Recent
and Proposed Australian Tax
Reforms
By Caroline Maxwell, London
Australia's
leading business executives
could be forgiven for being
a little rattled at the moment.
Australian companies, and
Australian resident multinationals
seem to have been condemned,
in the words of the Chinese
proverb, to be living in 'interesting
times' over the past few years.
A
survey conducted by Ernst
and Young in 2001 showed that
the majority of the country's
top businesses were dissatisfied
with the reforms already implemented,
and felt that the Australian
Taxation Office (ATO) had
acted in its own interests,
and had failed to adequately
consider the needs of Australian
businesses. Of those questioned,
46% believed that the tax
reforms had been unsuccessful
so far, and a whopping 62%
of respondents blamed the
tax system for constraining
economic growth.
During
2002 and 2003 the Australian
taxation system, especially
with regard to corporate issues,
was still being reformed at
a rate of knots, and many
found it difficult to keep
up. Although the aim of many
of the reforms was to create
a stable, long term, and coherent
system of taxation, companies
were and are being forced
to make decisions regarding
tax planning and the structuring
of their business on a relatively
short term basis.
The
'Review of Business Taxation:
A Tax System Redesigned' report,
or ' The Ralph Report' as
it is more commonly known,
was received by the Australian
government in 1999. The report
proposed a number of changes
aimed at redesigning the country's
business taxation regime,
and a great many (but far
from all) of the proposals
contained therein have been
accepted by the government,
(albeit with some amendments)
and were implemented in stages
between 2001 and 2004.
Still,
it is not enough for business,
and in November
2004 the Australian Chamber
of Commerce and Industry called
upon the government to use
its Senate majority to push
through a second wave of major
tax reforms to ensure that
Australian business remains
competitive. To argue its
case, Australia’s largest
business representative body
released a Taxation Reform
Blueprint entitled ‘A Strategy
for the Australian Taxation
System 2004-2014’ which sets
out a comprehensive programme
of reform of both personal
and business taxes over the
next ten years.
While the Chamber explained
that it welcomed the government’s
tax reforms in 2000, which
saw the introduction of GST
and a reduction in company
tax, it believes that the
measures did not go far enough
to improve Australia’s international
competitiveness. ACCI chief
executive Peter Hendy warned
that subsequent tax reforms
in other countries threaten
to leave Australia behind.
“In particular, Australia’s
high marginal tax rates and
low thresholds are uncompetitive
by international standards,”
observed Hendy. “This harms
innovation, education and
training, skilled immigration
and entrepreneurship, while
promoting tax avoidance and
evasion,” he noted.
According to ACCI’s 2004 Pre-Election
Survey, the level of taxation
was the number one issue facing
Australian businesses, followed
closely by the complexity
of tax legislation.
In
January 2005 the administration
of Prime Minister John Howard
said it was planning a major
simplification of the country's
tax code, which a senior tax
official says could be in
place within the next year.
Under the changes, the present
approach to combating tax
avoidance through the introduction
of new legislation to close
loopholes would be scrapped
in favour of the setting out
of broad principles, and the
issuing of rules and regulations
by the Australian Tax Office.
Dick Warburton, chairman of
the government's tax advisory
board, argued that the changes,
which have been on the table
for a number of years, should
be put in place within the
next twelve months.
This
wasn't enough to still the
calls for reform, and in March
2005 tax counsel for the Institute
of Chartered Accountants in
Australia, Ali Noroozi called
for the country's tax legislation
to be substantially overhauled.
Urging the government to publish
a white paper looking at the
current system and consulting
on the changes needed, Mr
Naroozi drew attention to
the gulf between the top marginal
tax rate and the corporate
tax rate as one of the key
areas in need of reform. "At
the moment, because there
is such a big difference between
the top marginal tax rate
and the company tax rate,
there are always people who
do explore all sorts of ways
of warehousing funds in companies,"
he explained.
