Submission No. 229 Back to full list of submissions
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15 April 1999

The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place

Dear Sir

Submission to Review of Business Taxation

The Federation of Japan Chambers of Commerce and Industry in Australia ("FJCCI") welcomes the opportunity to provide a submission in relation to the second discussion paper of the Ralph Committee’s Review of Business Taxation, A Platform for Consultation, Discussion Paper 2: Building on a Strong Foundation ("Building on a Strong Foundation").

The FJCCI represents the business interests of subsidiaries and branches of Japanese companies in Australia. Japanese companies are major contributors to the growth of the Australian economy and the Government’s revenue from corporate taxation.

Broadly, FJCCI supports the options for business taxation reform outlined in Building on a Strong Foundation. However, in the context of Japanese investment in Australia, our submission identifies instances where the effect of these options would lead to a departure from the broad objectives of the reform: that is, optimising economic growth, ensuring equity and facilitating simplification of taxation law.


1. Accelerated depreciation

We support the proposed reduction of the corporate tax rate to 30% and believe that this would lead to increased economic growth in Australia. In addition, we recognise that elimination of a concessional treatment of tax in other areas, such as substantially reducing or removing accelerated depreciation, to be one of the options for achieving a 30% corporate tax rate in a revenue neutral manner. Our submission is that, if the accelerated depreciation is to be eliminated, appropriate transitional measures be put in place to spread the economic impact of the removal of this concession over an appropriate period of time.

Our submission is based on the fact that a large proportion of Japanese investment in Australia is concentrated in capital intensive industries such as the manufacturing and mining industries. Accelerated depreciation has provided an incentive for Japanese companies to invest in such industries and to increase the scale of these investments over the years. The contribution of Japanese capital investment to the Australian economy is significant.

The immediate removal of accelerated depreciation in respect of all assets would result in substantial economic loss for Japanese investors in capital intensive industries. In effect, a penalty would be imposed on Japanese investors that have supported and increased the development of the Australian economy’s capital base. We believe that this would be unfair to current Japanese investors and send a negative signal to Japanese companies contemplating investment in Australian capital intensive industries in the future.

We submit that transitional measures be implemented with the aim of spreading the economic impact of the removal of accelerated depreciation over an appropriate period of time. For example, accelerated depreciation could be removed only in respect of assets that are purchased subsequent to the introduction of the business taxation reforms. An alternative may be to reduce the rate of acceleration over a period of time. We believe that such an approach is fair to Japanese investors and consistent with achieving the Government’s objective of reducing the corporate tax rate to 30%.


2. Consolidation

We welcome the introduction of a consolidated taxation regime for entity groups and support the committee’s objective of nullifying the ability of group companies to create tax advantages from intra-group transactions. However, we submit that the requirement for a resident holding entity to be at the head of a consolidated group is overly restrictive.

The committee’s proposal assumes that Japanese companies investing in Australia hold all their investments through a single Australian holding company. However, it is often the case that Japanese companies will hold a number of their Australian investments directly. Under the Ralph committee’s proposal, such subsidiary companies held directly from Japan would not constitute a consolidated group and, therefore, would be denied the benefits of the grouping provisions.

There does not appear to be a reasonable basis for denying companies the benefits of the grouping provisions in this situation. Indeed, it would seem more consistent with the committee’s objective of removing tax advantages from intra-group transactions that sister companies held directly from Japan are treated as a consolidated group.

Accordingly, we submit that the benefits of the grouping provisions should be retained in respect of sister companies that are held directly from Japan. This could be achieved by either extending the concept of a consolidated group to include sister companies that are directly held from Japan or retaining the grouping provisions in respect of sister consolidated groups. Alternatively, provisions which allow inclusion of companies with common interests of less than 100%, such as those existing in the United States, may be considered.

In the absence of such provisions, Japanese companies would be required to incur significant costs in restructuring their investments to comply with the proposed consolidated group requirements. We believe that such expenditure is unnecessary and that extending the consolidated group concept would be an appropriate measure to relieve Japanese investors from this cost burden.


3. Deferred company tax

We support the introduction of a deferred company tax system as a means of achieving simplicity and improving the integrity of the business tax system. Our submission is that such reform should be undertaken in a manner that does not create additional costs to foreign investors.

Some of our member Japanese companies receive large amounts of unfranked dividends from their Australian subsidiaries. These companies generally have Australian investments in capital intensive industries or industries that necessitate large start-up costs. For example, a profitable Australian mining investment may not generate franking credits due to the availability of large amounts of carried forward tax losses and, therefore, would pay unfranked dividends to its Japanese parent.

