Wayne Swan may yet go down in history as the father of a monumental change to the tax system. Not merely the far-sighted, poorly-sold and now emaciated mining tax applying to just four of the originally planned twelve or so commodities, but a truly massive change with the potential to set up Australia for decades to come.
Extraordinarily generous to ordinary businesses and much more demanding of those earning superprofits, the change would need the sort of patient consensus-building Swan completely failed to deliver in in the lead-up to the mining tax.
Unions in particular would need to be gently brought across the line. As they demonstrated by their unfortunate behaviour at the tax summit, union reps can’t be relied on to accept even good evidence that concessions directed at businesses could help their own members. Economist Harry Clarke wrote after the summit he “couldn’t work out if they were intrinsically stupid or just outlining a preconceived union viewpoint in bad faith; certainly they were not engaging with those who showed their views were wrong”.
Perhaps the single most important finding of last year’s Henry Review was that in a small open economy like Australia’s, high company tax hurts workers, low company tax helps.
“There is simply no debate in the academic community, there is a strong consensus,” Henry told the summit.
“Indeed in an academic conference that proposition would be considered so obvious that it would excite no interest at all.”
The sequence is the more the company tax rate is cut, the more a country like Australia pulls in more foreign capital, the more firms invest in processes that make their workers more productive, the more valuable those workers become and the more they get paid.
Swan understands the argument... He had already began pushing down the company tax rate, and would have pushed it down further had his mining tax not been kneecapped. He is particularly attracted to a variant of the idea known as Allowance for Corporate Equity (ACE), so much so that he gave it a special mention in his closing address.
Then he went futher by asking his new business tax working group to draw up a system that would work.
This was far from a throw-away line. As well as asking the working group for an quick report on tax losses by March, he asked for a second more expansive report on long-term measures “particularly an allowance for corporate equity” by the end of next year.
In an inspired move he added to membership of the committee the secretary of the Australian Council of Trade Unions Jeff Lawrence. Lawrence was chief among union reps at the summit spouting nonsense about the incidence of company tax.
As part of a small eight-person team he will be forced to act less like a politician and more like a collaborator sifting through evidence.
At the moment companies that raise money by issuing equity are penalised relative to those that borrow. Interest payments are a tax deduction but dividend payments are not. An Allowance for Corporate Equity would level the playing field, allowing the companies to completely write off against tax “normal” dividend payments.
And this is where it gets really interesting. They need not make the dividend payments. “Normal” would be calculated by applying a reasonable rate of return to the firm’s total equity (even if it was a partnership rather than a public company). The reasonable level would most likely be the average corporate bond rate.
The result would be that firms making normal returns (and firms just starting to make profits) would pay no corporate tax whatsoever.
For manufacturers struggling under the weight of the two-speed economy the benefits would be enormous. Instead of paying 30 per cent (soon to fall to 29 per cent) most would pay nothing.
Australia would become a very attractive destination in which to set up a firm and an attractive one in which to invest.
It would be partly paid for by imposing a much higher tax rate on the portion of earnings that exceeded the corporate bond rate. At the summit Melbourne University economist John Freebairn mentioned a rate “more towards 40 or 50 per cent”. He will sit on the business tax working group with Jeff Lawrence.
Most Australian companies would scarcely be touched by the higher rate. They are lucky to make much more than bonds. Mining companies (at the moment) make far more. They would pay far more without the need for a special tax.
As would each of the big four banks. Not by design, but because along with mining companies they are about the only Australian firms consistently making over the odds profits. Their return on equity exceeds 15 per cent, something they say is “middle of the pack” only because it sits between miners and everyone else.
If markets were working perfectly, no firms would consistently make such profits.
Freebairn told the summit it happened where resource rents were given away cheaply, where new products cashed on demand before the arrival of competitors and where there was a “monopolistic-type rent”.
“And lets rub it into the banks,” he added. “They seem to make much higher returns than anyone else.”
Bankers and high-profit miners will squeal. But if Australia gets ACE they will continue to mine and continue to provide banking services. The real change would be to invigorate every other Australian business. If the change was presented as part of a simple within-business tax swap that also lowered the overall business tax take it might just get traction.
