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Submission No. 18 Back to full list of submissions
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Pioneer International Ltd’s Response to "A Strong Foundation"

the First Discussion Paper of The Review of Business Taxation

Introduction

1. In response to Mr Ralph’s invitation in his foreword to "A Strong Foundation", Pioneer International Ltd (PNI) is providing its thoughts and views on the Discussion Paper and also on some of the issues raised in the Howard Government’s document, "Tax Reform Not a New Tax A New Tax System".

National Objective

2.1 PNI strongly supports the national objectives of optimising economic growth, ensuring equity and facilitating simplification. In terms of optimising economic growth PNI would like to see more emphasis placed on issues of international fairness, attracting and maintaining foreign capital and facilitating the expansion of Australian investment offshore. All these issues play an important part in creating and maintaining jobs in Australia, increasing and maintaining Australian standards of living, and improving and encouraging optimal levels of investment and savings.

2.2 We are not convinced that the Review should recommend that substantially increased weighting be accorded to simplification (refer paragraph 6.28). Whilst we view simplification as a necessity, it should not be driven to such an extent that it jeopardises optimal economic growth, or potentially distorts equity between business taxpayers.

2.3 Simplification must be viewed in its broader context, to create an environment where there is clarity of legislation and where business can proceed to conduct its activities with the confidence that it won’t be subsequently overturned by the ATO.

2.4 As an observation we are of the view that reducing the size of the income tax legislation doesn’t, of itself, result in simplification. It would be a nice outcome but it is not essential. Better design and an improved system is essential for simplification. Clearer and readily understood language is also essential for simplification. It is essential that the reform process fix the framework of the income tax legislation. To date the income tax legislation has been a series of bolt-ons to an outdated piece of legislation which hasn’t had the capability to deal with the changes in the way all aspects of business are conducted.

2.5 The Review must recognise that any new legislation created out of the process that is now being undertaken must have a limited life, or alternatively must have the capability to re-invent itself such that it does not over time develop the same symptoms that are present in the current legislation.

2.6 The mere rewriting of the legislation into plain English is not viewed as simplification. We see it as a waste of resources and are pleased that the current TLIP process has been incorporated into the Review’s work. We also support the early inclusion of the legislative draftsmen into the process.

Policy Design

3.1 We broadly agree with the Policy Design principles outlined in the document and summarised in Box 6.2. We do have residual concerns that these principles may give rise to some practical difficulties in implementation and interpretation.

3.2 Simplistically we are of the view that all income should be assessed and all expenses deducted. The issue becomes when should income be assessable and over what period, and when should expenditure be deductible and over what period.

3.3 Whilst we appreciate the need to avoid complex timing rules for derivation of income and incurrence of expenditure we are strongly of the view that income (and economic gain) should not be subject to taxation unless the taxpayer has received cash or has the right to receive cash. In an international business such as ours, exchange rate volatility can give rise to significant unrealised exchange gains and losses. Some of these may only be temporary in nature. It seems unfair to subject these to tax (and cash flow impact) on an arbitrary year end basis.

3.4 We acknowledge accounting profit may be a ready proxy for taxable income. However, while accounting profit includes unrealised gains and losses, these inclusions do not result in cash exiting the business as a result of this treatment, unless business decides to pay it out via dividends. Further comments in respect of accounting income as a proxy for taxable income are made at paragraph 9.3.

3.5 We are of the view that the tax system should not be used to provide incentive for business or investment activity. The Government should look to develop and provide business incentives for economic stimulus outside the process which imposes, administers and collects revenue. Revenue collection agencies are not trained and do not have a mind set which enables them to support, encourage and develop the economic rationale for providing incentives. It should be noted that providing 100% deduction for all business expenditure is not regarded as an incentive. As stated in 3.2 all business expenditure should be fully deductible.

3.6 The tax legislation should provide as few as possible tax preferences. At the same time the system should not be detrimental to economic growth.

Legislative Design Principles

4.1 We are in broad agreement with the Legislative Design Principles summarised in Box 6.3 and expanded on pages 81-87. We are in agreement with the views that multiple definitions of the same or similar terms and concepts should be deleted from the legislation and that a general anti-avoidance provision should be sufficient to cover all aspects of avoidance (i.e. there should be no need for specific anti-avoidance provisions to appear within the legislation).

