Submissions
 

Submission No. 278 Back to full list of submissions
Download in either PDF or RTF format

 

The Tourism Industry’s Response to "A Platform for Consultation"

Review of Business Taxation

 

15th April 1999

 

TABLE OF CONTENTS

Executive Summary

2. Introduction

3. Tourism Council Australia

4. General Issues

5. Fringe Benefits Tax

5.1 Issues
5.2 Reform Options

6. Depreciation

6.1 Issues
6.2 Reform Options

7. Capital Gains Tax

7.1 Issues
7.2 Reform Options

8. Corporate Tax Rate

8.1 Issues
8.2 Reform Options

9. Trusts and Entity Taxation

9.1 Issues
9.2 Reform Options

10.Tax Reform Costings

11. Attachment 1

1. Executive Summary

The tourism industry welcomes the opportunity to comment on A Platform for Consultation (APC) prepared by the Review of Business Taxation (RBT).

Australia’s business taxation system is in urgent need of reform. It is complex, internationally uncompetitive and distorts investment decision making. To this end any attempt to reform business taxation is welcome by the tourism industry.

The tourism industry supports the overriding principle of APC - to reduce the company tax rate. The industry also supports any reforms to improve the revenue sustainability and certainty of business taxation.

Listed below are the industry’s key recommendations as outlined in this Submission.

Fringe Benefits Tax

The tourism industry has identified the area of Fringe Benefits Tax reform as the most critical. TCA supports the following reform measures:

Car Parking

TCA supports moves to eliminate FBT on car parking.

Entertainment

The industry supports the abolition of entertainment from the FBT net and 50% deductibility of the entertainment expense.

Car Allowance

For the purpose of simplicity, the car formula for FBT should be a single rate of 50%.

Remote Area Employees and Managers that Live on Premises

The tourism industry asks for bona fide accommodation expenses of tourism industry personnel living in remote areas or managers required to live on premises, to be removed from the FBT net.

Treatment of Not for Profit Organisations

The industry also supports changes to the FBT treatment of not for profit organisations.

Depreciation

Depreciation

The tourism industry recommends the present depreciation regime continue to be based on effective life estimates. The industry would not support a change to the present arrangements, as this would add further complexity to an already complex system.

TCA recommends the integrity of the present depreciation system be retained.

Building Amortisation Allowance and Traveller Accommodation

Research by the Property Council of Australia provides evidence that the existing amortisation regime generally reflects the economic life of building structures.

In the absence of other research, the industry does not support the implication in APC that the building amortisation allowance is accelerated depreciation. The industry would welcome further evidence from the Review of Business Taxation that the amortisation regime is in fact accelerated depreciation.

In principle the industry seeks the retention of the amortisation allowance for buildings and traveller accommodation.

Write Offs and Grouping Provisions

The tourism industry supports immediate write off for assets valued at less than $1000. The industry does not support grouping provisions for items with immediate depreciation write off.

Accelerated Depreciation

The industry has reservations about the revenue implications associated with the removal of accelerated depreciation. Accelerated depreciation provides a bring forward tax benefit during earlier periods of an assets lifecycle. APC provides revenue estimates for the removal of accelerated depreciation for the 2003-04 financial year.

TCA supports the retention of accelerated depreciation because it eliminates a tax-based disincentive to renew capital equipment.

In later years the revenue gains from removing accelerated depreciation will diminish significantly.

Before the industry commits to the removal of accelerated depreciation further evidence of the inter- temporal revenue implications of such a policy decision is necessary.

Black Hole Expenses

The industry strongly supports the inclusion of black hole expenses in the depreciation system.

Balancing Charge Elections

TCA opposes the removal of balancing charge elections.

Export Market Development Costs

The industry seeks immediate depreciation write off for costs associated with the development of export markets.

Depreciation Limit On Motor Vehicles

The industry seeks the removal of the depreciation limit on motor vehicles with high business use.

Capital Gains Tax

Capital Gains Tax should be reformed to reduce compliance costs. As a matter of general principle, the concept of stepped rates has appeal and is already in operation in other jurisdictions. However, the stepped rate does not remove the lock in effect – some may contend that it promotes lock in. APC is relatively silent on the operation of the stepped rate options and until more detail is provided the industry cannot support the option. A supplementary submission will be provided on this matter.

