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TOWARDS A MORE COMPETITIVE TAX SYSTEM FOR AUSTRALIA

 

Submission by The Australian Industry Group to the Review of Business Taxation in respect of Discussion Paper 2 -"Building on a strong foundation"

16 April 1999

Foreword

The Australian Industry Group (Ai Group) has supported from the outset a rigorous and comprehensive review of the Australian business taxation system with the aim of creating a more dynamic, internationally competitive and equitable system that will support investment, growth and job creation.

Since the release of the Government’s A New Tax System (ANTS) last August, Ai Group has contributed at all levels of the debate and has been a strong advocate of effective and efficient change. Integrally, we have been an on-going participant in the Business Coalition for Tax Reform, recognising the fact that a cohesive position is essential to achieving the desired reform.

In approaching the Review of Business Taxation (RBT), we have considered a broad range of issues necessary for a comprehensive overhaul of the business tax system in the context of the whole package of tax reform. In coming to the recommendations outlined in this Paper, regard has been had to the interrelationships between the different elements of the reform process, including the restructuring of indirect taxes, through the proposed Goods and Services Tax (GST) as well as the reform of direct taxes.

This submission focuses on the business tax reform issues most critical to the broad spectrum of Ai Group membership. Ai Group’s State Councils and National Executive have rigorously examined the issues raised in the RBT’s Discussion Paper 2, Building on a strong foundation. In addition, we established an Expert Tax Committee within Ai Group to advise on tax reform options. The Committee has offered invaluable assistance in developing submissions to Government on the GST legislation, to the Senate Select Enquiry and to the RBT. More generally, it has provided an insight into the practical implications of various tax reform options on the day to day operations of Australian industry.

Ai Group welcomes the opportunity to contribute to the tax reform process and is confident that implementation of the recommendations contained in this document will provide the basis for a globally competitive and nationally viable business tax system.

The assistance of PricewaterhouseCoopers, who have provided technical advice on these issues, is acknowledged by Ai Group.

 

R N Herbert
CHIEF EXECUTIVE

 

In developing Ai Group policy on business tax reform, we have adopted an holistic approach to tax reform, which includes both indirect tax reform through the implementation of a GST and direct taxation reform addressing personal and corporate taxation. We recognise that there are a lot of issues that would be supported (and in some cases, seen as specific requirements) by industry, but Ai Group acknowledges the constraints in the RBT’s terms of reference in relation to revenue neutrality.

In developing our position on business tax reform, a number of guiding principles were followed in considering the options presented by the RBT. These principles are:

  1. The business tax system should be internationally competitive and supportive of investment, national saving, growth and job creation.
  2. Neutrality: Corporate decision-making should be made on the basis of commercial considerations - tax considerations should not distort such decisions.
  3. Harmonisation of accounting and tax treatments will provide certainty and reduce complexity and compliance costs.
  4. The circumstances of all categories of business should be considered: large or small, foreign or local, globalised or domestically focused.
  5. The business tax system should be simple, transparent, stable and should minimise uncertainty.

Ai Group has long been a strong advocate of comprehensive tax reform for Australia: business tax must meet demands of a pro-growth economic and global agenda.

An integral element of the reform of the business tax system is the introduction of a broad-based consumption tax, as proposed by the Federal Government in ANTS. Ai Group supports the Government’s proposed GST unconditionally.

Ai Group supports the broad direction of reform outlined by the Government in ANTS and acknowledges that the changes put forward represent a most comprehensive and innovative proposal to remodel the Australian tax system.

Ai Group endorses the principles enunciated in ANTS and encourages their thoughtful and expeditious implementation. In doing so, it is expected that the package will deliver competitive gains for Australian industry while addressing, in a rational and fair manner, the need for a nationally viable and competitive tax system which stimulates growth and jobs.