We believe that it would be inequitable for such investors (mainly non-portfolio investors) to bear the economic cost of an additional tax on distributions. This additional tax would be a significant impairment on the cash flow of Japanese investments in Australia, thereby, creating a disincentive for Japanese companies to invest in Australia. Further, it may create some uncertainties as to whether the deferred company tax paid by the subsidiaries will be a creditable foreign tax in Japan.

Our submission is that the introduction of the deferred company tax should be made only on the basis that it does not result in additional costs or create uncertainties. In this respect, we support the introduction of measures such as the Non Resident Investor Tax Credit, applicable to both portfolio and non-portfolio non-resident investors, which would provide appropriate relief from the burden of an additional tax.

Japanese non-portfolio investors make a significant contribution to Australian economic growth and, in particular, industries that require large start-up costs and initial investment in capital. It would be unfair to penalise and deter such investors from making an important contribution to the Australian economy.



4. Thin capitalisation

We submit that there is no reason to introduce further restrictions to the current thin capitalisation provisions.

Our submission is based on the significant increase in compliance costs that would result from the proposed amendments. The costs involved in determining, on a yearly basis, the gearing level of the worldwide group for Japanese companies would be excessive. This is particularly true for Japanese multi-national companies that often have operations in a significant number of countries around the world.

In addition, the extension of the thin capitalisation provisions to include the total debt of an Australian subsidiary (including debt from entities other than foreign controllers and their associates) would unduly restrict the manner in which Japanese subsidiaries could reasonably finance their Australian operations. We believe that the current provisions obtain an appropriate balance between giving Japanese companies the flexibility to finance their Australian investments with debt while ensuring that investors do not use excessive amounts of debt for tax driven purposes.

For the above reasons, we believe that tightening the thin capitalisation provisions would not lead to the generation of additional taxation revenue commensurate with the cost burden that such amendments would impose on Japanese companies. In addition, the increased cost burden and restriction that the proposed amendments would place on debt financing would have a detrimental effect on the level of Japanese direct investment. Accordingly, we would strongly urge the committee to reconsider its proposed amendments in relation to the thin capitalisation provisions.


5. Fringe Benefit Tax

Broadly, we agree with the committee’s assessment of the current Fringe Benefit Tax regime as being complex and costly, and fully support its recommendation that such system should eventually be dispensed with.

As was noted by the committee, we understand that the Fringe Benefit Tax system in Australia is unique in the world. It would not be an exaggeration to say that the additional compliance costs involved in meeting the onerous record-keeping requirements and trying to understand the complex and ambiguous law, is seen as being one of the drawbacks for investing in Australia when an investment decision is being made by the Japanese companies.

Our submission is that, in order to achieve a more equitable and fair system, an option where the Fringe Benefit Tax is levied on the employees, and not the employers, should be considered. Further, we support an introduction of a system based on a specific inclusion of benefits rather than the current all inclusive system where the rules regarding the exclusions and exemptions become unduly complicated.

However, some of our members who are motor vehicle manufacturers in Australia, have expressed further opinions in relation to the proposed FBT changes. Their views are outlined below.

"We fully agree with the committee’s assessment of the current FBT regime as being complex and costly and fully support any action which will assist to eliminate many of the complexities existing in the current FBT regime.

It is our opinion that FBT should remain payable by the employer at this stage. It is felt that at present the complex and costly elements of the legislation should be addressed as a matter of priority.

Our understanding of the proposed changes to the FBT statutory formula in respect of car fringe benefits by the committee could have the potential to place in jeopardy the survival of some or all of the local motor vehicle manufacturers in Australia, which as a group, are a substantial employer in this country.

Passenger Motor Vehicle manufacturers directly employ more than 20,000 and the employment within the automotive manufacturing sector exceeds 50,000 in 1997. The impact of the proposed changes by the committee on the motor vehicle industry should not be underestimated."

In conclusion

FJCCI is supportive of the broad objectives of the tax reform outlined by the committee, and believe that in selecting the appropriate measures to be introduced, the various implications to foreign investors as outlined above should be considered such that the international competitiveness of Australia is not unnecessarily compromised.

Should you have any questions in relation to the above, please do not hesitate to contact our member Mr Osamu Uchimura on (02) 9322 7000.

Yours sincerely,


Toru Obata
Chairman, Federation of Japan Chambers of Commerce and Industry in Australia
President, Japan Chamber of Commerce and Industry, Sydney Inc.