Chapter 2
THE GOVERNMENT'S PROPOSALS
Introduction
2.1 On 21 September 1999, the Treasurer released the report of the Review of Business
Taxation (hereafter referred to as the Ralph Report) along with the first phase of the
Government's response, in press release no. 58. A further press release, no. 69 of 21
October 1999, accompanied the introduction into the House of Representatives of the first
package of legislation to implement the Government's proposed business tax reforms. 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 also announced in principle support for replacement of the
existing law based on legal definitions of income with an approach which calculates
taxable income on a cashflow/tax value basis, an approach widely known as Ralph's `Option
2'. The proposed business tax reform measures announced to date relate to the company tax
rate, changes to entity measures announced in ANTS, depreciation and small business
measures, capital gains tax measures and integrity measures, as outlined below.
Company tax rate
The present situation
2.2 The general rate of tax payable by companies in Australia, as per the Income Tax
Rates Act 1986, s.23, is 36 per cent at present. In 1996-97, revenue from
company tax was $19 173 million, representing 17.9 per cent of the total revenue
collection; in 1997-98 the comparative figures were $19 406 million and 17.2 per cent and
in 1998-99 $20 733 million and 16.9 per cent. [1] This company
tax rate is claimed by the Government to be internationally uncompetitive, compared with
Hong Kong – 16 per cent, Singapore – 26 per cent, Germany – 30 per cent,
Indonesia – 30 per cent, Thailand – 30 per cent, United Kingdom – 30 per
cent, Korea – 31 per cent, New Zealand – 33 per cent, and the United States
– 35 per cent. Such headline rates are somewhat misleading, however, and it is
preferable to consider the effective company tax regime.
Government proposals
2.3 The Treasurer's press release of 21 September 1999 announced the Government's
proposal to introduce a phased reduction in the company tax rate to 34 per cent in
relation to the 2000-01 income year and to 30 per cent for the 2001-02 income year and
thereafter. The rationale for the proposed change is that it will make the headline rate
of corporate tax internationally competitive; non-portfolio foreign investors in
Australian companies will benefit because they will be better placed to utilise foreign
tax credits available in their home jurisdictions; for portfolio investors who receive no
credit in their home country for underlying company tax, reducing the tax rate directly
increases their after-tax return from investing in Australian stocks. By increasing
Australia's attractiveness as an investment location, a lower company tax rate should
strengthen Australia's prospects for investment, economic growth and jobs.
2.4 Most of the redesigned company tax arrangements, including the consistent treatment
of entities, and the Simplified Tax System for small business, are deferred to 1 July
2001, in recognition of the current demands on businesses associated with the need to
address Y2K compliance issues and the introduction of the GST on 1 July 2000. [2] Imputation credits attached to franked dividends paid to
shareholders will be based on a 34 per cent rate for 2000-01 and 30 per cent for 2001-02
and subsequent years. The value of existing franking account balances will be preserved by
converting them to the equivalent franking account balance at the new rates.
2.5 A 30 per cent company tax headline rate will align the company tax rate with the 30
per cent marginal tax rate applicable to most individual taxpayers. Also, according to the
Ralph Report, reducing the corporate tax rate will enable Australian companies to maintain
dividend flows to shareholders while increasing the levels of retained income and,
therefore, investment. [3]
2.6 The fiscal impact of the lower company tax rate has been estimated by Government as
follows: [4]
| Year |
1999-00 |
2000-01 |
2001-02 |
2002-03 |
2003-04 |
2004-05 |
| Tax rate |
36% |
34% |
30% |
30% |
30% |
30% |
| Fiscal impact in $m |
-60 |
-1260 |
-3480 |
-3135 |
-3090 |
-3405 |
Changes to entity measures announced in ANTS
2.7 The Government's revised proposals are designed to achieve a unified entity regime,
as outlined in A New Tax System (ANTS). The proposals are:
- taxing trusts, life insurers, cooperatives and limited partnerships as companies;
- simplifying the imputation system;
- refunding excess imputation credits to resident individuals and superannuation funds to
improve equity between taxpayers;
- providing consolidation for groups of companies and trusts, while addressing value
shifting; and
- achieving a consistent treatment of entity distributions.
2.8 The rationale for the changes is that at present, entities are treated
inconsistently for tax purposes. The unified entity regime is, with minor exceptions, to
commence on 1 July 2001.
