|Submission No. 21||Back to full list of submissions|
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24 December, 1998
Dr Alan Preston
Dear Dr Preston
The Review of Business Taxation
The National Mutual Group employs in excess of 2,000 Australians and welcomes the opportunity to participate in the fundamental redesign of Australia’s business tax arrangements.
The following submissions are made to assist the review in concluding its recommendations to Government. We welcome any feedback on our submissions and to this end ask that any inquiry or further discussion be communicated through Mr. Lewis Culliver :-
Phone: (03) 9616 3768
Fax : (03) 9618 4705
We have participated in the submissions made by the Investment and Financial Services Association and the Business Coalition for Tax Reform and had additional input via the Corporate Tax Association. We are in broad agreement with those submissions. Our own comments are intended to highlight our main areas of concern even though many of the points have also been made in those documents.
We applaud the objectives of optimising economic growth and taxpayer equity and the recognition that Australia requires an internationally competitive economy.
However we believe that national taxation objectives should include the encouragement of domestic savings. Australia’s tax objectives should extend beyond encouraging the efficient allocation of investment funds to include an objective of growing the pool of domestically sourced funds available for such investment.
We believe that an objective of ‘certainty’ in the tax system deserves equal weighting with that of ‘simplification’. A lack of certainty as to the tax outcome of a transaction can significantly add to the cost and risk associated with an investment decision and cause delay in implementation due to the need to obtain private tax rulings.
2. Policy Design Principles
The paper’s discussion of the taxation of comprehensive income was useful in terms of defining a theoretical foundation. We hope, however, that the need for a system which is internationally competitive and which encourages domestic savings will override the adoption of a theoretically pure tax base. In this regard we are most concerned with any notions of taxing unrealised profits (particularly within the superannuation system). We are also concerned that many of Australia’s competitors have adopted a more lenient regime for taxing capital gains. We therefore anticipate making further comments in this regard when the forthcoming issues paper defines a "variety of options which address timing and character distinctions".
If the tax system is to retain tax preferences such as CGT indexation and depreciation allowances then it is essential that they be retained on pass-through basis, particularly given that their primary purpose is to limit taxation to economic income rather than capital itself. We expect many investors will opt out of pooled investment if the pass-through mechanism is removed. There should be no disadvantage in the tax outcomes for unitholders or shareholders vis a vis those (usually wealthy) individuals who invest directly. The pooled environment allows small investors to diversify their risk and to participate in large scale investments which would otherwise be out of their reach as individuals. Widely held unit trusts and widely held companies should therefore be able to pass-through tax preferences to their constituents. Widely held vehicles operate in a highly regulated prudential environment and must face market realities when considering issues such as distribution policy.
We note the comments regarding transitional equity and the tension between the objective of a simple tax system and complex transitional legislation. We do, however, believe that transitional provisions are necessary in respect of the taxation of long term savings and protection products. Individuals make long term investment decisions based on the law as it stands at a point in time. Changes to that law, therefore, need to protect decisions already taken. In this regard we would like the opportunity to discuss transitional provisions which could apply to the Life Insurance Industry in implementing the government’s proposed reforms – including the grandfathering of existing policies and a phasing-in of the taxation of life company profits. Long term risk products have been priced according to a long standing tax regime. An immediate imposition of tax on profits emerging from existing long term policies would be extremely harsh.
We agree with the comments acknowledging the importance of an internationally competitive tax regime which recognises the payment of foreign taxes so as to create an incentive for maintaining domestic domicile for Australian entities investing offshore. We anticipate further comment in this regard upon the release of the second discussion paper and also following the international comparison paper. At this stage, however, we point out that the current Foreign Dividend Account regime does not provide for credits in respect of repatriation from foreign branches (eg New Zealand) or in respect of repatriation of active business income from jurisdictions such as Hong Kong. There does not appear to be a sound rationale for this approach. Our view is that active business profits earned in all foreign countries should be capable of repatriation back to Australia – flowing through to foreign shareholders without the imposition of Australian tax. That is, the Australian operations should be capable of acting as a conduit in respect of genuinely active business income earned offshore. Such a policy would assist in the development of Australia as a financial centre of Asia.
In a similar vein, we consider the current FIF regime to be a significant disincentive for Australian investors to invest in overseas portfolio assets.
The prospect of a lower corporate tax rate – perhaps as low as 30% - is certainly appealing to us. A corporate tax rate at this level would make Australia a far more attractive place for investment and bring us closer to rates levied by many of our competitor countries in Asia.
3. Legislative Design Principles
We are broadly supportive of the proposals outlined in "A Strong Foundation" in respect of the approach to business tax process reform.
In particular, we strongly support the concept of an Advisory Board to review the overall health of the business tax system – reporting to the Treasurer. Membership of such a Board should include a cross section of the private sector business community – we would obviously support a strong representation from the financial services sector - banking, funds management and superannuation/life insurance. Our view is that the Board would be more effective and have more influence if its membership included senior representation from Treasury and the ATO.
We support the proposed integrated approach to tax design. We are optimistic that the process outlined will result in legislation more closely reflective of policy intent. We would encourage private sector consultation in the design process in order to bring a practical approach to the table.
One aspect of process reform we would like to see introduced is the ability of the private sector to initiate reforms. Technical deficiencies in legislation often take too long to be rectified – contributing to considerable uncertainty. These issues often have a low priority within Treasury and the ATO. We would like to see a mechanism in place allowing identified problems to be promptly corrected.
Thank you for the opportunity to participate in the Review of Business Taxation. We look forward to the next phase of the review.
A. R. Summers