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SUBMISSION IN RESPONSE TO
REVIEW OF BUSINESS TAXATION
SECOND DISCUSSION PAPER
AUSTRALIAN FOOD AND GROCERY COUNCIL
1. Submissions Authority
This Submission to the Ralph Review of Business Taxation (RBT) is made by the Australian Food and Grocery Council (AFGC), (formerly the Australian Food Council), the peak, national, representative organisation of the Australian processed food, beverages and grocery products industry.
This Submission responds to selected key issues covered in the second discussion paper issued by the RBT entitled A Platform For Consultation (hereafter referred to as Platform).
This is the second Submission made by the AFGC to the RBT and should be read in conjunction with the first A Preliminary Response to "A Strong Foundation".
The Australian Food Council (AFC) became operational in June 1995, established as the peak, national representative organisation for the Australian processed food and beverages industry. The Australian Food and Grocery Council, operational from 1 January 1999, is a product of the merger between the Australian Food Council and the Grocery Manufacturers of Australia.
The membership of the Australian Food and Grocery Council is at Attachment 1.
The Australian Food and Grocery Councils charter is to promote a domestic business environment conducive to international competitiveness, strong and sustained investment, business growth and profitability for our member companies, complemented by greater export market opportunities.
2. Business Tax Reform In Context
The AFGC agrees that the case for business tax reform is solid and supports the "nature" of the approach adopted by the RBT consistent with national objectives, industry interests, design features of a "good" tax system simplicity, equity, efficiency and competitive neutrality and the imperative for improving Australias international competitiveness.
This Submission is intentionally brief and reflects the AFGCs consideration of the issues at this stage in the review process an evolving process that reflects the complexity of the current system and proposed reforms.
The AFGC supports the RBT exercise being considered in a wider tax reform context:
3. "A Package" Approach to RBT Reform Proposals
The AFGC recognises the closely interdependent nature of the numerous proposals under consideration in Platform. Indeed, the AFGC considers the direct business tax reform package to be synonymous in that respect with the ANTS Package. In this regard:
4. Durable Business Tax Reform
4.1 The Imperative
The AFGC underscores that a stable, certain, taxation environment is a fundamental criterion to promoting an internationally competitive business environment conducive to investment, growth and profitability.
Realistically, taxation systems will evolve, and, to that end, agreed ongoing consultative processes that allow businesses and the taxation authorities cooperatively to refine the detail of the system are essential. With the best will in the world, it is almost certain that major reform proposals will not be exactly 'right' on day one. Few claim to have the answers on the 'best' approach even at a point in time.
Notwithstanding, it is important that the fundamental architecture of the business tax system be sound at the outset. If it is not, the system will not endure the test of time.
For purposes of this submission, the AFGC recognises that comprehensive income is to be the benchmark direct business tax base although AFGC and, we are confident, others will continue to question the conceptual and practical merits of this benchmark against alternatives such as a direct expenditure tax base as canvassed in the AFGCs initial Submission to the RBT. For the same purposes, AFGC also accepts the key tax design feature of tax neutrality - that is, the same tax treatment across different activities, different investments, and across different legal entities.
However, these benchmarks which the RBT has set in A Strong Foundation, are frequently violated by the reform proposals presented in A Strong Foundation and in Platform. In some critical cases, these deviations are driven by the business tax rate/capital gains tax rate/revenue neutrality constraints imposed on the RBT by its terms of reference.
4.2. The Threat To Durability Of Business Tax Reform
AFGC is increasingly concerned that the deviations proposed both from the benchmark business direct tax base [comprehensive income] and practical neutrality across business activities, investments and entities will:
AFGC requests the RBT to have regard for these general concerns in framing its Report to the Government.
If, on reflection, the RBT concludes that some of the tensions generated by its terms of reference pose threats either to the revenue and/or to the need to develop a simpler, rather than a more complex, business tax system, then AFGC recommends that these concerns should be identified in the RBT Report to Government, and the widest possible range of options to deal effectively with these concerns should be canvassed for consideration by the Government.
Not do so, as indicated, runs the risk of business tax reform that is:
(1) more complex;
(2) threatens the revenue base over time;
(3) renders reduction in headline corporate tax rates unsustainable; and/or
(4) necessitates more concessions to be traded off to support durability.
5. Key Issues For AFGC Members
This section of the AFGC's Submission summarises member reactions to six specific RBT issues/proposals considered important to the Australian food and grocery industries.
5.1 Business Entity Taxation
Most AFGC members operate as companies. A few operate, at least in part, as cooperatives.
In general, therefore:
That said, AFGC members also note that consistent treatment of business entities is not a feature of Platform and that a range of entities will enjoy preferential treatment over companies, most trusts, and superannuation funds in that respect.
Most AFGC members support an optional consolidation regime, and also believe that it should be allowed where there is less than 100% wholly owned Australian resident ownership.
If consistency of tax treatment of business entities is a goal - and the RBT says that it is - then business entity taxation and the flow-through of tax preferences must be considered together.
