Submission No. 28 Back to full list of submissions
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Australian Institute of Company Directors

on the

Review of Business Taxation
First Discussion Paper

A Strong Foundation

December 1998


  • About the Australian Institute of Company Directors (AICD)
  • AICD philosophy on Business Tax Reform
  • Specific Recommendations:

1. Board of Directors

2. Taxing of Entities and Imputation

3. Group Company Taxation and Consolidation

4. Fringe Benefits Tax

5. Capital Gains Tax

6. Venture Capital



The AICD represents the views and interests of Australian directors, promoting the highest ethical and professional standards.

The AICD has a growing membership base, currently over 13,500, drawn from industry, commerce, the professions, government and non-profit sectors. Membership is on an individual, rather than a corporate basis. Through research and policy development, education, professional development, and information services, the AICD maintains a high public profile with government, regulators, the media and the business community, articulating the director’s point of view.

The AICD is organised with divisions in every Australian state and territory, and a National Office in Sydney. This structure enables the AICD to take a national perspective on major issues whilst remaining responsive to local needs across Australia in the key areas of education, professional development and policy.

A primary objective of AICD policy is the achievement of international competitiveness. In the contemporary debate on national direction and the appropriate balance between economic and social imperatives, the importance of international competitiveness is often overlooked. All the desirable objectives to which the nation might aspire such as high employment, quality health, education, welfare, improved environmental standards and social cohesion, are entirely dependent on our ability to create wealth. This in turn is determined by the level of international competitiveness and innovation we achieve in all sectors of the national economy which itself is a function of the speed and success of our reform process.

AICD has been pursuing fundamental tax reform for many years and was one of the founder members of the Business Coalition for Tax Reform (BCTR), now comprising of some forty business organisations.


International competitiveness is particularly relevant to the Australian taxation system, which has been in urgent need of reform for many years.

The AICD agrees with the view that Australia’s current system of business taxation is inefficient and cumbersome. In brief, it is a system characterised by complexity. The current taxation system represents a major competitive disadvantage for Australia in an increasingly globalised environment.

The AICD supports the government’s initiative in establishing the Review of Business Taxation and is keen to see a truly simplified business tax system emerge as a result.

It is imperative that party political considerations not be permitted to interrupt the introduction of bold ideas that would dramatically improve the efficiency of the Australian business tax environment to the benefit of all Australians. Within the context of achieving international competitiveness, the AICD sees the key objectives for the Review being delivery of a business tax system characterised by:

  • Efficiency
  • Simplicity
  • Transparency
  • Stability and certainty
  • Innovation being encouraged
  • Equality of treatment between structures
  • Low compliance cost
  • Non impedance to transactions
  • Alignment with the personal tax system.

In essence, the AICD believes we need a straightforward system which is easy to understand, dramatically lowers compliance costs and reduces the incentive to establish artificial minimisation arrangements. Importantly, we also need a system which continues to provide encouragement to develop Australia’s capital base. The level of capital investment must not be sacrificed on the altar of economic purism.

We welcome the initiative of the RBT in the first discussion paper "A Strong Foundation" in setting out a framework and principles for business taxation, which we believe are long overdue.

AICD has contributed to, and supports the BCTR submission on "A Strong Foundation". In addition, AICD has a number of specific recommendations which identify policy areas worthy of further attention. We shall discuss these in greater depth in our next submission to the RBT in 1999.



  1. Board of Directors

    The AICD strongly supports the establishment of a Board of Directors to oversee the administration of the tax system. The governance arrangements will need careful attention and whilst it is premature to address them in depth in this submission, a strong representation of independently selected practical business people on the board will be essential.
  2. Taxing of Entities and Imputation

    The AICD supports the broad concept of consistency of entity taxation and is supportive of the government’s general thrust in this direction.

However it is clear there are a number of major faults in the government’s proposals and it is essential that these be eliminated prior to implementation. They include:

  • The effect on non resident shareholders, especially for transactions which involve countries without a tax treaty with Australia.
  • The threat to large unit trust investment structures.


  1. Group Company Taxation and Consolidation

    The AICD supports the notion that resident companies should, for tax purposes – and at their own option – be eligible for group consolidation in Australia.
  2. The AICD also supports the concept that there should be no distinction between taxable profit and accounting profit. Tax should be calculated from a company’s, or a group’s consolidated, accounting profit.

    We recognise that such a system poses complexities because accounting profit is based on the "true and fair" concept. However, the simplicity which would result for the majority of corporate taxpayers is significant and this should be the driver.

