Submission No. 272 Back to full list of submissions
Download in either PDF or RTF format


Table of Contents

Executive Summary


1. Leasing and Public Infrastructure Tax Rules

2. Interest Withholding Tax on Government Securities

3. Taxation of Trusts as Companies

4. Fringe Benefits Tax

5. Other Issues

- Innovation
- Proposed Capital Gains Tax Concessions
- Offshore Banking Units and Regional Headquarters
- Small Business
- Regional Issues

Concluding Remarks


Executive Summary

As part of the Commonwealth Government’s tax reform plan, a committee of inquiry into business taxation was established to make recommendations on the fundamental design of the business tax system, the processes of ongoing policy making, drafting of legislation and the administration of business taxation.

On 22 February 1999 the Review of Business Taxation (Review) released a discussion paper containing sweeping proposals for changes to the Australian business tax system. The proposals include:

  • increased consistency between accounting and taxation rules;
  • giving major concessions for capital gains tax, with a possible tax rate cap of 30%;
  • reform of leasing and infrastructure tax rules;
  • transferring responsibility for payment of tax on fringe benefits from employers to employees;
  • the taxation of trusts, other than widely-held managed funds, such as cash management trusts, share unit trusts and property trusts, as companies;
  • reforms to the taxation of foreigners investing in Australia;
  • a reduction in the corporate tax rate to 30%, funded by replacing accelerated depreciation with deductions over the asset’s life; and
  • the introduction of a resident dividend withholding tax to replace the Commonwealth Government’s earlier deferred company tax proposal.

A number of the issues raised by the Review may have consequences for State and Territory Governments. The New South Wales Government submission to the Review of Business Taxation (Review) addresses several issues of concern and recommends the following:

  • amendment of Section 51AD and Division 16D of the Income Tax Assessment Act (1936), the so-called "leasing provisions", to remove a disincentive to private provision of public infrastructure. The current system has resulted in unnecessary complexity and has acted as a disincentive;
  • exemption from interest withholding tax on government bonds held by foreign investors in accordance with the Commonwealth Government’s new emphasis on making Australia a regional financial centre. This result would be consistent with the Commonwealth’s proposed treatment of corporate bonds;
  • States as the beneficial owner of a trust being entitled to refunds of excess imputation credits. This revenue neutral result would be consistent with the Commonwealth’s reciprocal taxation proposals;
  • further development of some of the Commonwealth’s proposed changes to Fringe Benefits Tax; and
  • improving the current tax concessions for Offshore Banking Units and Regional Headquarters.

The submission also raises other issues, as follows:

  • supporting improvement of the research and development tax concessions;
  • recognition of the case for capital gains tax concessions for venture capital investments; and
  • supporting tax incentive strategies for small businesses, and regional and rural areas, such as the income averaging provisions for primary producers.

The NSW Government considers that changes to the Australian business tax system are long overdue. Some of the proposals, such as changes to interest withholding tax, can reduce the financial cost of fundraising to governments. However, some of the proposed changes require considerable development before they can be implemented. The proposed taxation of trusts as companies is a case in point. Moreover, several areas of existing legislation require closer scrutiny, particularly those sections of the Income Tax Assessment Act (1936), covering the private provision of public infrastructure.



On 27 November 1998 the Commonwealth Treasurer, the Hon Peter Costello MP, announced the establishment of a committee of inquiry into business tax reform, called the Review of Business Taxation, to be chaired by Mr John Ralph, AO. The Ralph Inquiry was established to:

  • pursue the strategy, as set forth in the Commonwealth Government’s Tax Reform – not a new tax, a new tax system (A New Tax System) document, of consulting on the reform of business taxation, specifically taxation of business entities and business investments; and
  • make recommendations on the fundamental design of the business tax system, the process of ongoing policymaking, drafting of legislation and administration of business taxation.

The Review of Business Taxation (Review) was to make recommendations that were revenue neutral.

