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Submission No. 251 Back to full list of submissions
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21 April 1999

 

The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place
CANBERRA ACT 2600

 

Dear Sir

RE: RALPH REVIEW OF BUSINESS TAX

The South Australian Employers' Chamber of Commerce and Industry (SAECCI) is the peak employer representative organisation in South Australia, directly representing approximately 3,500 businesses and over 70 Industry Associations. Our membership consists of businesses from all industries in South Australia and has the following employment characteristics:

  • 67% of members employ less than 19 employees
  • 25% of members employ less than 99 employees
  • 8% of members employ more than 100 employees

SAECCI is a foundation member of the Business Coalition for Tax Reform (BCTR) and has assisted in the development of the submission from that body. The principles for tax reform developed by the BCTR are supported by SAECCI. They include:

  • The business tax system should be simple, transparent and minimise uncertainty
  • The tax system should not favour or disadvantage particular business structures over others
  • Taxation for the purpose of raising revenue should not favour particular industry sectors or firms over others
  • The tax system should avoid the double taxation of business income and provide relief for all business expenses
  • The tax system should not impede organisational restructuring
  • The business tax system should be internationally competitive and supportive of increased national savings

In addition to our general support of the BCTR submission, we submit the following points for the Review’s considerations as being of particular importance to South Australian businesses.

Evaluation of prospects for achieving a 30% company tax rate within a revenue neutrality context

Calculations by the Review show that this is only possible (over a five-year period) if:

  • The regime of accelerated depreciation is removed and calculations of capital write-offs are based on the notion of ‘effective life’;
  • No substantial reductions are made to capital gains tax (CGT);
  • All other reform options are carefully considered in view of the revenue neutrality constraint.

While not all of our members have been canvassed on this issue, from the consultation we have had to date, the proposal to remove accelerated depreciation as a contribution towards financing a permanent cut in the company tax rate to 30%, is likely to be acceptable to a majority of SAECCI's members.

That said however, we recommend that the Review investigates the idea of different tax rates which would allow a choice between a reduction in the company tax rate or accelerated depreciation. This could be available either at the level of individual businesses or entire industry sectors.

Substantial reforms to Capital Gains Tax are needed. This is discussed later.

Reform to Fringe Benefits Tax

The Review proposes some changes here, including:

  • Consideration of transferring the liability for fringe benefits tax from the employer to the employee;
  • Disclosure of benefits on group certificates;
  • The removal of car parking and entertainment from the FBT rules;
  • Alignment of FBT tax years;
  • Removal of the concessional valuation of cars.

In principle, we support proposals 2, 3 & 4 and we suspect that political reality is likely to negate any chance of change in respect of the first proposal.

With regard to proposals 1 (the transfer of liability for fringe benefits tax from the employer to the employee) and 5 (remove the concessional valuation of cars) SAECCI urges the review not to pursue the changes proposed.

Should the concessional valuation of cars be removed, or the liability of fringe benefits tax be transferred to the employee, the domestic demand for cars is most likely to shift significantly towards cheaper, smaller cars. This would put the Australian car industry at an unacceptable risk, due to its strong bias towards the medium-large car market segment. It will also put at risk the automotive components industry - which in our state accounts for a large share of output and employment. The shift in demand will mainly favour imported cars. This would negatively impact upon the trade balance which is already under considerable pressure.

We do not agree with the reduction of the so-called "generosity" of treatment of car benefits. South Australia’s car and automotive industry has weathered the effects of significant industry restructuring over the past fifteen years, tariff adjustments being the most recent.

The industry does not deserve to have thrust on it proposals which have the potential to reduce sales of Australian fleet vehicles and hurt the South Australian automotive industry enormously. In our view, proposals 1 and 5 have the capacity to do so.

The automotive industry has endured enough adjustment in recent years and is currently in a delicate balance, with foreign investors only too ready to re-locate manufacturing sites offshore if the situation worsens.

Therefore, we urge the review not to suggest either tampering with the concessional valuation of cars or recommend that fringe benefits tax liability be transferred to employees.

Entity Taxation Reform

The Review suggests a consistent entity treatment.

We agree with the principle of consistency, a removal of discrimination between various forms of business.

Nevertheless, many of our small business members have concerns with regard to the proposed changes with the taxation of trusts. These concerns are mainly related to the costs of adjustment incurred by the proposed changes to businesses already using trusts.

We seek further clarification from the Review as to how effective the proposed transitional arrangements will be in minimising these costs, both in the short and longer term.

Tax Incentives

The Review does not consider any specific tax exemptions or incentives. However, interested parties are invited to submit proposals for favourable tax treatment. We understand that all proposals need to demonstrate that:

  • the desired tax incentives are superior to any other alternative forms of Government intervention, and
  • are achievable in a revenue neutral framework.

SAECCI is concerned that the Review has not adequately addressed R&D tax concessions, and that these incentives will be the subject of a subsequent review. We urge the Review to support the view that R&D investments should be given concessional treatment, at least in the form currently in force.

Capital Gains Tax

As stated earlier, substantial reforms are needed in the Capital Gains Tax area.

Conclusions in the Review papers indicate that the capital gains tax regime in Australia is, at a general level, harsher than in other countries. In particular there is evidence from overseas investors - venture capitalists, US pension funds (as quoted in the Wills Review of Health and Medical Research) - that "Australian taxation treatment of capital gains penalises investment and management participation" in high risk projects (eg. high-technology, medical research sectors, etc.).

The Review raises some comprehensive reform options for capital gains tax. SAECCI seeks a substantial reduction of CGT rates, and to that end is supportive of the following proposals as offered by the Review:

  • Removal of indexation, and
  • Modification of the ‘averaging regime’.

In order to compensate those who would lose from these reforms (ie, mainly individuals investing for retirement and funds with portfolio structures biased towards long-term investments), support for these reforms needs to be balanced in some way.

We suggest it needs to be conditional on such things as -

Introduction of a ‘stepped rate’ - ie. reducing the tax rate proportionally with the period the capital investment is held (like the US model discussed by the Review - Table 11.1 p.292)

Reduction of CGT rates in a progressive, rather than capped, manner across all marginal income tax levels. Furthermore, the decrease could occur gradually, with reductions of less than the proposed 20% in the first year, increasing gradually to 20% over a transitional period - so as to impact less on tax revenue and to allow the assessment of other potential revenue gains over time.

Replacement of the goodwill exemption for small business with a general (and lower) exemption.

Relaxation of the quarantining of losses: the preferred option here being to allow ‘carry-back’ of capital losses, as well as imposing an individual annual revenue cap of $100,000 in order to benefit from the more favourable regime (of capital loss treatment).

Rollover relief in all cases where one investment is replaced by another of equivalent value.

We trust these comments are of assistance to the Review.

Yours Sincerely

ADRIAN DANGERFIELD
General Manager, Policy