The Business Council of Australia is part of the tax working group along with the ACTU and academics including Freebairn. It has previously spoken approvingly about the idea. This time Swan is doing things the right way around. This time his idea might get up.
Published in today's SMH and Age
Business tax working group
October 12, 2011
Today I am pleased to announce the terms of reference and appointments to a working group that will look at how our tax system can best help businesses respond to the pressures of a changing economy.
The working group will look at reforms that can increase productivity and deliver tax relief to struggling businesses in our patchwork economy and develop a set of savings options within business tax, such as broadening the base and addressing loopholes or unnecessary concessions.
Dealing with the challenges of an economy where different sectors are growing at different speeds has been central to our tax reform agenda both in terms of what we have done so far and what we need to do next.
At the Tax Forum last week, I announced that Chris Jordan, the chairman of the Board of Taxation, had agreed to head the working group.
It will focus on reform options that relieve the taxation of new investment:
• in the near term, by looking at changes to the tax treatment of business losses; and
• in the longer term, by looking at options like reducing the corporate tax rate further or alternatives such as allowances for corporate equity.
The working group will also be required to identify options to fund any proposals from within the business tax system.
The tax system will continue to play a critical role in helping our economy adjust to change and spreading the benefits of the mining boom to all corners of our patchwork economy.
Terms of reference
1. The Working Group will make recommendations on how the Australian business tax system can be improved to make the most of the challenges and opportunities arising from transformations in the broader economic environment, including the patchwork economy.
2. The revenue neutral reforms to the business tax system will aim to increase productivity, while delivering tax relief to struggling businesses.
3. The Working Group will focus on reform options that relieve the taxation of new investment:
3.1. in the near term, by reforming the tax treatment of business losses; and
3.2. in the longer term, by reducing the corporate tax rate further or moving to a business expenditure tax system, particularly an allowance for corporate equity.
4. For its final reports, the Working Group will provide specific analysis of these business tax reform options, including:
4.1. descriptions of how these reform options operate overseas and evidence on their effectiveness;
4.2. potential priorities for reform, including transitional paths;
4.3. worked examples of how these options would affect business taxpayers, including their financial and tax accounts;
4.4. revenue integrity provisions, such as measures necessary to limit: the inappropriate claiming of tax losses; the equity allowance to new equity; and small and closely held businesses converting labour into business income;
4.5. how the reform options integrate with the rest of the tax system now and in the future;
4.6. impacts on national income and macroeconomic risks; and
5. The working group will also identify a range of off-setting budget savings from existing Commonwealth business taxation (or spending) measures. Changes to the GST should not be considered.
5.1. The savings to be generated by the particular options will be costed by the Treasury in accordance with the budget rules.
6. In developing its recommendations, the Working Group should have regard to the report of the Australia’s Future Tax System Review and relevant international experience and expertise.
7. The Working Group is required to provide the Treasurer with:
7.1. an initial report on the proposed directions for improving the tax treatment of losses and offsetting savings in mid-November 2011;
7.2. a final report on the treatment of losses and the offsetting savings in March 2012; and
7.3. a further report on longer-term business tax reform options and offsetting savings by the end of 2012.
8. For its final reports, the Working Group should consult widely with industry and the broader community.
9. The Working Group may establish technical sub-groups to consider specific issues or seek input from other sources of expert advice.
10. The Working Group will be supported by a Secretariat within Treasury.
CHRIS JORDAN (Chairman)
Chris Jordan is a Fellow of the Institute of Chartered Accountants, the Taxation Institute in Australia, and the Australian Institute of Company Directors and is a Solicitor of the Supreme Court of New South Wales.
Chris is the NSW Chairman of KPMG. He is the Chairman of the Board of Taxation which is an advisory body to the Federal Treasurer and is a board member of the Sydney Children’s Hospital Foundation and the Bell Shakespeare Company.
Chris was awarded the honour of Officer of the Order of Australia in the 2005 Queens Birthday Honours list for high-level advice to Government.
Jennifer Westacott took up the role of Chief Executive at the Business Council of Australia (BCA) in April 2011.
Jennifer has extensive policy experience in both the public and private sectors. She has held critical leadership positions as the Director of Housing and the Secretary of Education in Victoria, and most recently was the Director-General of the New South Wales Department of Infrastructure, Planning and Natural Resources.