This Submission addresses several issues of concern to the NSW Government. The first section deals with Section 51AD and Division 16D of the Income Tax Assessment Act (1936) (the Act), the so-called "leasing provisions", covering private provision of public infrastructure projects. The second section deals with Section 128F of the Act, which covers interest withholding tax on government securities. The third section examines the Commonwealth’s proposal to tax trusts as companies, while section four examines proposed changes to the fringe benefits tax. The fifth section addresses other issues such as supporting improvement of research and development and Offshore Banking Units tax concessions, and argues that there is a case for special tax treatment of small business.

1. Leasing and Public Infrastructure Tax Rules

For public infrastructure projects, Section 51AD and Division 16D are aimed at restricting availability of tax benefits for assets which are nominally owned by the private sector, but which are effectively controlled by a government entity. For example, it prevents sale and lease-back arrangements where a tax-exempt government entity sells an infrastructure asset to a private company so that the company can access tax deductions for depreciation and capital allowances, interest payments and other investment allowances. The company in turn leases back the property to the tax-exempt entity, thereby effectively maintaining public control over the use of the asset, but at a cost which reflects a lower tax burden for the company.

In terms of its impact on public infrastructure projects, Section 51AD is significant because it operates to deny depreciation or capital allowances, interest deductions and other investment allowances to the owner of property, where:

  • the purchase of property by a taxable entity is financed wholly or predominantly by non-recourse debt (a form of finance arrangement where, in the event of default by the borrower, the creditor’s recourse is limited to the stream of rental income and subject property); and
  • the property is leased to another entity, or is used to provide goods and services, and that entity has effective control over that use; and
  • the lessee or end-user:
  • is a non-resident which uses the property wholly or principally outside Australia; or
  • uses the property other than solely for the purpose of producing assessable income (for example is a tax exempt body); or
  • was the owner of the property before it was acquired under a sale and leaseback arrangement.

Two points are noteworthy here. First, Subsection 51AD(4) of the Act stipulates that the provision applies if the property is used by the taxpayer to produce goods and services, but that use will be or will be able to be "controlled" by a tax-exempt body, such as a government department or statutory authority. In the case where the taxpayer is a private company, it is difficult to envisage a situation where effective control of a company, and the use of its assets, could actually reside anywhere other than with the central management of the company. In some instances, indirect control could be exercised by the company’s shareholders.

The second issue concerns the definition of "non-recourse debt" as contained in Subsection 51AD(8) of the Act. Non-recourse debt is commonly used in large, discrete, project finance transactions, its purpose being to ensure that the creditor’s rights against the debtor in the event of default are legally or effectively limited to the financed property. The definition of "non-recourse" debt in Subsection 51AD(8) states that access by a creditor to all taxpayer’s assets cannot be limited. It is hard to imagine any financing arrangement in which all the assets of the taxpayer would be available to meet the entire debt in the event of a recovery action by the creditor. Creditors normally have a charge over specific assets.

It should also be noted that Division 16D, which applies to non-leveraged finance leases, was added in 1984 to correct for the fact that Section 51AD does not apply unless the property in question is "predominantly" financed by non-recourse debt. Division 16D enables the Commissioner of Taxation, who has wide-ranging discretionary powers, to recast a lease transaction as a loan for taxation purposes. Under Division 16D, the taxpayer can claim an interest deduction, but is again denied access to depreciation deductions, capital allowances and any available investment allowances.

The Commonwealth Treasury (1994), who have not been fully supportive of removing these provisions, maintain that the primary function of Section 51AD and Division 16D is to promote private sector risk bearing in public sector infrastructure. However, it should be emphasised that Section 51AD was framed before the private financing of public projects and infrastructure was a major policy initiative of Governments. NSW contends that these provisions discourage rather than buttress the provision and financing of public projects and infrastructure by the private sector. This view is shared by Sieper (1995, p. 5-1), who argues that these anti-avoidance provisions are rendered obsolete "in a situation in which investment allowances have disappeared and where Government policy includes the active encouragement of private infrastructure provision".

Moreover, amending the provisions, as EPAC (1995, p. 151) suggested, would deliver cost savings on public infrastructure projects currently undertaken in the private sector. At present such projects are structured to ensure that Section 51AD or Division 16D do not apply. If this cannot be achieved, projects do not proceed in the private sector. For those projects undertaken by the private sector, amendment of the provisions would simply reduce transaction and administrative costs for both industry and the Australian Taxation Office (ATO) with benefits flowing to the ultimate end-users of the infrastructure by way of lower prices and/or benefits to taxpayers from smaller government contributions. At present, the cost to the community (through delays in obtaining a Section 51AD clearance), are unnecessary and mean that vital infrastructure services may not be adequately supplied.