The following key points of the Government’s tax reform package, applauded by Ai Group, are:

  1. Broadening of the indirect tax base to include services through the introduction of a GST.
  2. Major reform to personal income tax scales to improve incentives to work and save.
  3. Reform to Federal/State financial relations through the granting of GST revenue to the States; and
  4. The streamlining of business taxation.

Equally, Ai Group is opposed to any changes which would weaken the comprehensiveness and simplicity of the proposed GST. In particular, we oppose the exclusion of food from the GST. If food is exempt, anomalies and uncertainties will be created and compliance cost will increase unacceptably.

While we have welcomed these general reforms, Ai Group remains committed to the elimination of payroll tax which acts as a significant disincentive to job creation and encourages all Governments to work towards the elimination of payroll tax and other business inhibiting indirect taxes. In imposing a GST on top of payroll tax, which will be double taxation, Australia will be the only Western country to introduce a GST and not remove a non-hypothecated tax. ANTS recognised that Australia’s indirect tax system has major problems, is too complex, and penalises businesses unfairly.

List of Proposals Addressed in this SubmissionList of Proposals Addressed in this Submission

1. Accelerated Depreciation and a 30% Corporate Tax Rate
2. Taxation of Entity Distributions
3. Capital Gains Tax
4. Consolidations
5. International Tax Issues
6. Fringe Benefits Tax
7. Trusts
8. Black Hole Expenditure
9. Other Measures

The introduction of a 30% corporate tax rate in favour of the current accelerated depreciation regime is a good policy, producing a more competitive tax system and sending out a strong signal to the business community that Australia is "open for business". The major benefit of a reduction in the corporate tax rate is that it makes Australia a more internationally competitive location for business, which in turn will generate growth and job creation – objectives central to the national interest. A competitive headline 30% tax rate is far more consistent with the emerging world economy where capital is highly mobile and Ai Group believes that business ought to take the opportunity to embrace it.

Comparison of company tax rates of our major trading partners

Country Tax rate

(general corporate rate for residents)

Comments
Canada 29% Additional provincial taxes at an average rate of 15%
France 41.67% reduced to 40% from 1 January 1999 33.33% plus 25% surcharge reducing to 20% surcharge from 1 January 1999.
Germany 47.475/31.65% including solidarity surcharge  
Japan 48% (national plus local)  
New Zealand 33%  
Singapore 26%  
Taiwan 0% - below NT$50,000

15%-NT$50,000-100,000

25%-over NT$100,000

For taxable income between NT$50,000 and NT$100,000 the tax payable is the lesser of 15% and 50% of the taxable income over NT$50,000
United Kingdom 30% Rate reduced to 30% from 1 April 1999. Lower rate of 21% (reducing to 20%) applies to small companies with income below 300,000.
United States 35% (maximum) State taxes of 3-10% apply. These are deductible for Federal purposes. Some state taxes may be lower in certain circumstances.

Source: RBT’s ‘An international perspective’ A trade-off

Ai Group recognises that a lower company tax rate may only be introduced in conjunction with a reduction of depreciation rates.

Accelerated depreciation was introduced in many countries during the high inflation periods of the 1970’s and 1980’s. Indeed, Australia had one of the worst inflation records among OECD countries. It was introduced in recognition of the decline in the real value of tax deductions obtained towards the end of the life of depreciable assets in times of high inflation. With inflationary expectations dampened to about 2% annually, there is not the same need for accelerated depreciation.

The current pattern of investment, globalisation of industry and other massive changes to the modern economic environment demand that reassessment of the present regime is overdue.

Accelerated depreciation was first introduced, not simply for the purposes of stimulating investment, but predominately to preserve the value of deductions on wasting assets in the later years of their effective lives. Australia experienced high annual inflation rates of up to 10% or more from the 1970s until a few years ago: one of the worst inflation records among OECD countries. In times of high inflation, the tax deductions obtained towards the end of the life of depreciable assets become almost valueless. Hence governments had to accelerate the tax deductions. With inflationary expectations dampened down to about 2% annually, there is not the same need for accelerated depreciation.

