taking into account the recent changes in the US and the now legislated changes in France (discussed below). 

1.7        A competitive corporate tax rate is vital to ensuring Australia continues to attract foreign investment. The Committee was provided with evidence that clearly demonstrated Australia is now uncompetitive on all major measures used to evaluate the comparative tax burden across major economies. Whatever measure of international tax rate is used, the outcome is the same – Australia’s business tax rate is amongst the highest in the OECD.  The importance of having a competitive corporate tax rate for all Australian companies, was explained by Fortescue Metal Group:

... the global or international competitiveness of the Australian tax regime in general is critically important. Fortescue's expansion was funded almost entirely from offshore capital markets. There isn't enough money with Australian banks to fund the $22 billion or the most recent $10 billion expansion Fortescue has done. If investment is about growth, access to capital is critically important as well ... Global investors want to invest in competitive countries.[3]

1.8        Australia lags behind key international competitors with regard to its corporate tax rate. The United Kingdom used to have a business tax rate of 30 per cent but it is currently at 19 per cent, and will reduce this rate to 17 per cent by 2020. Ireland’s business tax rate is 12.5 per cent; Canada’s is 15 per cent; Singapore’s is 17 per cent. France has now legislated a reduction in its rate from 33 per cent to 25 per cent by 2022.

1.9        In particular, the Committee’s Report does not reflect the evidence heard regarding the Trump Administration’s recent cuts to the United States’ corporate tax rate. As noted by the BCA in its evidence to the Committee:

Australia, at this point, is ill-prepared to deal with the global implications of the US tax reform. So we know it's [reducing the corporate tax rate] the right thing to do, and clearly we urge very strongly that it be done.[4]

1.10      Coalition Senators strongly believe that a reduction in the corporate tax rate is a necessary step in ensuring that Australian businesses remain competitive, and indeed grow and hire more employees, in the face of strong international competition. 

1.11      It is a fact that Australia’s high corporate tax rate puts us at risk of losing investment to competitor nations. As discussed below, this will have a particularly negative impact on employment and wages growth for working Australians.

Investors

1.12      Coalition Senators acknowledge that companies and potential investors assess a wide range of factors when making investment decisions. However, as was clearly reinforced by contributors to the hearing, one of the key factors is the expected after-tax profit.  As noted by Mr Daniel Wild of the Institute of Public Affairs in his evidence, it is undisputed that “Cutting the business tax rate will raise after-tax profits”.[5]  

1.13      Deloitte tax partner, David Watkins, recently acknowledged the wide range of factors companies and potential investors consider, noting that Australia does not need the lowest tax rate in terms of our competitors as we have other advantages. But he added that:

However, the prolonged debate and uncertainty about the corporate tax rate in Australia is harming Australia's competitive position, when multinationals are making key investment decisions. Locking in a long-term corporate tax rate and providing business with certainty on this is critical.[6]

1.14      This was reiterated during the hearings by Peter Beaven, Chief Financial Officer at BHP Billiton:

The competition for a project to be allocated capital is intense and it is global. At BHP, we believe that aligning Australia's corporate tax rate with that of other developed economies would help this nation create and maintain nation-building jobs. It would make it harder for global capital to say no to Australian investments and Australian jobs.[7]

1.15      The Committee’s report fails to acknowledge the evidence presented at the hearings regarding the long-term benefits and beneficiaries of a corporate tax rate cut in Australia, which is unambiguously Australian workers.  As noted by Mr Simon Cowan of the Centre for Independent Studies, it is important that both short-term and long-term benefits are considered:

I think we need in that respect to separate out short-term and long-term benefits. In the short term, there's a benefit to foreign investors. That benefit is what secures additional investment in the country. As that additional investment comes in, as a result of what is effectively a higher rate of return, that investment then competes away that additional rate of return back towards the global expected average rate of return for investment. As that happens, the benefits to foreigners diminish and what we see is that investment then translates to capital deepening, an increase in productivity as a result of that and then through to wages. That's why modelling by the Treasury and others has found that the bulk of the incidence of corporate tax rates is actually borne by workers and the bulk of the benefits of a corporate tax rate cut would also flow through, in the longer term, to workers.[8]

1.16      Coalition Senators note the uncontroversial position articulated in this evidence has in the past received bi-partisan support, including from the current Leader of the Opposition, who previously stated:

Cutting the corporate income tax rate increases domestic productivity and domestic investment. More capital means higher productivity and economic growth and leads to more jobs and higher wages.[9]

1.17      By only focusing on short-term impacts, the Committee’s Report overstates the benefits that would flow to foreign rather than domestic investors. Cutting the corporate tax rate provides Australian business with a greater opportunity to grow and be more successful, which will overtime benefit all Australians, particularly resident investors and self-funded retirees. 