It is the NSW Government’s view that the problems with Section 51AD and Division 16D derive from inadequacies in the drafting of the relevant sections and cannot be overcome by rulings from the ATO. There is a need to introduce a greater degree of flexibility in these provisions. Although the NSW Government accepts that provisions preventing the private sector from exploiting tax concessions are required, Section 51AD’s catch-all "control of the use of property" test needs to be amended and limited in such a way as to ensure genuine transfer of risk to the private sector. Indeed, there would be much to be gained if such all-or-nothing aspects of the Act were refined with an aim of actively encouraging the private provision of public sector infrastructure.

It is regrettable, as Sieper (1995, p. 5-10) notes, that Section 51AD was not drafted along the lines suggested in the Commonwealth Treasurer’s initial December 1981 announcement. This was simply to deny access to the investment allowance (and if necessary accelerated depreciation) to finance leases involving tax-exempt entities (or non-residents which use the property wholly or principally outside Australia). With this approach, the provision would have automatically ceased to have effect in times, such as the present, where no such allowances are available.

The NSW Treasury may provide a supplementary submission to the Review setting out alternatives for replacing Section 51AD and Division 16D of the Act.

2. Interest Withholding Tax on Government Securities

The Commonwealth imposes withholding tax on non-resident dividend, interest and royalty income to ensure some return to taxpayers from income derived by non-residents from sources in Australia. This section of the submission, however, is concerned only with interest withholding tax on government bonds. For interest payments made to offshore investors holding bonds issued by resident Australian borrowers, the interest withholding tax is 10% (in most cases).

On 2 July 1998 the Commonwealth introduced a Bill into the Parliament to exempt from interest withholding tax domestic corporate bonds held by foreign investors. While this Bill lapsed upon the dissolution of the House of Representatives, the NSW Government understands that it has been reintroduced into the current Parliament. The Commonwealth explained that the measure was introduced to encourage the development of the domestic corporate debt market. The revenue foregone from this measure was estimated to be $3 million in 1998-99. In 1997-98, the corporate bond market represented only 2% of total market turnover, with the remainder comprising government debt. Therefore, the NSW Government estimates that revenue cost of exempting interest withholding tax on government bonds would be of the order of $150 million.

According to Commonwealth Treasury, the proposed exemption will not apply to government bonds as the revenue foregone exceeds economic benefits. (Details of the Commonwealth Treasury’s costings are not available at this time.) Other provisions of the relevant withholding tax legislation do, however, allow government entities to issue some bonds overseas without incurring interest withholding tax. These bonds, however, account only for a small proportion of total bond issues by State governments.

The borrowing costs of Commonwealth and State governments will fall if their bonds are given an interest withholding tax exemption. Recent estimates by leading investment bank J.P. Morgan suggest this saving will be in the region of 7 basis points (0.07 percentage points) on all Commonwealth and State government bonds. New South Wales Treasury Corporation (TCorp) estimates that this would reduce the cost of servicing NSW’s public debt by $A30 million (NPV) for every $A5 billion worth of 10 year bonds on issue. At present, New South Wales has roughly $A24 billion of gross debt issued to the private sector (of which $13 billion are domestically issued bonds, and are affected by the proposed changes). In short, lower yields on government bonds translate into lower borrowing costs.

The interest withholding tax has been cited by the Financial Sector Advisory Council as one factor inhibiting Australia’s – and, more specifically, Sydney’s – development as a regional financial centre. The Asian economic crisis provides an opportunity for Australia to regain the momentum previously lost to Singapore and Hong Kong, where the trading activities of many international banks became increasingly concentrated during the early-to-mid 1990s.

