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Submission No. 196 Back to full list of submissions
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Restaurant & Catering Australia

SUBMISSION TO BUSINESS TAXATION REVIEW IN RESPONSE TO A PLATFORM FOR CONSULTATION

Introduction

Restaurant & Catering Australia represents an industry which comprises almost 20,000 largely small businesses employing in excess of 160,000. We welcome the Government’s initiative to review Business Taxation as part of the total tax reform agenda and the process of consultation that the process has included.

Restaurant & Catering Australia has participated in this consultation process in three ways:

  1. The submission of our document "Better, Fairer Taxes" as part of the initial consultation round
  2. As a member of the taxes and charges subcommittee of Tourism Council Australia
  3. As a member of the Business Coalition for Tax Reform (BCTR)

It is clear that, unlike the GST issues where there has been almost universal acceptance of a broad based tax with food included, the review of business taxation involves a greater divergence of view. This divergence relates to the type of industry, but in our situation the biggest divergence rests with what is best for big versus small business. However, even allowing for this divergence, there are many issues where there is a common view, and where we support the BCTR points of reference, this is noted below.

Context

The Review of Business Taxation is the second part of the total taxation reform agenda. The Government’s agenda as covered by A New Taxation System, and in particular the GST, poses special challenges for sectors such as ours, not the least of which will be the projected 6.7% increase in prices for our product, but also the compliance burden. We believe it is very important that Government sees the effect on industry groupings in their total context, so that industries such as ours, made up as they are of largely small businesses, are not detrimentally affected on two fronts.

Overview of Business Taxation Issues

In reviewing the issues raised by the document entitled "A Platform for Consultation", the ones of most importance to restaurateurs and caterers are:

  • Fringe Benefits Tax, in particular the treatment of entertainment expenses
  • Simplicity and equity of tax system design, and burden of compliance
  • Accelerated Depreciation
  • Capital Gains Tax
  • Tax treatment of Trusts

Matters of least importance, and not generally commented on below, include:

  • Capital and investment allowances
  • Research and Development
  • Building depreciation
  • Traveller depreciation
  • Consolidation
  • International Taxation
  • Dividend Imputation

It is recognised that these less important issues will affect our industry in two ways: firstly in terms of the overall impact that changes will have on economic circumstances; and, secondly decisions made on these issues could affect the more important issues because of the overall goal of revenue neutrality.

An overriding comment that also relates to revenue neutrality is the relative importance of a lower company tax rate. The feedback indicates that the goal of 30% would not be a key objective of our industry operators, and certainly should not be achieved at the expense of other issues of more critical importance.

The Major Issues in More Detail

Treatment of Entities

Our industry is made up of nearly 20,000 businesses, the majority of which are small business (over 90% of which employ less than 20 people). They entity types reflect this make up. According to a recent survey of our members, private companies are the most common, followed by partnerships, sole traders and trusts.

In relation to the specific issue of whether trusts should be taxed the same as companies, the use of trusts in sectors such as ours is an important component and relates not just to the taxation regime, but more importantly to the common involvement of families and partners. This is where a trust is the most appropriate mechanism of preserving the interest in the business and controlling the distribution of its benefits.

Therefore, the overall attractiveness of trusts should not be diminished, both in terms of structure or taxation treatment.

The poor public perception of trusts appears to arise with repeated media reports on the use of trusts as a vehicle for "rich people" to save tax. Many of the complex web of trusts in these scenarios involve the use of shifting assets offshore. This type of scenario should be examined as part of a review of the overall integrity of the system, but should not be allowed to cloud the view of the more simple trust structures set up by small businesses.

Specifically, we do not support the general treatment of trusts as companies. If such a change if probable then it is essential that the BCTR qualifications are taken up, namely:

  • There should be a carve out for collective investment vehicles (such as cash management trusts) with a flow through of tax preferences
  • A facility should be available to small business for a flow through of tax preferences on a selective basis
  • Appropriate measures to ensure the tax treatment of superannuation is not adversely impacted by the entity tax proposals.