He
reportedly went on to suggest
that fears regarding the likely
implications for revenue collection
of a drop in the top marginal
rate are unfounded, observing
that: "We dropped the business
tax rate but that hasn't necessarily
meant collecting less tax
from business."
He
was followed in April by
business
lobby group, the Business
Council of Australia which
called upon the government
to undertake an immediate
and comprehensive review of
the nation’s tax system, warning
that high rates and a growing
level of complexity and red
tape are threatening to stifle
national competitiveness and
stymie economic growth. “As
with business, economies are
in competition with each other.
Governments cannot be wedded
to tax structures without
considering their effect on
their economy’s competitiveness
internationally,” observed
Hugh Morgan, BCA‘s Tax Action
Plan President. “Our analysis
demonstrates that in a number
of tax areas, we are not competitive
and it is impacting upon issues
that go to the continuing
success of Australia’s economy,”
he added.
Mr Morgan went on to argue
that comprehensive debate
was needed on radical root
and branch reforms to the
Australian tax system. Under
the BCA’s major proposals,
the Commonwealth-State tax
and state business taxes would
be overhauled, as would personal
income tax, which would be
levied at a single low rate
of 30% for high income earners,
thus bringing it into line
with corporate income tax.
The group also urged a general
review of the personal income
tax system, which would culminate
in the reduction of effective
marginal tax rates and an
improved tax environment for
saving. These changes would
be carried out in conjunction
with a “comprehensive” simplification
of the tax administration
and compliance systems, paring
back the 9,600 page Tax Act
which has increased from 3,600
pages in 1996. By early 2006,
this exercise had succeeded
in reducing the bulk of the
legislation by 30%.
The BCA called upon the government
to implement the first changes
by the 2006/2007 budget in
order to stave off “immediate
threats to...competitiveness.”
In
February, 2006, Treasurer
Peter Costello launched a
new study, the outcome of
which is designed to gauge
the competitiveness of Australia's
tax systems relative to other
developed economies.
The
aim of the study is to identify
areas where Australia both
leads and lags its international
trading competitors, and it
will cover taxes collected
at national, state and local
government levels. Personal,
business, indirect, property,
transaction and superannuation
taxes will be included in
its remit.
The
Business Council of Australia
called for the country’s tax
system to be put under "permanent
watch" in order to ensure
that it remains internationally
competitive.
In
a paper on tax reform, the
BCA expressed concern that,
despite the government's decision
to review Australia's international
tax competitiveness, there
continues to be an absence
of a strategic reform agenda
for tax.
It
called for the current review
of Australia’s tax system
not to be a one-off, and to
avoid focusing exclusively
on whether current tax rates
are competitive today, but
how these rates match up with
current global trends.
BCA President, Mr Michael
Chaney commented that: “Given
the fast-moving nature of
global tax reform, a competitive
tax rate now may become uncompetitive
within a short space of time."
He
added: “That’s why tax reform
must be a permanent item on
the reform agenda.”
Mr
Chaney urged the government
not to "play catch-up" through
periodic, short-term changes
to rates and thresholds, but
to anticipate global trends
in tax reform through a considered,
forward-looking plan of reform.
The
BCA paper also argued that
the review should not to simply
focus on OECD comparisons,
given the large volume of
trade that Australia undertakes
with non-OECD economies.
The
paper also recommended that
the tax system should be subject
to comprehensive and open
review at least every two
years, similar to regular
tax review processes now in
place in countries like New
Zealand.
Entitled
'Keeping a Permanent Watch
on Australia’s Tax System,'
the paper noted a number of
inadequacies in the Australian
tax system, particularly the
large gap - compared to other
economies – between personal
and corporate tax rates, which
it said encourages high-income
taxpayers to aggressively
minimise their tax liabilities.
The paper also bemoaned the
high cost of tax administration
and the rapidly growing complexity
of the tax system, the corporate
tax burden, and the high rate
of personal income taxation
which discourages overseas
talent to seek employment
in Australia.