NSW notes that the Prime Minister has given Australia’s development as a regional financial centre a high priority. This is reflected in the appointment of a Minister for Financial Services and Regulation, the Hon Joe Hockey MP. The proposed interest withholding tax changes are consistent with the Commonwealth’s new emphasis on making Australia a regional financial centre. They are also consistent with the Commonwealth’s tax plan which includes the abolition of a range of State taxes, such as Financial Institutions Duty, Debits Tax and Share Transfer Duty; changes that will help facilitate Australia (or more specifically, Sydney) becoming a world financial centre. (In this regard, it is worth noting that the Australian Stock Exchange looks set to replace Hong Kong’s Stock Exchange as the second largest bourse in the Asian region.)

The existence of a liquid and actively traded domestic bond market is an important attraction to financial institutions in the global financial market place. Complex tax arrangements such as interest withholding tax that either disadvantage foreign investors or increase administrative costs can be a key deterrent to investors. Removal of interest withholding tax on bonds is likely to increase the total number of foreign participants in the Australian bond market, and thereby increase liquidity.

The Financial System Inquiry (Wallis Report) recognised that existing interest withholding tax arrangements give rise to competitive neutrality concerns and tax driven responses which impede the efficiency of capital markets. Although the terms of reference prevented Wallis from making recommendations in respect of taxation, the NSW Government is of the view that his Report lends tacit support to interest withholding tax reform.

The Australian Financial Markets Association and the Financial Sector Advisory Council have recommended the complete abolition of interest withholding tax. They argue that any revenue foregone will be more than replaced by additional revenue from economic activity generated by the expansion of Australia as a financial centre.

The issue of revenue foregone if government borrowers are exempted from interest withholding tax should be examined against the advantages to be derived. The critical issue is whether the loss of revenue is more than compensated for by the budget gains derived from reduced borrowing costs and the benefits to economic growth and the tax base from increased participation by international investors in the Australian bond market. It is the view of NSW Government that, on a national basis, these benefits outweigh the costs to the Commonwealth budget.

In conclusion, the NSW Government believe that Government bonds should be entitled to the same exemption from interest withholding tax as that proposed for corporate bonds.

3. Taxation of Trusts as Companies

The proposal to tax trusts like companies by imposing tax at the company tax rate on income earned by trusts would impose a new and possibly unintended tax liability on trusts beneficially owned by State and Territory governments. A new imputation system involving full franking of all income paid to individuals or other entities outside consolidated groups is also proposed. Refunds of excess imputation credits would be paid to qualifying resident individual taxpayers and eligible superannuation funds only. The term "resident individual taxpayer" has not yet been defined. However, State and Territory governments are unlikely to be included in the definition because they are not subject to Commonwealth income tax under existing arrangements. There does not exist in the present proposals a mechanism whereby States and Territories can recover the income tax paid by the trust at the entity level.

A further complication arises where there is more than one trust in the entity chain, and that group of trusts does not qualify for grouping provisions. In this situation, an anomaly arises where the distributable profits of a trust, which is subject to entity tax, are received by another trust which has insufficient income to cover its expenses so that a net loss arises. Where this occurs, it appears that the imputation credits will not be refunded unless that entity is deemed a resident individual taxpayer or a superannuation fund. This means that under the current proposals some State trusts are unlikely to qualify for a refund of excess imputation credits.

By way of example, the trusts involved in the administration of the NSW Government’s home loan scheme would be adversely affected by the proposed taxation of trusts as companies. The trusts involved are:

  • the Home Purchase Assistance Fund (HPAF); and
  • the FANMAC Premier Trusts (FANMAC).

The HPAF was established by trust deed and operates for the purpose of supporting and administering the States home loan portfolio. Income earned by HPAF is available for distribution to either the State of NSW (the beneficiary) or to the trustee of the FANMAC trusts (the "special" beneficiary).

The FANMAC trusts hold mortgages which were funded through the issue of bonds. Although the financial position varies from one trust to another, in aggregate the FANMAC trusts are presently in substantial deficit. The deficits in the FANMAC trusts are funded by the distribution of investment income from HPAF. Any net income accruing to individual FANMAC trusts is distributed to the HPAF.

Under the Commonwealth’s proposal:

  • the HPAF would be liable for tax at the company tax rate on income earned. Where income is distributed to support the FANMAC trusts an imputation credit would be available to FANMAC trusts;
  • FANMAC trusts will be unable to realise any imputation credit benefit if they are in deficit;
  • in the case where a FANMAC trust is operating profitably, the imputation credit may be applied to the tax liability of the FANMAC trusts;
  • there is no provision for a refund of excess imputation credits.