The introduction of a 30% corporate tax rate in favour of the current accelerated depreciation regime is good policy and will represent a more competitive tax system and send out a strong signal to the business community that Australia is "open for business". A 30% company tax rate will therefore encourage foreign multinationals to have their Australian profits taxed here, rather than shifted to lower tax jurisdictions.

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Option 1 proposes a 30% corporate tax rate, traded off against removal of accelerated depreciation (the treatment of other incentives and concessions remains unclear). Endorsement of a reduced corporate tax rate of 30%, funded by the removal of accelerated depreciation, which is subject to the conditions expressed here. The corporate tax rate to be legislatively entrenched with appropriate protections against future increases.

The reduction in the corporate tax rate is an offset for the removal of accelerated depreciation. Any entities (including individuals) which do not benefit from a rate reduction should be exempt from the depreciation changes. Such entities should be able to claim depreciation based on (updated) effective lives with a 100% loading (which the RBT specifies as the current implied loading rates).

Depreciation rate schedules should be prepared in such a way as to ensure that ‘effective lives’ correspond with industry standards, industry practices and market adjustments, so as to accurately reflect the economic life of assets.

Integral to the above, any review of the Commissioner’s current rate schedule should be undertaken only with industry input and consultation. The effective lives arrived at after the removal of accelerated depreciation should be consistent with those recommended by the Commissioner in IT 2685.

Appropriate transitional measures are required to ensure that where effective lives are adjusted, both initially and in the future, old assets are grandfathered to avoid undermining the effectiveness of previous investment decisions.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Option 1 (continued) In order for Australia to be internationally competitive, general investment support is required for both capital equipment and R&D activities. With the removal of accelerated depreciation, it is vital that other incentives to investment are maintained. Ai Group strongly believes that the R&D concession must be maintained and should be increased to not less than 150%. The R&D tax concession needs to be increased as the reduction in the corporate tax rate will diminish the value of this concession.

Historically, the accelerated depreciation regime has operated as an incentive to invest in capital equipment. Ai Group supports the withdrawal of accelerated depreciation but strongly urges the Government to promote investment in targeted infrastructure projects through other means. Access to investment allowance incentives on a targeted or generalised basis consistent with broad economic or industry requirements should remain as a tool of Government.

Ai Group believes the current system of taxing entity distributions is sustainable against internationally competitive benchmarks. Furthermore, the current anti-avoidance provisions relating to various aspects of entity distributions are adequate. However, if change is considered desirable in line with other restructuring proposals, then the option of a resident dividend withholding tax is preferred.

Table summarising the current treatment of entity distributions by Australia’s major trading partners.

Country

All dividends deductible or exempt to entity shareholders.

Only franked dividends are exempt to entity shareholders.

All dividends taxable to entity shareholders.

Individual shareholders entitled to full imputation of company tax paid.

All distributions are taxed at the company level.

Individuals receive imputation credits with no reference to tax paid at company level.

Dividends taxed at the marginal rate for individuals or some reduced rate.

Canada

France *

Germany

Japan **

New Zealand

Singapore

Taiwan

UK

US ***

* Exempt if 10% or greater interest is held in the distributing company or value of shareholding is greater than FF150M.

** Fully exempt if 25% or greater interest is held in distributing company, otherwise 80% of dividend is exempt.

*** 70% deductible if <20% interest in distributing company, 80% deductible if >20% interest but <80% interest in distributing company, and 100% deductible if from a member of an affiliated group.

Source: RBT’s ‘An international perspective’

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Option 1 proposes a deferred company tax (DCT).

The DCT system subjects tax-preferred distributions to tax so that all distributions of profit are fully franked. Company tax paid would be creditable under the imputation system to resident individual shareholders.

