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The Geelong Chamber of Commerce____
Advancing Business and Industry in the Geelong Region
REVIEW OF BUSINESS TAXATION
ON ITS DISCUSSION PAPER 2
A PLATFORM FOR CONSULTATION
The Taxation of Investments and Entities
16 April 1999
On behalf of its members, The Geelong Chamber of Commerce is pleased to have the opportunity again to make its submission to the Review of Business Taxation, this time on its Discussion Paper 2 - 'A PLATFORM FOR CONSULTATION : The Taxation of Investments and Entities' - which was released earlier this year.
The Geelong Chamber of Commerce has, as its primary roles, the fostering and advancement of business and commercial activity and being an effective and independent voice of business in the Geelong region.
The Chamber has operated continuously since its establishment in 1853 and represents all business and industry sectors in Geelong. It is funded solely by members' subscriptions and is answerable only to members - currently over 540 - who are drawn from a wide diversity of large, medium and small business enterprises and organisations operating in Geelong, and include, for example, Ford Australia, Alcoa, Shell Refinery, Deakin University, Barwon Health, etc., to individuals.
The Chamber's Mission Statement is:
The Geelong Chamber of Commerce will advance business and industry in the Geelong Region through creative and innovative leadership, advocacy, co-ordination and promotion of business interests.
3. COMMENT ON DISCUSSION PAPER 2
The Chamber makes the following specific comments:
3.1 Chapter 1 Towards a New Policy Framework for Wasting Assets, and Chapter 2 The Case for Accelerated Depreciation
3.1.1 The Chamber reiterates the comment made in its submission on 'A STRONG FOUNDATION Establishing objectives, principles and processes' that the taxation system should not be used to provide business incentives, as these incentives generally help the taxpayers more who are on higher tax rates and distort the revenue picture.
Thus, the Chamber does not support accelerated depreciation or immediate write-offs for capital expenditure. The tax write-off should be based on the depreciation or amortisation based on accounting standards.
The Chamber believes that, in times of inflation, recognition ought to be given to the increased cost of replacement as well as the amortisation of historical cost.
The deduction should commence when the loss of value begins through the use of the asset in earning of assessable income, regardless of whether the derivation of that income has commenced. For example, an allowance for a building constructed to house a manufacturing business should commence when the manufacturing firm first occupies the building and begins setting up its plant, and not when the actual manufacturing process commences.
3.1.2 The Chamber believes that the practice of allowing an immediate write off for small items should continue, with the threshold being raised from $300 to $500.
3.1.3 It also believes that the choice of straight-line or diminishing-value depreciation should be maintained, but the balancing charge offset should be withdrawn and an averaging system applied to the balancing charge similar to the five year averaging of capital gains to avoid an excessive rate of tax being incurred by non-corporate rate taxpayers.
3.2 Chapter 3 Trading Stock and Similar Assets
3.2.1 The Chamber supports the retention of the present choice for each item of trading stock between cost, market selling value or replacement price. Although a restriction of the choice to cost and net realisable value would suit most taxpayers, the additional option of replacement price provides a choice for those businesses in which the recording of cost is almost impossible. Replacement price is almost equivalent to cost on a first-in first-out (FIFO) basis, which is not strictly cost, but which is often the only practicable method of valuing stock.
3.3 Chapter 4 Determining the Appropriate Treatment of Goodwill
3.3.1 The Chamber advocates the allowance as a tax deduction of the amortisation of goodwill in accordance with accounting standards, to help to minimise the undesirable difference between accounting income and taxable income.
The corollary is that, when goodwill is disposed of, there may be taxable income analogous to a balancing charge for plant, plus a taxable capital gain as well.
3.4 Chapters 5, 6 & 7 Taxation of Financial Assets and Liabilities
3.4.1 The Chamber does not support the taxation of financial assets on the basis of annual changes in market value because it will sometimes result in tax having to be paid on unrealised gains without funds having been generated to meet the tax payments.
3.4.2 The Chamber believes that the tax on changes in the value of foreign currency should be imposed only when that currency is exchanged for Australian dollars, or Australian dollars are used to settle overseas debts during a year.
However, the Chamber believes that Australian taxpayer firms with subsidiary companies, branches and permanent establishments overseas should be required to account for their Australian taxable transactions in Australian dollars.
3.5 Chapters 8, 9 & 10 Taxation of Leases and Rights
3.5.1 The Chamber recognises the undesirable inconsistency of treatment of leases and rights but it is concerned that some suggestions canvassed in the report are too complex for the small business owner.
In general, the Chamber supports a taxing basis which reflects the accounting standards treatment of finance and operating leases.
After all, over the period of the lease, the cost to the taxpayer will be allowed as a deduction whatever method of calculating the cost is used year by year. The Chamber believes that to approach the timing of the charge against income is too esoteric and sophisticated a manner to add to the already heavy cost of compliance.
3.6 Chapters 11, 12, 13 & 14 Taxation of Capital Gains
3.6.1 The Chamber believes that significant capital gains should be taxed. Otherwise, it believes that investors will seek capital gains rather than income returns, thus distorting the investment market.
3.6.2 The Chamber believes that the rate of capital gains tax (CGT) is too high in Australia, despite the allowance for inflation and the "averaging" method of taxing the gains. This represents a disincentive to long term investment.
3.6.3 However, the Chamber believes that, if there is too great a differential between tax rates for income and for capital gains, the investment market will be distorted.
Therefore, the Chamber favours capping the CGT rate at the corporate rate.
3.6.4 Consistent with its belief that the tax system is not the place to provide business incentives, the Chamber recommends that the government provides incentives to encourage savings and investment in other, more visible ways e.g. grants, subsidies and so on, rather than through tax legislation.