It appears that the Commonwealth’s proposal:

  • would impose a tax on trusts which currently do not have a tax liability; and
  • the proposed imputation arrangement would be ineffective in ensuring that the tax-free status of the ultimate beneficial owner – NSW Government in this instance – is preserved.

Where the State is a beneficiary of a trust which has paid tax under the entity tax regime, there is no mechanism, based on information presently available, to ensure the refund of excess imputation credits to a State beneficiary. The difficulties and seemingly unintended implications of imposing the entity tax regime on trusts where there is a State or Territory beneficiary may be overcome by expanding the class of trusts which can receive refunds of excess imputation credits to include trusts in which a State or Territory has a beneficial interest.

4. Fringe Benefits Tax

The NSW Government is also concerned about proposed changes to Fringe Benefits Tax (FBT). Specifically, there is some concern surrounding the new requirement that benefits greater than $1000 appear on individual Group Certificates. Fringe benefits will be reported on a fringe benefits year basis - effective from 1 April 1999 – and reportable fringe benefits will first be disclosed on Group Certificates for the year ending 30 June 2000.

For many Government agencies and State-owned Authorities, this threshold is too low and will capture benefits incidental to employment. Although some fringe benefits to individual employees have been excluded from the reporting requirements - for example, car parking benefits and benefits that constitute meal entertainment - there are other items not excluded, even though they are incidental to employment and are not subject to salary packaging.

By way of example, the State Rail Authority (SRA) provides travel passes to present and past employees. An agreement was reached with the ATO that the calculation of this benefit would be based on a statistical sample formulated in a survey conducted in 1989. The calculation was agreed upon for administrative practicality. The NSW Government is concerned that:

  • usage is based on statistical sampling and is not indicative of individual use;
  • personal usage by individuals would be impossible to monitor and administratively not practical;
  • FBT is paid on passes issued to past employees who no longer receive a Group Certificate from the SRA.

The NSW Government is also concerned about FBT provisions covering subsidised housing provided to Government employees, particularly in remote areas. Its inclusion as a reportable fringe benefit creates an inequality because certain industries (ie primary producers and mining industry employers) have already obtained exemptions under the new legislation in relation to remote housing. The NSW Government is a substantial employer of people who are required to be located in remote areas to perform numerous essential duties. The new legislation will mean that Government employees provided with a benefit identical to that provided to employees of primary producers and employees in the mining industry, will be disadvantaged. It is suggested that government employees be treated in the same way as employees in mining and primary producing industries.

Concern is also expressed over the inclusion of vehicles used predominantly for work-related purposes, but in special circumstances used for personal travel, as a reportable fringe benefit. It would be administratively burdensome tracking individual vehicle usage on pooled motor vehicles. In some instances, the employer stands to gain a benefit rather than the employee, eg where the vehicle is taken home for its own security to prevent vandalism or theft. It is suggested that pooled vehicles be treated as an excluded benefit similar to meal entertainment and car parking.

The timing of the proposals presents added difficulties for NSW government agencies. Although the reforms do not require reportable fringe benefits to be disclosed until the Group Certificates for the year ending 30 June 2000, the mechanism for tracking FBT per employee needs to be in place by 1 April 1999. Given that FBT and payroll systems have not captured this type of information before, substantial changes will be required in an extremely short time frame and this is of considerable concern.

Another matter of particular relevance to the Treasury, representing the Crown in Right for the State, is the issue of transferred officers within the single employer. There may be situations where an officer transfers between government agencies within the single employer and is issued with multiple Group Certificates. The administrative difficulty of tracking FBT for transferred employees across agencies and their subsequent disclosure on Group Certificates needs to be removed. It is suggested that where the group employer is different from the FBT employer, the $1000 threshold should rest with the group employer (that is, the employer that issues the Group Certificate).