Not supported Ai Group believes that this option, if implemented, could potentially constitute a significant disincentive for non-resident investment in Australia, as the level of tax on unfranked dividends paid to foreign investors will be increased from the current withholding tax rates, generally 15%, to the full 30% proposed company tax rate.

In addition to the above, there is some uncertainty as to the creditability of a DCT against any tax liability in the investor’s home country.

Unless the status-quo is maintained, companies’ reported profits and earnings per share will fall, thus leading to new investment capital being diverted to jurisdictions with higher returns.

The DCT system imposes tax at the company level on tax-preferred distributions undermining the benefits of tax concessions at the company level. If the taxation of entity distributions has to change then the status-quo should be maintained and any tax-preferred distributions should be taxable at the shareholder level to maintain incentives for companies to invest in capital equipment and R&D activities.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Option 2 would apply a resident dividend withholding tax (RDWT).

Under this option, a RDWT is levied at the company tax rate on tax-preferred distributions paid from a resident entity to resident investors, including other resident entities. Distributions to non-residents would receive a refund of RDWT and be subject to normal WHT.

The RDWT is conditionally supported Whilst this an RDWT overcomes the problems associated with a DCT for non-residents, the RDWT needs to be creditable to resident individuals and any excess of credits refundable to the individual.

This option cannot be supported whilst it undermines the value of the tax concession for R&D or similar targeted tax incentives. A mechanism is needed to ensure that entities are not required to pay tax on a tax preferred distribution that has arisen as a result of the R&D tax concession or similar concessions. Ai Group recommends that Iinternational models to be be examined with a view to finding options for quarantining thisensuring effective ‘flow-through’ of such concessions.

Where an entity pays a dividend to resident shareholders sourced out of foreign income, that dividend should carry deemed franking credits for the e underlying tax paid on th that e income in order to promote offshore investment by Australian companies.

In addition, the proposal that streaming rules be developed to allow ensure streaming of foreign income to foreign investors to preserve franking credits for the benefit of Australian investors and to avoid foreign dividend withholding taxes should be explored. Ai Group recognises that such reform may have an impact on revenue., Hhowever, these measures will reduce the potential pressures onensure that Australian multi-nationals will notto migrate due to the higher costs of capital and higher effective tax rates associated with distributing unfranked dividends to investors. Also, these measures will promote Australia as an appropriate jurisdiction for regional head-office and financing entities.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Option 3 contemplates taxing unfranked inter-entity distributions.

Under this option, unfranked dividends are would not be taxed at the source, but are taxed in the recipient’s hands,. however, e Entities will not be entitled to the section 46 dividend rebate currently available in certain circumstances.

Not supported by Ai Gsupportedroup The taxation of inter-entity distributions is ineffective in overcoming the problems of dividend streaming and therefore does not address the Government’s integrity concerns. In addition there will be complications for industry. This optionI t is merely a revenue raising proposal which does not simplify the taxation system or promote investor activity.

"Australia’s taxation of capital gains is relatively harsh compared with many other countries which may also have some adverse impact on our international competitiveness".

On this basis AAi Group strongly agrees with the need for capital gains tax reform and the targeting of specific activities (eg venture capital) in order to promote investment in Australia. The current capital gains tax system is deficient in many regards. It is uncompetitive, complex and inconsistent in its application and consequently may lead to a distortion of investment decisions. The proposals will go some way to contribute to a competitive regime.

CGT reforms must be consistent with equity and economic development objectives. The proposals, in a sense, seek to reform individual and company tax arrangements (eg change to indexation) in an endeavor to maximise behavioural changes.

Ai Group does not see the CGT debate ending with the BTRRBT because, quite simply, it encompasses a far broader range of related policy areas; sall beyond the exclusivity of the tax system.

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Modified treatment of capital losses

 

 

 

Removal of indexation

 

Supported

 

 

 

Supported

 

 


Removal of indexation is not supported by the Ai Group for either entities or individuals. Should indexation be withdrawn, a "step down" approach or a reduced tax rate in respect of capital gains is preferred.

