Submission No. 230 Back to full list of submissions
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19 April 1999


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


Dear Dr Preston

Review of Business Taxation - Discussion Paper No 2

We have pleasure in enclosing the Australian Institute of Company Directors (AICD) submission on the Review of Business Taxation Discussion Paper No 2, A PLATFORM FOR CONSULTATION.

AICD Tax Policy focuses on the need for an international competitive tax system as an essential contributor to wealth and job creation in Australia and our comments are made with this overriding objective in mind.

We draw your attention, in particular, to the Venture Capital initiatives set out in our submission, which we have developed in some detail.

We would be pleased to discuss these and other aspects of the submission with you and look forward to meeting in the near future.

Yours sincerely


Ian T Dunlop
Chief Executive Officer



Taxation & Economics Committee


A Platform For Consultation

Discussion Paper 2


Submission to Review of Business Taxation


April 1999



AICD Perspective on the Company Tax Rate

AICD Recommendations

Venture Capital

Capital Gains

Research and Development



Consolidation and Tax/Accounting Alignment


Fringe Benefits Tax

Appendix 1 About the Australian Institute of Company Directors (AICD)

Appendix 2 - AICD Philosophy on Business Tax Reform (including comments on a Board of Directors for the ATO



(RBT Discussion Paper 2 - Overview)

The major issue highlighted in A Platform for Consultation is the potential trade off between the current 36% corporate tax rate plus accelerated depreciation on the one hand, and a lower corporate tax rate, say 30%, with less or no accelerated depreciation on the other.

AICD tax policy historically has favoured retaining the 36% rate plus accelerated depreciation on national interest grounds, given the importance to the Australian economy overall of attracting and developing capital intensive projects, coupled with a need to provide for eventual alignment of the corporate tax rate and the top personal tax rate. Alignment becomes increasingly difficult as the personal tax rate drops.

If the price of moving to a lower company tax rate is to be paid solely by the abolition of accelerated depreciation, we remain concerned for a number of reasons:

Even if the majority of companies would be better off with 30%, that does not necessarily equate to the national interest – particularly the balance of payments - being better served.

Whether or not particular projects proceed in Australia may not affect individual companies but it will have a major impact on the balance of payments, and via the multiplier effect, on employment.

All primary and capital intensive industry is critically important, especially to the balance of payments, whereas there is little concrete evidence so far to suggest that a reduction in the corporate tax rate will cause significant additional investment to proceed in the services sector.

Dividend top up tax paid by individual shareholders will limit both the cost to revenue and the impact of any rate reductions. We question the methodology and the extent to which these figures have been factored into the tax foregone calculations published in Discussion Paper 2.

AICD recognizes that many companies of varying sizes and industries, having assessed the implications of the total tax package, are now expressing a preference for the lower corporate tax rate with less accelerated depreciation provisions. If a decision is taken to move in this direction, it should be made after careful consideration of the national interest which, inter alia, should encompass a view of the desirable balance, in the Australian economy of the future, between capital intensive and service industries. AICD does not have sufficient resources to complete this analysis of its own volition, but would be pleased to participate in further discussion on this issue.


Venture Capital (RBT Discussion Paper 2 – Chapter 11)

Measures for Business Angels to encourage direct investment

The business tax structure must give strong encouragement to innovation in Australian industry. In the AICD’s view, a number of key issues require recognition:

Market failure exists. Research has identified that SME’s suffer from an ‘equity finance gap’ when looking for capital of less than $2m. Costs to a financial institution of assessing and monitoring this size of investment outweigh the benefits. The Innovation Investment Fund (IIF) scheme is unable to assist at the lower end of the equity finance gap range.

SME’s are generally perceived to be the ‘engine room’ of employment growth, and the fostering and expansion of new businesses is an essential element in a dynamic and growing economy.

Individuals ("Business Angels") who take on the risk of investing directly in SME’s require a greater reward for that risk than individuals who invest in blue chip equities. Measures proposed by the AICD aim to address the difficulty in obtaining capital and to redress the risk-reward balance, at present skewed against such an investor who has to surrender nearly one half of any gain in tax.

