Chapter 6
Impact
on Australian Business6.1 The government's proposed tax reform package
sets out a number of measures which will affect business taxation arrangements
in Australia. Those proposals which affect the taxation of business income are
currently the subject of consultation and review by the RBT. The details of that
review are set out at paragraphs 1.38 to 1.41 of this report. Rather than attempt
to duplicate the work of the RBT this chapter will focus on the impact on Australian
business of the government's proposed changes to indirect tax arrangements. 6.2
Peak business groups were generally supportive of the Howard government's proposed
tax package. In evidence the Australian Chamber of Commerce and Industry (ACCI)
told the committee that the business community was looking for a tax system that
was equitable. There was a genuine recognition that the tax system that
replaced the existing system had to be equitable. There was recognition that the
existing system is not equitable. There is also recognition that whatever the
tax collection base adopted was it had to be adequate to provide the goods and
services that people demanded in a civilised society. I think that identified
a step forward in terms of the processes debate about fundamental reforms. [1]
6.3 The Business Coalition for Tax Reform also stated its commitment to
comprehensive tax reform that is fair, that enhances international competitiveness
and creates a climate favourable for investment, job creation and saving. [2]
The BCTR conducted its own research to develop what it called its five foundation
principles to guide the rebuilding of Australia's tax arrangements. They are:
- Elimination or reduction of as many of the indirect taxes as possible;
- Adoption of a single rate tax on domestic consumption levied on as broad
a base as practicable;
- Remodelling of federal/state financial relations;
- Reduction in marginal rates of tax on income and simplification to company
tax; and
- A reworking of the interface between tax and social security
systems to reduce the high effective marginal tax rates confronting low and middle
income Australians. [3]
We have assessed
the government's package for tax reform against our objectives and principles.
In our view there is good reason to believe that the proposals contained in “A
New Tax System” represent the most comprehensive reform to re-fashion the
Australian tax system since federation. We believe that measures in “A New
Tax System” form an integrated approach to tax reform that will improve our
international competitiveness, encourage investment and job creation, encourage
savings and improve fairness. [4] 6.4 The Australian
Society of Certified Practising Accountants believe that the current indirect
tax system is ad hoc, ramshackle and difficult to administer. [5]
The Society told the committee that the current system is riddled with anomalies
and is also very discriminatory against people who produce things in this country
as opposed to providing services. Further, they stated the system is constantly
having to be propped up by rulings and other administrative assistance. 6.5
Mr Phillip Holt, Managing Director, Australian Business Ltd. also advised the
committee that it has been a long time advocate of the proposed GST at a rate
of around 10% with minimal exemptions and minimal GST-free items. We have
been long critical of the existing indirect tax system with its multiple wholesales
sales tax rates and the variety and inconsistency of state based taxes. We have
argued against them because of the way they add to business costs, both in terms
of compliance with legislation and the relative costs to businesses that are trying
to engage in our export markets – the cascading effect. [6]
6.6 Advocates of a broader based tax system pointed to the longer term
growth potential of such a tax compared to the current more narrowly based indirect
tax system. Professor Dixon notably did not support this view. This finding was
presented in the paper Professor Dixon prepared for the Committee. The following
exchange emphasises the relevance of the finding. CHAIR,I think
this is quite an important point because, to the extent that welfare organisations
or those representing welfare groups provide support for a GST in concept, it
is on the grounds, almost exclusively, that the current taxation system will not
meet welfare needs in the future. If those projections are right, that assumption
that those welfare groups make is not true. I would be very interested
in trying to get to the bottom of this precise point. Given the remarks you have
made about Treasury and what information they may have-it is a question I will
talk to the committee about. I would be interested in perhaps a series of questions
from you that we might ask Treasury so that, through us, we can engage in a dialogue
between you and Treasury to tie this fact down. Prof. Dixon,I think
it has become a very critical part of the analysis because we are unable to find
significant welfare gains from re-allocation of resources. The flattening of the
tax system does not seem to produce anything that would make you want to make
this major change in the system to generate resource allocation gains. There does
not seem to be enough in that. So then it comes back to this other argument that
perhaps we have to change the tax system because the present system is falling
apart. But at the moment I have not seen the evidence for why you would want to
believe that assertion. I would be very interested in participating in such a
dialogue. [7] 6.7 Mr Carmody challenged the assertion
that the current indirect tax system could continue to meet the revenue needs
of governments. Mr Carmody told the Committee that: I just commend the
inquiry to the annual document produced by the Treasury called Budget Paper No.
