Wednesday, December 14, 2011

Tax. Think of the Business Council as a dog chasing a car

Wednesday column

The Business Council has selective amnesia. Last week its chief executive Jennifer Westacott sent an email to members distancing herself from an “inaccurate tax report in this morning's media”.

The Age had reported that Business Council had in the past spoken in favour of a widely applied super-profits tax.

As it had.

Its submission to the Henry Tax Review, Unrealised Gains: The Competitive Possibilities of Tax Reform commended a system that taxed normal returns differently to so-called pure profits saying it had “the potential to deliver significant benefits”.

Known as Allowance for Corporate Equity (ACE) the system would allow companies to deduct from their income a “normal return on their equity” before paying tax in the same way as they can presently deduct interest payments.

“The effect of such an arrangement is that companies would incur tax only on above normal returns,” the Business Council wrote, recommending Henry examine it in more detail.

So why the amnesia? It could be because the idea is gaining traction.

Dogs like to chase cars, but they get uneasy if they catch them... Umbrella organisations, especially responsible ones, like to propose good policies. But they get uneasy if they might become law.

The Minerals Council proposed a profits-based tax as an alternative to royalties in its submission to the Henry Review. It reversed course when Wayne Swan took the idea seriously and drew up legislation.

The Business Council has the same problem the Minerals Council had. Some of the companies it represents - the biggest high-profile ones - would be hurt by a tax that fell only on super-profits. Most would benefit, but it is no position to represent them. It needs the big mining companies and the banks. Without them it would have no clout.

The Business Council went cold on ACE just as the Treasurer was warming to it.

Its position paper ahead of the October tax summit said “few other countries in the world have introduced an ACE and the Henry review did not recommend moving to an ACE at this stage, instead suggesting that international developments should be monitored, with Australia being a fast follower rather than a pioneer in this area”.

It believed that was “the right approach for now”.

Henry himself thought he had opened up discussion rather than closed it down.

Weeks after the release of his report he said of all of the proposed refinements to company tax, ACE appeared to “offer the most promise”.

It also offered “the most in the way of empirical evidence, with variants having been used in
Croatia, Brazil, Italy, Austria, Belgium and Latvia; and it appears to offer the least resistance path of reform, probably being the easiest system to integrate into existing company income tax systems”.

Then the UK tax review called for an Allowance for Corporate Equity. It wanted tax on ordinary profits cut to zero and tax on super-profits to remain at the current rate. The lost revenue made up by extra taxes on consumers. Because the zero rate on ordinary profits would bring more capital into the country, it said in the long run the change would be partly self-funding, pushing up GDP 1.4 per cent.

Wayne Swan began to pay close attention. At the tax summit Melbourne University’s John Freebairn, a former research director of the Business Council, said Australia’s super-profits tax rate might be “more towards 40 or 50 per cent”.

It would only be paid by firms earning “monopolistic-type rent”.

“And lets rub it into the banks,” he added. “They seem to make much higher returns than anyone else.”

Swan liked the idea so much he set up a working group to examine changes to corporate tax, "particularly an allowance for corporate equity”. He made Freebairn a member, asked for worked examples and costings, and set a deadline of the end of next year.

The Business Council’s Westacott is also a member of the working group, as is ACTU secretary Jeff Lawrence. She will have to confront the Business Council’s previous support for the idea pretty quickly, even if it slipped her mind last week.

Raising the tax take for some businesses while cutting it for others would split her membership, but that doesn’t make it a bad idea.

Investment propositions that are marginal with company tax rates as they are will become viable if their tax rate is cut to zero. Australia will attract more capital and the workers that work with it will become more valuable. Businesses that make massive returns on equity (in the case of banks, with little accompanying downside risk) will stay.

If they are minded to, they will expand. As parliament debated the minerals resource rent tax this year spending on iron ore exploration jumped 49 per cent and spending on coal exploration 84 per cent; all in the space of three months.

Taxing only super-profits rather than ordinary profits looks like a win-win. It would bring in and keep the capital we need while raising money from firms that won’t leave. That’s why Swan’s attracted to it, that’s why he’s set up a working group to sort out the details, that’s why he has put the Business Council on it.

Published in today's Age



Business tax working group

Wayne Swan
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

Objectives

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.


Scope

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

4.7. costings.

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.


Timing

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.


Consultation

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.


Support

10. The Working Group will be supported by a Secretariat within Treasury.


Membership


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

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

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 McLEOD

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

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.

PETER BURN

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

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

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.

ROB HEFEREN

Executive Director, Revenue Group, The Treasury



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7 comments:

Marek said...

Doesn't company tax pretty much acts as a withholding tax for Australian shareholders anyway?

Peter Martin said...

Not for foreign shareholders.

Marek said...

And why should I (as an Australian shareholder) care about them?

Whatever country they are based in can give them a tax credit for tax payed here

Peter Martin said...

Because we want their money.

John said...

Wow. You'd think Westacott, having been at KPMG last year when they had their embarrassing mining tax situation, would have learnt about not pissing off big mining companies.

Marek said...

And here i was think they wanted our quality assets... how naive of me

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