Administrative Design Principles

5.1 We are in broad agreement with the Design Principles outlined in Box 6.4.

5.2 Unfortunately a poor relationship between the business tax paying community and the Australian Taxation Office (ATO) has developed. There is no doubt that business and the tax administration need to work together for the collective good of the economy. In order to do this the conflict which currently exists between the ATO and business taxpayers must be fixed. Improvements need to be made on both sides and acknowledgment that there needs to be a change in mindset. Claims of fairness and an open approach to the resolution of problems by the ATO are not supported by specific examples.

5.3 We support the implementation of an effective legislative and policy consultation process with involvement of all interested parties.

5.4 We also support the establishment of an Advisory Board. One of its objectives should be to ensure the consultative process works effectively.

Specific Issues

Introduction

6.1 Whilst not specifically referred to in the first discussion paper there are a number of issues which were raised in the initial Government Document, Tax Reform Not a New Tax a New Tax System, upon which we provide preliminary comment.

Deferred Company Tax

7.1 There has been much speculation as to how deferred company tax (DCT) or the full franking arrangements proposed in the initial tax reform document might work. We support the proposal but only on the following basis:

(a) It is a method for collecting, up to the corporate tax rate, the tax payable by domestic individual shareholders.

(b) Domestic individual resident shareholders are entitled to a refund of the tax paid to the extent their tax liability on the dividend is not 36%, and the excess is not utilisable against their tax liability on other income.

(c) Domestic superannuation funds, which are taxed at the rate of 15%, are entitled to a refund of excess franking credits if such funds are unable to utilise the additional tax to offset their tax liability on other income.

(d) The tax needs to be designed and referred to as a withholding tax in order to enable foreign shareholders to claim a credit in their domestic jurisdiction and obtain treaty relief where applicable.

(e) The accounting treatment is such that the DCT amount does not result in a charge to profit and loss, at the corporate level.

7.2 In essence what we support is the prepayment of tax on behalf of our shareholders, but not an additional tax charge on the company’s profits. The company is prepared to act as revenue collector in order to ensure that dividends are properly taxed and reduce the ATO’s administrative burden of tracking dividend payments and matching them to shareholders. The company is not supportive of the DCT representing a change to profit and loss or triggering lower dividend pay-out ratios.

7.3 Whilst outside the scope of business tax reform it is possible to envisage a scenario whereby resident individuals will not lodge income tax returns, on the basis that their salary, interest and dividends are subject of rates of withholding which equate their final income tax liability.

CFC Provisions

8.1 We view the CFC provisions currently contained in the legislation as being overly complex. In addition they require significant internal administrative effort, both domestically and offshore, which does not necessarily result in any additional revenue for the Australian Government.

8.2 In addition they make it very difficult and sometimes impossible to undertake any form of internal reorganisation without triggering an Australian income tax liability.

Capital Gains Tax

9.1 The income tax provisions need to be reviewed and amended to ensure that they provide appropriate relief for corporate reorganisations and mergers. In particular there needs to be relief for scrip for scrip transactions for both domestic and international mergers, as well as for divisional spin offs involving assets already owned by shareholders. The imposition of tax should not arise as an impediment to a merger of companies which provides enhanced value to shareholders and the economy in general.

9.2 We are of the view that indexation should be maintained. However, it needs to be consistent for all taxpayers which means that it must be able to be passed through corporations to shareholders and be tax free in their hands.

Accounting Profit as a Proxy for Taxable Income

9.3 The move towards a system of comprehensive income brings book profit and taxable income closer together. We view this positively. However, care needs to be taken to ensure that the current tax complexities and arguments are not merely transferred to the interpretation of accounting standards and their application. The tension between the desire to report higher book profits and lower taxable income may go some way to mitigating the problems of interpretation and application of the accounting standards.

9.4 We are of the view that there will still needs to be modifications to book profit and reiterate the point that gains should not be taxed without cash or an entitlement to cash.

Consolidated Tax Regime

10.1 We are broadly supportive of a consolidated regime for corporate groups.

 

 

 

 

 

23 December 1998

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