Views on the bill
2.1
The committee received 29 written submissions. This chapter
provides an overview of the views expressed in these submissions.
2.2
An overwhelming majority of submissions expressed support for the bill.
One of the key arguments made in support of the bill was that it would help
make Australia's corporate tax settings more internationally competitive and
encourage higher levels of foreign investment in Australia. Others also argued
that the bill would help reverse declining levels of business investment
generally. Greater investment, it was argued, would flow through to stronger
economic growth, more jobs and higher wages for Australian workers.
2.3
Other submissions highlighted the benefits of the Enterprise Tax Plan
for small and medium businesses specifically. At the same time, a number of
submissions emphasised the importance of passing the bill in its entirety and
ensuring the tax cuts were ultimately extended to all businesses, large and
small.
2.4
The committee also received some submissions arguing against the bill,
on the grounds it would lead to lower government revenue without necessarily
delivering the promised economic benefits. Some critics also suggested that the
primary beneficiaries of the bill would be foreign investors and, because of
the way the United States foreign tax credit system operated, the US
government. These criticisms are set out in this chapter, along with responses
from supporters of the bill.
Support for the Enterprise Tax Plan
Need for internationally
competitive corporate tax settings
2.5
Many submitters argued that Australia has comparatively high corporate
tax rates, and submitted that the tax cuts set out in the bill were necessary
to ensure Australia remained internationally competitive. For example, the
Financial Services Council (FSC) emphasised the importance of company
tax rate settings given intensifying competition for foreign investment and the
increasing mobility of businesses. Australia's current company tax rate of
30 per cent, it submitted, compared poorly to the average in Asia of
22 per cent. The FSC added:
Research demonstrates cutting company tax will drive capital
into Australia for new enterprises, jobs and opportunities. Workers will be a
substantial beneficiary of increased investment in Australia as increased
labour productivity spurred by this investment will result in higher real
wages.[1]
2.6
The Business Council of Australia (BCA) also argued that Australia was
'falling behind in the global contest for new investment'.[2]
It pointed to evidence that overseas investment in Australia had fallen
45 per cent in the last year, and was currently at its lowest level
since 2003. While some of this fall might be attributed to the winding down of
the mining investment boom, the BCA noted that other resource-exporting
economies (for example, Brazil and Canada) had experienced much smaller
declines in overseas investment.[3]
Falling foreign investment was particularly problematic, the BCA argued,
because Australia was a small, open economy that relied heavily on foreign
investment to boost its own investment capacity and grow the economy.[4]
According to the BCA, with other countries continuing to cut corporate tax
rates while Australia stood still, if the bill was not passed Australia's
'company tax rate will become even more uncompetitive, driving investment,
innovation and jobs abroad'.[5]
2.7
The Business Coalition for Tax Reform (BCTR) also noted that Australia's
company tax rate had become less and less competitive compared to other OECD
countries. It submitted:
In an environment where global investment is mobile and
highly sensitive to balancing risk and reward, and Australia's recent mining
construction boom has not yet been replaced by other major sources of
investment, we cannot afford to ignore the ongoing deterioration of our global
competitive position.[6]
2.8
The Centre for Independent Studies (CIS) produced evidence showing that
when international comparisons took into account country size, Australia was
even less competitive with other OECD economies.[7]
Noting that investment decisions are often made over a long-term horizon, the CIS
also noted that 32 of 35 OECD countries had in fact cut their overall company
tax rate since Australia last cut its rate, suggesting that Australia was
falling further behind.[8]
2.9
In addition to arguing that Australia's comparatively high corporate tax
rate discouraged international investment, the CIS also warned that Australian
companies might eventually seek to relocate to countries with more competitive
tax settings. This, it contended, could have a major impact on tax revenues.
The largest companies in Australia, the CIS submitted:
...may have no alternative but to be located in Australia for
the moment, but there is a risk that one or more of these companies may be
driven to relocate offshore if the gap to other tax rates becomes too great.[9]
2.10
A range of other submitters, including the Minerals Council of Australia
(MCA), Australian Institute of Company Directors, CPA Australia, the Corporate
Tax Association (CTA), KPMG, PwC, the Australian Financial Markets Association
(AFMA), Business SA, the Australian Chamber of Commerce and Industry (ACCI) and
the Chamber of Commerce and Industry Queensland (CCIQ) also argued that
Australia's current corporate tax rate was internationally uncompetitive.[10]
Need to address falling levels of
business investment
2.11
A number of submitters also argued the Enterprise Tax Plan would drive
higher levels of business investment, and emphasised the need for stronger
business investment in the current economic environment. For example, Ai Group
argued:
In our view, raising business investment is a leading
priority in the current environment in which the Australian economy requires
rebalancing in the wake of the mining investment boom. In particular, this
rebalancing requires the rejuvenation and re-capitalisation of the non-mining
trade exposed sectors that were so adversely impacted by the period of high
currency closely associated with the commodity price boom.[11]
2.12
The BCA also expressed concern about the impact of falling levels of
business investment. It submitted that current economic activity was being
driven by past investments rather than new investment; current levels of
business investment, the BCA further noted, were falling at a rate last seen in
the early 1990s recession.[12]
2.13
Arguing that business investment 'is a core driver of economic growth
and prosperity', the BCA made the case that the tax cuts would be important in
helping to arrest and reverse falling business investment levels in Australia.