    It is essential that the corporate tax system is not viewed in isolation. Rather, tax principles and legislation should be reviewed holistically in conjunction with accounting standards and companies law, with the object of developing a streamlined system which actually achieves genuine business tax reform.

  3. Fringe Benefits Tax
  4. The AICD believes that the current fringe benefits tax structure adds unnecessary complexity and increases the compliance burden for business without any offsetting advantages, either for corporates or for the nation. We advocate the removal of fringe benefits tax and the introduction of a system where fringe benefits are taxed through the PAYE system. This is administratively far simpler. It is also fairer in that fringe benefits are then only taxed at an individual’s marginal tax rate.

    Additionally, the AICD advocates the removal of car parking as a fringe benefit.


  5. Capital Gains Tax

The AICD calls for simplification of capital gains tax.

  • Capital gains tax should not apply to assets held for more than ten years. This would significantly free up the capital market and allow investors to concentrate on directing their funds toward effective investment without, as now, being reluctant to turn over investment due to capital gains tax considerations. This will also minimise compliance paperwork, and place a cap on the period for which documents need to be retained.
  • Capital gains tax hurdles relating to mergers and reorganisations where only paper changes hands should be abolished. Many restructures and mergers don't take place because the tax costs are too great. The resultant profits from expected efficiencies from such activities are therefore never realised, to the detriment of the Australian economy and its hundreds of public shareholders.
  • Black holes where expenditure is neither deductible nor classified as a capital loss should be eliminated. The complex capital gains tax legislation creates assets out of everyday transactions which were never contemplated by the drafters. The result in the recent landmark Orica case is a classic example, where rights and obligations under certain contracts were considered to be assets. The wider implications of this case now affect many normal commercial contractual arrangements.


6. Venture Capital

The AICD believes the business tax structure must give strong encouragement to innovation in Australian industry. In the AICD’s view, a number of key issues require recognition:

  • There is a paucity of venture capital for sme’s in Australia. Large sums are committed by government each year to r&d. However, the benefits from this are not being fully realised for the country because of the lack of Australian venture capital.
  • Securing investment to establish and expand small business enterprises is problematic under our current structures.
  • Macro-economic circumstances and negative attitudes to investment in private companies exacerbate the problem.
  • sme’s are generally perceived to be the ‘engine room’ of employment growth, and the fostering and expansion of new businesses is an essential element in a dynamic and growing economy.
  • Research has identified that sme’s suffer from an ‘equity finance gap’ when looking for capital of less than $2m. Costs to a financial institution of assessing and monitoring this size of investment outweigh the benefits. The IIF scheme is unable to assist at the lower end of the equity finance gap range.

Two sets of recommendations are proposed to address these problems.

The AICD has developed these concepts in detail. We realise that previous schemes aimed at encouraging venture capital have suffered from abuse, which has undermined their credibility. However we consider improved venture capital arrangements are fundamental to achieving international competitiveness, and that our proposals would minimise the risk of abuse.


Measures to encourage direct investment by Business Angels

Individuals ("Business Angels") who take on the risk of investing directly in sme’s require a greater reward for that risk than individuals who invest in blue chip equities. The aicd’s measures aim to address the difficulty in obtaining capital and to redress the risk-reward balance, at present skewed against such an investor who has to surrender nearly one half of any gain in tax.

The AICD’s measures are designed to encourage these investors, frequently experienced industrialists or other professionals, to provide advice to management and to be rewarded accordingly.


The AICD measures incorporate:

  • Introduction of cgt rollover relief for investors who realise existing assets in order to fund investment in qualifying companies;
  • Exemption from cgt of any gain realised on investment in qualifying companies;
  • Allowing an investor to become a paid director of a qualifying company without vitiating the reliefs under certain conditions. Those already connected to the qualifying company should be disbarred from its benefits but this should not extend to subsequent investor-directors;
  • Relief against an investor’s other capital gains if shares are disposed of at a loss or written off to compensate for the higher risk inherent in sme’s; and
  • Allowing a qualifying company to raise up to $5m in any one tax year. It would exclude investment in real property and retailing operations.


Measures to encourage indirect investment through Pooled Development Funds

The value of PDF’s has been demonstrated. To succeed further, they need to be enhanced. The AICD proposes two measures:

  • Introduction of cgt rollover relief permitting investors to realise existing investments without penalty providing investment is then made in pdf’s; and
  • Provision of full relief within a pdf such that all losses realised by the fund itself should be capable of being fully offset against realised gains of that fund, rather than the limited offset as at present.