Indexing and Averaging

The industry will only support the removal of CGT indexing and averaging if the practical operation of the stepped rate of CGT is suitable. In the absence of information, the industry does not support the removal of CGT indexing or averaging.

Stepped Rates

As discussed earlier, more information on a stepped rate system of CGT is required. In the absence of detailed information on the stepped rate system, TCA does not support the proposal.

Black Hole Expenses

If the integrity of the existing CGT regime is retained, the industry supports the inclusion of black hole expenses in the CGT cost base.

Rollover Relief

TCA supports the extension of scrip for scrip rollover relief and that rollover relief available to small business be extended to all businesses.

Company Tax Rate

Reduction of the Company Tax Rate

The tourism industry supports reduction in the company tax rate.

The Rate of Company Tax

However, support for a particular rate of company tax is dependent on the structure of the Government’s business tax reform package. As A Platform for Consultation presents options and is not a policy statement, the industry will reserve its commitment to a specific rate of company tax.

Taxation of Trusts

CIV’s and the Flow Through Principle

The tourism industry supports the flow through principle being maintained for collective investment vehicles, so long as public unit trusts are treated as CIV’s or the investment vehicle satisfies a widely held rule.

Partly owned or wholly owned sub-trusts under a CIV should also be treated as CIV’s.

Consolidations

TCA does not support the consolidation of returns, as it will significantly add to the compliance burden of tourism groups.

Thin Capitalisation

For compliance reasons, TCA supports the up lift of the foreign controller test to 50%.

Imputation System

The tourism industry does not support a system of deferred company taxation but does support the principle of a resident withholding tax used in conjunction with a franking rebate scheme.

Discretionary Trusts

TCA supports taxing discretionary trusts as companies so long as the legal status of discretionary trusts is unaffected and the changes are based on principles of tax neutrality.

Tax Reform Costings

TCA has costed the reform recommendations as outlined in this submission. Operating under the revenue neutrality constraint, the recommendations outlined in this Submission would sustain a corporate tax rate of 33%.

2. Introduction

The tourism industry welcomes the opportunity to comment on A Platform for Consultation (APC) prepared by the Review of Business Taxation (RBT).

Australia’s business taxation system is in urgent need of reform. It is complex, internationally uncompetitive and distorts investment decision making. To this end any attempt to reform business taxation is welcome by the tourism industry.

The tourism industry supports the overriding principle of APC - to reduce the company tax rate. The industry also supports any reforms to improve the revenue sustainability and certainty of business taxation.

This submission is based on a Tax Pulse Survey of over 300 tourism operators (big, medium and small) conducted by the TCA in January 1999. Rather than comment on APC in its entirety, the submission focuses on the most important issues raised in this survey:

  • Fringe Benefits Tax
  • Depreciation and Accelerated Depreciation
  • Capital Gains Tax
  • Company Tax Rate
  • Taxation of Trusts

A summary of results of the survey is provided in Attachment 1.

3. Tourism Council Australia

Tourism Council Australia (TCA) is the peak body representing over 30,000 tourism and travel enterprises across Australia. TCA members come from virtually every sector of the tourism industry and represent large, medium and small businesses. The majority of TCA’s members are represented on TCA’s National Associations Council comprising Chief Executives from the following Associations:

  • Australian Duty Free Association
  • Automobile Association of Australia
  • Australian Youth Hostels Association
  • Australian Hotels Association
  • Australian Farm and Country Tourism
  • Australian Federation of Travel Agents
  • Australian Association of Convention Bureaux
  • Caravan Industry Australia Ltd
  • Hotel Motel and Accommodation Association
  • Inbound Tourism Organisation of Australia
  • Meetings Industry Association of Australia
  • National Restaurant and Catering Association
  • Pacific Asia Travel Association
  • Regional Airlines Association of Australia
  • Registered and Licensed Clubs Association of Australia
  • Tourism Training Australia

4. General Issues

As outlined in the introduction of this submission the tourism industry supports the overall goal of APC ie to present options to reduce the company tax rate. We understand that APC is an options paper and does not constitute a Government policy statement on definitive reform policies for Australia’s business taxation system.