It acknowledged that tax was not the only factor in driving business
investment, 'but a globally-competitive company tax rate is one of the most
direct and effective economy-wide policy levers that we have for driving higher
investment'.[13]
2.14
The BCA also reasoned that the benefits of the tax cuts would start to
be apparent ahead of the full implementation of the actual cuts in ten years'
time:
Larger businesses will bring forward investments ahead of
actual tax cuts if they are confident that the lower rates will apply once
investments come on stream. Signalling credible future tax cuts can bring
forward the economic benefits for the whole community.[14]
2.15
Like the BCA, the CIS noted that non-mining investment is 'at
recessionary levels: historically, it has only been this low in the depths of
the 1990s recession'.[15]
The CIS provided an extensive list of sources that argued that reducing
corporate tax rates helps boost business investment.[16]
Enterprise Tax Plan as a driver of
growth in the economy, employment and wages
2.16
Another argument made by multiple submitters was that reductions in the
corporate tax rate would help promote economic activity, jobs growth and
increased prosperity for Australian workers. For instance, CPA Australia argued
that there was clear evidence:
...that reducing the tax burden on businesses lifts
productivity, and increases both their competitiveness and their capacity to
expand, and encourages job creation. Further, the tax incidence of higher
company taxes falls on workers as lower wages, and less jobs.[17]
2.17
The CTA advised that it was 'fully supportive' of the corporate tax rate
reduction. It noted that the 1 per cent permanent increase to Gross
Domestic Product (GDP) over the long-term would be equivalent to a
$16.7 billion increase in the size of the economy at current GDP levels,
and should in fact be larger by 2026 when the rate reduction was fully
implemented. A larger economy, the CTA argued, would ultimately lead to higher
wages for Australian workers.[18]
2.18
The BCA argued that the benefits of the tax cuts would be widely shared,
and took aim at the idea the cuts were an expression of 'trickle down'
economics:
Australian workers will be the biggest winners—not foreign
shareholders, not the banks, not other big businesses. Australian workers
receive around two-thirds of the total gains because higher investment means
more jobs and higher wages.[19]
2.19
The CIS also suggested that the tax cuts would help address prevailing
low levels of wages growth:
The improvement to wages occurs because the tax cut results
in more capital being invested in Australia... This makes the economy larger, and
a larger economy results in increased wages. Another way of explaining this is
the increase in capital in the economy means there is more capital per worker.
Each worker becomes more productive as a result. The increased productivity of
each worker raises the wages paid to workers.[20]
2.20
The BCTR also argued that the primary beneficiaries of the tax cuts
would, in fact, be Australian workers:
In terms of the benefits, there is a strong consensus among
economists that reducing our corporate rate will lead to higher levels of
investment over the long-term and generate significant additional economic
growth. Since as much as two-thirds of company tax is shifted to labour, mainly
through lower wages, the main beneficiaries of a company tax cut will be wage
earners.[21]
2.21
The CCIQ argued that reductions in the corporate tax rate would help
encourage greater foreign investment, and in turn 'increased labour
productivity resulting in higher wages and increased workforce participation'.[22]
Benefits for small and medium
businesses
2.22
Some submissions highlighted the benefits of the Enterprise Tax Plan for
small and medium enterprises (SMEs). Ai Group emphasised that small businesses
would benefit from the whole package of measures in the bill—including lifting
the threshold below which businesses qualify for small business entity
treatment for tax purposes; applying a 27.5 per cent tax rate to incorporated
small business entities; and raising the discount for unincorporated small
business entity income to 8 per cent. Ai Group concluded:
Regardless of the form of business entity involved, these
measures will improve the incentives for small business owners to invest in
their businesses, to grow and to lift the numbers of people they employ.
Raising the small business entity threshold will also reduce compliance costs
for close to 100,000 small-to-medium sized businesses.[23]
2.23
Similarly, the Institute of Public Accountants (IPA) underlined the
important contribution of small businesses to productivity and economic growth,
and welcomed the proposed increases to the turnover threshold for small
business entities:
We agree with the Government that providing more tax relief
to SMEs will generate a growth dividend to the economy in the form of
potentially increased employment, higher wages and removing disincentives to
business growth caused by the turnover threshold. The current low threshold
discourages growth as entities lose access to tax concessions once they pass
the threshold.[24]
2.24
In its submission, the IPA noted that an estimated 90 000 to
100 000 businesses would benefit from lifting aggregated turnover
threshold for access to small business tax concessions from $2 million to
$10 million:
This would enable greater reinvestment in small businesses
and provide the opportunity for these businesses to increase employment and
increase wages. It would also provide incentives for small businesses at or
near the existing $2 million turnover threshold to grow, as currently they
would lose these concessions once they passed the threshold.
Of particular interest to entities with turnover above the
existing threshold limit is access to simpler depreciation rules, lower
corporate tax rate and also the newly enacted small business roll-over
restructure relief.[25]
2.25
The IPA also wrote in support of increasing the tax discount for unincorporated
small businesses:
Given further cuts to the small business company tax rate, it
is entirely appropriate that further increases to the tax discount provided by
the offset are made. This minimises tax distortions between the different
entity types through which small businesses may be run, and ensures that the
many small businesses run through unincorporated entities also receive an
increase in their cash flow from tax relief.[26]
2.26
The Australian Small Business and Family Enterprise Ombudsman, Ms Kate Carnell
AO, also expressed support for increasing the tax discount for unincorporated
small businesses:
This would account for the approximately
73 per cent of small businesses, particularly small family
businesses, that choose to manage their affairs through various legal
structures such as partnerships and trusts. Offering a tax discount for
unincorporated small businesses in conjunction with lowering the corporate tax
rate for small businesses ensures sole traders, partnerships and trusts receive
a similar tax benefit to incorporated small businesses.[27]
2.27
Ms Carnell also registered support for the proposed expansion of the
small business entity threshold for tax purposes, suggesting the higher
threshold:
...would allow more small businesses, including family
businesses, to access these red-tape saving measures. Changes to definitions
and eligibility criteria which support as many small businesses as possible to
access these reform measures, will help them to reinvest much-needed funds back
into the business.[28]
Importance of extending the tax
cuts to all businesses
2.28
While submitters generally welcomed the cuts for small businesses, some
also emphasised the importance of ultimately extending the tax cuts to all
businesses, as currently provided for in the bill. In this connection,
submitters cautioned against any move to amend the bill to restrict the tax
cuts so that they were only available for smaller businesses. For example, the
BCA submitted:
Restricting the tax cuts to smaller businesses would mean
missing out on the bulk of the investment gains and barely improve our global