“Australia
needs a more vigorous debate
on spending priorities and
strategies for the future,”
Mr Chaney added.
“Business
and individual taxpayers will
not passively accept projections
of ever-expanding spending
needs and therefore, ever-increasing
tax burdens," he concluded.
Taxation Reforms In 2000/2001
Possibly
the most important, and certainly
the most talked about measure
of recent times was the introduction
of GST, or the Goods and Services
Tax in July 2000. GST is essentially
a value added indirect tax,
similar in nature to VAT and
GST where it exists throughout
the world, and imposed at
a rate of 10%.
Any
business with an Australian
turnover of more than AU$50,000
(Approx. USD$26,258) must
be registered for GST purposes,
and a registered business
must collect GST on the consideration
it receives for making taxable
supplies. There are, however,
a few exemptions from to the
GST rules:
1)
Businesses making supplies
or providing services in areas
such as health, education,
and basic food products are
exempt from GST. Although
they are not liable to pay
the tax themselves, they can,
however, claim input tax credits
(essentially a GST refund),
for acquisitions related to
the making of those supplies.
2) Business concerned
in 'input taxed' areas, such
as financial services suppliers,
and those involved with existing
residential properties are
also exempt from GST. However,
they may not be able to claim
an input tax credit for acquisitions
pertaining to the making of
those supplies, or the provision
of those services.
3) Registered businesses
are not required to pay GST
on their exports. However,
GST is imposed on all goods
imported into Australia, although
once again, a refund may sometimes
be claimed.
The
topic of GST caused quite
a stir when put forward by
John Howard and Peter Costello,
and there was somewhat hysterical
speculation that 40% of small
businesses would fail as a
result of added administration
and costs. And indeed, the
Australian National Organisation
Survey, conducted for the
Queensland University of Technology,
and the first of its kind
since the introduction of
the tax, showed that many
small businesses are buckling
under the strain of high compliance
costs. The survey also showed
that of Australia's largest
organisations, only 13% felt
that the introduction of GST
had adversely affected their
business. This, however, is
a much lower figure than can
be found in the results of
the aforementioned Ernst and
Young survey, in which only
1 in 4 of those questioned
considered GST to have been
beneficial to the Australian
economy.
Despite
the compliance casualties,
in the final analysis, it
is the end user in the chain
of transactions that really
bears the brunt of the charges,
as business can usually claim
a GST refund on business related
acquisitions. And with personal
income tax rates on a downward
trajectory, people are not
as upset as perhaps they might
have been. In conclusion,
it is probably fair to say
that although the tax has
not been well received, it
could have been worse.
However,
although the tax itself was
generally accepted with only
a little grumbling, there
was an outcry from small business
groups, investors, accounting
groups, and the opposition
regarding the GST Business
Activity Statements, and the
government was forced into
an embarrassing climb-down.
The initial idea was that
businesses would be required
to report monthly or quarterly
to the tax office their turnover
and the amount of tax collected-
on a double sided A4 page
with 148 pages of instructions!
Unsurprisingly, this was deemed
to be too complex, and the
burden of bureaucracy was
too much for many SMEs and
small investors.
Eventually,
bowing to widespread criticism,
the Australian government
made substantial changes to
the BAS rules, which meant
that:
-
Businesses with under AU$2
million turnover, self-funded
retirees and nearly 500,000
small investors were freed
from much of the costly
and time consuming paperwork
-
People with investment income
do not now have to fill
in an instalment activity
report
- Over
1.5 million people (including
sole traders) now just have
to send the tax office a
cheque each quarter for
the same amount.
- The
BAS form now only needs
to be completed and adjustments
made once a year
Although
the changes were welcomed,
the incident was something
of an embarrassment to the
government, which was criticised
for costing Australian business
billions of dollars in setting
up quarterly reporting procedures
that subsequently had to be
abandoned.