Conditional Support

Until an official statement on definitive reform measures is made, the industry cannot present definitive policy recommendations to the review. All recommendations outlined in this paper are conditional, and the industry reserves the right to change its position on any of the recommendations made in this submission as the business tax reform policy agenda unfolds. Furthermore, the industry will be making supplementary submissions to the review on key elements of APC.

Revenue Estimates

The APC terms of reference have been written under the revenue neutrality constraint.

The industry is concerned that the revenue costings provided in APC do not provide a solid financial base for the reform of Australia’s business taxation system. Most important are the costings associated with the removal of accelerated depreciation. The estimates included in APC could certainly be achieved during the first year of business tax reform.

However, the savings identified will diminish over time as accelerated depreciation is a bring forward tax benefit. If, for instance, the industry unequivocally supported the removal of accelerated depreciation based on the information provided, it would be supporting a reform option that was not financially sustainable in the medium to long term.

The industry wants a permanent reduction in the company tax rate. With potential revenue holes in the medium to long term, significant upward pressure would once again be placed on the company tax rate.

The industry may be risking a permanent tax concession, for a temporary reduction in the company tax rate.

TCA would welcome present value estimates of revenue gains associated with reform options outlined in APC.

Business Coalition for Tax Reform

TCA is a foundation member of the Business Coalition for Tax Reform. TCA supports the submissions that BCTR have made to the Review of Business Taxation and specifically the submission made on APC.

5. Fringe Benefits Tax

The existing fringe benefits tax regime is in urgent need of reform. The FBT system continues to tax bona- fide business expenses and research by the Commonwealth Government’s Productivity Commission highlights that it is the most costly tax to comply with – compliance costs actually represent 50% of the total amount paid in FBT.

TCA sponsored an Australian Tax Research Foundation project that closely examined the existing FBT system.

The report found that there are strong grounds for moving away from the existing FBT system, which was really introduced as a transitional means of taxing fringe benefits while moving towards integration of the taxation of fringe benefits into the PAYE/personal income tax system. The present FBT system is complex, a compliance nightmare, hated by employers and frequently unfair as between different employees.

Issues

FBT Rate – Grossing up of Fringe Benefits

1. In the interests of tax neutrality between fringe benefits and wages and salaries, the value of fringe benefits in the hands of the employee should either:

  • Be grossed up on the basis of the income tax rate (inclusive of the medicare levy) applicable to the employee, or equivalently,
  • Be taxed at a rate equal to the percentage represented by the relevant marginal income tax rate (inclusive of the medicare levy) as a proportion of the corresponding after tax wage/salary rate for that employee.

FBT Rate Structure

2. For as long as Australia applies a progressive income tax rate structure, that rate structure should also apply to the taxation of fringe benefits (if taxed on a grossed up basis) or should be used to determine the higher rate structure needed if benefits are not grossed up before tax.

FBT Base – Business Related Expenses

3. A fixed percentage of all such expenditures – say 50% or possibly less – would be treated as a deductible business expense to which no fringe benefits tax would be payable.

4. The remaining proportion – say 50% or possibly more – would be treated as a non-deductible expense, but again with no fringe benefits tax applicable. In the case of non-taxable entities, such expenses would need to be taxed as personal expenses.

FBT Base: Fringe Benefits Exemptions and Concessions

5. Tax expenditures associated with the present FBT system should be reviewed and, in the most substantial cases, reduced or eliminated as part of an appropriate broadening of the fringe benefits tax base. Clear examples where such broadening is appropriate include:

  • FBT exemption for religious institutions.
  • FBT exemption for public benevolent institution- provided benefits.
  • FBT under-valuation of car related benefits.
  • FBT exemption for public hospital employee benefits.

    In the case of expenditure on benefits provided by non-taxable entities to third parties (eg entertainment) for administrative simplicity a flat rate – say the prevailing company income tax rate – should apply to the portion deemed to be a private benefit.

