|Submission No. 79||Back to full list of submissions|
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A Platform for Consultation
The option to transfer FBT from a tax on employers to a tax on employees is supported, however further details of the implementation process are required.
Where the tax liability for fringe benefits is transferred from the employer to the employee, the current concessions and exemptions in the FBT Act (eg. Remote Area Housing and superannuation contributions) should be maintained in the Income Tax Assessment Act.
An FBT threshold of $5,000 should be introduced, where businesses with FBT liabilities of $5,000 or less would be exempt from FBT and not required to lodge a return.
For most tax purposes and calculations, a partnership is treated as if it is a single taxable entity.
However, for Capital Gains Tax calculations, partnerships are treated with a fractional interest approach. That is, each partner is required to keep a separate record of their respective interests in the partnership assets - a considerable compliance burden. This also negates the advantage of partnerships being allowed to prepare a single depreciation schedule as each partner still has to maintain a separate asset register in case of asset disposal.
The discussion paper does acknowledge that many taxpayers have difficulty in complying with CGT record keeping requirements or are unaware of their responsibilities in this area. Two options are proposed to address this:
The SBDC considers the entity treatment of partnerships to be the preferred option. Under this approach, the partnership would be regarded as the owner of all the assets of the business and a partner's ownership interest would be in the partnership as a whole. In this way, the fractional interest method currently used for CGT purposes would move away from calculating an individuals assets to that of calculating the assets of the whole partnership.
This approach would eliminate the need for balancing adjustment roll-over relief and reduce the level of record keeping required.
While the discussion paper suggests that under the entity treatment a capital gain would flow through to the individual partners, the paper is silent in relation to capital losses. It is important for the Review Committee to clarify this matter, that is whether capital losses will be held in the entity or flow through to the partners. Whichever of the two options is finally employed, the SBDC recommends consistency in the treatment of both capital gains and losses within partnerships.
The paper also fails to discuss the treatment of the "goodwill exemption" available under the CGT provisions. The provisions dealing with goodwill exemption broadly state that half of any capital gain arising from the disposal of goodwill is exempt from CGT, provided that the net value of the business disposed of and the related business is less than the net asset threshold (1999 - $2,248,000).
Currently, each partner (under the fractional approach) can individually qualify for the 50 per cent goodwill exemption on the basis that each partner's net assets do not exceed the threshold. The SBDC recommends that this concession be maintained if an entity approach to CGT is adopted. That is, the net asset threshold should increase depending on the number of partners in the partnership.
To simplify record keeping, the SBDC recommends that the entity treatment of partnerships be adopted in calculating capital gains and losses.
With the adoption of an entity approach, the SBDC recommends that the current 50 per cent goodwill exemption threshold be maintained for each partner.
The current system taxes real capital gains at marginal rates, which acts as a disincentive to savings and investment by businesses and individuals. To encourage investment and capital attraction, the discussion paper proposes some preliminary options and alternate treatments for capital gains, including:
The introduction of a capped 30 per cent tax rate on capital gains would provide a definite incentive for individuals to invest in income bearing assets. The discussion paper makes the comment that the concession would be confined to individuals to limit its revenue cost, as well as certain investment vehicles such as trusts and superannuation funds.
However it is unclear whether the 30 per cent rate will apply to incorporated entities, and if not, a significant inequity will exist between incorporated and non-incorporated businesses. This issue must be addressed before any of the above options are implemented.
The paper also comments that a lower rate on capital gains than on other forms of income would require tight controls, as investors sought to convert ordinary income into capital gains income. This may lead to increased administrative and compliance requirements on both individuals and eligible companies holding investment assets.
However, despite the potential limitations, the reduction in the capital gains tax rate to 30 per cent, whether capped or stepped, should be supported and the SBDC recommends the Review Committee consider an equitable basis for its implementation.
A further option supported by the SBDC is the proposed $1000 CGT threshold for individuals. Again the issue of equity arises between incorporated and non-incorporated businesses and the fairest treatment would be access to the threshold by all tax paying entities - both individual and corporate.
Due to the increase in administration and compliance that would accompany such a move, the SBDC recommends that the threshold be increased to $5000, that is, the first $5000 capital gain is tax free for both individuals and corporate entities. This would compensate business for compliance costs and provide an additional incentive to invest.
The option to cap the effective Capital Gains Tax rate at 30 per cent is supported, subject to equitable access by both individual and incorporated investors.
The tax free capital gains threshold be increased to $5000 and provided to both individual and incorporated investors.
Currently capital losses are quarantined and can only be offset against realised capital gains. The discussion paper proposes the following options in respect of the treatment of capital losses: -
Allow carry forward at an appropriate interest rate;
Allow carry back of losses to offset earlier gains;
Remove quarantining of capital losses where gains on assets are assessed on an annual basis; and
Limit quarantining of past and future losses to shares and units in trusts.
Given that capital gains tax is calculated over an artificial time frame that does not necessarily align with business cycles, Option 2, allowing the carry back of capital losses to offset earlier capital gains is preferred.
In addition, the ability to offset capital losses against ordinary income should also be considered by the Review Committee. Under the current system, a capital gain is included in assessable income while capital losses are quarantined and can only be offset against a capital gain. This restriction on capital losses is at best inequitable.
Although the discussion paper suggests that only certain capital losses should be offset against ordinary income, the SBDC is of the opinion that this should be extended to include any capital loss. This would promote investment and risk taking by small business and provide a more equitable and less complex treatment of capital gains than proposed in the discussion paper.
The carry back of capital losses would be considered equitable and is recommended.
