Chapter 1

Chapter 1

CONDUCT OF THE INQUIRY

Reference from the Senate

1.1 On 14 October 1999 the Senate referred the following matters to the Finance and Public Administration References Committee for inquiry and report by 22 November 1999:

    (a) the economic theories, assumptions, calculations, projections, estimates and modelling which underpin the Government's proposals for business taxation reform, contained in the Treasurer's press release no. 58 of 21 September 1999 and in subsequent announcements;

    (b) whether the package is revenue neutral and, if not, how it could be made revenue neutral;

    (c) whether there are any uncertainties in the assumptions, costings or implementation of the measures which threaten revenue neutrality, including:

      (i)the realisation assumptions concerning capital gains tax,

      (ii) the potential for income to be converted to capital gains in order to minimise overall tax paid, and

      (iii) the timing or the collection and bring forward of revenue;

    (d) the effects of the package on future federal budget revenues, expenditures and surpluses, including a critical assessment of the economic and other assumptions underpinning the projections;

    (e) the estimated levels of revenue to be generated or foregone due to the proposed changes in business tax and capital gains tax and the basis for those estimates;

    (f) options for reducing tax avoidance and minimisation;

    (g) the further effective reduction in the research and development tax concession arising from the package; and

    (h) such other technical funding matters as the committee considers fall within the scope of this inquiry. [1]

Conduct of the inquiry

1.2 In view of the extremely short time frame available to it, the committee determined it would concentrate particularly on the fiscal impact of the Government's proposals to reform business taxation. It invited submissions by way of press advertisements and direct requests to interested persons and organisations. Thirty-five submissions were received and published by the committee. The submissions are available on the committee's web site, at and a hard copy compilation of submissions and other published documents is tabled with this report. A list of submittors is included in Appendix A.

1.3 The committee also commissioned a modelling exercise from Professor Peter Dixon, Director of the Centre for Policy Studies at Monash University. The report Company taxes, Depreciation allowances and Capital gains: some effects of Ralph was provided on 10 November and updated on 12 November 1999. Professor Dixon's report is included as Appendix C.

1.4 Three days of public hearings were held in Canberra on 22 October and 11 and 12 November 1999. Twenty-seven witnesses gave evidence, including three by video conference link from the United States. A complete list of witnesses is included in Appendix B. The Hansard transcripts of evidence are tabled with this report and are also available electronically via the committee's home page www.aph.gov.au/senate_fpa.

Government proposals relating to business tax reform

1.5 In the course of the committee's inquiry, the Government introduced its first package of legislation in response to recommendations in the Ralph Review of Business Taxation. [2] The Treasurer's press release no.69 of 21 October 1999 provided a breakdown of the fiscal impact of the measures contained in the legislation. A second stage response to the Ralph Report came with press release no. 74, issued on 11 November 1999. This dealt primarily with anti-avoidance measures and with improving the operation of the tax system. It included updated fiscal impact tables which the committee has examined closely in the course of this inquiry.

Contents of the report

1.6 In the committee's examination of the Government proposals for business tax reform, three areas stood out as being of particular concern. They were:

  • capital gains issues and, in particular, the estimates for the level of realisation of capital gains;
  • the impact of the removal of accelerated depreciation; and
  • the loss of revenue due to presently ineffective anti-avoidance measures in such areas as the alienation of personal services income.

1.7 While there are clearly many other aspects of the Government's package which may impact on revenue neutrality and were put to the committee as areas of concern, in the limited timeframe available the committee was not in a position to address them other than through the presentation of evidence provided to the inquiry.

1.8 In the remainder of this report, the committee has provided a resume of the Government's proposed business tax reform changes in Chapter 2. In Chapter 3, it has addressed the modelling issues, while in Chapters 4, 5, and 6 it has examined, respectively, capital gains tax issues, company tax and accelerated depreciation issues, and tax avoidance issues. In Chapter 7, it considers the impact of the proposed changes on research and development. And finally, in Chapter 8, it presents its conclusions.

Acknowledgments

1.9 The committee would like to thank all persons and organisations which lodged submissions or provided evidence to the committee in this inquiry. In view of the extremely short lead times available, their response was particularly gratifying. The committee extends particular thanks to the officers of the Treasury and the Australian Taxation Office who responded to numerous requests from the committee at short notice, and to Professor Dixon, whose commissioned paper was also provided within an extremely short timeframe.

Footnotes

[1] Journals of the Senate, 14 October 1999, p. 1892.

[2] House of Representatives, Votes and Proceedings, 21 October 1999, pp. 1057-8.