There are three in-principle solutions that would achieve consistency:
The AFGC recognises that RBT faces a dilemma:
Notwithstanding, the AFGC considers that the correct, and consistent, treatment of tax preferences, on which practicable neutral treatment of business entities heavily depends, is as follows:
Full pass through of tax preferences via adjustments to the present imputation system would complement the proposal (see section 5.2) to pay refunds of unused franking credits and make the label 'full' dividend imputation more accurate, rather than, as at present, quite misleading.
5.2 Imputation, Deferred Company Taxation & Alternative Approaches
Amongst the options proposed in Platform most AFGC members would prefer the so-called deferred company tax proposal (DCT) to be replaced by the proposed resident dividend withholding tax (RDWT) proposal:
That said, AFGC members recognise that both of these proposals effectively bring forward (albeit slightly in some cases) the point at which tax preferences are 'washed out' through the operation of imputation as it presently operates in Australia, or proposed equivalent arrangements.
5.3 Imputation Refunds
For many, but not all, AFGC members, the provision of refunds of unused franking credits to Australian resident shareholders unable to exhaust such credits against other current tax liabilities is not perceived as offering a material advantage to their businesses.
Nevertheless, as a matter of tax equity, and given (for purposes of the RBT) AFGC's acceptance of the tax neutrality principle, AFGC recognises that this initiative is a useful improvement in the equity of imputation arrangements, and is consistent with the intent of imputation overall. In particular, it helps reduce over-taxation of dividends relative to other forms of investment income.
5.4 Exchanging Existing Tax Preferences For A Lower Business Tax Rate
Perhaps not surprisingly, AFGC members have different rankings in relation to the importance attached to existing tax preferences. Consequently, their individual preparedness to accept a trade-off of abolition of specific preferences in exchange for a lower 'headline' business tax rate depends on the particular concessions to be removed or reduced.
Nevertheless, there is a net balance of AFGC members - if not consensus - that is prepared sympathetically to consider a tax preferences/'headline' tax rate trade-off.
Although AFGC members generally are significant investors in plant and equipment, the proposal to remove or reduce accelerated depreciation as a financing mechanism for a lower 'headline' business tax rate has received a perhaps surprising level of positive interest.
This interest generally is based on AFGC members taking the costings/revenue implications of various reform options presented in Chapter 39 of Platform at face value. And this favourable consideration needs to be interpreted carefully. Other considerations are also relevant:
To the extent that these sorts of considerations are the basis for AFGC support for this particular tax preference/tax rate trade-off, that support in part may reflect a perception that this trade-off will be net after tax profit-positive for AFGC members.
While that situation might be consistent with an economy-wide revenue-neutral outcome, this needs to be carefully assessed. More generally:
5.5 Research & Development Tax Concession
Notwithstanding the AFGC memberships favourable disposition to trading specific tax preferences for a reduction in the headline business tax rate, many AFGC members, particularly R&D dependent companies, consider retaining the R&D tax concession at 125%, indeed its restoration to 150%, a necessary incentive for investment and innovation.
The AFGC has consistently advocated the R&D tax concession as an appropriate and effective instrument of Government intervention to correct a market failure.
The evidence of the real impact since the rate of assistance was reduced from 150% to 125% is compelling for a restoration to 150%:
The food industry has found the R&D Tax concession particularly attractive as it provides incentives for innovative activities which are incremental improvements in products and processes rather than substantial advances in new technologies or products. However, at the present level of 125% (representing a return of 9 cents in the dollar) compliance costs have reduced the attractiveness of the concession considerably.
5.6 Tax Treatment Of Capital Gains
Amongst AFGC members, different responses to different proposals concerning capital gains tax (CGT) are evident:
5.7 Fringe Benefits Taxation
Consistent with the principle that genuine fringe benefits are a close substitute for wages and salaries, and therefore should be taxed at the same rate, there is a broad consensus amongst AFGC members that:
AFGC members have more mixed views about the merits of tightening up the statutory formulae in relation to motor vehicle fringe benefits.
While the in-principle merits of that proposal resting on the need to tax salary and fringe benefit substitutes at the same rate, are recognised, AFGC members are concerned about application of such changes retrospectively, given the significant number of motor vehicle benefits at present incorporated in remuneration packages.
As to the proposal to tax fringe benefits in the hands of employees, again AFGC members have mixed views:
6. Concluding Observations: AFGC Support For Reform Is Conditional
The AFGC emphasises that its support for specific business tax reform proposals is conditional.
In particular, if AFGC is to support removal of any existing tax preferences - notably accelerated depreciation - in exchange for a lower 'headline' business tax rate, it will do so only if that exchange is durable.
The AFGC is highly cognisant of recent instances where businesses have been offered a lower company tax rate most recently 33% in 1993-94 also justified on the grounds of improving Australia's international competitiveness only to see that rate increased to the present level of 36% two years later because the Budget position was such that the Government concluded that it could not afford to lower the rate.
Chopping and changing the business tax rate itself generates complexity - including as a result of the requirements of the imputation system.
Accepting the permanent abolition of particular tax preferences that exist at present, in exchange for a temporary reduction in the 'headline' tax rate, for AFGC members at least (if not Australian business generally), is no deal at all.
MITCHELL H HOOKE
AUSTRALIAN FOOD AND GROCERY COUNCIL
16 April 1999