The federal government should revisit tax reform to take a more strategic approach to the role tax can play in supporting higher living standards and a stronger economy rather than continuing with piecemeal approaches, Business Council of Australia Chief Executive Jennifer Westacott said.
In a submission to the Business Tax Working Group the Business Council has rejected the options put forward to fund a cut in the company income tax rate and called on the government to roll the findings of the group into a 10-year reform process.
The process ought to build on the work of the Henry review and involve the whole community in considering all taxes with the goal of achieving a more competitive and efficient system that raises enough revenue for Australia's future needs.
“We have not walked away from a cut in the company tax rate and it should remain a priority for Australia. Business needs a materially lower tax burden because it is vital for growth, to attract investment and for supporting jobs and higher wages,” Ms Westacott said.
“We have always said that lowering the business tax burden would not be easy and could not be done overnight, but should be considered as part of a comprehensive review of the whole tax system and implemented over time as part of a total tax and budget strategy.
“Only a comprehensive tax reform process will allow a genuine debate about issues such as the Commonwealth and state and territory funding arrangements and tensions around who should be accountable to deliver essential services in health, aged care and education.
"There is a critical need for community engagement, not just business engagement, to address and balance the social and economic aspirations of Australians and the role tax can play,” she said.
Ms Westacott said the BTWG terms of reference, requiring that a company income tax cut be funded by changes elsewhere in the business tax system, was excessively limiting and risked doing more harm than good to the national economy over the medium to longer term.
"The revenue needed for a material company tax rate cut can't be found through other business tax changes without very deep impacts on some companies and sectors," Ms Westacott said.
"We approached the BTWG process in an open and constructive manner. We considered whether revenue-neutral reforms could be found to boost productivity and deliver net benefits to business and the broader community, and we have taken account of the challenging economic circumstances and longer term revenue-raising needs of the nation.
“On balance we found that delivering any meaningful company tax cut purely from changes to business arrangements risks significant damage to investment and growth, particularly in key sectors.
"Our members have noted the flexibility they have to move their investment and activities to other countries where there are more favourable tax settings and we don't want to risk making that worse when many companies are already facing serious competitiveness pressures.
"Companies in a number of sectors highlighted the long lead times on projects and their concern that short-term revenue gains to government might be sought at the expense of their capacity to contribute to economic growth that would benefit the community over the longer term.
“We must not underestimate the danger of compromising the viability of our capital investments, which are expected to account for 30 per cent of national economic activity by next year.”
In its submission, the Business Council highlighted that members have expressed widespread concern around each of the options for funding a company income tax cut canvassed in the BTWG.
In respect of the specific savings measures examined by the BTWG:
- there was concern about unquantified but potentially significant adverse impacts that changes to thin capitalisation rules might cause as the options have not yet been costed
- changes to depreciation and capital expenditure mean deep cuts in some sectors that would make affected companies substantially worse off even after a cut in the company tax rate
- reducing the diminishing value rate for depreciation from 200 per cent to 150 per cent would have a major negative impact on many companies, particularly in mining and resources
- changes to statutory effective life caps on depreciating assets would have major ramifications that could render capital investments unviable, particularly in the aviation, resources and mining
- exploration and prospecting arrangements are important in recognising that these activities often do not lead to a viable project but are a legitimate and normal business expense
- changes to the Research and Development Tax Incentive, announced in 2009 as part of the government's innovation agenda for the next decade, may compromise business research and would change the incentive before its contribution to the innovation agenda could be assessed.
The Business Council recommends the government commit to the goal of a 25 per cent company tax rate as part of a comprehensive, decade-long tax reform process focused on:
- ensuring long-term revenue adequacy to deal with issues such as demographic ageing
- addressing the imbalance between Commonwealth and state and territory taxing and spending
- ensures the tax system to raise more from efficient sources such as consumption and land taxes
- promoting efficient resource allocation to support productivity and competitiveness
- reducing tax system complexity and compliance costs.
"We will continue to work constructively with all governments to ensure predictability is restored to our tax system, and that there is a willingness to approach tax reform comprehensively so our tax system does its share of the heavy lifting to lay the foundations for continued economic strength and higher living standards for all Australians in the future," Ms Westacott said.