competitiveness.[29]
2.29
The BCA added that restricting the tax cuts to small businesses would
lock in a two-tier company tax system and 'entrench perverse incentives for
businesses to inefficiently structure their businesses for tax purposes'. In
addition, the BCA suggested that small businesses would also benefit from
across-the-board cuts, given the improved economic conditions the cuts would
produce and the reliance of small and large businesses on one another.[30]
2.30
The BCTR also argued against any moves to amend the bill in this regard:
The notion of amending the bill so that tax cuts are denied
to larger businesses, even in ten years' time, raises the alarming prospect of
Australia's international competitiveness being even further eroded, with
serious consequences for future investment, jobs and wages. As a smaller
capital-importing country, we cannot afford not to set out on this modest path
to maintaining our competitiveness and our ability to attract much-needed
capital investment.[31]
2.31
The MCA, while suggesting the staged reduction in the corporate tax rate
was fiscally responsible, also emphasised the importance of extending the cuts
to all corporate entities:
Importantly the proposed rate cut should apply to all
corporates, small and large, to bring the company tax rate back into alignment
over time. Different tax rates based on business size or turnover introduce
distortions and complexity into the tax system. Any alternative to an economy
wide corporate tax cut is a second best option and would not have the same
impact on Australia's competiveness.[32]
2.32
The ACCI, which noted that most of its own members were small
businesses, also cautioned against any amendments that would deny the tax cuts
to larger businesses. In addition to undermining the benefits to the economy of
the Enterprise Tax Plan, the ACCI argued, any such amendment:
...risks entrenching a two-tier company tax system, which gives
businesses an incentive to restructure or turn down growth opportunities
because the effective tax rate from moving above the threshold becomes so high.[33]
Opposition to the bill and counterarguments from supporters of the bill
2.33
Several submitters argued against the bill, in large measure on the
grounds that the tax cuts would result in a loss of revenue that the government
needed to fund spending on health, education, reducing inequality and other
policy measures. Some of these submitters also suggested that the bill would primarily
benefit wealthy individuals and companies, rather than low and middle income
Australians.
2.34
This section of the report sets out concerns expressed in submissions
and competing perspectives on these concerns as set out by supporters of the
bill.
Concerns regarding the effect of
corporate tax cuts on government revenue
2.35
Some submitters argued that the tax cuts imposed too high a cost on
government revenue. For example, the Australian Council of Social Services (ACOSS)
opposed the bill, on the basis that the lost revenue would have to be replaced
from other sources such as personal income tax increases or spending cuts.
ACOSS contended that the proposed tax cuts contrasted with unlegislated
measures that would cut $7 billion over the next four years from social
security payments.[34]
2.36
Similarly, the Justice and International Mission Unit, Synod of Victoria
and Tasmania, Uniting Church in Australia (JIMU, Uniting Church), argued that
government revenue was already too low for the government to deliver 'basic
functions in protecting vulnerable people and providing services for a decent
society', and cuts to company tax would compound the situation.[35]
2.37
The Australian Council of Trade Unions (ACTU) claimed that the cuts
would result in approximately $51 billion in lost revenue, and noted that
the Australia Institute had modelled a loss of $19.7 billion per annum
after 2026–27.[36]
2.38
The Grattan Institute recommended the government defer the bill 'until
we have eliminated the large and persistent budget deficits that increase the
vulnerability of the Australian economy, and drag on future incomes'.[37]
2.39
Other submitters, however, suggested that critics had overstated the
impact on revenue, particularly given the growth dividend that would result
from the cuts. For example, the BCA argued that the proposed cuts would:
...increase government revenues over time. Independent
Economics (2016) estimates that more than half of the revenue impact will be
clawed back through stronger growth which delivers higher revenues across all
levels of government.[38]
2.40
The BCA further challenged the assumption that corporate tax levels as a
share of the economy would fall as the corporate tax rate came down. In this
regard, it noted that the corporate tax rate had fallen 19 per cent in the
last 30 years, yet 'corporate tax collections are much higher as a proportion
of GDP today'.[39]
The BCA concluded that not proceeding with the Enterprise Tax Plan 'because of
its revenue impact would be short-sighted and counterproductive'.[40]
2.41
The BCA also noted that Australia's dividend imputation system would
temper some of the impact on revenue:
Dividend imputation reduces the overall revenue impact of
company tax cuts because part of the tax cut is clawed back from personal
income taxes on dividends. Domestic shareholders will gain over time from
stronger investment and a more buoyant economy.[41]
2.42
The CIS submitted that the expected growth in company tax receipts in
future years would more than offset the cost of the cuts. It provided evidence
showing:
...that the increased tax burden on companies in the next four
years is more than the gross cost of the tax cut, and substantially more than
the net cost. So the cost of the tax cut could be more than fully funded by the
higher tax impost on companies over this four year period. Similarly, the total
burden on companies will still be higher than today, even with the tax cut.[42]
2.43
The CIS also suggested that the economic benefits of the tax cuts would
'result in governments receiving more tax revenue, substantially offsetting the
costs of the tax cut'.[43]
The CIS noted that Treasury modelling showed that the economic growth dividend
of the tax cuts would reduce their cost from 0.5 per cent of GDP to
0.3 per cent of GDP, and this remaining cost would be offset by three
other measures in the 2016–17 Budget: anti-tax avoidance measures,
increases to tobacco excise, and superannuation measures.[44]
2.44
The CIS also took issue with the argument that funds for a company tax
cut should instead be used for other policies, such as education. The CIS
argued that it was wrong to assume that company tax cuts would prevent other
worthwhile investments. Moreover, the CIS submitted that the government only
needed to choose between different policies where they had substantial budget
costs. In the CIS's analysis, the benefits of the Enterprise Tax Plan appeared
substantially greater than the costs, and the 'policy is budget neutral when
combined with several other policies from the 2016–17 Budget, meaning there is
no need to choose between the tax cut and other policy'.[45]
2.45
The MCA submitted that the cost to revenue from the tax cut is
'responsible and proportionate':[46]
Claims that a company tax rate reduction will create a gaping
hole in government revenue ignore offsetting revenue gains from increased tax
collections stemming from the economic growth dividend and revenue costs pale
in comparison to corporate tax revenues.[47]
2.46
The ACCI also pointed to a growth dividend as offsetting the impact of
the cuts on government revenue:
While tax revenue falls due to the lower headline rate, this
is offset by revenue gains from increased profits and wages. A lower company
tax rate also increases revenue by making it less cost-effective for companies
to restructure their operations to avoid paying tax in Australia.[48]
Debate regarding the extent of the
bill's benefits
2.47
Some submitters questioned whether the Enterprise Tax Plan would deliver
the investment, economic growth, and jobs and wages growth envisaged by its proponents.