The treatment of capital losses should reflect the treatment of revenue losses, allowing capital losses to be offset against revenue gains. The distinction between revenue and capital has no economic or commercial foundation in the current taxation system and results in a distortion of investment decisions due to the limitations on the use of capital losses.

Ai Group recommends the retention of indexation in pursuit of a competitive capital gains tax regime. The retention of indexation will ensure that taxpayers are only taxed on real gains on long-term investments.

Should indexation be withdrawn, a "step down" approach or a reduced tax rate in respect of capital gains is preferred. The step down approach, like indexation, would be effective in promoting investment in patient capital and would ensure that bona fide investors in long-term projects are rewarded for their investments. Speculators would not receive the same level of concessions as long-term investors and this acts as an incentive for investors to commit to long-term projects.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Scrip-for-scrip rollover relief

 

 

 


Targeted concessions for certain types of investment (eg venture capital and high technology start-ups)

Removal of the averaging provisions

Supported

 

 

 

 

 

Supported

 

 

 


Supported

  • The Ai Group recommends that the relief is broadened beyond the proposed application to listed companies. The US experience suggests an extension is workable. The roll-over relief will have a positive effect on mergers and deconsolidation activity in Australia. At present, potential synergies remain unrealised due to unacceptable tax costs of mergers.s.
  • The options available for targeted concessions need to be expanded and clearly defined for certain activities. This needs to be considered beyond the BTRBT and regard should be had to other policies impacting on this area.

  • As part of the reform of the CGT system, concessions such as averaging, which usually are not the key driver of investment decisions, should be sacrificed in favor of more targeted concessions. This is particularly applicable to the averaging concession which has the potential to be inappropriately exploited.

Ai Group welcomes the BTR RBT recommendations to develop a workable consolidation regime in a manner which reduces compliance costs for entity groups. However, while the stated objective is desirable, we are of the view that the RBT proposals on this area do not present a workable consolidation regime. A revised model should be developed which will reduce compliance costs and satisfactorily deal with numerous unresolved issues, such as the status of pre-consolidation losses. However, Ai GroupWe are is anxious to ensure that the consolidation regime is a truly optional regime so as not to disadvantage entity groups which do not wish to consolidate due to the additional costs associated with consolidation.

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Group entities can elect to be taxed as single entities whereby intra-group transactions and intra-group interests would be ignored. Conditional support Ai Group supports the concept of a consolidation regime with entities having the option to consolidate. This optional regime should not be compromised by the removal of certain tax relief provisions which would disadvantage entities should they choose not to consolidate. The current proposal is restrictive; in effect most entity groups will have no option but to elect to consolidate.

The RBT option proposes that entities which elect not to consolidate should not be entitled to roll over relief on gain assets, transfer of losses between group entities or the inter-corporate dividend rebate. Ai Group’s support for a consolidation regime is subject to entities being allowed to continue with such roll-over relief, transfer of losses and inter-corporate dividend rebates should they elect not to consolidate (election should be based on taxpayer preferences and there should be no legislative or administrative pressures).

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
If a company chooses to consolidate, they must be able to do so within a workable framework. The system proposed is both restrictive and impractical.

Part of the reasoning behind the proposal to form consolidated groups is to reduce the compliance costs (eg where a return may be based on consolidated accounts), and to reduce the burden on the taxpayer of where complying with onerous election and lodgement procedures. A further reason is the flow-on effects this will have in reducing administrative costs for the ATO.

Where If consolidation is considered effectively compulsory, some company groups may find themselves subject to much higher compliance costs. These costs will arise as a result of the need to eliminate intra-group transactions, due to the problems associated with deconsolidations and entities exiting the group and the transitional concerns regarding the ability to include pre-consolidation balances. In addition, where a consolidated group for accounting differs to the consolidated group for tax, large costs will be incurred in deconsolidating the accounting books and then reconsolidating for tax purposes. Consolidations may reduce administrative costs for the ATO but will greatly increase compliance costs for many taxpayers, outweighing the perceived benefits of consolidations for many taxpayers.

