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FPA Submission on "Review of Business Taxation - A Strong Foundation"
The Financial Planning Association of Australia ("FPA") is the peak professional organisation for the financial planning industry in Australia, with over 9,000 members in 31 Chapters throughout the country. The FPA promotes improved quality of financial advice for consumers and high standards of ethical and professional behaviour amongst its members.
The FPA is dedicated to promoting the importance of financial planning and self-provision in retirement to Australians generally. It also represents the interests of thousands of financial planning professionals and licensed securities dealers, all of whom have a keen interest in the proposed Tax Reform and the outcome of the review of the Australian tax system in relation to both personal and business taxes.
The FPA therefore provides a brief Submission in relation to your discussion paper, "Review of Business Taxation - A Strong Foundation" ("the Paper"), as follows:
Objectives of Reform
We note from the Paper that the recommendations of the Review are to be consistent with:
1. Improving the competitiveness of the Australian economy;
2. Providing a secure source of revenue;
3. Enhancing the stability of taxation arrangements;
4. Improving simplicity and transparency; and
5. reducing the costs of compliance (p. x).
In this regard, one of the 3 key problem areas identified in the Paper includes the need to reduce compliance and administration costs (p. xi), a theme continued throughout the Paper in various sections (eg. p. xviiMarja Blyth Page 2 15/01/99 paras 41 & 42, p. 28 para 3.5, p. 91 para 6.136, etc.).
The National objectives of tax reform are expounded at para 34 on p. xvii as:
1. Optimising economic growth;
2. Ensuring equity; and
3. Facilitating simplification.
The FPA agrees with these objectives and guidelines, but submits that the proposals outlined in the Paper fall short of achieving them and in some instances obstruct the achievement of the objectives.
FPA's Submission on Reform Proposals
Whilst we note that a more detailed discussion paper is to be issued by the Review in February, 1999, in general terms we submit that the proposals outlined in the Paper give rise to serious concerns in the following areas:
(i) The effects on Australia’s international competitiveness if we require all business entities to be taxed as if they were companies at the flat corporate rate of tax (currently 36%);
(ii) Potential implications of treating all assets as "business assets" (p. 5, paras 1.13 - 1.15);
(iii) The implications of mandatory full imputation system;
(iv) Adopting accounting principles for taxation purposes (pp. 20 - 22 paras 2.24 - 2.28) is good in principle but we would be concerned if unrealised capital gains and some other items caught by "comprehensive income" (p. 72 para 6.54ff) were to become taxable.
In particular, the FPA submits that:
1. The result of requiring all business entities to be taxed as if they were companies at the flat corporate rate of tax (currently 36%) and treating all assets as "business assets" effectively applies a universal withholding tax to every form of non-salary and wage income (including for example interest-paying bank deposit accounts).
Taxing at source also means that there is a huge timing difference as to when the tax is paid on the income as compared with issuing an assessment on the basis of a return lodged after the income is received.
These results clearly contradict the Paper's stated guidelines of improving simplicity and transparency, the need to reduce compliance and administration costs, and the stated objectives of ensuring equity, facilitating simplification and (we submit) optimising economic growth.
4. In addition, the introduction of the full imputation system will have the following further adverse effects, which, we submit, will override the perceived benefits of "transparency":
(a) Effective double taxation where a trust incurs expenses and invests directly into equities, along with loss of use of franking credits in these circumstances;
(b) Effective double taxation on foreign-sourced income if mandatory franking credits is accepted;
(c) Loss of ability to offset capital losses incurred by an investor against capital gains received through a trust;
Defining the Tax base
We are extremely disappointed that little evidence was put forward to uphold the assertion that a comprehensive income tax was the appropriate tax base. Given Australia’s poor savings record it is somewhat surprising that no effort was made to examine the consequences of an expenditure tax. We believe this should be undertaken.
We believe the real beneficiary of this proposal is the Government, who will be able to raise more revenue quickly, without regard of the adverse effects of increased taxpayer compliance costs.
Except for "providing a secure source of revenue", it is submitted the proposal does not meet the guidelines and National objectives referred to above, and in order to address the situation we would submit that, as a minimum, the Review recommends:
1. Provision should be maintained for public unit trusts and issues associated with discretionary trusts should not be confused with these.
2. Mandatory full imputation must not be introduced (apart from the proposal to refund unused imputation credits to taxpayers whose marginal tax rate is below the corporate tax rate, which measure is necessary for reasons of equity and transparency).
We look forward to receiving the second discussion paper in the New Year to examine the detail of the Government's proposals. In the meantime, please do not hesitate to call the writer should you have any queries.
Financial Planning Association of Australia Limited
Michael F McKenna