The AICD’s measures are designed to encourage these individuals, frequently experienced industrialists or other professionals, to invest and where appropriate to provide advice to management and to be rewarded accordingly.

The AICD has developed these detailed venture capital proposals because of the experience of our members and published data which highlight these problems. We realise that previous schemes aimed at encouraging venture capital have suffered from abuse, which has undermined their credibility. However, improved venture capital arrangements are fundamental to achieving international competitiveness, and we believe that our proposals would minimise the risk of abuse.

The AICD measures incorporate:

  • Introduction of CGT rollover relief for investors who realise existing assets in order to fund investment in qualifying companies;
  • Exemption from CGT of any gain realised on investment in qualifying companies;
  • Allowing an investor to become a paid director of a qualifying company without vitiating the reliefs under certain conditions. Those already connected to the qualifying company should be disbarred from its benefits but this should not extend to subsequent investor/directors;
  • Relief against an investor’s other capital gains if shares are disposed of at a loss or written off: to compensate for the higher risk inherent in SME’s; and
  • Allowing a qualifying company to raise up to $5m in any one tax year. It would exclude investment in real property and retailing operations.

Measures for Pooled Development Funds to encourage indirect investment

The value of PDF’s has been demonstrated. To succeed further, they need to be further enhanced. The AICD proposes two measures:

  • Introduction of CGT rollover relief permitting investors to realise existing investments without penalty providing investment is then made in PDF’s; and
  • Provision of full relief within a PDF such that all losses realised by the fund itself should be capable of being fully offset against realised gains of that fund, rather than the limited offset as at present.

2. Capital Gains (RBT Discussion Paper 2 – Chapters 11 and 12)

This is a major issue in terms of international competitiveness:

We support scrip for scrip relief for all listed companies, and with appropriate safeguards, might support extension to unlisted companies, particularly in cases where the company is seeking listing.

We support the introduction of a ten year step down, so that while 100% of any gain is taxable in the first year , only 90% would be taxable in the second year, 80% in the third year etc. It is vital that the rate go to zero after ten years so as to achieve simplicity.

We support the complete elimination of indexation.

We support the complete elimination of averaging.

We disagree with the concept of a tax free threshold.

We believe that, overall, CGT rates are too high for high rate taxpayers, but wish to see this addressed by reducing the top marginal income tax rate so as to achieve the international competitiveness which we and the Government regard as so critical.

3. Research and Development (RBT Discussion Paper 2 – Overview)

R & D is a critical element in Australia being the "clever country".

The existing 125% deduction is insufficient: more so with any drop in the company tax rate.

We advocate the introduction of a 200% deduction: to approved applicants with an annual cap on the total, to protect fiscal integrity and to ensure that only the better justified projects go forward. This is likely to be more effective than a "blanket" 125% or 150% regime and will not necessarily cost any more (depending on the level of the cap).

4. Entities (RBT Discussion Paper 2 – Chapters 15 and 16)

The AICD supports the broad concept of consistency of entity taxation.

We support the general treatment of trusts as companies.

Effective transition provisions that protect business owners against adverse capital gains and stamp duty impacts must be introduced.

There should be a carve out for collective investment vehicles – defined on the same basis as public trading trusts - with a flow through of tax preferences, so as to maintain the status quo.

Superannuation should not be adversely affected by the entity tax changes.

We are not advocating any facility to provide a flow through of tax preferences for small business.

We support a profits first rule designed in a way that allows the tax treatment to accord with commercial reality so that genuine returns of capital are not adversely affected.

5. Imputation (RBT Discussion Paper 2 – Chapters 15 and 30)

We support the introduction of Resident Dividend Withholding Tax, and hence reject the concept of deferred company tax, subject to

Allowing streaming of offshore earnings directly to non resident shareholders.

In this context we recognise the possible need to re-negotiate treaties.

6. Consolidation (RBT Discussion Paper 2 – Chapters 25 and 26)

The AICD supports the notion that resident companies should, for tax purposes – and at their own option – be eligible for group consolidation in Australia.

Our support is conditional, however, on the suggested arrangements being improved by addressing the issue of the forfeiture of losses on entry and the issue of a mechanism for preventing multiple layers of tax applying to inter entity dividends.