For example, the ACTU challenged the idea that the tax cuts would do much to
generate jobs growth, increase investment levels or lift living standards in
Australia. It submitted that recent Treasury modelling found that cutting the
company tax rate by one percentage point would 'serve mainly to benefit company
profits in the short term, with an increase in GDP of only 0.1% and growth in
jobs of less than 1% over two decades'.[49]
2.48
According to the ACTU, the majority of the benefit of the corporate tax
cuts would flow through to higher company profits and shareholder dividends,
rather than improved levels of business investment. With respect to the
argument that the bill would led to higher levels of foreign investment, the
ACTU contended:
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.[50]
2.49
The ACTU added that there was 'little or no evidence that investment
decisions are significantly influenced by headline company tax rates'. This was
particularly the case, it argued, because Australia is effectively competing
against tax havens where the company tax rate was zero or close to it:
Unless the company income tax base is repaired, demands made
by Australian business organisations on behalf of foreign-owned corporations
will be for ever-lower company tax rates until they are aligned with the negligible
or zero rates enjoyed in tax havens.[51]
2.50
Several submissions also disputed the notion that the benefits of the
tax cuts would flow through to higher incomes. For instance, the Grattan
Institute submitted:
The Government maintains that the change will boost GDP by
more than 1 per cent in the long-term, at a budgetary cost of $48.2
billion over the next 10 years. But the best analysis from the Commonwealth
Treasury shows that the net benefits to Australians' incomes will be much
smaller once profits flowing out of Australia are taken into account.[52]
2.51
Explaining its reasoning on this point, the Grattan Institute made a
clear distinction between GDP and Gross National Income (GNI), explaining that
given the benefits of the bill disproportionately flow to non-residents, this
meant the relationship between GDP increases and GNI increases was weaker:
A corporate tax cut increases economic activity (measured by
GDP) by more than it increases national incomes (measured by GNI). When
foreign-owned corporates pay less tax, more money flows out of the Australian
economy. And most of the profits on their additional investments in Australia
don't benefit Australians.
Treasury estimated that cutting corporate tax rates to 25 per
cent would only increase the incomes of Australians – GNI – by 0.8 per cent.
Roughly a third of the benefits of greater economic growth would go to
foreigners.[53]
2.52
The Grattan Institute further noted that Treasury's modelling indicated
the benefit to GNI would be further reduced by the need to increase other taxes
to make up for lost revenue. In sum, the 1.2 per cent increase to GDP
would, based on Treasury's analysis, actually only result in a 0.6% increase in
GNI after the share of extra GDP paid to foreign investors (0.4%) and the
economic costs of increasing other taxes (0.2%) were taken into account. The
reform, the Grattan Institute concluded, 'might still be worth doing, but it's
less of a game changer'.[54]
2.53
Several submissions questioned the importance of tax settings to
company's investment decisions, and in particular the effect of company tax
settings on foreign investment levels. For example, JIMU, Uniting Church,
suggested that multinational companies were attracted by a broad range of
factors that informed macroeconomic stability, rather than just taxation
policy. It added that several large OECD countries:
...with relatively high tax rates are very successful in
attracting FDI [Foreign Direct Investment], suggesting that market size,
non-tax factors and taxable location-specific profits are particularly
important in attracting FDI.[55]
2.54
For its part, the Grattan Institute submitted:
Company tax cuts would be imperative if, without them, there
would be no foreign investment in future. But tax cuts only affect decisions at
the margins. Despite a company tax rate of 30 per cent, more money was invested
in mining projects in Australia than in any other country in the world for each
of the eight years of the mining boom. Corporate investment decisions don't
just turn on tax rates – they also consider Australia's stable government,
educated workforce and developed economy.[56]
2.55
A large number of submitters, noting that some commentators had
questioned the economic benefits of the bill, maintained that the overwhelming
weight of evidence indicated the bill would deliver substantial economic
dividends. For instance, KPMG suggested that while some 'outlier' modelling questioned
the benefits of corporate tax cuts, mainstream models were in agreement that:
...corporate tax discourages investments and its incidence is
largely borne by labour over the long term through lower real wages. Therefore,
cutting company tax will have positive incentive effects for foreign investment
and increase national income.[57]
2.56
The BCA challenged the notion that the costs of the Enterprise Tax Plan
outweighed the benefits. Against a 10-year budget impact of $48 billion,
the plan would deliver an annual $16 billion in net benefit, 'after
taking into account the costs of raising offsetting taxes'. The BCA concluded:
The order of magnitude of the economic gain from cutting
company taxes to 25 per cent is large, including by historical standards of estimated
reform pay-offs.
To put this into context, the National Competition Policy
reforms benefited the economy to the tune of at least $40 billion in today's
dollars. These reforms took a decade to implement and required the combined
effort of all levels of government, covering close to 1,800 pieces of
legislation (National Competition Council, 2010; Productivity Commission,
2005). The 1988 general tariff reductions, a major economic reform, were
estimated by the Commission (2000) to increase GDP by 0.5 per cent.
