Company tax rate cut comes with compromises

The Business Tax Working Group has released a discussion paper canvassing a number of possible ways in which a cut to the company tax rate could be funded from within the business tax system. The 71-page paper notes that the options canvassed are not recommendations and that, to date, the Working Group has not finalised an assessment of the costs and benefits of the options canvassed.

The Working Group says it “believes that Australia should have an ambition to reduce its company tax rate over the medium term and that achieving a materially lower rate is a worthwhile reform objective”. The Working Group notes the Henry Tax Review’s proposal to cut the rate to 25% over the short to medium term. Further, according to preliminary Treasury estimates, a 25% company tax rate would have revenue implications totalling $26 billion over four years from 2012­–2013.

According to the Working Group, a comprehensive tax base that contains minimal special exemptions and deductions for certain investments can result in a more productive mix of different investment options and a broader tax base that will generate greater revenue to fund a lower company tax rate. However, it notes that there may well be circumstances where a departure from a uniform tax base can be justified on economic grounds (such as encouraging activities that give rise to positive social benefits). Further, the Working Group notes that its terms of reference do not allow it to consider changes to the GST.

The Working Group’s consideration of base-broadening options builds upon its recent work on the tax treatment of losses whereby three areas were identified as being worthy of additional analysis:

• interest deductibility (including thin capitalisation rules);
• capital allowances and the treatment of capital expenditure; and
• the research and development (R&D) tax incentive.

The Working Group has been careful to note that the options set out in the paper should not be interpreted as an indication that they will be adopted by the Working Group or the Government. The Working Group is open to suggestions on potential transitional arrangements that could accompany any potential base-broadening options.

The Working Group says it plans to meet with stakeholders during August and September 2012 in relation to the discussion paper. The Working Group intends to release a draft of its final report to the Treasurer in late October 2012, with the final report due to the Treasurer in December 2012.

Submissions are due by 21 September 2012.

Source: Business Tax Working Group discussion paper, 13 August 2012 www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Business-tax-reform