  • Ai Group appreciates that there are concerns of tax arbitrage under a dual regime but we believe the risks to be minimal and that any risks could be covered by anti-avoidance provisions.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Treaty re-negotiation including the allowance of imputation credits to resident investors for foreign withholding taxes paid by resident companies repatriating foreign profits.

Permitting companies to stream foreign earnings directly to foreign investors.

 

 

Thin capitalisation rules for inbound investment based on a total debt approach, rather than focusing only on debt from related parties.

 

Supported

 

 

 

 

 


Supported

 

 

 

 

Supported

Ai Group strongly supports this proposal to avoid the imposition of DCT on distributions that have already been taxed overseas. A more detailed discussion of this proposal can be found in chapter 2 of this submission: Taxation of Entity Distributions.

Ai Group supports the streaming of dividends to foreign investors in order to reduce the trend of Australian based multinationals migrating and also to attract overseas entities to set up head offices in Australia. Once again, a more detailed discussion of this proposal can be found in chapter 2 of this submission: Taxation of Entity Distributions.

The current thin capitalisation rules do not take into account unrelated party debt, which has limited their effectiveness. The proposal to move to a total debt approach is supported by Ai Group, contingent on the introduction of grandfathering provisions for existing investments financed on the basis of the current rules.

RBT Options Canvassed Ai Group Position Basis of Recommendation and Conclusion
Require taxpayers to impute transfer pricing adjustments in line with the self-assessment regime.

 

 

 

Reduce record-keeping by standardising transfer pricing documentation requirements between Australia and our major trading partners.

Legislation of our transfer pricing methodologies and the calculation of an arm’s length consideration.

 

Supported

 

 

 

 

 


Conditionally supported

 

 

 

 


Not supported

The requirement for taxpayers to return income and expenses on an arm’s length basis will reduce taxpayer uncertainty in relation to transfer pricing transactions and will be consistent with the approach adopted in many overseas countries. Adjustments should be made on a consistent basis and not only where the non-arm’s length price is detrimental to revenue. In addition, franking credits that are normally denied where the Commissioner makes a transfer pricing adjustment need to be allowed where a taxpayer self-assesses the transfer pricing adjustment.

Ai Group is strongly in favour of the reduction in record-keeping requirements which are currently onerous for taxpayers to comply with. However, the US-style requirements are considered to be highly onerous and an alignment with these requirements would not be supported by Ai Group where they increase the record-keeping requirements, regardless of the perceived benefits to be achieved through standardisation.

Although this approach may remove uncertainties, Ai Group believes the legislation of these rules would introduce too much rigidity into our system, particularly as transfer pricing is not an exact science. Ai Group does not believe a formal coding of the transfer pricing methodologies is necessary due to the extensive powers of the ATO to make adjustments where necessary and the substantial penalties that may potentially apply to taxpayers who do not comply with the transfer pricing requirements.

Ai Group continues to strongly opposed the breadth and complexity of the current fringe benefits tax regime. We are of the view that, believing the compliance costs associated with this tax are disproportionately high in relation to the amount of tax collected. to vastly outweigh the tax benefits. This opposition disparity has been increased recently with the introduction of theextends to the requirement to include details of fringe benefits on employee’s group certificates. We also continue to urge the Government to deal with and the problems associated with defining what a benefit is and how the benefits should be apportioned.

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
To attribute the taxable value of fringe benefits to each employee and make the employee liable for tax on the benefit at the appropriate marginal rate. Not supported Ai Group has strenuously objected to increased compliance costs which have as their hallmark the extension of the definition of "benefit". Before any shift of the nature discussed can be considered, the definition of benefit needs firm resolution.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Remove meal entertainment and on-premises car-parking from the list of benefits.