1. These days the revenue estimates appear in statement No. 5. At the back of
statement No. 5 there is a historical series showing how different revenue heads
have moved relative to GDP. The indirect tax share of revenue relative to GDP
has been falling. In terms of budget pressures, I think it is sufficient
only to remind the Senate inquiry of the 1993-94 budget. Before the 1993 election
it was asserted that income tax cuts could be funded without the need for a GST.
In the first budget after that election, by virtue of the fact that the revenue
base was leaking, we ended up with increases in wholesale sales tax rates and
increases in petrol excise in a desperate attempt to shore up the budget in the
face of the looming l-a-w tax cuts. The case for reform has recently been
made by Dr Neil Warren in a little piece that you may have seen called `GST: the
long, winding road', which details at some length the need to shore up the revenue
base on the indirect tax side if that part of the system is not to collapse completely.
It should not be difficult to understand that, if you have a tax base that applies
to a very limited part of private final consumption expenditure and that part
of private final consumption expenditure is declining relative to the total, unless
you continually raise the tax rates applying to that narrow base you will lose
revenue. [8] 6.8 The Australian Stock Exchange
pointed to significant benefit to share investors of reduced costs as a consequence
of the removal of marketable securities duties. The Exchange pointed out that
5.5 million Australians owned shares. Many more did so through superannuation
savings. The removal of these duties will benefit those shareholders directly.
Marketable securities duties have been shown to have a substantial impact on the
spread between buying and selling prices for shares and therefor on the liquidity
of the share market. This impacts on share prices and therefor on the cost of
capital for new investments by Australian companies. [9]
6.9 Mr Roche referred to the work of Professor Peter Swan, Professor of
Finance at the University of Sydney: [Professor Swan] has produced estimates
of the impact of the abolition of marketable securities duty based on the experience
of the halving of the duty initiated by the Queensland government in 1995. Professor
Swan estimates that abolition will reduce overall transaction costs, including
the cost of the spread between buyers' and sellers' prices, by 27 per cent. It
will increase liquidity, or average turnover of shares, by over 60 per cent and,
in the long run, boost the market capitalisation of listed Australian companies
by $65 billion. I should add that what flows from that previous figure is that
it creates a potential capital gains tax windfall of $16 billion for the Commonwealth
government through the increase in the value of those shares. I should also add
that this tax is only collected upon realisation of the shares. [10]
Compliance Costs6.10 Compliance costs fall into two categories
– initial or start up costs and on-going costs. The initial compliance costs
for the GST are not estimated in the ANTS document. Industry groups told the Committee
that the Government's proposal of a $500 million compensation fund will not adequately
compensate for these initial costs. 6.11 The on-going compliance costs
of the GST are estimated in the Regulatory Impact Statement for the GST legislation
at over $1.9 billion in its second year of operation. [11]
Canadian experience suggests that the first year on-going compliance costs will
be around 33 per cent higher or around $2.7 billion. [12]
6.12 Business groups told the committee that compliance costs are a key
issue in their push for tax reform. The Business Coalition for Tax Reform told
the committee that compliance costs are the central reason that the business community
is interested in tax reform with the current high level of compliance costs and
the expectation that if the current tax system remains unchanged compliance costs
will increase further. The BCTR told the committee: We are concerned about
compliance costs for a number of reasons. They disadvantage business. They impose
extra costs on business. Extra compliance costs are also passed on to consumers
in the form of higher prices. Compliance costs also represent a waste of resources
that could be used elsewhere. So a tax system that reduces compliance costs is
advantageous both from a business point of view and from the general community
point of view. The issue of compliance costs is central to our advocacy
of a single rate, broad based consumption tax including food because, as exemptions
from that tax rise, so do compliance costs. They rise very dramatically. As you
know compliance costs fall disproportionately on small business and small business
would be disadvantaged disproportionately in terms of compliance costs if food
were exempt from the GST. [13] 6.13 In its submission
to the Committee the BCTR referred the Committee to a study it had commissioned
on compliance costs associated with the proposals in ANTS by Dr Geoff Pope of
Curtin University. The BCTR referred the Committee to the following two conclusions
from that study: the real question is whether the likely administrative
and compliance costs of the GST and associated reforms are a price worth paying
in order to achieve a more modern, efficient and simpler tax system overall. The
question can be asked of the community generally in terms of gross compliance
costs i.e. the resource costs to the country as a whole and to business in terms
of its estimated net compliance costs, after allowing for offsetting benefits,
particularly the value of cash flow benefits. This paper points to positive answers
to all of these questions. The sentiments of many in the community for
greater equity and the ensuing calls for amendments in the GST need careful consideration
from a compliance cost viewpoint as a general principle, the equity tax objective
invariably conflicts with the simplicity objective. The overriding principle of
the GST is to make the tax base as comprehensive and simple as possible. `compliance
costs are minimised if a tax is as simple as possible e.g. single rate minimum
border line,….minimum of special exemptions, reliefs and provisions. Examples
from the [ UK Compliance Costs of Taxation] study are many' [14]
6.14 In a further paper prepared for the BCTR [15]
Dr Pope provided estimates of the magnitude of the compliance costs of the GST.
