Australia needs to reduce its corporate tax burden to remain competitive, according to a series of submissions to the federal government’s tax reform white paper.
Australia needs to reduce its corporate tax burden to remain competitive, according to a series of submissions to the federal government’s tax reform white paper.
The white paper, which was commissioned by former treasurer Joe Hockey, will set the government’s policy agenda for tax reform, potentially into the next election.
The paper is in its final stages and an initial report is due this month, although it is widely believed Treasurer Scott Morrison will delay its release until next year.
A cut in the company tax rate to 25 per cent was one measure proposed to improve national competitiveness, by the Minerals Council of Australia and Business Coalition for Tax Reform, among others.
Moving to that level would put Australia in line with the OECD average rate.
Business Coalition for Tax Reform chairman Frank Drenth said it was broadly accepted that a good portion of the company tax burden fell on workers.
“Some people thinking cutting company tax goes to fat guys who smoke cigars,” he said.
“Companies are inanimate objects, they’re mostly a flow through … senior executives employed by companies just pay a lot of personal income tax.
“The accepted general economic theory is that the incidence of company tax falls partially on labour and partially on shareholders, but a significant portion falls on labour.”
This was accepted by Labor treasury spokesman Chris Bowen earlier this year, and backed up by a KPMG report, which calculated the portion of company tax falling on workers as potentially more than two thirds.
On the tax rate, Mr Drenth said 25 per cent was the new 30 per cent, internationally.
“Britain is going to be down to 20 per cent soon … they’re very aggressively touting for business,” he said.
“There’s some debate about whether the company tax rate really matters in a world that’s awash with capital. I’m not sure I follow (that school of thought).
“If people are looking to make an investment somewhere, they’ll work out their investment on an after-tax basis; people will take the company tax rate into account.”
Mr Drenth said foreign investors would tend to be marginal, or incremental, in Australia, meaning they were affected most when investment costs increased, and were most sensitive to company tax rates.
The Minerals Council of Australia put forward a similar position in its submission.
“With Australia depending heavily on foreign investment, it is becoming more important to develop and maintain a globally competitive company tax system,” the council said.
“There is clear evidence that Australia’s company tax rate is increasingly uncompetitive and too high for a capital-hungry country.
“Treasury research estimates that each additional $1 collected by way of company income tax reduces the living standards of Australian households by around 50 cents in the long run because of reduced investment. “
Despite arguments it deserves a better deal than that currently offered by the GST distribution formula, Western Australia stands to benefit most from reductions in income and company tax.
That’s because the state receives less in federal government spending than it pays into the taxation system, an outgoing net fiscal subsidy, which, in 2012-13 was more than $20 billion, according to the state Department of Treasury.
At that level, it was around $8,000 per capita.
The number will have fallen in the years since, in tandem with commodity prices, but WA has been a donor state for the past three decades, with more than $120 billion transferred out of the state in the past decade alone.
As such, any reduction to company tax will leave WA a major beneficiary.
Imputation
The Australian Private Equity and Venture Capital Association similarly backed competitiveness in company tax settings, adding that the dividend imputation system should remain.
In its submission, Avcal said there was a risk a change to imputation might make it more difficult for large capital raisings to be successful.
“The imputation system serves as an added incentive for investment capital to flow from Australian individuals and superannuation funds into local entities, rather than offshore,” Avcal said.
“The existence of the dividend imputation system is in no apparent way impeding the deployment of capital offshore by Australian investors or Australian businesses.
“There is a risk that placing restrictions or new limitations on the dividend imputation regime ... may amplify the challenges already being faced in relation to the capacity of Australian funds to raise larger allocations of capital from domestic sources.”