The most significant impact on NSW Government agencies will be those which have Public Benevolent Institution (PBI) status. This has exempted the agency from the requirements of the FBT legislation. Major changes for PBI agencies are not to be implemented until the 2000/2001 FBT year. However, they are required to comply with the Group Certificate disclosure in the same manner as other agencies from 1 April 1999. Where the agency has to implement systems to capture information as well as follow a steep learning curve to understand and comply with the FBT legislation in such a short timeframe, they must be considered disadvantaged.

5. Other Issues


Innovation through continuous research and development is essential to Australia’s economic growth and development.

The beneficial impact of research and development tax concessions can be quite substantial. Recent research conducted for the NSW Department of State and Regional Development suggests that by international standards, Australia’s ratio of gross expenditure on research and development to gross domestic product (GDP) has been and remains relatively low.

The research also suggests that expenditure on research and development is strongly tax-sensitive in Australia. This was reflected in a reduction in research and development expenditure following the reduction in the research and development tax concession from 150% to 125%. There is a case for stimulating the growth of the Australian economy by improving its research and development concessions.

Consequently, the NSW Government would have strong concerns about any further erosion of research and development tax incentives. Indeed, there appears to be a strong case for increasing the concession to their previous levels, and broadening their availability.

Proposed Capital Gains Tax Concessions for Venture Capital Investments

Venture capital investments are extremely risky and essentially provide benefits to investors in the form of capital gains. As this finance is extremely footloose between countries, the level of capital gains tax can place a large impediment on attracting such activity.

Venture capital can be viewed as long term, patient capital. Venture capital investors forgo expectations of returns on the understanding that earnings will be retained and applied to financing further innovation, research and development. Investors receive their returns in the form of capital gains when the company is listed on the stock exchange or sold to other parties. Consequently, capital gains tax is a major criterion in locating venture capital projects.

The venture capital industry developed in the USA out of a need to finance high technology start-up companies and to cover the substantial risks associated with leading edge technology. Generally the industries which have come to rely most on venture capital financing include computer software, biotechnology, computer engineering, electronics and pharmaceutical manufacturing.

These are high value adding industries that Australia needs to develop. Also, industries such as computer software, computer engineering and electronics provide what can be considered as positive externalities, in that they provide flow-on benefits that increase the competitiveness of other industries.

In the USA, a major source of funding for venture capital is sourced from the tax-exempt pension funds. It has been stated (Howard, J and Associates, Coopers and Lybrand, 1998 p 3) that none of this money is flowing to Australia due to the application of capital gains tax and withholding tax.

The NSW Government recognises the case for concessional capital gains tax arrangements to venture capital investments.

Offshore Banking Units and Regional Headquarters

Australia has a number of advantages as a financial centre. These include highly financially skilled labour, leading edge computer and telecommunications services, stable government and a comparatively deregulated financial sector that has a high degree of accountability and integrity.

The competition for Offshore Banking Units (OBUs) and Regional Headquarters (RHQs) is very intense in the Asian region. For example, Singapore offers specific tax concessions to attract foreign business activity, including a company tax rate of 10 per cent in the first 10 years of an RHQ’s operation. Similarly, Hong Kong has a low tax regime for all companies and offers generous depreciation allowances.

The Commonwealth Government has committed itself to developing Australia and particularly Sydney, as a regional financial centre in the Asian region. As part of its commitment it provides special tax provisions for OBUs and RHQs. The tax incentives include:

  • a wholesale sales tax exemption for imported computer and computer related products; and
  • deductibility of certain costs including expenditure of a capital nature incurred between the period 12 months before commencement and 12 months later.

The Commonwealth Treasurer determines which operations qualify as RHQs for concessionary treatment. NSW Government assistance to RHQs mirrors the Commonwealth scheme, and provides assistance in the form of State tax rebates to operations eligible under the Commonwealth program.

In 1998, 260 RHQs were located in NSW. This reflects the advantage that NSW, especially Sydney, enjoys in the areas of financial and technology infrastructure, and skilled labour. More than 60 per cent of the RHQs in Sydney are in the information technology sector. These activities provide international best practise technology, increase the level of skills in Australia, and provide export opportunities by creating business links throughout the region.