In this context, a company tax reduction of just five
percentage points is a low cost, low effort and highly efficient way of
delivering a significant permanent boost to GDP and national income.[58]
2.57
The CIS similarly claimed the impact of the tax cuts would be very
substantive. Noting that Treasury had modelled an increase to GDP from the tax
cuts of 1.0 to 1.2 per cent, the CIS observed:
Treasury has argued this gain to GDP is substantial, only
slightly less than the combined benefit of the major reforms to
telecommunications, ports and rail in the 1990s. The gain from the tax cut is
also similar to the estimated gain to GDP of 1.1% from an extensive range of
reforms proposed by Infrastructure Australia, including large productivity
improvements in gas, electricity, the NBN, telecommunications, water and
transport. And these two examples are not single reforms, like a company tax
cut, but a collection of numerous reforms covering many separate changes to
regulations, and taking years to design and enact.[59]
2.58
The BCTR addressed the notion that company tax settings were not
critical in informing investment decisions by foreign companies. While noting
that there are multiple factors that shape Australia's overall investment
profile, the BCTR explained:
At the end of the day any prospective investor will still
need to factor in our relatively high corporate rate when weighing up
prospective investment decisions. Business tax rates do matter.[60]
2.59
Similarly, the Australian Financial Market Association (AFMA) maintained
that while investment decisions were made with a view to a whole range of
factors, corporate tax rates remained important:
While the corporate tax rate alone is not the only tax
disincentive for Australia as a destination for foreign capital, it is clearly
an area where we have been slipping and tangible improvements can be made, such
as through the measures proposed in the Bill.[61]
Treasury transfer effect
2.60
One of the arguments made against passing the bill was that for
companies operating under a foreign tax credit system (primarily US companies)
would in effect be required to pay any tax saving delivered by the Enterprise
Tax Plan cuts to the government where the company was headquartered. According
to this analysis, the bill would in effect result in a transfer of funds that
would have been collected by the Australian Government instead being collected
by the US Government.
2.61
This argument was put forward in submissions from the Australia
Institute and the ACTU.[62]
The ACTU summarised its concerns for the committee:
By far the largest source of foreign investment in Australia
is the United States. Where multinational corporations based in the United
States do not engage in profit shifting to tax havens, the headline tax rate
they face is the US rate of 35 per cent. Australia has double taxation
agreements with the United States and numerous other countries. Under these
agreements, US-based multinational corporations receive a credit for company
tax paid in Australia. On profits earned in Australia they pay Australian
company tax at the rate of 30 per cent, receive a credit for the 30 per cent
paid in Australia and then pay the extra 5 per cent to the US Treasury. If the
Australian company tax rate were lowered to 25 per cent, as advocated by the
Business Council of Australia and other business groups, then tax-abiding
US-based corporations operating in Australia would pay Australian company tax
at the new, lower rate of 25 per cent but would be required to pay a total of
10 per cent to the US Treasury. There is no benefit to the corporation or to
the incentive to invest in Australia but there is a large cost to Australian
government revenue.[63]
2.62
A range of submissions suggested these concerns were based on a
misreading of the impact of the treasury transfer effect. For example, the BCA
rejected the argument that the cuts represented a 'free kick' to the US Government,
and pointed out that the issue had already been accounted for in modelling:
Some suggest this means a lower company tax rate here will
simply lead to more tax paid in the US when profits are repatriated, with no
net effect on rates of return and investment in Australia. However, most of the
profits of foreign entities are not repatriated but retained in Australia. As a
result, a reduction in the company tax rate in Australia will encourage US
firms to invest here.
The impact of foreign tax credits is already taken into
account in the modelling of a company tax cut. The Henry Tax Review (2010) also
considered this issue and concluded the impact in the Australian context is
likely to be limited.[64]
2.63
Similarly, the CIS called the idea that the cuts would be 'gift' to the
US Government a 'furphy', and emphasised that Australia should not forego a
benefit to itself 'just because some non-Australians (including the US
Treasury) also gain a benefit'. Like the BCA, the CIS also noted that the
treasury transfer effect was likely to be limited, given US firms would have
even more incentive to retain funds in Australia if the company tax rate was lower.[65]
2.64
Directly addressing claims by the Australia Institute that the value of
the tax cuts to the US Treasury would amount to approximately $1 billion
in 2026–27, the CIS submitted that:
...this calculation has major flaws, rendering it of no value.
First, the data they use has US companies paying total
Australian tax of about $US2.9bn on average, but they are unable to indicate
what proportion of this is from Australian company tax (as opposed to other
Australian taxes). So the report guesses that the proportion is 80%. The report
argues that the other possible Australian taxes would make up only a small
portion of the total figure, stating that interest withholding taxes are low in
value. However, the report doesn't (and probably couldn't) remove the effect of
all other relevant Australian taxes. Hence there is no real analysis behind the
80% proportion, which the final figure of $1bn relies on. As this 80% figure is
simply fabricated, the overall figure should be treated as being made up as
well.
Second, the calculations do not include the impact of excess
foreign tax credits. US companies with excess tax credits will feel no impact
of an Australian company tax cut, as argued by Zodrow (2006). This will partly,
or fully, offset the supposed 'transfer' to the US Treasury—but the Australia
Institute does not even mention excess foreign tax credits, let alone estimate
the impact on their figure.[66]
2.65
The BCTR reasoned that concerns about the foreign treasury transfer
effect were 'completely misplaced':
In the first place, some 72 per cent of inbound investors in
fact don't operate under a foreign tax credit system. Instead, their domestic
tax systems treat foreign dividends as exempt, so that any reduction in
Australian tax will clearly boost their after-tax return in Australia.
Secondly, those that do operate under a foreign tax credit
system (almost exclusively US companies) do not face domestic top-up tax unless
and until their foreign profits are repatriated to the US, which most
Australian subsidiaries of US companies avoid doing. The Henry Tax Review also
examined this issue and concluded the impact in the Australian context is
likely to be limited.[67]
2.66
Similarly, the CTA advised that the concerns were misplaced:
Firstly, approximately 72% of inbound investment into
Australia comes from countries outside the US and US investment into Australia
is both in the form of portfolio and non-portfolio (being holdings greater than
10%) investment. It is only non-portfolio investment that could theoretically
benefit. Secondly, US tax rules only tax foreign sourced profits from active
business once those profits are repatriated and there seems significant
evidence to suggest US companies do not repatriate foreign sourced profits.
