Review of Business Taxation
The then Government’s August 1998 Tax Reform announcement, which foreshadowed the GST and a range of changes to personal income tax, also set in train a review of the business tax system. That Review was set a clear goal: to reduce the rate of company tax to 30% (from 36% then current) on a Revenue neutral basis. With the cost to Revenue of such a company tax rate cut estimated in the order of $3 billion per annum, the achievement of neutrality was a considerable challenge.
In February 1999, a discussion paper (‘A Platform for Consultation’) was released by the Review. This highlighted the acceleration (over effective life) of depreciation inherent in the Tax Commissioner’s broad-banded safe-harbour depreciation schedule (IT2051) as an annual cost to Revenue of some $2.5 billion. Other integrity, reform and high level design issues were also identified.
In the event, at the end of July 1999, the RBT final report and recommendations were handed to the Government and on 21 September, the first tranche of policy responses was announced. Key amongst these was the immediate abolition of accelerated depreciation to in large part compensate for the phased reduction in the company tax rate to 30% for the year-commencing 1 July 2001 (34% for 2000/2001). A range of other decisions was also taken, including the immediate removal of the 13- month rule for advance expenditure and of the balancing charge offset on equipment disposal. Further decisions were deferred to a second tranche to be the subject of further study.
In AELA’s main representations to the RBT, it was accepted that it was a matter for Government policy to set the level of equipment investment incentive (implicit in the particular mix of company tax and depreciation rates) for a given state of economic activity. AELA’s concern however, is that within such tax mix as determined, leasing’s tax benefit transfer capacity should not be inhibited. That the changed tax mix represents a disincentive to equipment investment needs to be borne in mind when financing decisions are being made, as the lease rental (where the lessor has priced the lower depreciation) will reflect it whereas the loan repayment will not; after tax however, the disincentive effect is the same.
The Government’s response to the Review also introduced a new Simplified Tax System (STS) for ‘small businesses’, defined at the time as those with average annual turnover of less than $1 million. This measure incorporated an immediate write-off for capital purchases up to $1,000 and a simplified depreciation regime (including access to the pre-existing accelerated write-off rates until 30 June 2001), after which all eligible assets (ie with an effective life under 25 years) would be pooled and the pool depreciated at the declining balance rate of 30% per annum.
Another RBT policy area, which subsequently required AELA’s attention, was the changed approach to Thin Capitalisation. While previously this measure had centred on the prevention of Australian Revenue being adversely impacted by the payment by foreign controlled companies of tax deductible interest to overseas parents or associates rather than the return of non-tax deductible dividends to the same parties, the RBT approach taken up by the Government was to restrict such deductible payments to all parties, overseas or domestic, related or non-related. From AELA’s perspective, it was necessary to ensure that the leasing portfolios of our overseas-owned members were not disadvantaged by the operation of the prescribed financial intermediary gearing. Also important was to ensure that the Debt/Equity Rules, which accompanied the restrictions, did not adversely impact on affected lessees. In the event, these objectives were achieved; both will also be considered within the Tax White Paper reform process (see earlier comments).
A range of other higher level tax system change proposals affecting equipment investment and finance were also under consideration. Of these the proposal to introduce the Tax Value Method was potentially the most significant, but in August 2002 the Government announced that it had accepted the recommendation from the Board of Taxation not to proceed with the Tax Value Method; AELA members welcomed this decision.