Extend the provisions to offset capital losses against all forms of ordinary income.
The Review Committee has considered the current accelerated depreciation provisions and reaches the view that accelerated depreciation can be seen as a "loan" by Treasury. The paper suggests that the accelerated depreciation provisions should be abolished as part of the trade-off for a reduction in the corporate tax rate to 30 per cent.
Accelerated depreciation provides an incentive for small business to invest and update its plant and technology. The benefits available to individual businesses depends significantly on industry type and activity. The discussion paper acknowledges that accelerated depreciation provides significant benefits to capital intensive industries such as mining and manufacturing, while being of little benefit to service industries such as finance, education and retailing.
The argument put forward in the discussion paper for the removal of accelerated depreciation, is that compensating business with a reduced company tax rate across all industries would provide a more equitable solution, even though some sectors would still suffer and others benefit. The Committee considers that the long term outcome would be a more competitive business sector in the international arena. Furthermore, introducing an effective life depreciation regime would still enable businesses to effectively write off their capital investments, but in a more uniform manner.
The paper does recognise that removal of accelerated depreciation would make investments in depreciable assets less attractive to businesses. The reduction of company tax rates would be expected to offset (to varying degrees) the impact of the removal of accelerated depreciation in affected businesses and benefit those industries with little demand for asset depreciation.
However, the removal of accelerated depreciation rates should be resisted by small business unless there is adequate compensation for non-incorporated businesses. Many small businesses in Australia (approximately 350,000) do not operate in a company or trust structure and will not receive a reduction in their tax rates to offset the loss in depreciation allowances.
The SBDC does not support the removal of accelerated depreciation provisions as a trade off for a reduction in the company tax rate.
The discussion paper proposes to extend the definition of trading stock to include work in progress (WIP) for professional services. The rationale being that operating expenses are deductible at year end, although the WIP is not treated at that stage as assessable income.
The SBDC is strongly opposed to the valuation of WIP for professional services as trading stock. If introduced, it would:
In addition, there is no guarantee that small business will actually receive payment for the work in progress or make a profit on the transaction. In which case any prepaid tax would not be recoverable before year end.
For small business there is no benefit to change or restrict the current valuation methods for trading stock. The inclusion of consumables in trading stock will add greatly to compliance and record keeping with minimal revenue benefits to Government.
The inclusion of WIP for professional services is not supported as there is no guarantee the work will mature to a recoverable amount. Furthermore, this will bring forward the taxing point of income which will have significant impact on the cash flow of many small businesses.
A key focus of the discussion paper is the desire to introduce a more consistent tax treatment of income regardless of the type of entity. Under the current system the treatment of business income and imputation credits can vary widely between different entity structures, particularly companies and trusts. The result of this is increased complexity and compliance, loopholes for tax avoidance and the inconsistent treatment of entity income and shareholder distributions.
The discussion paper proposes that trusts be taxed as companies and that all distributions be fully franked. It also makes the point that the existing imputation system is overly complex and that taxpayers who are unable to use the imputation credits made available with franked dividends lose those credits.
The SBDC is of the view that the taxation of trusts as companies would be disadvantageous to small business. Many small businesses, particularly family trusts, distribute to individuals whose average rate of tax is lower than the proposed 30 per cent company tax rate. The incidence of tax will therefore increase as well as the complexity and cost of administering trusts.
In addition, what is evident but not discussed in the paper, is that under the entity method trust distributions would no longer retain their special characteristics in terms of primary production, dividends and capital gains. Options are proposed to treat primary production income separately, however no special provisions have been made for the treatment of capital gains under a trust structure.
This is likely to impact on many small business owners. Currently capital gains distributed by a trust to an individual forms part of their overall capital gain or loss position. On this basis, the capital gain from the trust can be offset against an individual's capital losses and is subject to averaging concessions. Under the proposed entity taxation system these concessions will not be available.
The discussion paper also proposes that entities take into account a beneficiaries effective tax rate when making distributions. This will enable a beneficiary to recover any excess imputation credits immediately and would be of significant benefit to the affected individuals. However, this also adds to the compliance burden on businesses, particularly those with multiple shareholdings and beneficiaries, and places additional cash flow demands on businesses required to cover the reimbursement.
The SBDC recommends the Review Committee consider an alternative to taxing all trusts as companies by allowing "family trusts" (as defined under the trust loss provisions) to operate under the current system.
The recommended approach to refunding imputation credits would be through the individuals tax return from the ATO, which would alleviate the need for onerous record keeping by the distributing entity. For entity chains, the taxing of unfranked dividends is preferred as the simplest option.
In addition to recognising the primary production income element of a distribution, the characteristic treatment of capital gains by trusts should also be retained.
The current capital gains tax system includes indexation and averaging features. The paper argues that removal of the indexation feature would remove complexity in the system by unifying the treatment of both appreciating and depreciating assets. Currently, depreciating assets are depreciated without adjustment for inflation. The paper also proposes that averaging of capital gains is removed or modified to prevent abuse of the system by individual taxpayers.
The proposal to remove indexation and averaging on capital gains to prevent abuse of the system is not supported. Once again this measure impacts inequitably on small business and small investors as incorporated entities will not be affected. The removal of indexation may not be significant in the current low inflation environment but a rationalist approach dictates that this will not always be the case and high inflation rates will reduce real capital gains while increasing tax liabilities.
Removal of these features will act as a definite disincentive to business investment and economic growth as small businesses evaluate the timing and cost benefit of asset purchases and disposals.
The current system of indexation and averaging on capital gains should be retained.