The Australian Financial Review
By Tim Cox, Tax Partner
As the dust settles on Labor’s election triumph, the new Australian Government now has an opportunity to address business tax reform with fresh vigour. This is an issue of critical importance to the country’s future prosperity that cannot be left in the too-hard-basket any longer.
What does business tax reform entail? Australia needs a considered review of the taxes impacting business – not just federal income tax, but the many other taxes imposed on business to comply with federal, state and territory legislation.
This is a big challenge, but the prize is significant. Attention to business tax reform would help address other challenging issues, namely federal–state relations, the impact of red tape and the important question of our global competitiveness.
Despite its obvious importance, there has been a tendency by government to view business tax reform negatively. But the truth is that changing the architecture of our tax system would be win-win for both business and government, which is why it is in the federal government’s interests to lead the way.
Australia’s business tax system is complex and unwieldy, even after some progressive improvements. Businesses of all types and sizes are burdened with excessive costs that hamper their ability to prosper at home and compete overseas. At the same time, the system’s complexity and lack of transparency discourages international investors.
There is a real risk that in a rapidly globalising world, Australia’s competitiveness is being significantly undermined. The view that Australia’s corporate tax system is grossly inefficient was reinforced in the World Bank’s latest Paying Taxes report.
While Australia has focused on personal income tax rates, other countries are actively reforming business tax regimes – they are streamlining their respective tax systems and lowering rates. New Zealand, for example, was ranked in the top 10 countries in the world for ease of paying taxes.
The extent of Australia’s problem was first outlined in the landmark 2007 Tax Nation report, a project jointly undertaken by PricewaterhouseCoopers, the Business Council of Australia and the Corporate Tax Association) that measures the total tax contribution of our top 100 companies. This will be updated in February.
The Tax Nation report highlights that, while government revenue from company tax receipts has continued to grow both in quantity and importance, the structural inefficiency of the tax system is an obstacle to business activity. The study points out that 54 types of taxes were potentially levied from businesses by federal and state and governments. This compares with just 22 business taxes in the much larger UK economy.
On top of this direct tax burden, Australian businesses face considerable compliance and administrative costs, not to mention the risks of collecting large amounts of tax on behalf of nine governments across the country.
The 92 businesses surveyed in Tax Nation overall paid nearly $28 billion in taxes to governments over the financial year, while being responsible for collecting and administering another $37 billion. Remarkably, however, two thirds ($18.1 billion) of the tax revenue paid was from corporate income tax, with the remaining 53 taxes responsible for bringing in just one third ($9.4 billion) of the total.
If we aspire to be internationally competitive, Australia needs an efficient tax system.
The opportunity for Australia lies in dramatically simplifying its overall business tax system and easing the compliance burden. Scaling back and simplifying the tax regime would also reduce the government’s own administration and collection costs.
This represents a win-win outcome for both government and business.
Tax reform is much more than a federal issue and indeed many of the structural problems relate to the number and the differences between state taxes. The New South Wales government’s current review of state taxation is a step in the right direction and an encouraging sign that the nation’s largest state recognises the significance of business tax reform.
The recent move by NSW and Victoria to harmonise their payroll tax rules is another positive move that should be replicated nationally.
It is understandable that governments move cautiously in relation to tax reform. But now is the time for the new federal government to build on the momentum created by the states and to show leadership with real improvements in a year when there will be no elections in any states or territories. An excellent start would be to initiate a Productivity Commission review of the entire business tax system.