1.18      This is because a lower corporate tax rate will encourage Australian businesses and companies to invest more, expand domestically rather than overseas and ultimately provide better returns to Australian investors in the long-run.  

1.19      The argument relied upon by the Committee in its Report that Australia’s dividend imputation makes the corporate tax rate irrelevant in Australia or worse still, cutting the corporate tax rate would leave Australian investors worse off, is simply not true.  Both investors and workers will benefit, as noted by Mr Wild in his evidence:

Shareholders will benefit. Some of the benefit of higher after-tax profits will flow through to shareholders as either higher dividend payments or higher share value. This includes the 15 million Australians who compulsorily hold a superannuation account.

1.20      While it is the case that franking credits will be adjusted in line with the rate of tax paid by the corporate making the distribution, Australian resident shareholders, such as those who manage their own superannuation, will not be worse off.  This was emphasised recently by the SMSF Association Chief Executive, John Maroony:

A lower corporate tax rate would result in higher earnings which would either then be distributed in higher dividends or used to increase the value companies over time.[10]

1.21      The Coalition senators consider that, to keep jobs, investment and our wealth here in Australia, Australian needs remain an attractive destination for investment. Australia’s corporate tax rate is becoming increasingly uncompetitive. If left unaddressed it will cost us investment, jobs and wages growth.

Evidence by Professor Peter Swan and Dr Janine Dixon

1.22      The Committee’s Report relies on assertions contained in submissions made by Professor Peter Swan and Dr Janine Dixon. However, both submissions have been directly challenged and comprehensively refuted by Dr Chris Murphy, and this fact is not sufficiently noted.  

1.23      Professor Swan’s claims rely on a theory that foreign investors – who are not eligible for franking credits - can completely avoid paying Australian company tax by selling their shares to those who are eligible for franking credits, and then buying them back at a lower price once dividends have been paid. Unfortunately, Professor Swan was unable to present any convincing empirical evidence for his unorthodox theory. Indeed, it sits uncomfortably with ASX rules on the subject of disclosures of substantial shareholdings, which do not appear to have led to disclosures to the market consistent with Professor Swan’s hypothesis.

1.24      Dr Dixon asserted that reducing the company tax rate provides a windfall gain to old capital.  However, the Government’s Enterprise Tax Plan deliberately takes a staged approach over time, which minimises this phenomenon. Dr Dixon’s modelling does not incorporate forward looking behaviour, and so completely ignores this signalling effect under the Government's plan.  As a result, Dr Dixon has not actually modelled important aspects of the Government’s policy, and her conclusions and results cannot be relied upon.

Budget Impact

1.25      The Committee’s report incorrectly asserts that there is uncertainty about how the proposed corporate tax cuts are funded. There is no uncertainty. The Enterprise Tax Plan is fully funded and has been accounted for in each Budget update since it was first announced in the 2016-17 Budget. This was confirmed by the independent Parliamentary Budget Office (PBO) in the 2018 Finance and Public Administration Legislation Committee Additional Estimates hearing:

...the government's fiscal forecasts fully incorporate the cut in the corporate tax rate, so the projected return to surplus, which was reflected in the post-election report but also in the most recent MYEFO, does incorporate the corporate cut.[11]

1.26      The Committee’s Report also incorrectly asserts that the cost of the Government's proposed corporate tax cuts contained in the ETP No. 2 Bill is $65 billion.[12]  The Government provided the Parliament with the medium-term estimate of the Enterprise Tax Plan tax cuts on 11 May 2017.

1.27      The cost of the ETP Bill as legislated was estimated to be $29.8 billion over the medium-term.  The medium-term cost of the unlegislated element of the Enterprise Tax Plan as contained in the ETP No. 2 Bill is estimated to be $35.6 billion over the 10 years from 2018-19 to 2027-28. 

1.28      In relation to affordability, the Committee does not acknowledge the progressive rollout of the corporate tax rate cuts to all Australian businesses under the Government’s Enterprise Tax Plan.  The gradual approach to implementing tax cuts is economically beneficial – as it provides a signal for firms to start investing now, rather than just providing a tax cut for investment that has already occurred – but also fiscally responsible and affordable. 

1.29      As outlined in the Explanatory Memorandum for the ETP No. 2 Bill, the progressive extension of the lower 27.5 per cent corporate tax rate to corporate tax entities with aggregated turnover of $50 million or more will commence from 2019-20, the same year as the Budget is projected to return to balance.  The chart below illustrates how the progressive extension of the lower corporate tax rate interacts with the improving budget trajectory, and demonstrates that the tax cuts are affordable and are fully funded.  

