Time to Review the Dead Weight of Australia’s Business Taxes

A new report on business taxation in Australia has found that the country’s business sector is being increasingly weighed down by a tax system which is inefficient, overly complex and levies too many taxes for little return.

The report, Tax Nation: Business Taxes and the Federal–State Divide, by the Business Council of Australia (BCA) and the Corporate Tax Association (CTA), highlights numerous problems with the current system arising from the division between federal and state tax systems, and calls for a major rethink on business tax across governments.

The report – the first comprehensive examination of its kind of Australia’s entire business tax system – is based on a survey of the number, type and total amount of taxes paid by nearly 100 of Australia’s largest companies.

BCA President Mr Michael Chaney said the BCA and CTA acknowledged the importance of tax changes in recent years, including the GST and the Ralph reforms that were designed to remove a number of serious impediments to tax competitiveness.

“However, we are concerned that agreements, particularly by the states, to streamline the business tax system following the GST’s introduction have changed, slowed or not been acted on. Instead, we continue to see the overall number of taxes growing, increasing the burden on business,” Mr Chaney said.

“The overall issue of federal–state business tax arrangements needs to be reviewed again, which is why the BCA and CTA are now calling for a Productivity Commission review into the entire business tax system and to make recommendations for possible reforms,” he said.

The report found that:

  • Governments impose 56 different taxes on business including 21 federal taxes, 33 state and territory taxes and 2 local government taxes.
  • This compares to the United Kingdom, where a similar study found that in an economy three times the size of Australia’s, business paid only 22 different types of taxes – less than half the number of taxes facing Australian businesses.
  • The 92 businesses surveyed as part of the report, which was carried out for the BCA and CTA by PricewaterhouseCoopers (PwC), paid Australian governments a total of $27.5 billion in tax in 2006. This is the equivalent of all federal and state government spending on Australia’s schools system.
  • For every $1 paid by businesses in income tax they paid a further 50 cents in a range of other business taxes.
  • $18.1 billion of the $27.5 billion in taxes directly borne by the 92 companies surveyed was paid to Canberra as part of corporate income tax – a total large enough to fund Australia’s current defence budget.
  • The remaining $9.4 billion was paid through 50 other separate business taxes. This includes 35 state and local taxes which raised just $4.7 billion (or 17 per cent) of all business tax revenue.
  • In addition to the taxes they paid, the survey found the 92 businesses collected a further $37 billion for governments from other taxpayers, through excises, personal income tax (PAYG) and the GST.
  • One-third of respondents spent more than $2 million per year on tax compliance, with some spending as much as $10 million.

Equally important, the survey highlights the reliance on fewer than 100 companies being able to continue to contribute a significant share of tax revenue to Australian governments.

“Recent moves by the states to harmonise their regimes represents a significant step in the right direction. However, much more needs to be done to eliminate unnecessary inconsistencies between tax regimes,” Corporate Tax Association Executive Director Mr Frank Drenth said.

The BCA, which has been leading calls for a major shake-up of federal–state relations, said Australia’s business tax system was a clear example of how confusing and conflicting roles between tiers of government was acting as a significant drag on business and the economy.

“Tax reform can never be a one-off – the global business environment is moving too fast to allow us to play catch-up or worse, stand still. The next wave of genuine tax reform will occur only as a result of reforming all levels of tax – federal and state,” Mr Chaney said.

“Tax needs to be an integral part of any move to reform federal–state relations more broadly.

“Our survey confirms there are too many taxes being levied for comparatively little return, but at the same time, the system involves considerable paperwork and compliance costs for business, large and small.

“The question we now ask is whether this is sustainable when many of the overseas companies that Australian businesses are now competing with operate under much more streamlined tax systems,” he said.

Tax Nation: Business Taxes and the Federal–State Divide