In
his 2004 budget, Australian
Treasurer Peter Costello proposed
further reforms to the GST
regime aimed at reducing the
compliance burden for small
businesses, by allowing firms
currently below the registration
threshold and voluntarily
registered for GST to report
and pay GST annually, instead
of quarterly. These measures
will benefit around 740,000
small businesses and 30,000
non-profit organisations that
are voluntarily registered
and currently pay on a monthly
or quarterly basis.
Capital
Gains Tax
Changes
to Australia's Capital Gains
Tax regime were brought forward
to improve the country's international
competitiveness, soon after
the Ralph Report was issued.
New measures included:
-
The abolition of averaging
provisions for assets sold
after 11.45am on the 21st
September 1999
- The
indexation of capital gains
frozen from the 30th September
1999
- The
exclusion from the CGT regime
of gains and losses on the
disposal of plant
- A
50% cut in CGT for individuals
on assets purchased after
October 1st 1999
- An
effective CGT rate of 10%
for complying superannuation
funds and some trusts.
Franking
of Corporate Dividends
Taking
effect in 2001 were new rules
governing the franking of
corporate dividends, a new
imputation regime, and new
rules for franking credits
for foreign withholding tax.
These new rules will be welcomed
by Australian resident entities
with offshore investments,
and allow that:
-
A franking credit of up
to 15% of a gross distribution
received by an Australian
corporate entity will be
available for foreign withholding
tax paid on foreign distributions.
- An
additional franking credit
may be allowed to a resident
corporate tax entity if
withholding tax on the distribution
received by the entity is
less than 15% of the gross
distribution, and withholding
tax was by its foreign subsidiaries
on the foreign distributions
they received.
In
order to be eligible for the
credit, foreign distributions
must be equivalent to frankable
distributions.
Transfer
Pricing and Thin Capitalisation
The
Ralph Report also threatened
that related party transactions
outside a consolidated entity
would be subject to 'arm's
length' rules, which basically
means that they would receive
the same consideration and
tax treatment as if they had
been two independent parties
dealing with each other at
arm's length. A set of transfer-pricing
regulations was put in place
in 2001.
Of
great importance to multinationals
is the issue of thin capitalisation
(whereby a non-resident entity
chooses to finance an Australian
subsidiary using debt rather
than equity in order to maximise
interest deductions against
Australian income), and reforms
were implemented in 2001.
The new regime applies to
both foreign entities investing
in Australia and Australian
businesses investing overseas,
and is designed to prevent
multinational taxpayers from
allocating a disproportionate
amount of debt to their Australian
operations. The existing thin
capitalisation and debt creation
regimes were repealed, and
the existing safe harbour
debt to equity ratio of 2:1
for general investors was
amended to 3:1. For financial
institutions, this ratio applies
to non-lending business, with
an overall safe harbour gearing
of 20:1 applying to the total
business of financial institutions.
Changes In 2001/2002
The
reform most triumphantly heralded
by the finance minister was
the reduction of corporate
income tax, from 34% to 30%.
Mr Costello also announced
the abolition of stamp duty
on most share transactions
and put an end to the Financial
Institutions Duty (FID). The
FID required financial institutions
which receive money to pay
a duty of 6 cents per $100
dollars received for normal
transactions, up to a maximum
of $1200 per transaction,
or 0.005% of 5% of the Australian
operation's average daily
liability for short term dealings.
This move was said to be costing
the government (or saving
the taxpayer, depending on
how you look at it) $1.2 billion
per year.
Other
measures possibly of interest
to Australian business and
resident multinationals were
the introduction of full GST
input credits on motor vehicles
and Capital Gains Tax concessions
for shareholders of listed
investment companies. There
were also transitional changes
to the draft legislation for
the thin capitalisation and
debt/equity ratios, but nothing
too spectacular.
