Submission No. 26 Back to full list of submissions
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Wandoo Economics
Suite 66, Canberra Business Centre
Bradfield Street, Downer ACT 2602
ACN 066 854 519

Howard Pender
Advanced Energy Systems
Australian Ethical Investment Ltd
Australian Ethical Super Pty Ltd
Statute Technologies Pty Ltd (part of Softlaw group)
Wallaby Hill, RMB 1006 The Forest Rd, Bungendore NSW 2621
Phone: 61 (02) 6238 1267 Voicemail: 61 (02) 6221 1332 Fax: 61 (02) 6238 1287

23 December 1998

Alan Preston
The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Pl


Dear Alan

I refer to your request for public submissions on issues canvassed in "A Strong Foundation" Review of Business Taxation (Canberra: AGPS 1998). I wish to make three comments on this document:

  • Firstly, it is my contention the Review’s interpretation of its terms of reference is unduly narrow;
  • Secondly, the Review’s cursory rejection of a schedular approach to business tax fundamentally compromises its stated desire to "build a strong foundation" for business tax in Australia.
  • Thirdly, "a closed economy mindset" permeates much of the discussion in this document.


The terms of reference require your review to "pursue the strategy" specified in A New Tax System (ANTS). ANTS canvassed the possibility of capping the statutory CGT rate at a rate beneath that applicable to labour and other income from capital. This possibility is explicitly included in your ToR, 3(c)(i). As a consequence I feel it is quite open to the Review to "further pursue" the schedular direction for business tax. The Review is also asked to "make recommendations on the fundamental design of the business tax system ……". If any economic ideal has underpinned "fundamental design" in Australia it is that of a comprehensive income tax (CIT). In view of this ToR I think it is quite open to the Review to explore the possibility further pursuit of the CIT is fundamentally incompatible with the long term aim of "improving the competitiveness and efficiency of Australian business".

Stemming from both:

  • the narrow interpretation of the ToR;
  • the failure to recognise the schedular direction implicit in a portion of the ToR,

the document cursorily rejects a schedular approach to business tax (See p.71). I refer you to my book The Joy of Tax, H Pender (Sydney: Australian Tax Research Foundation, 1997) which might be subtitled "Tax Policy in an Open Economy". Of the OECD and Asian countries Australia has embraced the CIT most enthusiastically. (See the discussion in Chapter 4). See also The Tax Burden on Portfolio Investment in Australia and Asia, H Pender (prepared for the ASX, unpublished). I describe Australia’s attitude to business tax design as "global’r than thou". I strongly encourage you to examine the experience of the Scandinavian and Asian countries which, like Australia, face high levels of capital mobility. All five Scandinavian countries have explicitly schedular tax arrangements. Schedular arrangements are also common in Asia – either explicitly or by rate design.

A closed economy mindset permeates the discussion in this document. All tax policy propositions should be tested "in a closed economy ……….. but in an open economy …..…". I’ll give two examples.

The discussion on page 69 of Policy Design Principles could be construed as adopting either a closed economy or supra-national approach. The duty of Australian politicians and Australian officials (for example, members of a Review like this) is to Australians. Capital has to hire labour and the real wage depends on the size of the capital stock. Capital is highly mobile so justice for the worst off Australians demands tax policy takes as a significant design principle "the quantum of the world capital stock that will be located in Australia". (The term capital should be very broadly construed, to include, for example intellectual property.) The chances of employment and the level of pay for the worst off Australians depend on this quantum of capital in Australia. By failing to acknowledge this as a design principle the Review is failing in its duty to those Australians.

As a second example, much of the discussion in Chapter 2 blames problems with our business tax arrangements on "unstructured accretion" (ie. a failure of process to consistently apply the CIT paradigm). There is no discussion of the possibility the problem is with the paradigm rather than the process.

Large numbers of directors of Australian companies (including myself) are put in the position by our tax system when it is necessary to question the compatibility of Australian domicile and duty to shareholders. In spite of your Terms of Reference (which clearly give a schedular pointer) this first discussion paper might better be subtitled "A Strong Foundation for Tax Policy in an Economy Where Capital is Immobile" or, more aptly still, "A Very Weak Foundation for Tax Policy in a Small Open Economy Like Australia".

Yours sincerely


Howard Pender