Dr Pope agrees with estimates for the gross compliance cost for the GST of $1.9
billion as being reasonable. Dr Pope goes on to point out that a number of offsets
exist to reduce businesses costs in this area. These include tax deductibility,
cost savings through abolition of WST and state taxes and cash flow benefits.
Dr Pope argued that at the level of the individual registrant or business the
cost reduces from the gross estimate of $1,195 to a net figure of $130. 6.15
Mr Michael Walpole of the Australian Taxation Studies Program of the University
of New South Wales addressed the Committee specifically on the compliance costs
of the GST in relation to small business. Mr Walpole made the point that taxation
compliance costs as they impact on business are particularly regressive when it
comes to small business. They impact relatively more severely on small businesses
than on other businesses. Mr Walpole's concern is that the introduction of a value
added tax or goods and services tax will follow that pattern and increase compliance
costs in certain areas. Mr Walpole believed that the GST is an expensive tax as
far as compliance costs are concerned. It is for that reason that he believed
that the introduction of such a tax should be kept as simple as possible in terms
of exclusions and exemptions. In addition to limiting exemptions he told the Committee
that particular care needs to be paid to issues such as the turnover threshold
at which businesses must compulsorily register, the rules applicable to businesses
in terms of how their invoices are to appear, and what substantiation they must
give in support of input credits. [16] 6.16
In relation to simplicity he regarded food as particularly problematic as an exclusion.
He believed it would give rise to an increase in compliance costs in a tax that
is already quite expensive in terms of its compliance costs. 6.17 Mr Walpole
also pointed out the unusual method of calculation used in the Regulation Impact
Statement concerning compliance costs: The Regulation Impact Statement
consistently refers to the net compliance costs as being the compliance costs
after all the other taxes that are going to go have gone. That is a most unusual
way of describing the net compliance cost. Normally net compliance costs are the
compliance costs for the business after netting of the tax flow benefit to the
business and, in our survey, the tax deductibility of those costs to the business.
That is why I took issue with the Regulation Impact Statement. [17]
6.18 The Council of Small Business Organisations also advised the Committee
about their concerns for the cost of collecting and complying with the proposed
GST. While welcoming the package's $500m to assist small firms in implementing
the GST COSBOA believed the initiative would only go part of the way to solving
the compliance cost issue. Further, details as to how this money is to be spent
are yet to be determined and given the number of small businesses it will clearly
not be enough to compensate these firms for the cost of the GST implementation.
COSBOA believed that much more money would be needed as that allocation would
not deal with the ongoing compliance cost issue. [18]
6.19 COSBOA believes that the costs of taxation compliance will fall disproportionately
on small enterprises. They referred to a report of the University of New South
Wales which showed that small and medium business suffered an annual cost disadvantage
compared to their larger business counterparts of more than $30000pa and that
this result is reflected in studies of similar tax systems to GST in other countries
where it was found that compliance costs fall more heavily on smaller firms than
large ones. COSBOA told the Committee that: studies of the costs of the
New Zealand GST in 1991 found that costs of compliance fall disproportionately
on smaller enterprises. That study quantified the cost at NZ$16.39 cents for each
NZ$1000 in sales of small firms as against 5.4 NZ cents for those with turnover
above NZ$50m. Further analysis for the large disparity showed that for the lowest
level of traders ( those between NZ$30000 and NZ$100000) for every NZ$1 of compliance
cost NZ$3.53 in revenue collected compared with NZ$330 revenue for the largest
turnover businesses. [19] 6.20 COSBOA recommended
that small firms be fully compensated for the cost disadvantage that they will
inevitably suffer as against their larger rivals as a result of GST administration.