Much the same synergies are created through the presence of OBUs in Australia. The NSW Government provides OBU’s with State tax exemptions on Financial Institutions Duty, Debits Tax and Loan Securities Duty (which are proposed to be abolished under the Commonwealth Government’s tax reform package). The tax concessions for OBUs are particularly important because, as purely financial centres established for offshore banking purposes, they are extremely mobile. Hence, taxes play an important role in deciding their location. At present, there are about 71 OBUs in Australia, the bulk of which are located in Sydney.

The NSW Government would not support a reduction in the Commonwealth’s OBU and RHQ concessions, which would place a significant tax impediment for firms locating in Australia and NSW, thereby reducing overall economic benefits. Such an outcome would also be inconsistent with the Commonwealth Government’s stated objective of establishing Sydney as a major financial centre.

This concern also extends to the proposal to impose company tax on branch offices. This appears to be at odds with the goal of making Sydney a regional financial centre. Attracting branch offices, particularly those of banks, can provide a significant impetus to the globalisation of the Australian economy.

Bank offices are already restricted in the activity they can perform under banking regulations, and are unlikely to be used as tax avoidance vehicles. Moreover, they can be considered a key factor in developing Australia as a regional financial centre. Tax arrangements should provide a positive environment for this development.

Small Business

The NSW Government is committed to assisting and nurturing small business. For example, through the NSW Department of State and Regional Development, the Government provides assistance through the Small Business Expansion and High Growth Business programs. The Government also provides a tax-free threshold that exempts businesses with payrolls of less than $600,000 from payroll tax.

The NSW Government believes that there is a case for providing special tax treatment for small businesses, at least from a compliance viewpoint. Small businesses face relatively high compliance burdens, due to the lack of economies of scale associated with business tax payment systems. This places a major obstacle in front of small business. For instance, the taxation of fringe benefits is a particular area of concern for small business. As noted above, the proposed FBT changes appear to be unnecessarily complex. Although this is problematic for larger employers, a disproportionate compliance cost is imposed on smaller firms.

Regional Issues

The NSW Government is committed to regional development and to policies which assist and facilitate regional development. Such assistance is not only a reflection of the special nature of regional and rural Australia, but also of the need to develop regional areas so that Australia’s population and industries are not completely centralised.

Given the importance of regional and rural areas, it is considered that the Review should support the need for continued recognition of the special problems faced in these areas.

There is also some concern with the Review’s option to abolish the provisions under Division 9 of the Income Tax Assessment Act (1936) which allows eligible tax co-operatives a tax deduction for repayment of loans made to Government. As the Review notes, cooperatives eligible under Division 9 are predominantly rural based. These provisions, along with appropriate taxation of cooperatives, should be considered as part of the Commonwealth’s Government’s rural policy, and therefore any changes to them should be considered in this context.

Concluding Remarks

The NSW Government believes that changes to the Australian business tax system are long overdue and are one way to reduce the financial cost to governments, such as changes to interest withholding tax. However, some of the proposed changes require considerable development before they can be implemented. The proposed taxation of trusts as companies is a case in point. Moreover, several areas of the existing legislation require closer scrutiny, particularly those sections of the Income Tax Assessment Act (1936), covering the private provision of public infrastructure.


Australian Economic Analysis Pty Ltd (1999) "Innovation and Government Policy: Recent Trends in Australia and New South Wales" Report prepared for the NSW Department of State and Regional Development.

Commonwealth Treasury (1994) "Some Tax Benefit Transfer Issues", ALEA Lease and Equipment Conference, Sydney, 7-8 November.

EPAC (1995) Private Infrastructure Task Force Interim Report, AGPS, Canberra.

Financial System Inquiry (1997) Financial System Inquiry Final Report, AGPS, Canberra.

Howard, J and Associates, Coopers and Lybrand (1998) "Impediments Imposed by Capital Gains Tax on Seed and Start-up Enterprises" Queensland Venture Capital Reference Group.

Review of Business Taxation (1998) "A Strong Foundation", Discussion Paper 1, AGPS, Canberra.

Review of Business Taxation (1999) "A Platform for Consultation", Discussion Paper 2, 2 vols., AGPS, Canberra.

Sieper, E. (1995) "Infrastructure Taxation", in Private Infrastructure Task Force Interim Report: Commissioned Studies, EPAC, AGPS, Canberra.