Thirdly, current proposals for US tax reform from both sides of US politics are
proposing rules to encourage the repatriation of foreign sourced profit by
reducing the US tax rate on these profits to below the proposed 25% Australian
tax rate, so there will in fact be no incremental US tax if these reforms are
implemented and profits repatriated.[68]
2.67
KPMG also submitted that the 'assertion that a reduction of the
Australian corporate tax rate will simply give rise to an increase in tax
revenue for some foreign jurisdictions such as the US is a highly simplistic
and incorrect analysis'.[69]
It noted that only six OECD countries had a foreign tax credit system for the
taxation of dividends from subsidiaries (the United States, Chile, Ireland,
Israel, Korea and Mexico). Moreover, for countries with a foreign tax credit
system, a 'substantial portion of profits that are made in Australia are not
immediately repatriated'.[70]
2.68
The Grattan Institute, which in general argued against passing the bill,
advised that the treasury transfer effect 'can be overstated':
Foreign firms will only pay the extra tax when they
repatriate profits earned in Australia to their home country. Many US firms
have been very slow to repatriate profits for this precise reason.[71]
Effects of the dividend imputation
system
2.69
Some submitters argued that the operation of Australia's dividend
imputation system meant domestic investors would be largely unaffected by the
corporate tax cuts, yet foreign investors would stand to receive a large
benefit. The Grattan Institute explained:
Australia's unusual dividend imputation system means that
domestic investors are largely unaffected by the company tax rate since any
profits paid to them are taxed at their personal income tax rate. Yet because
foreign investors, by contrast, do not benefit from dividend imputation, a cut
to the company tax rate provides bigger benefits to them. For those who have
already made long-term investments in Australia, a reduction in the tax rate
would be a windfall. Many of the international studies about the economic
impacts of cutting corporate tax rates are therefore not readily applicable to
Australia.[72]
2.70
The Grattan Institute also submitted that because of Australia's
relatively unusual dividend imputation system,[73]
Australia's effective corporate tax rate was in fact lower than its
comparatively high headline rate would suggest, at least for local investors.
It explained:
By contrast, corporate taxes have a much bigger economic
impact in other OECD countries where they reduce the rate of return for local
investors. International comparisons show that Australia has a median level of
taxes on corporate profits for local investors when both company taxes and
individual income taxes are considered...
Consequently, many of the international studies about the
economic impacts of cutting corporate tax rates do not readily apply to
Australia.[74]
2.71
The ACCI noted that some commentators have argued that only foreigners
would benefit from a reduction in Australia's company tax rate because domestic
investors receive personal tax credits through the dividend imputation system.
The ACCI argued:
This criticism ignores two important points. Firstly,
domestic investors do use all the franking credits attributable to them.
Secondly, the impact on foreign investors flows through to Australian
households and businesses. When companies around the world are deciding where
to set up and expand their operations, the tax rate they face is a major factor
in determining their rate of return. If Australia is uncompetitive, they will
invest elsewhere. As a result of decreased investment flows, Australians will
bear the consequences of fewer jobs and lower living standards.[75]
2.72
The Ai Group acknowledged that Australia's imputation system for
domestic shareholders:
...will dilute the net benefits of the reduction in the company
tax rate. This occurs because, other things being equal, the value of franking
credits available to domestic shareholders per dollar of after-tax profit will
fall and the lower quantity of tax paid at the corporate level will be
associated with the distribution and use of correspondingly fewer imputation
credits. Thus a dollar of pre-tax domestic profits company income distributed
to domestic shareholders will bear the same level of tax both before and after
the company tax reduction.[76]
2.73
At the same time, the Ai Group noted that 'the corollary to this is that
there is no revenue cost in respect of domestic profits distributed to domestic
shareholders'.[77]
The Ai Group also argued that the company tax reduction still had decisive
benefits, even with Australia's imputation system:
First, in respect of capital provided by domestic
shareholders, there is both an improved capacity to retain taxed profits in the
company for reinvestment and also a higher incentive to retain and reinvest the
profits. Thus, in respect of capital provided domestic shareholders, the impact
of the cut in the company tax rate is targeted very closely to the objective of
reinvestment.
Second, overseas shareholders cannot use Australia's
imputation credits. The lower company tax rate therefore lifts incentives to
invest both in respect of retained and distributed profits. As it is inherently
more mobile than domestically-sourced capital on average, this additional
impact on the incentive to invest from abroad is another dimension of the effective
targeting of the company tax rate reduction.[78]
2.74
The CIS was also critical of the idea that the tax cuts should not
proceed because they would have a greater impact in the short term on foreign
shareholders than Australian shareholders. The CIS argued that it was:
...truly perverse to argue that Australia should forego a
benefit to our wages, employment, incomes, GDP, exports and investment, just
because some foreigners benefit as well—this is a self-destructive form of
xenophobia.
In fact, if there are foreigners who benefit as well as
Australians, this should strengthen the arguments for the tax cut. A policy
that indirectly benefits foreigners should increase our support for the policy,
not decrease it: just the same as a policy that caused collateral damage to
foreigners should garner lower levels of support.[79]
2.75
Similarly, the BCTR argued that criticism of the fact foreigners would
benefit from the cuts missed the point—that the cuts are intended to boost
economic growth by encouraging greater business investment:
Business would certainly want foreign investors (as well as
domestic investors) to recognise that the after-tax return on both their
existing and future projects is going to be enhanced as a result of the
proposed measures. This will result in them boosting their investment levels
above what they would have been without the rate cut, the benefits of which
accrue mainly to wage earners.[80]
2.76
Several submitters challenged the suggestion that the imputation system
meant that Australia's corporate tax rate was not as high as the headline rate
would suggest (an argument, as noted above, made by the Grattan Institute). For
example, the BCTR submitted:
There is an argument that because Australian shareholders are
able to offset company tax already paid against their own tax liabilities when
they receive a dividend, the effective rate of company tax on the ultimate
owners of the business is a lot less than 30 per cent. Reducing the corporate
rate in fact means that Australian shareholders will be entitled to a reduced
franking credit and will therefore pay more tax on the dividends they receive.