Capital
Allowances
A
new capital allowances regime
came into effect in 2001,
replacing the previous 37
separate capital allowance
regimes with a uniform system.
By doing this, the government
hoped to achieve greater simplicity
and neutrality, provide consistent
treatment for capital expenditure,
and provide the opportunity
for write-offs of certain
types of capital expenditure
based on several alternate
bases (although the range
of 'black hole' expenses that
are available is said to have
disappointed Australian business).
The new system is based on
the following principles:
-
A set of general rules to
calculate the deduction
for the notional decline
in value of most depreciating
assets. (However, the wording
raised problems for Australian
businesses in this respect,
since the definition of
'assets' is left vague.
This means that businesses
in Australia are still in
the position of having to
use three different concepts
of an asset in CGT, accounting
and capital allowance terms).
- A
pooling mechanism whereby
some expenditures are pooled
and given deductions for
the decline in the pool.
- Deductions,
immediate or over a period
of time, for certain capital
expenditure used in the
primary production and mining
industries.
Consolidation
From
late 2002, wholly owned entity
groups are allowed to choose
whether to consolidate, and
thus be treated as a single
taxpayer for income tax purposes.
Companies can choose not to
consolidate, but after repeal
of the existing grouping provisions
are repealed, and the inter-corporate
dividend rebates cease to
apply they will find that
they are unable to transfer
losses, defer tax on the transfer
of assets, or obtain rebates
on un-franked dividends if
they decide not to, so perhaps
the word 'choice' is slightly
misleading
Previously,
each entity within a wholly
owned group was taxed separately,
some (but not all) intra-group
transactions were ignored,
inter-corporate dividend rebate
and loss transfer provisions
still applied, and although
there was the potential for
double taxation on gains,
there was also the possibility
of legitimate tax minimisation
by creating multiple tax losses
within the group, and value
shifting so as to create losses
where no actual economic loss
had occurred.
Other Ralph Report Proposals
One
of the more extreme proposals
in the Ralph Report, originally
its centrepiece, was the 'Option
2' or 'tax-value' method,
which if adopted would mean
that taxable income would
be determined on the basis
of cash flows and the changing
value of assets. Although
the federal government announced
its support in principle for
Option 2, the start date was
delayed in order to allow
further consultation and investigation,
Finally,
in March, 2002, the Board
of Taxation, (itself a creature
of the Ralph Report) presented
a 260-page consultation document.
ATO Assistant Commissioner
Andrew England, who helped
draft the proposal, said that
although the plan aimed to
simplify the two existing
Income Tax Assessment Acts,
and provide a more robust
and comprehensive structure
for income tax law more consistent
with economic and accounting
approaches to income measurement,
it was still likely to face
opposition from the business
sector and tax practitioners.
'TVM
is not a new tax, it's a new
way to draft income tax law
and structure income tax law,'
Mr England told journalists,
pointing to the proposal's
revenue neutral properties.
He
was right about the opposition:
in September, Treasurer Peter
Costello announced the demise
of the government's Tax Value
Method (TVM) plans, much to
the delight of the Australian
business community. Michael
Dirkis, tax director of the
Tax Institute of Australia
welcomed Mr Costello's announcement:
'We
are happy to say that chapter
in tax reform has gone away.
It is good that the government
has seen common sense with
this issue,' he commented.
Institute
of Chartered Accountants tax
counsel, Brian Sheppard echoed
this sentiment, explaining
that: 'It wasn't going to
deliver a simplified tax system,
just a different tax system.'
Taxation
of International Business
The
Government was slow in grasping
the nettle of the taxation
of international businesses,
not releasing its proposals
until August, 2002. Launching
the international taxation
arrangements consultation
paper, Mr Costello observed
that:
'I
do not want to see Australian
companies leave Australia.
I want Australian companies
to grow and remain headquartered
in Australia.' He continued:
'The net benefit will be if
we can encourage regional
headquarters and promote Australia
as a financial centre.'
