Tax White Paper Reform
As discussed above, in March 2015 the Government released the Tax Discussion Paper (TDP), the first element of the Tax White Paper reform process. It outlined the process for considering the future direction of Australia’s tax system and invited submissions to inform the Government’s tax options Green Paper; feedback on these options is to provide the basis for the 2016 Tax White Paper policy proposals.
The TDP noted that Australia’s corporate tax rate is high, with greater reliance on corporate income tax than most countries. Although capital allowances received little attention, it was acknowledged that the increase in the diminishing value rate for depreciation from 150% to 200% was to better reflect the economic pattern of depreciation. Other observations included that the tax-induced bias towards debt finance could potentially be significant in eroding the corporate tax base, and that the thin capitalisation rules seek to limit the extent of the potential erosion.
AELA’s submission on the TDP addressed those issues relevant to Members’ operations. In the order raised in the TDP, the continuation of the car statutory formula method was supported as a significantly less complex and less costly FBT compliance option. An alternative to the tax treatment of residual value setting in finance leases was proposed. Recent changes to the thin capitalisation regime should be allowed to determine their effectiveness, and any changes to the debt-equity regime should await the Board of Taxation’s review. Any cut in the corporate tax rate should not occur at the expense of capital allowances. A Treasury/ATO protocol was proposed for new tax measures. The effectiveness of the Investment Allowance in stimulating economic activity was noted. In the GST area, whilst retaining the reduced input tax credit regime, zero rating of business-to-business financial services would address the over-taxation of business consumption of financial services. Finally, we recommended that Luxury Car Tax be phased out, and associated ‘luxury’ car imposts be abolished.
AELA looks forward to continuing involvement in the Tax White Paper reform process.
Australia’s Future Tax System (Henry Review)
In early 2008 the Government established the review of Australia’s Future Tax System (the Henry Review) to comprehensively review Federal and State taxes, with the final report to be provided to the Treasurer by the end of 2009. Treasury released an initial discussion paper in August 2008 setting out the framework of Australia’s tax and welfare systems. In areas relevant to AELA, the paper noted that Australia’s corporate tax rate of 30% was above the OECD average of 26.6%, whereas in 2001 when our rate went from 36% to 30% the OECD average was 32.5%. In relation to effective life depreciation, it suggested that corporate tax reductions in other OECD countries had been partly financed by less generous tax depreciation allowances, and that effective life depreciation coupled with the 2006 introduction of the 200% rate for the diminishing value method had resulted in a greater alignment of tax depreciation with economic depreciation.
AELA’s submission to the review highlighted that the most undesirable feature of the present input taxation regime for financial services is the over-taxation of business consumption of those services; without the entitlement to the input tax credit, the GST is no longer in fact a value added tax. Other countries have introduced mechanisms to rectify this distortion, and Australia’s GST regime needs to regain its international competitiveness. We also suggested the abolition of luxury car tax. Even with this abolition, ‘luxury’ cars would remain subject to limits on depreciation and input tax credits, tax imposts not borne by any other goods. For these purposes a common threshold of $75000 should apply, indexed to the general Consumer Price Index.
Our submission proposed an alternative to the current Fringe Benefits Tax (FBT) statutory formula, increasing the present four bands so as to remove the incentive for more car use. This would also provide consistency with the operating costs method, reduce compliance burdens, ameliorate greenhouse gas emissions and address tax expenditure concerns. A significant micro-reform move would be the further abolition of state taxes. The legislative framework covering remaining state taxes should be made uniform. The Government released both the Henry Review and provided its initial response on 2 May 2010. In responding, the Government announced that the company tax rate was to be dropped to 29% from 2013-14 and to 28% from 2014-15. For small business (turnover under $2 million), from 2012-13: company tax would drop to 28%; assets up to $5,000 would be immediately deductible; all depreciable assets except buildings would be allocated to a single depreciable pool and written off at a 30% rate. In the event, many of these proposed measures have not been implemented.
The Henry Review also recommended that capital allowance arrangements should be enhanced and streamlined to ensure effective rates more closely match rates of economic depreciation, and to reduce administration and compliance costs. It also recommended that the small business entity turnover threshold be increased form $2 million to $5 million.
In relation to the FBT statutory formula, the Henry Review recommended that the current formula for valuing car fringe benefits be replaced with a single statutory rate of 20% regardless of the kilometers travelled. The operating cost method would remain as an alternative, with the Review noting that while it provides a more accurate valuation, it imposes a higher compliance burden for users with low levels of business use. The Review recommended that fringe benefits that are readily valued and attributable to individual employees should be taxed in the hands of employees through the PAYG system.
In the context of AELA’s submission that the current GST regime results in the over-taxation of business consumption of financial services, it was pleasing that the Review concluded that input taxation of financial services under the GST is inefficient and harms competition, and that financial services used by businesses should be treated like any other business input, and that changes should be achieved through consultation with the financial services industry. Elsewhere we note that in the May 2010 Commonwealth Budget the Government announced significant GST hire purchase reforms, which were implemented from 1 July 2012.
the 2011-12 Budget the Government announced changes to the FBT treatment of cars consistent with the recommendations of the Henry Review. The previous four ‘statutory rates’ were replaced by a single flat rate of 20% regardless of the distance travelled. These changes apply to new contracts entered into after 7.30pm (AEST) on 10 May 2011, and are phased in over four years.
In November 2012, AELA made a submission to the Senate Committee review of the changes to the statutory formula for determining the taxable value of car fringe benefits. AELA concluded that although the changes introducing the one statutory rate did not address all the objectives we regarded as desirable, AELA was of the view there should be no further changes to these arrangements. The Senate Committee report was tabled in February 2013; no further changes were suggested at this time, but the Committee recommended that in 2015 the Government commence a review of the car FBT framework.