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Submission No. 257 Back to full list of submissions
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15 April 1999

 

Dr. A. Preston
The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place
Canberra ACT 2600

e-mail address: rbt&treasury.gov.au

Dear Sir,

The Institution of Engineers, Australia has not made a formal submission to the review of Business Taxation – The Ralph Committee. The following submission has been prepared by a senior Fellow of the Institution to highlight some of the issues germane to the Review, and to make a valuable contribution to the efficacy of the Review process.

The following submission on the Review of Business Taxation is forwarded in response to the call for Submissions to-A Platform for Consultation.

In supporting the Mission and Goal Statements of the review and the proposed 30% company tax rate & Capital Gains Tax (CGT) relief, I note in particular that Accelerated Depreciation on fixed plant and equipment and retention of the 125% R&D Taxation benefit could have substantial benefits to our economy. The long term benefits of Accelerated Depreciation on fixed plant and equipment and the 125% R&D Taxation benefit needs further consideration. It is believed their inclusion with a 30% company tax rate & CGT relief would improve the international competitiveness of the economy in order to attract capital for investment and maximise the opportunities for job creation. I discuss each of these issues below.

ACCELERATED DEPRECIATION

Australia’s manufacturers and industry generally must either maintain their international competitiveness or become internationally competitive if they are to retain or build market share. Australia’s manufacturing and industry sector contributes much less to our economy than this sector does in other competing nations. This is highlighted by the following graph which shows Australia’s manufacturing sector contributes between 3 to 10 percentage points less to GDP than in other competing nations. (refer graph 1 below and table A in attachment 1).

Graph 1
(Reference: The World Development Reports; The World Bank)

Adopting the countries depicted in Graph 1 as a bench mark shows that Australia is under performing in the manufacturing and industry sectors. To achieve international competitiveness means our manufacturing and industry sector must invest in plant and equipment which is of world class. In recent times there has been considerable international change in technology in; the motor vehicle industry, the steel industry and the textile clothing and footwear industries. New technology incorporates robotics, computerisation and new technological processes. Economies of scale have sometimes changed with the new technology; new technology brings lower operating costs as well as often smaller economies of scale than the older plants. The economic life of plant and equipment is affected by the rapid changes in technology.

Unfortunately many manufacturers and industries in Australia still have plant and machinery which is not of world’s best standard and consequently work practices also languish behind world’s best practice. Resolution of this issue is not simple. This is a complex issue as has been highlighted by the recent reviews within Australia into the Motor Vehicle Industry, and the Textile Clothing and Footwear Industry. Any changes to the tax system must give due cognisance to the structure of the economy and the need to encourage manufacturers and industries to continuously update their plant and equipment as technology changes. As Australia is reducing its tariffs it is imperative that manufacturers and industry in general adopt world’s best leading practices. This will require considerable capital investment in new fixed plant and equipment. Manufacturers and industry in general need some incentives other than the threat of tariff reductions to make this investment. Such investment is not only in the manufacturers’/industries’ interest but is also in Australia’s interest.

Accelerated depreciation for fixed plant and equipment (equating to an economic life which will probably be substantially less than its physical life) is an attractive way of stimulating investment in new current technology. Such stimulation should result in;

  • increased investment in new technology,
  • increased international competitiveness,
  • growth in the manufacturing and industry sector,
  • an increase in job growth in the sector, and
  • an increase in GDP per Capita.

It is acknowledged the updating of fixed plant and equipment may result in an increase in imports. This may have a short term affect on the balance of payments. However this should be rectified in the longer term, as manufacturers and industry in general become more internationally competitive. As a result there should be an increase in both import replacement and exports. The increases in both import replacement and exports minus the cost of importation of fixed plant and equipment is anticipated to ultimately have a positive affect on the balance of payments.

It is requested that the Review Team;

  • incorporates accelerated depreciation for fixed plant and equipment in conjunction with the 30% company tax rate and CGT relief in its recommendations, and
  • undertakes economic modelling to examine the benefits that such an approach would have on Australia’s economy and the net affects on government taxation revenue (refer concluding comments).

RESEARCH AND DEVELOPMENT

Research and Development (R&D) does not appear to have received specific mention in the review to date. R&D is the precursor to the development of new products and markets, it will also generate growth in the economy and job creation. Whilst it is acknowledged that the Government has recently done much to stimulate R&D activity through outlays via R&D grants, the Innovation Investment Funds etc we must recognise that Australian Business sector still performs poorly by international standards in its investment in R&D. The following table shows that investment in R&D by Australia’s Business sector ranks a lowly eighth out of eleven OECD countries.

TABLE 1
(Reference Australian Bureau of Statistics 8104.0 & 8112.0)

Research and Development is an imperative for a healthy Australian economy. R&D is important to all industry sectors. It is the difference between Australia retaining and/or gaining international leadership or developing an unacceptable followership and consumption culture.

It is requested that the Review Team;

  • retains the current 125% percent taxation deduction for R&D, and
  • undertakes economic modelling to examine the benefits that such an approach would have on Australia’s economy and the net affects on government taxation revenue (refer concluding comments).

CONCLUDING COMMENTS

Adoption of a 30% company tax rate & CGT relief together with;

  • an accelerated depreciation for fixed plant and equipment used in manufacturing and industry generally, and
  • the retention of the 125% R&D Taxation Benefit and the current R&D, Venture Capital outlays

should result in an expansion in the economy and generation of employment. It is requested that the Review Team incorporate the above in their recommendations.

Benchmarking our economy against those of our international competitors shows that Australia ranks a lowly 15th based upon GNP (measured at PPP) Per Capita. The leading country Singapore’s GNP per Capita is 1.47times that of Australia. Based upon GDP per capita Australia’s relative position is still 15th compared to our international competitors. Switzerland which has the highest GDP per Capita is double that of Australia.

Clearly there is significant opportunity to expand our current economy. It is requested that the Review Team in developing options based upon a revenue neutral basis should undertake economic modelling of the benefits of a 30% company tax rate & CGT relief, accelerated depreciation for fixed plant and equipment and retention of the 125% Tax Benefit to our economy. The economic modelling should determine how long it would take this scenario to become revenue neutral. Finally it is requested that the Government should be advised of the affects of this scenario on the economy in general and on its revenue.

Yours sincerely,

 

E. J. (Joe) Abercrombie FIEAust, CPEng
National President

 

Attachment 1

Table A

TABLE A
(Reference: The World Development Report, The World Bank)