    Interaction with Tax/Social Welfare System

    Any taxable fringe benefit – and the tax payable thereon should be included as part of the employees’ remuneration for purposes of assessing the eligibility for tax concessions and personal benefit transfer payments subject to means tests.

    Integration with the Personal Income/PAYE System

    In most cases, the taxation of fringe benefits should be handled under the personal income tax system, and preferably integrated with the PAYE system with which employers must already comply.

Reform Options

Not all the issues above are examined within APC. The tourism industry has identified the area of Fringe Benefits Tax reform as the most critical. TCA supports the following reform measures:

Car Parking

TCA supports moves to eliminate FBT on car parking.

Entertainment

The industry supports the abolition of entertainment from the FBT net and 50% deductibility of the entertainment expense.

Car Allowance

For the purpose of simplicity, the car formula for FBT should be a single rate of 50%.

Remote Area Employees and Managers that Live on Premises

The tourism industry asks for bona fide accommodation expenses of tourism industry personnel living in remote areas or managers required to live on premises be removed from the FBT net.

Treatment of Not for Profit Organisations

The industry also supports changes to the FBT treatment of not for profit organisations.

6. Depreciation

The depreciation and amortisation system is characterised by unnecessary complexity and significant anomalies.

TCA does not seek special incentives - simply the right for members to offset the real cost of income producing assets against assessable income - no more than any other taxpayer.

Issues

Too many depreciation regimes

Rates of depreciation vary depending upon when an asset was purchased, creating a mass of paperwork for taxpayers. In addition, existing regimes favour repair and maintenance of existing assets over upgrading to more ‘state of the art’ plant and equipment.

Building amortisation allowances

Property Council of Australia research shows current amortisation rates is a rather good approximation of the economic life of commercial structures.

Economic life by Building Type

Building Type Structure Plant Fittings
  (number of years)
Offices 27 19 7
Shopping Centres 27 22 7
Hotels 27 21 7
Industrial 31 22 7

The Property Council derived a single figure for economic life by weighting the structure, plant and fixtures by their contribution to initial cost, with the following results:

Offices 17 years
Shopping Centres 17 years
Hotels 15 years
Industrial 20 years

The Property Council research shows that by the end of this estimated life span:

  • buildings were unable to compete with new investments without a major re-injection of capital;
  • building values are rarely greater than the land on which they are situated;
  • owners are faced with rising maintenance costs in order to keep their assets running at a satisfactory level;
  • buildings are demolished to make way for more productive use of capital; and,
  • the findings of the Property Council research highlights that the amortisation allowance does not represent accelerated depreciation – as the allowance generally reflects the economic life of commercial structures.

Black Hole Expenses

Demolition and site clearing costs are necessary expense items contributing substantially to the overall cost of a building.

Balancing Charge Election

The balancing charge election allows the taxpayer to elect to defer a taxable gain, when the sale price of an asset is greater than its written down value. This system effectively encourages the taxpayer to renew capital equipment by effectively reducing the tax cost of replacing assets. The balancing charge election is an effective policy to assist the industry maintain a stock of state of the art capital equipment.

Write Offs and Grouping Provisions

The existing depreciation regime provides for immediate write offs for assets worth less than $300. The threshold for write offs is too low and adds significant compliance costs for hotel, airline and restaurant businesses - especially where spare parts are held ready for use.

Accelerated Depreciation

Accelerated depreciation is an important consideration in the development of medium to large tourism infrastructure projects. The following provides examples of how accelerated depreciation is employed in the tourism industry:

  • Accelerated depreciation reduces the cost of infrastructure and similar assets such as aircraft and ships. In the absence of accelerated depreciation more marginal routes may be disbanded impacting regional Australia through the transport network.
  • Similarly accelerated depreciation reduces the cost of large tourism resort projects and hotels. In the absence of accelerated depreciation such projects may not reach the hurdle rates required for commencement.
  • If other tax regimes offer accelerated depreciation and Australia does not, it makes Australian companies competing in an international environment less competitive. Australian airlines and shipping operators would become less competitive in the absence of accelerated depreciation.
  • Accelerated depreciation provides an incentive to update equipment giving Australia a more modern tourism infrastructure than would otherwise be the case.

