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Submission No. 72 Back to full list of submissions
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ASX SUBMISSION

REVIEW OF BUSINESS TAXATION

SECOND DISCUSSION PAPER

A PLATFORM FOR CONSULTATION

  

April 1999

AUSTRALIAN STOCK EXCHANGE

 

Executive

Summary

Introductory comments

Recommendations

1. Trade-off between company tax rate reductions and abolition of tax concessions

1.1 R&D tax concession
1.2 Accelerated depreciation
1.3 Taxation reductions

2. Entity taxation system

2.1 Deferred company tax
2.2 Resident Dividend Withholding Tax (RDWT)
2.3 Options to avoid the double taxation of distributed tax-preferred income
2.4 Preventing double tax through the entity chain under the full franking system
2.5 Collective investment vehicles
2.6 Should tax-preferred income accruing to CIVs be taxed ?
2.7 Definition of CIVs
2.8 Pooled superannuation trusts

3. Investment in Australia by non-residents

3.1 Option for a Non-Resident Investor Tax Credit (NRITC)
3.2 Treatment of conduit income for entities (other than CIVs)
3.3 Proposal to allow franking credits to be available to residents investing in Australia via non-resident entities.

4.Taxation of foreign source income

4.1 Allow an imputation credit for withholding tax paid on foreign dividends
4.2 Thin capitalisation rules

5. Reform of capital gains tax

5.1 Estimation of revenue costs of CGT rate reductions
5.2 Means of implementing rate cuts for CGT
5.3 Indexation
5.4 Relief for scrip-for-scrip transactions
5.5 Averaging

6. Taxation of financial arrangements

6.1 General Response to Elective Mark-to-Market Taxation
6.2 Eligibility to Make Mark-to-Market Election
6.3 Inclusion of Equity Derivatives in Mark-to-Market/Realisation Regime
6.4 Timing Adjustment
6.5 Hedging
6.6 Quarantining of Losses
6.7 Synthetic Arrangements
6.8 Debt/Equity Hybrids

Attachment 1: Modelling analysis of deferred company tax

Attachment 2: Capital Gains Tax Issues

Attachment 3: Modelling of options for CGT reform

 

Contacts

Michael Roche
National Manager,
Strategic Planning & Review and
Chief Economist
ASX Ltd
Ph: (02) 9227 0019
Jason Anderson
Senior Economist
Strategic Planning & Review
ASX Ltd
Ph: (02) 9227 0953
Michael Giddings
Group Taxation Manager
Legal Services
ASX Ltd
Ph: (02) 9227 0801

Executive Summary

ASX strongly encourages the government to make the globalisation of Australian business the driving force for reform of business taxation. In trade and industry policy, Australian governments have confronted the difficult issues that arise when actively participating in international markets.

Taxation policy should not be an exception to this overall trend. Cross-border investment flows are vital to reducing the cost of capital in Australia, and the generation of employment in the industries of the future. With these issues taken into account, it might be possible to reduce the company tax rate without sacrificing tax concessions that contribute to investment in important sectors of the Australian economy.

As a result, ASX disagrees strongly with the government’s requirement that tax reform recommendations of the Review of Business Taxation be revenue neutral (against the baseline of A New Tax System).

If the government imposes a revenue neutral constraint, then ASX believes that the Review of Business Taxation can at least strike a balance between the achievement of growth and equity goals for tax reform, drawing on options contained in the second Review of Business Taxation discussion paper A Platform for Consultation. In this submission, ASX sets out arguments for the following proposals:

  • Reduction of the company tax rate to 30 per cent. In the context of the Government’s revenue neutral constraint, this would have to be funded by the abolition of tax concessions (in particular accelerated depreciation).
  • An entity taxation system that taxes companies and trusts in the same manner, while accommodating collective investment vehicles.
  • The entity system is implemented through a resident dividend withholding tax, which accommodates the overlap between Australia’s tax system and that of other countries, so that the tax burden on foreign investors is not increased as a result of deferred company tax.
  • Foreign source income is given some limited tax relief through provisions to create franking credits for foreign dividend withholding tax.
  • Reforms to the thin capitalisation rules.
  • Adoption of an optional mark-to-market for equities and equity derivatives.

ASX is particularly concerned about the deferred company tax proposal. Modelling analysis by ASX indicates that deferred company tax will raise the tax burden on non-resident investors in large, globalised Australian companies. For a theoretical Australian company, DCT is estimated to raise the weighted average cost of capital by 8 per cent (from 10.8 per cent to 11.6 per cent), and decrease the estimated market value of equity by 16 per cent. DCT is expected to diminish Australia’s position as a regional financial centre for equities, and indirectly impact on resident investors.

ASX has carefully considered the options for reform of capital gains tax. Some preliminary analysis of this issue is provided in the submission, and ASX has commissioned detailed analysis of CGT reform. ASX argues that any CGT reforms should:

  • significantly reduce the current harsh and uncompetitive rates of capital gains tax, while preserving the progressive structure of the income tax system.
  • be neutral as to the duration of an asset holding.
  • maintain indexation as a necessary structure for capital gains taxation.

ASX strongly supports moves to reduce personal capital gains tax rates below those for other income, but not at the price of removing indexation. ASX believes that CGT rate reductions can be at least partly funded by behavioural responses, as lower CGT rates both encourages new investment activity and leads investors to sell assets that they would otherwise hold for longer periods of time, thereby increasing the tax base. If the response is sufficiently great, then a rate reduction may well be largely self-funding.

ASX notes that with indexation in place and the reduction of the entity tax rate to 30 per cent, Australia will achieve a highly competitive business CGT regime.

The proposal to provide an exemption from capital gains tax for scrip-for-scrip transactions is strongly supported, and this reform can be funded through the abolition of averaging provisions.

The full submission is available to download in either PDF or RTF format.