Most Australian companies would pay no tax on their earnings, while some would pay a much higher rate of "super tax" on large profits, under radical plans being developed in the wake of the Gillard government's tax summit.
The change, if fully implemented, would in effect extend the government's minerals resource rent tax across the entire Australian corporate sector.
It would lead to the most profitable companies paying a lot more tax, and the rest paying less or none at all.
The plan is being prepared by a working group set up by Treasurer Wayne Swan after this year's tax summit, and has received preliminary support from key business groups and union leaders.
According to its authors, the plan is aimed at giving more incentive for business investment, without necessarily reducing the total amount of company tax collected.
Addressing a tax conference at Canberra University yesterday, the head of Treasury's revenue group, Rob Heferen, compared the change to the introduction of the goods and services tax in 2000.
He said this would be a more radical change.
"When Australia introduced a consumption tax there was a pretty clear path to follow," he told the conference.
"This is not like that. We need to be careful about unknowns. Having said that, the imperative for the change may well be a little bit stronger"...
The nine-person working group is examining a proposal known as "allowance for corporate equity", under which no tax would apply to the portion of corporate profits necessary to get a reasonable return on equity.
Most companies, especially most manufacturers, fail to meet that hurdle and so would pay no company tax.
Banks and mining companies make a much greater return on equity and so would be liable for the super tax on the excess portion of their earnings.
Working group member John Freebairn from Melbourne University told the conference the super tax rate could be as high as 40 or 50 per cent.
He nominated McDonald's and KFC as examples of companies able to make larger than normal profits because of the power of their brands.
ACTU secretary Jeff Lawrence, also on the business working group, opened the door for broad agreement on the proposal, telling the conference the union movement would be prepared to accept it on the condition the total company tax take did not fall.
He previously opposed moves to cut the standard corporate tax rate below 29 per cent.
The Business Council of Australia, also represented on the working group, has previously spoken in favour of the idea.
Asked by The Age whether the change would be practical, Mr Heferen said it had been implemented in a number of countries although not on the scale of the GST.
"Belgium has one, Brazil and Italy had it, Latvia has it. But from what I can gather none have done it for the reasons we think it is useful, which is to attract capital and boost labour productivity."
Mr Heferen represents Treasury on the working group and headed the Henry tax review secretariat.
"It would be complex, but company tax is already complex. It would be especially difficult when people were getting used to it," he said.
"Our next step is to properly quantify the cost of change, the actual cost of people moving over to a new system.
"That is something that whatever government Australia has needs to think about. The costs of change might be very significant."
Mr Swan has asked the working group to deliver a report on the proposal by next December.
He has asked for an earlier report on the tax treatment of losses by March.
Published in today's SMH and Age
Beyond the Tax Forum - Speech by Rob Heferen
From: Jennifer Westacott
Sent: Monday, December 05, 2011 09:32 PM
Subject: Statement from Jennifer Westacott to BCA members on inaccurate tax report in this morning's media
To: BCA Members
BCA Liaison Delegates
BCA Company Chairmen
Reports in this morning’s SMH and Age newspapers that the BCA favours the introduction of a super profits tax are wrong.
The BCA is participating in the Business Tax Working Group which is examining options to relieve the taxation of new investment. However, the group has not even begun to consider options around the allowance for corporate equity model – which is just one option that the Treasurer has asked the group to examine, along with a reduction in the company tax rate.
The BCA’s position is to support the recommendation of the Henry review that Australia’s company tax rate should be reduced to 25 per cent as economic and fiscal circumstances permit.
We have also reiterated the need for extensive consultations on any major changes to the tax system, and we will be holding a specialist tax forum for BCA members early in the new year.
If you have any questions or concerns about this, please feel free to contact me or our Chief Economist, Peter Crone.
Thanks and regards
Jennifer
From: Peter Martin
Date: Tue, Dec 6, 2011 at 3:40 PM
To: XXXX
Cc: Jennifer.Westacott@bca.com.au
I wrote that the Business Council had previously spoken in favour of the idea.
You'll find it here, in its excellent paper entitled:
UNREALISED GAINS: THE COMPETITIVE POSSIBILITIES OF TAX REFORM
Currently, corporate income tax falls on the
‘full return’ to corporate equity – that is, the
normal return and so-called ‘pure’ profi t.
Under an ACE system, companies are
allowed to deduct an imputed normal return
on their equity from the corporate income tax
base, in a similar way to deductions that are
made for interest payments on debt. The effect
of such an arrangement is that companies
would incur tax only on ‘above normal returns’.
The adoption of an ACE has the potential to
deliver signifi cant benefi ts. Assuming that the
corporate tax rate remains unchanged, the
ACE reduces the corporate tax burden by
effectively narrowing the tax base. While we
accept the conventional wisdom that, in general,
broader tax bases are more effi cient, the ACE
has the potential to deliver benefi ts for a country
like Australia while avoiding distortions to
resource allocation and ineffi ciencies typically
associated with narrower tax bases.
The ACE system has the potential to remove
the bias in favour of debt fi nancing that fl ows
from the tax deductibility of interest on debt.
Implementing new tax arrangements that work
to reduce an excess reliance on debt will improve
economic effi ciency. It may also eliminate the
need for thin capitalisation rules which, in turn,
would materially reduce complexity within the
tax system.
As for expenditure taxes generally, under an
ACE the tax system should not affect the cost
of capital of a fi rm, as the effective marginal
tax rate (EMTR) is zero for an investment
generating returns that just cover the cost
of capital (that is, an investment that only
produces ‘normal returns’).
In addition, the ACE could eliminate potential
problems and complexities that arise in having
to distinguish debt from equity fi nance. In the
face of fi nancial innovation which has blurred
the distinction between the two, the ACE
approach may provide signifi cant benefi ts in
terms of greater simplifi cation and improved
resource allocation.
While current depreciation rules continue to
apply, the ACE could also reduce distortions
associated with the treatment of depreciation.
Specifi cally, it offsets the investment distortions
caused by deviations between true economic
depreciation and depreciation for tax purposes.
From an implementation perspective, the ACE
is likely to be relatively simple to introduce
because it continues to rely on the current
corporate income tax system. Initially the ACE
approach could apply only to new equity
capital, which limits the revenue implications
and also minimises potential windfall gains
to shareholders.
The benefits of an ACE would, however, be
undermined if the corporate tax rate is raised
to offset the impact of base narrowing.
This
is one of the major disadvantages usually
highlighted in respect of an ACE arrangement.
However, the authors of this study concluded
that there is no need to increase the corporate
tax rate because in the long run the potential
to stimulate investment both for locally based
companies and from inbound investors will
raise the pre-tax return to domestic factors
of production by more than the revenue loss
from the ACE.
An ACE arrangement warrants further
investigation, and we recommend that the review
panel examine the proposal in more detail
I don't know why Jennifer did not acknowledge this in her email to members.
Peter
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