Tax & Regulatory Reform


Recommendation Summary

  • Undertake a wholesale review of the Australian tax and transfer system, including a review of tax contribution of offshore service and product suppliers.
  • Implement a single company tax rate of 25% for all businesses (small, medium and large) by 2024-25.
  • Make permanent the instant asset write-off on new investment up to $20,000 - Introduce a 20% instant asset write-down for new investment in eligible depreciable assets valued above $20,000.
  • Lead on regulatory reform
  • Review prudential regulations and capital requirements that increase the cost of capital for small businesses.
  • Reduce the current registration cost and ASIC’s annual renewal fees by 50% for companies with a turnover of less than $5 million per annum.
  • Review proposed changes to R&D tax incentives

The Government has made progress in reducing both personal and company tax rates in the last few years but there is more work to be done with the company tax rate specifically, as well as the need to progress broader tax reform.

1. Reform of the tax and transfer system

Australia’s tax and transfer system is needlessly complex and unnecessarily expensive to administer. It is becoming unaffordable and no longer fit for purpose. It is among the least competitive in the world, ranking well below most other advanced economies including New Zealand, the United States and the United Kingdom.

Major reform of Australia’s most inefficient taxes is necessary and has the potential to boost Australia’s national income by tens of billions a year.

Reform of the tax and transfer system is crucial to ensuring the Australian economy is in a strong position to deal with the challenges and developments in an increasingly volatile, uncertain and complex environment.

However, successive governments have seen reform of the tax and transfer system as too hard, placing many necessary reforms off limits. Reform of the tax and transfer system is crucial to ensuring the Australian economy is in a strong position to deal with the challenges and developments in an increasingly volatile, uncertain and complex environment.

To ensure Australian businesses remain competitive in increasingly global markets, a wholesale review of the tax and transfer system is needed. This should include examination of offshore service and product suppliers to ensure they are complying with their tax obligations.

Reducing the corporate tax rate to the average of other advanced economies over ten years will deliver higher wages for ordinary workers through an upfront investment boost. Greater reliance should be placed on consumption taxes like the GST, which are more efficient because they do not distort decisions about whether to spend or save. Our tax system should aim to be broad based, with a focus on maximising growth, efficiency and productivity. It should not disadvantage the genuinely vulnerable nor unfairly penalise the prosperous.

A review of the tax and transfer system will also serve the interests of individual tax payers and welfare recipients. A more efficient and effective tax system will create opportunities to look at the income and living standards of all Australians and whether the system can be made more progressive.

Policy Recommendation: 

  • Undertake a wholesale review of the Australian tax and transfer system, including a review of tax contribution of offshore service and product suppliers.

2. Company Tax Rate

CCIQ strongly supports the Government’s efforts to lower the company tax rate to 25% and welcomes the legislated cuts to date. In particular, the Government’s action to bring forward the timetable for the tax cuts for firms with turnover up to $50 million will make a material difference to the competitiveness of medium, small and family businesses and their ability to invest, to grow and to employ more people.

We encourage the government to continue to seek to extend the tax cuts through legislation to businesses of all sizes to deliver maximum benefit to the economy and to also eliminate the disincentive now created to not grow above $50 million turnover. Extending the tax cuts will encourage larger businesses to undertake more investment – to grow and, employ more people.

Small to medium businesses make an important contribution to the Australian economy, accounting for over half of private sector economic activity in Australia and over two-thirds of private sector employment. Many of these small businesses rely on sales and service contracts with larger businesses. Therefore, greater investment by larger businesses, following a lowering of the company tax rate, will have flow-on benefits for small businesses. Growth in larger businesses stimulated by a reduction in the company tax rate will increase employment opportunities for both large and small businesses.

Much of the opposition to extending the company tax cut to businesses of all size was in response to concerns about the revenue impact based on the projections made by Treasury and others when the enterprise tax plan was first announced in 2015. Such projections are inherently problematic as history of revenue from company tax has shown.

Figure 5 demonstrates that on the last three occasions when the company tax rate was reduced, there was a brief reduction in revenue collected, to be followed by a strong recovery in revenue.

ACCI

To illustrate the doubt around projections of the cost of company tax cuts, in the 2014/15 Budget, being the year before the 10-year Enterprise Tax package was announced, the 2017/18 company tax revenue projection in the Budget papers was $84.7 billion. At the time the package was announced in 2015, which is when the 10 year projections of the “cost” of company tax cuts were published, the projection for 2017/18 was revised down to $80.2 billion. However, the final budget outcome, released in September 2018, showed the actual revenue for 2017/18 (and three years into the rate reductions) was $84.6 billion – close to the original projection made prior to the company tax cuts being announced.

This illustrates that opposition to company tax cuts based on the fiscal impact forecasts is problematic. Company tax revenue is affected by many factors, and there should be less concern about the fiscal impacts and more focus on the opportunities for economic growth and investment created by an internationally competitive tax rate.

The current tax rates reflected in legislation mean that by 2021, there will be a full 5% differential between a business with turnover below $50 million and those trading above. This presents a substantial disincentive for a business to grow larger than $50 m and is not good policy for the long term. We recommend policy-makers aim for a single 25% rate for all businesses over a 10 year time frame, which was the ambition of the original enterprise plan. This could be phased in as a one percentage point reduction per year for larger businesses commencing in 2020-21. In this proposition, company tax rates from 2019/20 would be:

ACCI2

Policy Recommendation:

  • Implement a single company tax rate of 25% for all businesses (small, medium and large) by 2024-25.