Accelerated depreciation is important for the tourism industry and any proposal to remove such a measure would require a detailed financial analysis of compensatory measures to ensure that investment decision making is not impacted.

Whether a tourism project is undertaken or a tourism based transport asset such as a ship is purchased will depend on expenditure, nature, quality and timing of the return to be derived from that project or asset.

Accelerated depreciation plays an important part in determining whether such projects go ahead.

In part, it has an important impact on cash flows. In the absence of accelerated depreciation, additional tax payments would need to be made in the early stages of a project/asset life cycle.

This generally means that there is less cash to repay debt funding on the project/asset during this period.

Thus, given that there is less cash to repay debt funding in the early years, the project becomes far more risky for a financier.

The project requires long-term debt funding, with the obvious greater credit risk to the financier, and ensuing greater financing cost and/or higher levels of equity funding.

Thus accelerated depreciation has an important impact on hurdle rates for a projects, part cash flow hurdle rates. In the case of many tourism projects and transport assets, cash flow in the early years of a project is a highly sensitive area because it is less predictable than in many other industries.

Reform Options

Depreciation

The tourism industry recommends that the depreciation system reflect the economic life of income producing assets. Although the present depreciation regime is based on effective life, the industry would not support a change to the present arrangements. Any such changes to depreciation schedules would add further complexity to an already complex system.

TCA recommends the present depreciation system be retained.

Building Amortisation Allowance and Traveller Accommodation

Research by the Property Council of Australia provides evidence that the existing amortisation regime generally reflects the economic life of building structures.

In the absence of other research, the industry does not support the implication in APC that the building amortisation allowance is accelerated depreciation. The industry would welcome further evidence from the Review of Business Taxation that the amortisation regime is in fact accelerated depreciation.

In principle the industry seeks the retention of the amortisation allowance for buildings and traveller accommodation.

Write Offs and Grouping Provisions

The tourism industry supports immediate write off for assets valued at less than $1000. The industry does not support grouping provisions for items with immediate depreciation write off.

Accelerated Depreciation

The industry has reservations about the revenue implications associated with the removal of accelerated depreciation. Accelerated depreciation provides a bring forward tax benefit during earlier periods of an assets lifecycle. APC provides revenue estimates for the removal of accelerated depreciation for the 2003-04 financial year.

TCA supports the retention of accelerated depreciation because it eliminates a tax-based disincentive to renew capital equipment.

In later years the revenue gains from removing accelerated depreciation will diminish significantly.

Before the industry commits to the removal of accelerated depreciation further evidence of the inter- temporal revenue implications of such a policy decision is required.

Black Hole Expenses

The industry strongly supports the inclusion of black hole expenses in the depreciation system.

Balancing Charge Elections

TCA opposes the removal of balancing charge elections.

Export Market Development Costs

The industry seeks immediate depreciation write off for costs associated with the development of export markets.

Depreciation Limit On Motor Vehicles

The industry seeks the removal of the depreciation limit on motor vehicles with high business use.

7. Capital Gains Tax

The Capital Gains Tax provisions exemplify the anomalous and incoherent nature of the Income Tax Assessment Act more than any other does. Apart from the excessive record keeping and further costs of compliance associated with Part IIIA, certain provisions act as a disincentive to restructuring and further investment.

Issues

Comprehension
CGT provisions are complicated, anomalous, incoherent and inconsistent.

Compliance Costs
CGT compliance costs are exacerbated by ambiguous terminology, bureaucratic jargon and a lack of guidance on how to assess liability.

"Lock-in Effect

CGT reduces the mobility and thereby the efficiency of capital investment.

CGT and rebateable dividends

The Government has proposed to disallow the reduction of capital gains by the payment of rebateable dividends. The unintended consequences of this may be significant.

Apportionment
The ITAA requires apportionment of the total consideration on a composite asset to each separate asset. Why? In any event, how?

Repair/Capital expenditure dichotomy

"Repairs" are deductible; "improvements" are not. This creates anomalies and conflicts with other incentives in the ITAA.