This argument is questionable for a number of reasons.
Firstly, the effect of dividend imputation is that the underlying income of the
company is taxed at the shareholder's marginal tax rate. In some case
(especially for super funds and many retirees) this will be lower than 30 per
cent. However, in many other cases the marginal rate can be as high as 49 per
cent.
Secondly, while an analysis of the tax rate facing shareholders
is interesting (if ambivalent – some are higher; others are lower), it is far
from clear that many Australian domiciled companies make their capital
investment decisions on the basis of the after-tax return for their
shareholders. For listed companies, by far the most critical driver for them
and their managers is reported earnings, and those earnings are worked out from
the perspective of the company on an after-tax basis.
Thirdly, the focus on Australian shareholders of listed
Australian companies, while important, assumes we are a closed economy and
totally ignores the position of foreign investors. Those investors and their
shareholders do not benefit from imputation and their focus will always be on
the after-tax outcomes for their Australian investments. For a
capital-importing country such as Australia, the factors impacting on the
investment decisions made by foreign investors have always mattered.[81]
2.77
KPMG noted that Australia's imputation system gives rise to a partial
'claw-back' of revenue lost as a result of a lower company tax rate. This, it
argued, 'presents a more advantageous framework for lowering the company tax
rate, rather than diminishing the need for doing so'.[82]
Concerns regarding corporate tax
avoidance
2.78
Some submitters argued against the tax cuts on the basis that many
corporations already pay too little tax. For example, the ACTU submitted that
57 per cent of ASX-200 companies 'used subsidiaries in tax havens to
avoid paying tax in Australia and almost one third had an average effective tax
rate of 10 per cent or less'.[83]
2.79
The CIS characterised the argument that the company tax cuts should not
proceed because of supposedly widespread corporate tax avoidance as
'particularly odd':
...it is effectively arguing that (a) taxes should remain
unaffected at zero on the largest tax avoiders who pay no tax; but (b) taxes
should remain highest on those businesses who pay the full rate of tax.
Similarly, cancelling the tax cut will have the greatest harmful effect on the
businesses who pay the most tax and the smallest impact on those who pay the
least tax.[84]
Other issues raised in submissions
2.80
Some submissions, while in varying degrees supportive of the bill,
suggested ways in which the bill could be improved. Issues raised included: the
operation of the imputation system as the corporate tax rate was reduced; issues
concerning the definition of a 'small business' for tax purposes; the $1,000
cap on the small business income tax offset; and whether the staged approach to
the tax cuts is appropriate. The next part of this report summarises these
issues, as raised in various submissions.
Operation the imputation system
2.81
As noted in the previous chapter, the bill provides that as the
corporate tax rate reduces, so too does the maximum imputation credit that can
be attached to dividends. Some submitters, such as Pitcher Partners, expressed
concern that this might create an 'inequitable imputation outcome for
shareholders' where retained profits were not paid out in the year they were
earned.[85]
Pitcher Partners explained its concerns in this regard:
Broadly, this means that retained profits that have been
taxed at the current corporate tax rate of 30% may be subject to a reduced
imputation rate (i.e. 27.5% until the year ended 30 June 2024) rather than the
corporate tax rate actually paid. This will result in shareholders paying a
higher amount of "top‐up" tax on dividends
paid by the company. As private companies generally retain profits for working
capital, this results in a disproportionate cost to small and middle market
taxpayers when they finally release their profits that were taxed at the higher
rate.[86]
2.82
Pitcher Partners further explained the cost to small and medium sized
companies of the approach currently contained in the bill. Pitcher Partners
suggested that SMEs tended to be more reliant on retained profits than larger
companies (which typically have better access to other avenues of funding).[87]
It also observed that because many SMEs will transition to the reduced
corporate tax rate on 1 July 2016 (that is, retrospectively), these companies
will not have the ability to minimise the impact of the new measures on their
franking account balances.[88]
2.83
Pitcher Partners put forward two options for 'transitional relief':
allowing after-tax profits that existed as at 30 June 2016 to be franked at the
30 per cent rate; or a transitional approach that allowed
pre-existing profits to be franked for at 30 per cent for a limited amount of
time after the transition date (for example, up to five years). Pitcher
Partners acknowledged that both options would have a cost to revenue.[89]
2.84
The CTA also expressed concern about a situation where a company with a
company tax rate of 27.5 per cent (and eventually
25 per cent) pays a dividend sourced from years where the profits are
taxed at 30 per cent:
...this effectively results in franking credits being 'trapped'
in the company unless the company starts to derive more income that is exempt
in its hands (such as dividends from certain foreign operations).