As a long term objective, the AICD also supports the concept that there should be no distinction between taxable profit and accounting profit. Tax should be calculated from a company’s, or a group’s consolidated, accounting profit. We do recognise that such a system poses complexities because accounting profit is based on the "true and fair" concept. However, the simplicity which would result for the majority of corporate taxpayers is significant and this represents the driver. The critical success factor is not to view the corporate tax system in isolation. Rather, it is to review accounting standards and companies law in conjunction with tax principles and legislation, with the object of developing a streamlined system which actually achieves the objectives of business tax reform.

7. Goodwill (RBT Discussion Paper 2 – Chapter 4)

The AICD supports the retention of the current tax treatment of acquired goodwill. No changes are required.

We would prefer the gap between accounting and tax treatments to be addressed by changes to the accounting treatment.

8. Fringe Benefits (RBT Discussion Paper 2 – Chapter 38)

We support the removal of fringe benefits tax and the introduction of a system where fringe benefits are taxed through the PAYE system. This is administratively far simpler. It is also fairer in that fringe benefits are then only taxed at an individual’s marginal tax rate.

We support the removal of car parking as a fringe benefit.

We support the removal of entertainment as a "fringe benefit" and reversion to the non deductible regime.

We support the proposal to value car benefits on the basis of 50% business use presumed.



The AICD represents the views and interests of Australian directors, promoting the highest ethical and professional standards.

The AICD has a growing membership base, currently over 13,800, drawn from industry, commerce, the professions, government and non-profit sectors. Membership is on an individual, rather than a corporate basis. Through research and policy development, education, professional development, and information services, the AICD maintains a high public profile with government, regulators, the media and the business community, articulating the director’s point of view.

The AICD is organised with divisions in every Australian state and territory, and a National Office in Sydney. This structure enables the AICD to take a national perspective on major issues whilst remaining responsive to local needs across Australia in the key areas of education, professional development and policy.

A primary objective of AICD policy is the achievement of international competitiveness. In the contemporary debate on a national direction and the appropriate balance between economic and social imperatives, the importance of international competitiveness is often overlooked. All the desirable objectives to which the nation might aspire such as high employment, quality health, education, welfare, improved environmental standards and social cohesion, are entirely dependent on our ability to create wealth. This in turn is determined by the level of international competitiveness and innovation we achieve in all sectors of the national economy which itself is a function of the speed and success of our reform process.

AICD has been pursuing fundamental tax reform for many years and was one of the founder members of the Business Coalition for Tax Reform (BCTR), now comprising of some forty business organisations.



International competitiveness is particularly relevant to the Australian taxation system, which has been in urgent need of reform for many years.

The AICD agrees with the view that Australia’s current system of business taxation is inefficient and cumbersome. In brief, it is a system characterised by complexity. The current taxation system represents a major competitive disadvantage for Australia in an increasingly globalised environment. The AICD supports the government’s initiative in establishing the Review of Business Taxation and is keen to see a truly simplified business tax system emerge as a result.

It is imperative that party political considerations not be permitted to interrupt the introduction of bold ideas that would dramatically improve the efficiency of the Australian business tax environment to the benefit of all Australians. Within the context of achieving international competitiveness, the AICD sees as key objectives for the Business Tax Review the achievement of:

  • Efficiency
  • Simplicity
  • Transparency
  • Stability and certainty
  • Innovation being encouraged
  • Equality of treatment between structures
  • Low compliance cost
  • Non impedance to transactions
  • Alignment with the personal tax system.

In essence, the AICD believes we need a straightforward system which is easy to understand, dramatically lowers compliance costs and reduces the incentive to establish artificial minimisation arrangements. Importantly, we also need a system which continues to provide encouragement to develop Australia’s capital base. The level of capital investment must not be sacrificed on the altar of economic purism.

The AICD strongly supports the establishment of a Board of Directors to oversee the administration of the tax system. The governance arrangements will need careful attention and whilst it is premature to address them in depth in this submission, the importance of a strong representation of independently selected practical business people cannot be underestimated.

The AICD has, for some time, advocated the need for a complete retirement savings review. We continue to support such a move.

Finally, we note that the AICD has contributed to and supports the BCTR submission to the RBT.