3.6.5 As the taxing of income does not provide relief for inflation, the Chamber believes that the taxing of capital gains should not attempt to do so either. The compliance cost of calculating indexation, particularly in the dividend reinvestment in shares, is enormous. The Chamber believes that, if scrapping indexaton is thought to be unacceptable, it is worth considering an alternative which allows for lower rates of tax on capital gains for longer held assets (the "stepped rate").
3.6.6 The Chamber supports the retention of small business rollover relief and concessional treatment of goodwill and gains on assets sold to finance retirement.
3.6.7 To reduce compliance costs, which the Chamber considers are very substantial, the Chamber recommends that items with a disposal consideration of less than $5,000 be exempted from CGT.
3.6.8 The Chamber supports the 'entity principle' for the application of CGT to partners equity in partnerships. It believes that the present requirement to keep records of each partners equity in each partnership asset places a heavy burden of compliance on small businesses.
3.6.9 The Chamber believes that capital losses should be able to be deducted from taxable income in the year in which the loss is incurred, instead of being quarantined until there is a capital gain against which it can be offset.
Some taxpayers may never derive a subsequent capital gain. Some may die or, in the case of a company, it may be wound up, without ever having received tax relief for their loss. The Chamber believes that this is inequitable.
3.6.10 Although it is not mentioned in the Discussion Paper, the Chamber believes that discrimination against private companies in the exemption of half of the capital gain on the sale of goodwill by small businesses should be removed.
At present, the company itself is exempt but the shareholders who become liable for CGT on their shares, on the liquidation of the company, receive no exemption.
Furthermore, they will pay tax on their proportion of the tax saved by the company when the net assets are distributed to them. By comparison, the sole trader receives the full value of the exemption.
The Chamber believes that this situation should be corrected.
3.7 Chapter 15 A Fairer and More Consistent Treatment of Entity Distributions
3.7.1 The Chamber supports the introduction of the "deferred company tax" proposal.
3.7.2 The Chamber believes that the refunding of excess imputation credits is crucial for equity in the entity distribution system and should be introduced into the tax laws regardless of what other changes are made.
3.8 Chapter 16 An Alternative Treatment for Collective Investment Vehicles
3.8.1 The Chamber believes that cash management trusts, property trusts and other collective investment vehicles should be exempted from the proposed entity tax regime because of the disastrous effect it would have on the investment market.
It further believes that the flow-through principle of income retaining its tax character in the hands of investors should be retained.
3.9 Chapter 17 - How a Redesigned Imputation System Would Apply to Entities
3.9.1 The Chamber makes no comment on this chapter.
3.10 Chapter 18 Defining Distributions in an Entity Regime
3.10.1 The Chamber recognises the current inconsistency in the taxing of company and trust distributions, and it supports the 'entity principle' in seeking to overcome the inconsistency.
3.10.2 However, the Chamber believes that no change should have the effect of taxing the shareholders or beneficiaries on benefits which they receive which are not represented by income derived by the company or trust, and which are not received by them as employees.
It believes that a shareholder or beneficiary should not be taxed on the benefit derived from an asset owned by the company or trust unless the benefit comprises the distribution of income derived by the entity or the provision of remuneration of an employee.
3.10.3 The entity should not receive a tax deduction for expenses incurred in providing benefits to shareholders or beneficiaries. The Chamber believes that it is simpler to deny the deductions than to tax the benefits.
3.11 Chapter 19 - Distinguishing Profit and Capital Distributions
3.11.1 The Chamber supports the 'slice' approach to enable capital to be distributed ahead of profits where this is the intention and desire of the parties.
3.12 Chapters 20 and 21
3.12.1 The Chamber makes no comment on these chapters.
3.13 Chapter 22 Bringing Trusts into the New Entity Regime
3.13.1 The Chamber believes that, even with trusts being taxed under the entity regime, the trust income should retain its character in the hands of the beneficiary. Thus, primary production averaging should still apply to trust beneficiaries and the present rules should continue to apply to farm management deposits.
Although this treatment would be inconsistent with the way in which company distributions are dealt with, the Chamber sees no necessity to force primary producers into abandoning their trusts, which are frequently formed for reasons other than tax saving, e.g. asset protection and succession planning.
3.14 Chapters 23 to 37
3.14.1 The Chamber makes no comment on these chapters.
3.15 Chapter 37 Implications for Superannuation Funds
3.15.1 The Chamber strongly believes that, to minimise the huge economic burden faced by taxpayers in the next millennium in providing age pensions, significant incentives must remain to encourage people to save for their retirement.
The Chamber, therefore, opposes any increase in the rate of tax payable by superannuation funds on their earnings, and it supports the retention of the deduction for income earned on pension funds when paid to pensioners.
3.16 Chapter 38 Towards a Better Regime for Taxing Fringe Benefits
3.16.1 The Chamber believes that employees should be taxed on the taxable value of fringe benefits. Now that benefits are to be included on group certificates when they exceed $1,000 per annum, the Chamber considers that there is no practical difficulty in taxing the grossed- up amount.
3.16.2 The Chamber does not support any increase in the amount taxed beyond the grossed-up amount.
3.17. Chapter 39
3.17.1 The Chamber makes no comment on this chapter.
Submitted for and on behalf of The Geelong Chamber of Commerce by resolution at its meeting held on 14 April 1999.
Tel: 03 52222234
Fax: 03 52224845
Address: Victorian Business Centre, 69-71 Moorabool Street, Geelong Vic 3220
This submission was prepared by the Chamber's Public Finance Committee.
The Committee members comprise senior partners of three chartered accountants, senior partners of two law firms, and a regional manager of a major bank.