"Black Hole" expenses

Site clearing, feasibility studies and other similar expenses cannot be deducted, amortised or included in the cost base of the asset for CGT purposes.

Rollover provisions

These are unnecessarily restrictive and penalise firms attempting to restructure their operations.

Reform Options

Capital Gains Tax should be reformed to reduce compliance costs. As a matter of general principle, the concept of stepped rates has appeal and is already in operation in other jurisdictions. However, the stepped rate does not remove the lock in effect – some may contend that it promotes lock in. APC is relatively silent on the operation of the stepped rate options and until more detail is provided the industry cannot support the option. A supplementary submission will be provided on this matter.

Indexing and Averaging

The industry will only support the removal of CGT indexing and averaging if the practical operation of the stepped rate of CGT system is suitable. In the absence of information, the industry does not support the removal of CGT indexing or averaging.

Stepped Rates

As highlighted earlier, more information on a stepped rate system of CGT is required. In the absence of detailed information on the stepped rate system, TCA does not support the proposal.

Black Hole Expenses

If the integrity of the existing CGT regime is retained, the industry supports the inclusion of black hole expenses in the CGT.

Scrip for Scrip Rollover Relief

TCA supports the extension of scrip for scrip rollover relief and rollover relief available to small business is extended to all businesses.

8. Corporate Tax Rate

Australia’s corporate tax rate is high relative to Australia’s global trading partners and investment competitors. It impacts on Australia’s ability to attract capital and direct investment. The rate should be reduced and the reduction sustained. The extent of the reduction depends on the final reform agenda for Australia’s business taxation framework.

Issues

The Business Tax Framework

The company tax rate is of importance to the tourism industry as it competes in the global marketplace for direct investment in local enterprises. However, the rate should not be seen in isolation from the remainder of the business taxation framework. The tax rate is only one element - and needs to be analysed in conjunction with other proposals in APC.

The Rate of Company Tax

For international competitiveness reasons, TCA would support a reduction in the company tax rate but only if the rate reduction is sustainable and from a total business taxation reform perspective the industry is not worse off.

Reform Options

Reduction of the Company Tax Rate

The tourism industry supports reduction in the company tax rate.

The Rate of Company Tax

However, support for a particular rate of company tax is dependent on the structure of the Government’s business tax reform package. As A Platform for Consultation presents options and is not a policy statement, the industry will reserve its commitment to a specific rate of company tax.

9. Trusts and Entity Taxation

Trusts have grown to be the preferred financing vehicle of small, medium and large businesses. Often this has nothing to do with tax minimisation, but provides an extremely efficient structure for raising capital for businesses to grow or provides limited liability structures for small business operations.

The tourism industry warns the RBT that any measures to turn off the capital tap by disadvantaging trusts could be extremely detrimental to the future growth of the industry.

Issues

Listed Trusts

Australia’s trusts sector is the engine room for economic growth. Growth in the sectors capitalisation for hotel, casino and airline investment is testament to the fact that they are important financing vehicles for the tourism industry’s growth.

Trusts also provide very efficient structures for sourcing the capital required to finance the development of the tourism sector.

There is no evidence of tax avoidance as all investors are required to provide tax file numbers and funds provide all distribution information to the ATO.

Given the importance of listed trusts to the tourism sector and the access to more liquid and deeper means of financing, the industry strongly supports the retention of existing taxation arrangements.

Potentially there are significant compliance burdens confronting partly owned trusts and sub trusts of listed trusts. Such vehicles should be recognised as CIV’s for taxation reasons.

Discretionary Trusts

Closely held, discretionary trusts are often used for legal liability reasons rather than for tax avoidance purposes. This is at odds with the views of both the ATO and Treasury. The industry therefore would support any taxation measures adopted by the review that would reduce potential for avoidance without tax disadvantaging discretionary trusts or reducing their legal liability status.

Collective Investment Vehicles and the Flow Through Principle

TCA supports the taxation of trusts in the hands of beneficiaries rather than at the source. However, TCA also acknowledges the policy imperatives of the Government. Taxing at the source creates significant compliance burdens and a widely held test should be established to minimise compliance impacts of changes to the structure of the taxation of trusts.