Wasting Assets/Goodwill

In this area, we support:

  • Deductibility be available to the bearer of the expenditure
  • The cost base to be actual cost to the taxpayer
  • Deductions to start when assets are ready for use
  • All legitimate business expenditure to be written off or immediately deducted
  • Acquired goodwill treated in accordance with accounting principles as a wasted asset.
  • Consistent treatment of the valuation of trading stock

(Most of these are consistent with the views of the BCTR)

A reduction of the company tax rate does not afford sufficient incentive for restaurateurs and caterers to completed lose access to accelerated depreciation of their assets. Therefore, we do not support the complete removal of accelerated depreciation as a trade off for a 30% company tax rate. If, as part of the calculation of revenue neutrality of other changes supported by our sector, some mid point between the accelerated depreciation rates and the deductibility rates based on economic life may be acceptable. However, this is a very conditional support for minor change depending on the impact of the total package.

Leases

In line with the BCTR recommendations, we

  • Broadly support the retention of present arrangements
  • Support measures to prevent the assignment of lease tails

Capital Gains Tax

R&CA is very supportive of the recent changes in relation to small business and the CGT which is of key importance to sectors such as ours. Whilst of lesser importance, we are in support of the recommendations of BCTR that:

  • Support scrip for scrip rollover relief (and similar transactions) for a range of entities (rather than just listed companies)
  • Permit carry back of capital losses for assets acquired after 1 July 2000
  • Replacement of the goodwill exemption for small business with a general exemption

We do not support the tightening of averaging provisions.

Fringe Benefits Tax

This is a key issue for our sector, and one that was the subject of our previous submission "Better, Fairer Taxes".

Whilst acknowledging some of the political and revenue difficulties in the recommendation to transfer the liability for FBT to the employee, the principle is very important as it places the liability where the benefit lies, and minimises the administrative burden on business.

We strongly support the removal of parking and, in particular, entertainment expenses from the FBT regime. In line with our previous submission, we would go further than the BCTR that recommends are reversion to non-deductibility at the entity level, by saying that the Ralph review should take the opportunity to revisit the inequity created by dealing with legitimate business entertainment expenses in a different way to other legitimate business expenses. Business entertainment expenditure which is legitimate and which is subject to substantiation rules should in principle and in practice be deductible. If there is a concern over a return to the inclusion by business of expenses which do not meet the test of "expenditure made in the course of earning income", then the adoption of the policy outlined in our previous submission being 50% deductibility should be considered. As the work undertaken by the University of Newcastle shows, such a policy change will result in the creation of 9,000 new jobs and a minimal impact on the revenue base due to monies raising through taxation on increased economic activity and employment.

In relation to the issue of revenue impact of the recommendation in A platform for Consultation, we question the estimate made in that document that by 2003-4 the recommendation to revert to non-deductibility/non FBT regime for entertainment would cost $510 million. In Chapter 38 (p 793) it is shown that $199.2 million was collected for 1997-98 on meal/entertainment FBT. The six year growth rate indicated by the 2003-4 estimate seems excessive and may be based on an estimate of how business entertainment may be positively impacted by the removal of FBT. This of course, would be a misleading assumption as if the current complex rules continued to apply, then business entertainment will not grow at anywhere near this rate.

It is our strong view that the revenue impact of any positive change to business entertainment treatment will be offset by revenue gains in the resulting economic improvement. We commend the Ralph report for its recommendation, but remain convinced that it should go further.

However, if it is considered that a revenue impact should be factored in, it is important to note that this issue is of such importance to our industry that in view of revenue neutrality, many of the less important issues could be set aside.

Simplicity

The need for greater simplicity in the business taxation system is easy to request but, it is acknowledged, much harder to deliver, particular as much of the complexity comes from grandfathering provisions so as not to prejudice people who have made business decisions on the basis of a certain tax system being in place.

Having said that, it is still a fundament concern to particular small business sectors such as ours that the taxation system is far too complex. It is not clear from the Platform for Consultation whether the resulting taxation system will be any less complex (will the number of pages in the Tax Act be more or less?). Therefore, we would recommend that not only should the total package pass the revenue neutrality test (as demanded by the Government) but also the complexity test.

Conclusion

In this brief submission, we have covered those issues which are of most critical importance in the areas of business taxation. In particular, FBT/Entertainment, trusts, accelerated depreciation and CGT are big issues for our sector.

The submission comes as a result of a very brief process of consultation with our members and may need to be further elaborated on in the coming weeks. We welcome any further avenues for input, whilst acknowledging the tight timeframes under which the Review works.

 

16 April 1999