3. Instant Asset Write-Down

The Government’s decision to extend the instant asset write off for small business owners by 12 months to 30 June 2019 is welcome. This is the fourth successive year in which the write off has been extended. There is a strong case that instant tax right off of purchases up to $20,000 for small businesses should be a permanent part of taxation regulation.

In addition to stimulate large-scale investments, consideration should also be given to an instant asset write-off for eligible depreciable assets valued above $20,000 propose by the Labor opposition. This provides an upfront deduction of 20%, with the balance depreciated in line with normal depreciation schedules after the first year.

This does not change the overall taxable base associated with investment in an asset. It simply changes the depreciation profile, by bringing forward the tax deductable depreciation benefits for businesses investing in new assets. This targeted and direct approach will stimulate investment in machinery, plant and equipment, particularly for investment intensive industries.

Policy Recommendation: 

  • Make permanent the instant asset write-off on new investment up to $20,000
  • Introduce a 20% instant asset write-down for new investment in eligible depreciable assets valued above $20,000.

4. Ongoing regulatory reform

The Government should show strong leadership on regulatory reform. In an age of rapid commercial disruption, policy makers must ensure that new entrants are subject to the same laws and regulations as incumbents. At the same time, care must be taken to ensure that regulation encourages innovation, effectiveness and efficiency, while supporting the public good. Regulation must remain fit-for-purpose and take account of changes in business models and the impact, real and potential, on the provision of goods and services.

Key priorities in relation to reducing red-tape for business include:

  • Harmonisation. Regulations should be harmonised across the state and territories where relevant. This should be addressed through the COAG process as a matter of urgency.
  • Ensure consistency of regulation for all businesses. Foreign entities or tech disruptors should be subject to same regulations as domestic entities.
  • Regulation must be fit for purpose. This should be determined through industry liaison. Australian businesses tell us of instances where they have to comply with regulations that are not relevant to their industry. As part of the COAG process a national audit should be conducted.
  • Regulation must be easy to read and follow. This can be better achieved by the use of plain language, easy to read forms, short documents, and consistent definitions. For example, there are numerous definitions of “small businesses” for the purposes of regulation.
  • Regulation must be nimble, agile and adaptable. Regulations and those who administer them must be able to change rapidly as circumstances demand.
  • Greater use of technology should be utilised to identify and simplify regulation and reduce red tape. Single touch payroll is a good example of how technology can be used to reduce red tape.

Strong leadership on a regulatory reform agenda is important. The Government has previously championed and raised the profile of red tape reform across government through initiatives such as the red tape repeal day, establishing deregulation units in each department and publishing the Australian Government Guide to Regulation.

Policy Recommendation:

  • Lead on regulatory reform

5. Improve access to finance

An outcome of the Banking Royal Commission has been a tightening of lending requirements, particularly for small business. Finance institutions are increasing the administrative burden on businesses seeking to renew or take out new loans. This is proving to be a major constraint on many small business seeking new capital to grow their business, or simply to stay in business.

The RBA has identified access to finance as a problem for small business even those who have a good credit history. Actual behaviour and performance of lenders needs to monitored closely against codes of conduct; complaints should be investigated promptly; and enforcement action taken in a timely and effective way.

Policy Recommendation:

  • Review prudential regulations and capital requirements that increase the cost of capital for small businesses.

6. Australian Securities and Investment Commission (ASIC) Fees

CCIQ supports the application of government fees and charges where they reasonably reflect the costs of delivering services and where these costs would otherwise be borne by the taxpayer. It is appropriate for ASIC to continue to charge fees where there is a clear link between the fee and the benefit offered in return.

However, the recent review of registry fees has shown that ASIC’s fees and charges are in excess of cost recovery. The Chamber considers there is scope to reduce or abolish fees, while maintaining a user-pays funding model.

The Chamber is most concerned about the annual review fee and its impact on small and medium sized businesses. A proprietary company pays the same fee, regardless of the size of the business, with the fees having a greater impost on smaller business. This fails to satisfy basic principles of equity.

ASIC has previously argued that charging a fee incentivises companies to interact with ASIC each year, as well as keeping their data up-to-date and considering their ongoing solvency. However, the Chamber contend that this could be achieved with a dramatically reduced fee or alternative mechanism.

Policy Recommendation: 

  • Reduce the current registration cost and ASIC’s annual renewal fees by 50% for businesses with a turnover of less than $5 million per annum.

7. Research and Development (R&D) Tax Incentives

R&D Tax Incentive (RDTI) provisions of the Treasury Laws Amendment (Making Sure Multinational Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 (the Bill) put at risk business investments in R&D.

The RDTI was first introduced in 1985 with the aim of encouraging Australian industry to undertake R&D activities. Since then the R&D tax provisions have undergone a number of significant changes. The constantly changing R&D landscape creates additional administrative and compliance costs for Australian businesses. Consistency in R&D tax policy settings provides investment certainty to businesses.

While we strongly and consistently support measures to improve the targeting of expenditure and greater integrity, we do not support cuts to the RDTI. The R&D tax amendments proposed go further than increasing the integrity measures surrounding the RDTI – it reduces the amount of government funds supporting Australian R&D activity.

We recommend that the Government ensure that any cost control or targeting mechanism, such as the intensity measure, is done in a way that decreases program complexity and encourages particularly smaller businesses to invest – the proposed mechanism does neither.

We are concerned that changes included in the bill will result in incentives too low to drive investment in Australia when compared with the level of support available in other jurisdictions, and that the reforms miss an opportunity to stimulate more local industry and research institute R&D collaboration.

Policy Recommendation:

  • Review proposed changes to R&D tax incentives