1.30      Sources: 2018-19 Budget Papers and the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017. 

1.31      As outlined in the 2018-19 Budget, the Budget is forecast to return to balance in 2019-20, which is the same year that the threshold for the 27.5 per cent corporate tax rate would increase from $50 million turnover to $100 million. In fact, the budget is forecast to be in surplus for seven years before the corporate tax rate is reduced to 25 per cent, with the surpluses projected to exceed 1 per cent of GDP by 2025-26.

Relationship between Employment and Wage Growth

1.32      The Committee incorrectly states that “the assumption that workers’ wages would automatically and fully rise to reflect higher productivity is thoroughly misplaced” and “...there will only be a very modest increase in wages over the long term as a result of the government’s proposed corporate tax cuts.”[13] 

1.33      This conclusion is not supported by informed economic modelling, or by much of the evidence that was heard by the Committee. The Committee heard evidence from the independent think tank, the Centre of Independent Studies, which accurately summarised accepted economic orthodoxy:

...the more you invest, the more opportunities there are out there to hire more workers at the end of the day.[14] 

1.34      The Committee also heard that:

If companies are more successful it means they're able to increase people's wages, which means they are expanding—they're growing— and their revenues are growing. People get more hours of work because companies are more successful. Unemployed people get a job because companies are expanding.[15]

1.35      Coalition Senators also highlight the evidence provided to the Committee by the BCA on the need to expand the already legislated corporate tax cuts for small and medium sized businesses:

I think the best evidence is Peter Strong, from the Council of Small Business, who says that the small-business tax cuts, which the Senate has rightly legislated, will become meaningless without the big-business tax cuts.[16]

1.36      This position was also previously endorsed by the current Leader of the Opposition and his party, who stated:

...lowering the corporate rate for smaller businesses only (as the Greens propose) creates an artificial incentive for Australian businesses to downsize. In worse case scenarios some businesses might actually lay people off to get small – and the size based different tax treatment would create a glass ceiling on business workforce growth. Instead we want a level playing field regardless of the size of the corporate.[17]

1.37      The Committee’s Report completely ignores and directly contradicts other previous statements made by Mr Bill Shorten, the current Shadow Treasurer Mr Chris Bowen, former Treasurer Wayne Swan, former Finance Minister Penny Wong, and former Prime Minister Julia Gillard, all of whom argued that reducing the company tax rate would increase investment, productivity, jobs and wages.  

1.38      Coalition Senators express their disappointment in the breakdown in the
bi-partisan support for reducing the corporate tax rate for all businesses, as would be achieved by the Government’s Enterprise Tax Plan, which will lead to more jobs and higher wages for working Australians.

The BCA Commitment

1.39      Coalition Senators disagree with the Committee’s conclusion that the BCA’s commitment to the Senate “has little credibility”.[18]  The statement was signed by nine CEOs and Managing Directors of major Australian companies, and the President and CEO of Australia’s major representative body for Australian business leaders.

1.40      The Committee’s report fails to take into account additional evidence provided by the BCA and its members which demonstrate their commitment. In particular, Coalition Senators note statements from witnesses, including:

...if we were subject to a 25 per cent tax rate on our 2017 results, we would be able to give the same return to our shareholders after tax with a $5 million lower pre-tax profit. Effectively what that means is we would reinvest that $5 million into hiring more team members.[19]

If we were to be in the same position as we were at the end of 2017, and the tax savings had saved the business $5 million, then that would allow us to hire roughly 50 software developers. They earn about $100,000 each. That's how we would see this playing out for our business.[20] 

1.41      These are just some examples of the evidence provided to the Committee on the how Australian businesses will invest more to create more jobs and pay their workers higher wages if the second tranche of the Enterprise Tax Plan is passed by the Parliament.

1.42      Based on this evidence, it is the view of Coalition Senators that the BCA’s statement represents a substantial commitment to invest more in Australia, which will lead to businesses employing more Australians, and drive stronger wage growth. By disregarding this statement, the Committee is succumbing to populist, anti-business rhetoric rather that will ultimately hurt Australian workers and their families.

Conclusion

1.43      Coalition Senators believe that Australia must reduce its corporate tax rate to remain internationally competitive to encourage businesses to invest more, hire more staff and pay higher wages.

1.44      The Committee heard significant and compelling evidence that supports the conclusion that the best possible way to ensure future job security and wages growth for working Australians is for the Parliament pass the Government’s ETP No. 2 Bill.

Recommendation 1

1.45      The Coalition members of the Committee recommend that the Treasury law Amendment (Enterprise Tax Plan No. 2) Bill 2017 be passed without amendments.

Senator Jane Hume	Senator Amanda Stoker
Deputy Chair	Senator for Queensland

Navigation: Previous Page | Contents | Next Page