Among
the suggestions contained
within the consultation document
are: the reduction of capital
gains tax for foreign executives
working in the Commonwealth,
and the elimination of double
taxation on foreign share
options. ABC News reported
on Friday that the system
of dividend imputation - whereby
tax paid on dividends at the
company rate is credited to
shareholders - would be altered
under the proposals to reduce
the tax bias against Australian
companies with large foreign
operations.
The
Treasury Department was also
said to be considering offering
tax breaks to foreign multinationals
in order to encourage them
to establish regional headquarters
in Australia.
The
planned changes were warmly
welcomed by business groups.
Chief Executive of the Business
Council of Australia (BCA),
Katie Lahey commented:
'Australia
must grasp this chance to
recalibrate its cross-border
tax laws to be internationally
competitive, to attract and
retain people, skills and
investment, and at the same
time jettison the dead weight
holding back the international
growth of Australian companies.'
Executive
Director of the Corporate
Tax Association, Frank Drenth
echoed this sentiment, announcing
that: 'This will make the
system more workable.' He
said that the newly released
proposals represented a step
in the right direction, explaining
that:
'In
themselves, these measures
are not going to make a Singapore
funds manager pack up their
bags and move to Sydney. But
they represent recognition
that we don't need to tax
every last cent of foreign-sourced
income.'
Taxation Reforms In 2003/2004
The
government took further steps
towards improving the international
taxation regime for businesses
in December, 2003, introducing
measures which took effect
from July, 2004, relaxing
Controlled Foreign Company
(CFC) rules as they apply
to countries possessing broadly
similar taxation regimes (BELCs),
such as the US, the UK, Germany,
France, Canada, Japan and
New Zealand, in effect exempting
income derived from outside
such countries but passing
through them (and therefore
taxed in them). Further legislation
is expected to extend the
exemption to income arising
inside the 'comparable' countries.
"Once
the package is complete",
said Ernst and Young, "Australian
multinationals doing business
in these major commercial
centres will no longer need
to be overly concerned with
measures that are aimed at
tax haven operations. The
Government has clearly recognised
the fact that business takes
place in these countries for
commercial rather than tax
related reasons."
However, CFC rules continue
to apply to income derived
through a trust or arising
under the Foreign Investment
Fund (FIF) measures, even
if derived through CFCs resident
in such comparable tax countries."
The new legislation also allows
fund managers to invest up
to 10% of their fund in foreign
passive investments before
FIF rules apply, and will
also relieve complying superannuation
funds from the FIF measures.
The amendments also provide
a withholding tax exemption
on widely distributed debentures
issued to non-residents if
those debentures are issued
by public unit trusts.
Taxation Reforms In 2005/2006
In
December, 2005, the Government
released draft legislation
for the final stages of reforms
of the taxation of financial
arrangements (TOFA stages
3 and 4).containing proposals
for the tax-timing treatment
of financial arrangements.
According
to the government, the draft
legislation reflects, where
possible, financial accounting
concepts contained in the
new accounting standards,
offering significant compliance
cost savings compared to the
current tax treatment. However,
Mr Brough said that he is
aware that some industry groups
would prefer to see the final
legislation based on a direct
link to accounting standards.
The
draft legislation contains
rules that cover tax-timing
treatments for financial arrangements,
including tax-timing hedging
rules that are designed to
minimise tax-timing mismatches.
Details about the treatment
of synthetic financial arrangements,
the commencement date and
transitional issues, and interactions
with the rest of the income
tax law are being developed.
As
previously mentioned, in February,
2006, Treasurer Peter Costello
launched a new study, the
outcome of which is designed
to gauge the competitiveness
of Australia's tax systems
relative to other developed
economies.
The
aim of the study was to identify
areas where Australia both
leads and lags its international
trading competitors, and it
will cover taxes collected
at national, state and local
government levels. Personal,
business, indirect, property,
|