2.9 The fiscal impact of the changes to entity measures announced in ANTS has been
estimated by Government as follows: [5]
| Changes to entity measures announced in ANTS |
1999-00
$m |
2000-01
$m |
2001-02
$m |
2002-03
$m |
2003-04
$m |
2004-05
$m |
| Special regime for collective investment vehicles (CIVs) |
0 |
-55 |
-145 |
-105 |
-105 |
-100 |
| Defer taxing trusts as companies and CIVs |
-40 |
-85 |
-300 |
110 |
-15 |
-10 |
| Refunding imputation credits during year |
0 |
0 |
-190 |
0 |
-10 |
-10 |
| Taxing unfranked inter-entity distributions |
-60 |
35 |
-70 |
-120 |
-155 |
-125 |
| Changes to timing for life insurers |
0 |
-180 |
0 |
40 |
0 |
0 |
| Transitional taxation of fees on life policies |
0 |
-110 |
-110 |
-110 |
-90 |
-90 |
| Delay life policyholders measures |
0 |
-30 |
-30 |
0 |
0 |
0 |
| Consolidation of losses in acquired companies |
0 |
0 |
-190 |
-380 |
-390 |
-300 |
| Value shifting and loss duplication in groups |
0 |
0 |
0 |
75 |
80 |
85 |
| Total |
-100 |
-425 |
-1035 |
-490 |
-685 |
-550 |
Depreciation measures
Removal of accelerated depreciation
2.10 Accelerated depreciation is where the tax deduction allowed for the decline in
value of an asset is brought forward relative to the economic life of the asset.
2.11 To partly offset the lower company tax revenues, the Ralph Report proposed, and
the Government accepted, that the current accelerated depreciation measures be removed.
The proposed new system will be based on one that calculates the rate of depreciation
based on the effective lifetime of the business asset. It will apply to plant and
equipment assets covered by Division 42 of the Income Tax Assessment Act 1997 except
for assets acquired or commenced to be constructed before the time of effect (11:45am AEST
21 September 1999). Taxpayers will be able to reassess the effective life of their assets,
having regard to changing market or technology developments.
2.12 The Government proposes that small businesses, defined as businesses with
three-year average turnovers of less than $1 million per annum, (including over 95 per
cent of businesses and 99 per cent of primary producers), will have access to simplified
depreciation provisions, a cash accounting regime and a simplified trading stock regime
from 1 July 2001.
2.13 The fiscal impact of the depreciation and small business measures, is estimated by
Government as follows: [6]
| Depreciation measure (a) All taxpayers |
1999-00 $ m |
2000-01 $ m |
2001-02 $ m |
2002-03 $ m |
2003-04 $ m |
2004-05 $ m |
| Remove accelerated depreciation |
30 |
1050 |
2260 |
2300 |
2610 |
2550 |
| Pooling of low value depreciable assets (<$1000) |
0 |
30 |
410 |
40 |
-80 |
-180 |
| Remove balancing charge offset |
20 |
400 |
360 |
170 |
80 |
0 |
| Allow write-off for indefeasible rights |
-11 |
-51 |
-37 |
-36 |
-30 |
-29 |
| Sub-total |
39 |
1429 |
2993 |
2474 |
2580 |
2341 |
| (b) Small business |
|
|
|
|
|
|
| Cash accounting |
0 |
0 |
-220 |
-320 |
0 |
0 |
| Simplified depreciation arrangements |
0 |
0 |
-60 |
-220 |
-230 |
-330 |
| Small business exemption from depreciatn measures |
0 |
-219 |
-474 |
257 |
88 |
56 |
| Sub-total |
0 |
-219 |
-754 |
-283 |
-142 |
-274 |
| Total |
39 |
1210 |
2239 |
2191 |
2438 |
2067 |
Capital gains tax measures
2.14 A capital gains tax liability occurs when there is a real capital gain in the
value of an asset acquired after 20 September 1985 at the time of its disposal. At
present, the acquisition price and the cost base are adjusted by the rate of inflation, if
the taxpayer owns the asset for longer than one year. An averaging system applies which
attempts to ensure that the taxpayer is not taxed on capital gains at a marginal rate
higher than that which applies to the taxpayer's other income. However evidence from the
Ralph committee points to significant abuse of these provisions by some taxpayers.
2.15 The Government's proposed changes are to halve the CGT rate for individuals,
meaning that they will pay no more than 24.25 per cent on nominal capital gains held for
at least one year (this rate reducing proportionately for taxpayers on lower marginal tax
rates). Complying superannuation funds will be taxed at two-thirds of the difference
between the disposal price and the original cost. Indexation of the cost base for
calculating capital gains is proposed to be frozen at 30 September 1999 and averaging of
capital gains will be discontinued effective from 21 September 1999.
2.16 The reasons outlined by Government for the proposed changes are to invigorate
asset management, to stimulate greater participation by individuals in investment, to
achieve a better allocation of capital resources and to make Australia more competitive
internationally as an investment location.
2.17 In addition, small businesses with net assets of up to $5 million will have a 50
per cent active asset exemption; will be able to roll the remaining gain into replacement
assets or CGT retirement exemption; and will be exempt from CGT where active assets are
held for 15 years or more.