 

 


Remove the concessional nature of the statutory formula for car benefits

Supported

 

 

 

 

 

Not supported

 

 

 

Ai Group supports the exclusion of these benefits from the definition of "fringe benefits" and believes that while this is a step in the right direction, there are other benefits currently within the FBT regime which should be excluded. We urge the Government to undertake a a more rigorous examination of the concept of employee fringe benefits which needs to be undertaken to more accurately and precisely define the its limits.

and the list of exclusions removed so that only taxable fringe benefits are included within it. As stated in the MTIA submission, "a central flaw in FBT is the definition of a "fringe benefit" which should be clearly restricted to items forming part of employee remuneration and should not include genuine costs of business".

This issue proposal isappears completely out of place in the context of structural tax reform - thiits is a revenue-raising matter initiative at the microtax level and should not be incorporated into strategies designed to overhaul the system itself.

Ai Group supports the simplification of the tax system by taxing trusts as companies, subject to the proviso that all the benefits afforded to companies are available to trusts.

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Trusts will be taxed as companies except for a few types of trusts (eg complying superannuation funds, deceased estates, CIV, etc). Conditional support Ai Group believes that business structures should be treated consistently by the taxation system, subject to our comments below regarding distributions of tax-preferred income.

However, we are firmly of the view that if trusts are taxed as companies, then they must be entitled to take advantage of the benefits of corporate structures such as the ability to transfer losses, rollover relief and tax free inter-entity distributions and access to R&D concessions.

Ai Group strongly supports the retention of the current tax treatment of tax preferred distributions to beneficiaries. Under the present system, tax preferred deductions (eg CGT indexation and the goodwill exemption) are able to flow through to beneficiaries in certain circumstances. Under the proposed entity regime, where tax-preferred distributions are paid by the trust, these distributions will be subject to the proposed rules applicable to entity distributions and tax will be withheld accordingly. Given that a trust is not a separate legal entity, there should be no reason why individuals should be denied such concessions because they have used a trust structure, especially given the numerous genuine commercial and domestic purposes served by trusts.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
In addition, the RBT proposes to treat unpaid income or capital to which a beneficiary is presently entitled as a distribution to that beneficiary and a loan back to the trust. This is a consistent application of the current position in an entity regime, whereby a beneficiary who is presently entitled to income is assessed on that income.

There are certain transitional issues which require consideration, including the treatment of trust distributions in the first year. These will be deemed to be dividends in that year, however the income will not have borne any income tax in the hands of the trust during the year and therefore the distribution, presumably, will be subject to a DCT or RDWT.

Ai Group welcomes the removal of this anomaly in the tax system which can operate to disallow a company a deduction for expenditure properly outlayed in carrying on its business.

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Option - Black hole expenditure (listed above) to be treated in a manner consistent with other expenditure. Supported Ai Group supports the proposition that the tax treatment of black hole expenditure should reflect the underlying accounting principles. These principles require that expenditure which does not make a future economic benefit available to the taxpayer should be immediately written-off. Other expenditure should be subject to capital allowances.

Ai Group supports the consistent treatment of the following black hole expenditure as outlined in the BTR:

  • Unsuccessful / successful feasibility or market studies
  • Export market development costs
  • Winding up and closure costs
  • Demolition costs
    • Relocation costs
    • Contribution to local or regional infrastructure as condition of project
    • Expenditure to preserve title to an asset
    • Company pre-incorporation costs; legal and consulting fees to establish a business
    • Prospectus and underwriting costs
    • Take over defence costs
    • Landscaping

There are numerous other proposals put forward in Discussion Paper 2, some relating to areas which are not of key importance to the members of Ai Group. We have focussed on those measures most relevant to our members and the industries they operate in. The following measures have been examined due to their relevance to the manufacturing industry and the members of Ai Group. The more detailed proposals not examined in this submission were considered not to be relevant to Ai Group members and are likely to be covered by submissions from the relevant interest groups.

