Submission to Inquiry into Tax Deductibility
Changes to the operation of the company tax system should be assessed on their merits, rather than with the narrow view of funding a reduction in the company tax rate. A compelling, evidence-based case for change, that is mindful of the investment and innovation impacts, needs to be made before any changes are considered.
A similar analysis was recently conducted by the Business Tax Working Group and it was unable to recommend a revenue-neutral package, within the company tax system, to fund a lower company tax rate. The process received feedback from many businesses that they would be worse off under the trade-offs canvassed. Some submissions questioned whether there would be a net benefit for the economy from the trade-offs proposed.
The case for retaining interest deductibility for businesses is compelling. Interest deductibility is a longstanding feature of the tax system. Businesses borrow to invest and grow, and interest is a cost incurred in this process. Allowing deductions for expenses incurred in earning income, such as interest, is an important tax principle. Disallowing these deductions would result in double taxation (of both borrower and lender), harm investment and growth, significantly impact committed investment and certain sectors, and risk unintended consequences. Most of our competitor countries allow deductions for interest while imposing lower company tax rates. In addition, Australia has some of the toughest integrity laws in the world, including rules limiting excessive interest deductions for multinational companies.