2.18 The Government also proposes to provide CGT rollover relief when there is an
exchange of interests in companies or fixed trusts because of a takeover. CGT liability
will be deferred until the ultimate disposal of the replacement asset. This removal of
impediments to scrip-for-scrip takeovers with more than 80 per cent acceptance by the
target company shareholders is intended to enable start-up enterprises to undergo capital
restructuring without triggering a CGT liability and to encourage such businesses to
remain in Australia.
2.19 Venture capital investment will be encouraged in two ways. Non-resident tax-exempt
pension funds that are tax exempt in their home jurisdiction will be exempt from income
tax on the disposal of investments in new equity in eligible venture capital investments;
and Australian widely-held superannuation funds will be provided with a CGT exemption
where they receive income from a Pooled Development Fund representing gains on the
disposal of eligible venture capital investment.
2.20 The fiscal impact of the capital gains tax measures is estimated by Government as
follows: [7]
| CGT measures |
1999-00 $ m |
2000-01 $ m |
2001-02 $ m |
2002-03 $ m |
2003-04 $ m |
2004-05 $ m |
| CGT for individuals |
0 |
210 |
230 |
210 |
180 |
100 |
| CGT for super funds |
0 |
-70 |
-50 |
-70 |
-60 |
-60 |
| Freeze indexation |
0 |
10 |
40 |
50 |
60 |
70 |
| Allowance for arbitrage |
0 |
-20 |
-50 |
-100 |
-150 |
-180 |
| Scrip-for-scrip relief |
0 |
2 |
-19 |
-5 |
11 |
29 |
| Venture capital |
0 |
0 |
0 |
0 |
0 |
-5 |
| Total |
0 |
132 |
151 |
85 |
41 |
-46 |
Integrity measures
2.21 As proposed by the Government when announcing its stage one response to the Ralph
Report, the Treasurer made a second announcement in a press release, no. 74, of 11
November 1999, relating to the business tax reforms. This concentrated largely on a number
of integrity measures to contribute to the fairness and equity of the business tax system.
They include: limiting the extent to which non-commercial losses can be used to reduce the
tax paid on other income; restricting the ability of individuals to reduce tax by
diverting the income they earn from their personal services to an entity; requiring
prepayments in respect of tax shelter arrangements to be deductible over the period during
which the services are provided; improving the general anti-avoidance rule (Part IVA of
the income tax legislation) and streamlining its operation; losses on certain interposed
companies will be denied for tax purposes; and the holding period for dividend streaming
and franking credit trading rules is proposed to be reduced and the exemption for small
transactions raised from $2000 to $5000.
2.22 The fiscal impact of the integrity measures announced on 21 September 1999, on 21
October 1999 and on 11 November 1999 is as follows: [8]
| Integrity measures |
1999-00 $ m |
2000-01 $ m |
2001-02 $ m |
2002-03 $ m |
2003-04 $ m |
2004-05 $ m |
| Stage 1 measures |
15 |
485 |
627 |
625 |
675 |
665 |
| Stage 2 measures |
0 |
515 |
910 |
850 |
825 |
825 |
| Total |
15 |
1000 |
1537 |
1475 |
1500 |
1490 |
Other measures
2.23 Other significant measures have been proposed by the Government. They include:
allowing imputation credits for foreign dividend withholding tax; tightening thin
capitalisation rules for inbound investment; introducing gearing rules for outbound
investment; imposing CGT on the sale of non-residential interposed entities; providing
effective life depreciation for mining and quarrying; recognition of blackhole
expenditures; and assorted tax design reforms.
2.24 In addition, the Government has indicated its intention to establish a
non-statutory Board of Taxation, to facilitate an integrated and consultative approach to
business tax matters and to establish a working group to assist in the development of a
new approach to calculating taxable income based on cashflow/tax value.
Footnotes
[1] Commissioner of Taxation, Annual Report 1998-99, p.
28.
[2] Treasurer, The New Business Tax System, Press
Release no. 58, 21 September 1999.
[3] Review of Business Taxation, A Tax System Redesigned, July
1999, pp. 424-25.
[4] Treasurer, Introduction of Legislation on Business Tax
Reform, Press Release no. 69, 21 October 1999, Table 1.
[5] Treasurer, The New Business Tax System: Stage 2
Response, Press Release no. 74, 11 November 1999, Attachment O, Table 1.
[6] Treasurer, The New Business Tax System: Stage 2
Response, Press Release no. 74, 11 November 1999, Attachment O, Table 1.
[7] Treasurer, The New Business Tax System: Stage 2
Response, Press Release no.74, 11 November 1999, Attachment O, Table 1.
[8] Treasurer, The New Business Tax System: Stage 2
Response, Press Release no.74, 11 November 1999, Attachment O, Table 2.
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