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Trading Stock Proposals

Value stock at either:

1. Lower of cost or net realisable value ("NRV");

2. NRV; or

3. One of the current methods (ie cost, market selling value or replacement cost) but only allow a change of method based on non-tax considerations.

Consumables

Treat consumables on the same basis as trading stock

 


Limit deductions for consumables to a specified number of items of the same class, each costing less

Limit total deductions in respect of consumables in a given class (proposed cap at $10,000), subject to each item costing less than the de- minimus threshold.

 

 

 

Ai Group does not support any of the suggested changes to the valuation of trading stock.

 

 

 

 

 

 

 

 

 

Not supported

 

 

 

 

 

 

Supported

 

 

 

This proposal is out of place in the context of structural tax reform - it is a revenue-raising initiative at the microtax level and should not be incorporated into strategies designed to overhaul the system itself.

 

 

 

 

 

 

 

 

 

Given that theThis measure may improve consistency between tax and accounting but the expenditure has been incurred and does not form part of an item of trading stock, for tax purposes and the current treatment should remain, ie allow immediate deduction for expenditure on consumables to be used within one year..

 


  • If the treatment of consumables is to be changed, Ai Group strongly supports the adoption of a "bundling" approach. The "bundling" of items would greatly reduce compliance costs,. H however, there are likely to be practicalmaybe difficulties in distinguishing "classes" of assets, and assets within a class. This issue will need close attention to minimise any uncertainty.
Goodwill

Proposal to allow acquired goodwill to be depreciated.

 

 

Conceptually supported

 

 

Ai Group conceptually supports this proposal, given that expenditure on goodwill is genuine business expenditure. The current state of law represents a major difference between the accounting treatment and the tax treatment.

In addition, given that goodwill is inherently difficult to value, there are currently incentives for taxpayers to manipulate the valuation of goodwill to achieve a more favourable tax result. By allowing a deduction for goodwill, this incentive is likely to be reduced.

However, on balance Ai Group believe that the revenue cost of this initiative could be better ‘spent’ on other proposals. Accordingly, we are of the view that the status quo should be maintained such that the cost of acquiring goodwill is only deductible upon realisation.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Balancing Charges

Proposal to remove the balancing charge offset (ie. the ability to offset balancing charges against the cost base of other depreciable assets).


Supported


Removal of the balancing charge offset would result in the cost of an asset being fully deducted over the life of the asset. The introduction of this measure will contribute revenue to offset the cost of other measures supported by Ai Group – particularly the need to strengthen the R&D concession.

Building Depreciation

Option 1: Retain existing treatment

Option 2: Proposal to include buildings and structures in the general depreciation regime.

Option 3: Reduce the rate of depreciation.

 


Not supported

 

Supported

 

 

 

Not supported

 

 


  • The Ai Group supports the consistent treatment of buildings with other assets.

 

RBT Options Canvassed Ai Group Position Basis of Recommendations and Conclusions
Leases

Option 1: deeming of leases of depreciable assets to be a sale of the underlying asset financed by way of loan.

 

Supported

 

 

Ai Group supports this measure and its underlying objective of aligning tax treatment with accounting treatment.

Ai Group also supports the policy restricting the transfer of tax benefits from lessees to lessors. These transfer of benefits result in tax driven transactions which may distort investment decisions.

Involuntary receipts
  • Option 1: make no distinction between voluntary and involuntary compensation receipts.
  • Option 2: distinguish between voluntary and compensation receipts but on a consistent basis.

Supported

 

 

 


Not supported


Ai Group believes in the consistent treatment of voluntary and involuntary compensation receipts, ie tax both gains and losses at the time of receipt.

Standing crops Not supported

 

 

Expenditure on planting and tending crops for sale or use in business is currently immediately deductible for tax purposes. However, crops do not constitute stock for tax purposes until severed from the land. Accordingly, there is no requirement to bring their value to taxation until either severed or sold with the land.