The implication of this is that there will be a significant
incentive for companies to pay out all retained profits prior to the change in
the corporate rate to avoid wasting the credits as to do otherwise will result
in an effective permanent cost to shareholders, as the tax can never be claimed
as a credit.[90]
2.85
The CTA submitted that a better approach would be to allow companies to:
...frank their dividends to the 30% rate until such time as its
30% franking credit balance is fully utilised. This could possibly be managed
by quarantining a 30% franking account and the establishment of other franking
accounts that could trace tax paid to the respective income year, and allow
corporates the ability to frank dividends at the requisite tax rate from that
account or allowing companies to continue to frank at the 30% rate until the
30% franking balance is exhausted.[91]
2.86
The Tax Institute suggested it was unclear whether in fact the
government intended that a company would be allowed to frank dividends based on
the corporate tax rate they had paid, or if it would be based on the rate paid
in the current income year.[92]
However, like Pitcher Partners, the Tax Institute suggested:
The draft law appears to operate such that if the corporate
tax rate paid in the previous income year is higher than the rate that applies
in the current year, the entity will only be able to frank dividends to the
extent of the lower corporate tax rate. This would have the effect of 'trapping'
franking credits in the entity.[93]
2.87
The Tax Institute expressed concern in this regard, and submitted that
the 'correct policy outcome should be to permit an entity to frank dividends at
the rate of tax a corporate tax entity has paid consistent with the broader
imputation credit system'.[94]
2.88
While supportive of the bill in principle, the FPA highlighted the same
issue regarding franking credit calculations:
We would also highlight that while the proposed solution for
franking credit calculations is pragmatic, the assumption that profits are distributed
by businesses in the year they are earned (Explanatory Memorandum 1.71) is not
always the case, particularly in small companies where it is a common practice
to withhold profits to later financial years. This will lead to (for example)
the business paying tax at as much as 30%, but only able to distribute a 25%
franking credit when the profits are distributed.[95]
2.89
Several other submitters expressed concern about this aspect of the
bill, including Chartered Accountants Australia and New Zealand, which
suggested that a transitional arrangement that would allow dividends to be
franked at the rate they had been taxed.[96]
Definition of a 'small business'
2.90
Several submissions expressed some reservations about growing complexity
around the definition of a 'small business' for tax purposes. Business SA,
while supportive of the reductions in the company tax rate, expressed concern
that the bill 'introduces additional complexity to small business tax
arrangements by not aligning thresholds for small business tax concessions'. It
noted, in particular, that:
On the basis that the company tax rate reduction only applies
to businesses with revenues less than $10 million, the same businesses should
have equal access to existing small business tax concessions, particularly
small business capital gains tax concessions.[97]
2.91
Chartered Accountants ANZ also expressed concern that the bill would
create some new complexity, with small businesses 'now confronted with at least
three turnover tests':
$10 million for simpler depreciation rates and trading stock
rules, immediate deductibility for small business start-up expenses, roll-over
for restructures of small business, immediate deductions for certain prepaid
business expenses, accounting for GST on a cash basis, paying GST by quarterly
instalments, fringe benefits tax car parking exemption, annual apportionment of
input tax credits for acquisitions and importations that are partly creditable
and pay-as-you-go instalments based on gross domestic product adjusted notional
tax.
$5 million for the small business income tax offset.
$2 million for the small business capital gains tax
concessions.[98]
2.92
Chartered Accountants ANZ submitted that ideally 'there should be one
consistent definition of small business under the tax law and one turnover',
and harmonisation of the definition in both Commonwealth and state legislation.[99]
$1000 cap on the small business
income tax offset
2.93
Some submitters while supportive of the increases in the rate of the
small business tax offset for unincorporated small businesses, argued that the
$1000 cap should be lifted over time to ensure the tax discount remained
broadly equivalent to the small business company tax rate cuts. As Chartered
Accountants ANZ explained:
As currently drafted, the small business offset will provide
a small business owner a 5% discount. However, when the company tax rates are
reduced below 28.5% and the discount rises, it is unclear how the offset
provides a discount broadly equivalent to the small business corporate tax
rate, given that the offset is capped at $1,000. The capping of the offset at
$1,000 means that as the discount component increases, the maximum amount
subject to the offset decreases.[100]
Comments regarding the 'phase in'
approach
2.94
Several submitters, including the CIS and the CPA, indicated that while
they supported the bill, they would prefer more expeditious shift to the
25 per cent corporate tax rate.[101]
While indicating that its preference would have been for a shorter
implementation timeframe, Chartered Accountants ANZ acknowledged that:
...that the immediate revenue impact of extending the corporate
tax rate reduction to all corporates would be significant and could not have
been achieved without also implementing other major tax reforms.
Accordingly, the road map contained in the Bill is helpful.[102]
2.95
Other submitters, such as the Council for Small Business Australia,
argued in support of the staged approach, and underlined the need to build
community support for tax cuts for large businesses:
We also support the staggered roll out of the changes. The
Australian community, including the small business community, has become
suspicious of a number of big businesses who seem to be dodging their tax and
abusing the tax system. The facts as we see them are that 90% of businesses, of
all sizes, pay their due tax and are fine ethical and responsible members of
the Australian community. The few that don't give the rest a bad name. Those
few also make a negative impact on the federal budget and the economy and need
to be bought to task. We understand that the ATO is undertaking that task. When
the general community sees that the recalcitrant businesses, and indeed the
dishonest businesses, are being dealt with then the staggered approach can be
accelerated and the tax cuts could be introduced earlier for big businesses.[103]
2.96
Similarly, KPMG argued that the phased approach 'has economic advantages
as well as giving rise to greater community acceptance'.[104]
Committee view
2.97
The committee considers the Enterprise Tax Plan, as set out in the bill,
a critical reform that will improve Australia's tax system for businesses and
drive investment and growth in the economy. There is clear and compelling
evidence that the benefits of the Enterprise Tax Plan will ultimately flow
through to growth in jobs and wages, helping to improve Australian living
standards overall.
2.98
The committee is also satisfied that the substantial economic benefits
of the Enterprise Tax Plan more than outweigh its cost to revenue, which will
at any rate be largely offset by higher levels of economic growth.
2.99
The overwhelming evidence received by the committee suggests concerns
that the tax cuts would largely result in a 'transfer' of revenue from the
Australian Government to the US Government are not well founded. The committee
also notes that this issue has already been considered in modelling of the
Enterprise Tax Plan.
2.100
The committee acknowledges that some submitters raised concerns about
the operation of the imputation system during the transition to a lower
corporate tax rate. However, the committee is satisfied that the approach set
out in the bill, and explained in the Explanatory Memorandum,[105]
is appropriate. The committee understands that the approach in bill is also
broadly consistent with the approach taken when the corporate tax rate was
reduced from 36 per cent to 34 per cent in 2000 and from
34 per cent to 30 per cent in 2001.[106]
Recommendation 1
2.101
The committee recommends that the bill be passed.
Senator Jane Hume
Chair
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