6.21 The Society of Certified Practising Accountants also told the committee
that compliance costs was the issue that they wanted to focus their representations
on. To ensure compliance costs are minimised the Society told the committee that
it was absolutely imperative that the tax system be kept as pure as possible and
as simple as possible to ensure that the administrative burden on business especially
small business is kept to a minimal impact. The more exemptions you have
the harder it becomes. At the moment you have a situation where people can just
do a fraction of all of their sales or a fraction of all of their purchases to
determine their GST liability. Once you start getting exemptions into the system,
it then becomes an administrative nightmare and you go into situations like Canada
where in the small business in one case a bakery, for six donuts there is no GST,
but for one donut you pay GST. Instead of being able to say “what were my
sales for the month? Hence 10% of that must be the GST component”. They would
have to separate those with from those without and it would become quite complicated.
We're very conscious of the impact of the lower income earners hence we stress
the compensation package. I would strongly recommend that the exemptions in the
GST system be kept to an absolute minimum. [20] 6.22
The Society quoted New Zealand evidence that New Zealand businesses regarded the
GST as one of the easiest taxes for them to comply with. The time taken to prepare
returns could be as little as fifteen minutes a month. [21]
That result the Society said should be contrasted to a finding in a report of
the Small Business Deregulation Task Force, the Bell Report. In the key findings
and recommendations that report found on average small business spent 16 hours
a week on administration and compliance activities of which three hours is directly
associated with tax and other compliance matters totalling about $7000 a year.
[22] 6.23 In a paper released on 6 April 1999
the Society examined the taxation implications of the tax reform process for the
small business sector. [23] In particular the paper
focuses on compliance issues. The Society's aim is to ensure that the changes
to the tax system so not reduce the sector's capacity to comply with their tax
obligations or to increase the costs of complying with the Australian tax system.
The point is made that compliance costs are already relatively high compared to
many similar countries. The key point made is that those compliance costs are
also highly regressive, with the result that the small business sector carries
far more than its proportionate share of those costs. The Society believes that
this position will be exacerbated with the introduction of the GST. 6.24
The Society notes the difficulty and cost of complying with the current WST system
but points out that not many small businesses are involved in the WST system.
By contrast 1.4 million will register for the GST at the implementation phase
and be required to make monthly or quarterly GST returns. 6.25 While continuing
to maintain overall support for the package the Society make 20 specific recommendations
in relation to the GST and further recommendations in relation to other elements
of the package and the findings of the Review of Business Taxation. 6.26
The National Taxation and Accountants Association took a completely opposite view
to that expressed by the ASCPA. The NTAA is also concerned about compliance cost
issues to small business. The NTAA was far more pessimistic about the cost to
small business of complying with the package. The NTAA referred to the $7000 cost
estimate of the Bell Committee in relation to small business compliance costs.
However rather than believing the GST would reduce that compliance burden the
NTAA estimated that it would have the opposite effect. It would increase the compliance
burden on small businesses.
Footnotes[1]
Evidence, p. 1897. [2] Evidence, p. 608. [3]
Submission No. 104, p.4. [4] Evidence, p. 608.
[5] Evidence, p. 564. [6]
Evidence, p. 1992. [7] Evidence, p. 539 [8]
Evidence. pp.652-3 [9] Evidence, p.1979. [10]
Evidence p.1980. [11] Regulation Impact Statement
for the Introduction of a Goods and Services Tax, p.8 [12]
Regulation Impact Statement for the Introduction of a Goods and Services Tax,
p.7 [13] Evidence, p. 614. [14]
Supplementary submission Vol. 2; Geoff Pope, Compliance Cost Implications of
the Government's Tax Reform Proposals BCTR Discussion Paper 1998. [15]
Jeff Pope, The Compliance Costs of the Goods and Services Tax: A Comment on
Current Major Issues, 7 April 1999. [16]
[16] Evidence, p.1776. [17]
Evidence, p.1786. [18] Submission 1368. [19]
Submission 1368. [20] Evidence, p. 565. [21]
Evidence, p. 574. [22] Evidence, p. 574. [23]
Tax Reform Issues for Small Business, the Australian Society of Certified Practicing
Accountants, April 1999.
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