Jennifer was a Director and National Lead Partner at KPMG and provided advice and assistance to some of Australia’s major corporations on climate change and sustainability matters, and provided advice to governments around Australia on major reform priorities. She previously chaired the Public Sector Performance Commission in South Australia, and was a member of the Commonwealth Grants Commission.
Jeff Lawrence was elected as Secretary of the Australian Council of Trade Unions (ACTU) in August 2007.
Prior to that, he was National Secretary of one of Australia’s largest unions, the Liquor Hospitality and Miscellaneous Union (now known as United Voice). Jeff is a Director on the AustralianSuper trustee board.
Under Jeff’s stewardship, the ACTU was a key negotiator in the drafting of the Fair Work Act, which features a guaranteed safety net of rights and conditions, improved protection from unfair dismissal, the abolition of Australian Workplace Agreements, an independent umpire, and rights to collective bargaining.
During his time as Secretary, Australian unions have successfully advocated for economic stimulus measures to protect Australian jobs during the downturn, won the first national paid maternity leave scheme, and received government commitment to increase superannuation guarantee to 12 per cent to ensure all workers have financial security in retirement.
Jeff has devoted his entire career to advancing the interests of working Australians and their families, particularly the low-paid.
Rob was appointed Ernst & Young’s Oceania Managing Partner and CEO in 2010 and was previously Ernst & Young’s New Zealand Country Managing Partner. He has more than 30 years experience in corporate and international tax.
Rob has held a number of high profile roles in New Zealand including Chairman of the New Zealand Business Roundtable. In 2001, he conducted the most recent comprehensive New Zealand government tax review – the McLeod Review. In 2009, he was appointed to the government-sponsored Tax Working Group and the Capital Markets Development Taskforce, both of which had a strong focus on tax reform. He was also a member of the New Zealand Government appointed Consultative Committee on Capital Gains Tax in 1989.
He has been appointed to numerous government committees, the latest ones focusing on defence, infrastructure and Maori economic development.
Teresa Dyson is a Tax Partner in Blake Dawson’s Brisbane office, specialising in providing income tax advice on corporate and financing issues to domestic and international businesses. Teresa is a member of the Board of Taxation and the Resource Taxes Implementation Group.
Teresa is the National Chairman of the Law Council of Australia, Business Law Section, Tax Committee and, in that capacity, represented the Law Council of Australia at the Tax Forum. She is currently recognised as a leading individual in tax in Chambers Global 2011 and Best Lawyers 2011.
Dr Peter Burn, Director of Public Policy, Australian Industry Group (Ai Group), has extensive experience in taxation policy through his role at Ai Group since 2002 and as Director – Policy at the Business Council of Australia with particular responsibilities for taxation policy from 1997. Peter was also the Secretary of the Business Coalition for Tax Reform in the years around the Australia's New Tax System.
Prior to these roles, Peter lectured in public finance and microeconomic policy at the University of Queensland and the University of Newcastle and still earlier served in the Tax Policy Division of Treasury during the 1980s reforms to Australia's tax system.
Frank Drenth has been in the role of Executive Director of the Corporate Tax Association (CTA), since 1998. The CTA represents the taxation interests of about 120 of Australia’s largest companies. He is also Deputy Chair of the Business Coalition for Tax Reform, which brings together the views of the broader business community on tax reform issues.
Over a period of many years Mr Drenth has had extensive experience as an external stakeholder in the development of Australia’s tax policy and law, as well as aspects of tax administration that are relevant to large companies. Mr Drenth has previously occupied corporate tax roles in large Australian companies. He has also worked a large chartered accounting firm after starting his career with the Australian Taxation Office.
John Freebairn holds the Ritchie chair in economics at the University of Melbourne. He has degrees from the University of New England and the University of California, Davis. Prior to joining Melbourne in 1996, his preceding career includes university appointments at the ANU, LaTrobe and Monash, and periods with the NSW Department of Agriculture and at the Business Council of Australia. John is an applied microeconomist and economic policy analyst with current interests in taxation reform and environmental economics.
Executive Director, Revenue Group, The Treasury
. Tax forum. Were the unionists "stupid," or acting in bad faith?
. Who'd have thought it? The tax summit gets somewhere
. Henry's great tax forum speech