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.
![](~/media/Committees/economics_ctte/BusinessCouncilofAust/Interim_Report/d01_1.jpg)
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 |
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