An expert panel set up by the Australian Federal Government has recommended reducing the corporate tax rate over the short to medium term but concerns exist as to how this may be funded.
The Business Tax Working Group established by Treasurer Wayne Swan after last year’s tax forum has released a discussion paper outlining a number of possible ways that the proposed cut to the Australian company tax rate could be funded.
At 30 cents in the dollar, Australia’s corporate tax rate is comparably high by international standards which the panel believes is impeding Australia’s productivity.
A fundamental driver for the reduction in the company tax rate is to assist Australia to continue to attract investment and reduce incentives to shift profits off-shore. It was noted that a lower statutory corporate tax rate could make Australia more attractive to foreign investment and increase the quantity of the capital stock for greater productivity. A lower corporate tax rate could also spur investment across the economy by reducing the pre-tax required rate of return.
The view to reduce the company tax rate is consistent with the recommendation made by the Australia’s Future Tax System (AFTS) Review which proposed that the company tax rate be reduced to 25 per cent over the short to medium term.
How could the cut be funded?
The Business Tax Working Group have identified that a cut to the corporate tax rate could be funded by broadening the business tax base and removing or adjusting special exemptions and deductions which favour certain investments, industries or funding options.
These changes, if introduced in later years, may create fundamental changes to the Australian tax landscape.
The working group’s discussion paper contains a description of the options currently under consideration and can be found on the Treasury website here. Broadly speaking, the options presented focus on three tax base broadening categories. Listed below are some of the options outlined by the Business Tax Working Group:
Interest deductibility (including changes to the thin capitalisation rules)
The options being considered include:
- Various changes to thin capitalisation regime, including removing the arm’s length debt test and/or reducing the safe harbour gearing levels. The reduction for general entities may be from 75% to 60%.
- Capping interest deductions for all business taxpayers or capping interest deductions for all business taxpayers (except banks).
Capital allowances and the treatment of capital expenditures
In light of these considerations, the following areas have been highlighted for reform:
- Lowering the diminishing value rate for depreciation from 200% to 150%.
- The removal of the statutory life caps or part removal of the statutory life caps for certain depreciating assets used in particular industries. Currently, the beneficiaries of statutory caps include the oil and gas, petroleum, agricultural and transport industries and irrigation water providers.
- Reduction or removal of the immediate deductibility for exploration or prospecting expenditure.
- Various proposed changes to building depreciation, including depreciating buildings over effective lives, the removal of building depreciation deductions, or allowing a uniform rate of depreciation of 2.5% per cent per annum
The Research & Development tax incentive
The working group has identified four options for potentially better targeting of the R&D Tax Incentive. These options would limit or deny the non-refundable tax offset and include:
- The abolition of the 40% cent non-refundable tax offset
- The introduction of a threshold turnover above which the 40% non-refundable tax offset could not be claimed
- The introduction of a cap on the amount that can be claimed annually under the 40% non-refundable tax offset
- Cutting the rate of the non-refundable tax offset to 37.5%
Business groups and the general public are invited to provide submissions in response to the paper until the 21st of September 2012.
While it is too early to tell if the options provided for broadening the tax base will be adopted by the Government, it is important that directors are aware that these issues are being considered. Our tax team at William Buck will keep you up to date with changes as they happen.