Consolidations

Although consolidations are not an element existing tax system, there is significant discussion of introducing consolidations within APC.

If companies could transfer franking credits and problems with TR98/12 were resolved, there would be little need to introduce a system of consolidations.

Rather than simplify tax compliance, the consolidation of returns will give rise to significant compliance burdens. US taxpayers would testify to this.

Imputation System

Presently, low-income earners such as pensioners are denied full use of franking credits, as they do not have the level of income to claim all credits. The system needs to be reformed and all shareholders and investors given access to franking credits regardless of income.

Reform Options

CIV’s and the Flow Through Principle

The tourism industry supports the flow through principle being maintained for collective investment vehicles, so long as public unit trusts are treated as CIV’s or the investment vehicle satisfies a widely held rule.

Partly owned or wholly owned sub-trusts under a CIV should also be treated as CIV’s.

Consolidations

TCA does not support the consolidation of returns, as it will significantly add to the compliance burden of tourism groups.

Thin Capitalisation

For compliance reasons, TCA supports the up lift of the foreign controller test to 50%.

Imputation System

The tourism industry does not support a system of deferred company taxation but does support the principle of a resident withholding tax used in conjunction with a franking rebate scheme.

Discretionary Trusts

TCA supports taxing discretionary trusts as companies so long as the legal status of discretionary trusts is unaffected and the changes are based on principles of tax neutrality.

10. Tax Reform Costings

TCA has attempted to provide costings of the recommendations outlined in this proposal and other measures that could finance the reduction in the company tax rate. The costings are based on information provided in APC.

Items Increasing Revenue

Elimination of the R&D Concession $700 m

Change to Thin Capitalisation $500 m

Resident dividend withholding $110 m

FBT Changes – Cars $600 m

FBT on NFPO’s $290 m

Total $2.2 bn

Items Decreasing Revenue Collections

FBT – Entertainment ($500 m)

FBT – Carparking ($100 m)

Blackhole Deductions ($100 m)

Total ($700 m)

Total Impact Of Preferred RBT Position $1.5 bn

Based on the RBT revenue neutrality constraint, it is estimated the savings identified in this paper could finance a company tax rate of 33%.

Attachment 1

Tourism Industry Business Taxation Survey

TCA has conducted a survey of member organisations to establish priority reform initiatives for the industry. The survey results are provided in attachment 1.

The results were collected by broad sectoral groupings namely;

  • Large capital intensive, high technology businesses eg airlines, shipping, rail, financiers, computer firms
  • Large property intensive business primarily hotels
  • Small businesses providing personal services eg restaurants, tour operators, consultants and travel agents.

Overall, it appears that the property intensive businesses are beneficiaries of the existing business taxation regime and want to maintain the status quo. Interestingly, there is a degree of similarity between the large capital intensive businesses and small businesses.

This does not mean that a set of core business tax reform initiatives cannot be developed. For instance, the survey results highlight that there is a high intensity of interest in the following issues amongst all the sectoral groups:

  • Existing taxation concessions and incentives available to the industry are very important.
  • The retention of the present depreciation regime is very important.
  • Exempting bona fide business expenses from the FBT net are very important.
  • Reform of the capital gains tax system is important.
  • The taxation treatment of trusts is very important.

Other very important property intensive sectoral issues are:

  • The retention of the amortisation regime for traveller and other accommodation.
  • The maintenance of capital and investment allowances.

RESULTS OF BUSINESS TAXATION SURVEY

  Large Capital Intensive/ High Technology Businesses Large Property Intensive Businesses Small Businesses Providing Personal Services
Overall Taxation concessions and incentives Very important Very important Very important
FBT Exemptions Very important Very important Very Important
Depreciation Very important Very important Important
CGT Not Important Very important Very important
Tax treatment of trusts Not important Very important Very Important
Capital and investment allowances Not important Very important Not important
Traveller depreciation Not important Very important Not important
Building depreciation Not important Very important Not important
Research and development Not important Not important Not important