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Submission No. 44 Back to full list of submissions
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SUBMISSION

to the
REVIEW OF BUSINESS TAXATION
first discussion paper

A STRONG FOUNDATION

State Chamber of Commerce NSW

December 1998

 

CONTENTS

1.0 INTRODUCTION

2.0 OVERVIEW OF THE STATE CHAMBER OF COMMERCE

3.0 THE TAX BASE

4.0 DESIGN FRAMEWORK

5.0 BUSINESS TAX PROCESSES

6.0 INTERNATIONAL INVESTMENTS

7.0 TAXATION OF TRUSTS AS COMPANIES

8.0 COMPANY TAX AND CONCESSIONS

9.0 ONGOING REFORM

 

1.0 INTRODUCTION

The State Chamber of Commerce is a long standing advocate of fundamental reform of Australia’s taxation system. We believe the existing system is subject to a variety of anomalies and distortions, as well as being extremely complex and costly in terms of compliance. The Federal Government’s proposals for A New Tax System (ANTS) provide an opportunity to achieve many of the business communities aspirations in this area. The Chamber welcomes the Review of Business Taxes (RBT), and the opportunity to make comment on its proposals and deliberations.

As a member of the Business Coalition for Tax Reform (BCTR), the State Chamber of Commerce has enjoyed the opportunity to participate in, and contribute to the development of the BCTR’s position in relation to the review process. Please find attached an additional copy of the Business Coalition for Tax Reform submission to the Review of Business Taxes.

While the membership of the State Chamber of Commerce is extremely diverse and encompasses the entire spectrum of business interests in the tax reform debate, we are not at variance with the BCTR on any significant point of policy. For this reason, we do not feel it is necessary to make a exhaustive submission to the RBT secretariat.

However, we would like to emphasise a number of issues which we believe are of importance to the breadth of our membership. Foremost among these is the treatment of trusts, dividend imputation and business incentives. There are also a number of issues which do not necessarily fall within the terms of reference of the RBT but which are worthy of consideration in the context of an ongoing reform agenda.

 

2.0 OVERVIEW OF THE STATE CHAMBER OF COMMERCE

The State Chamber of Commerce (New South Wales) is the peak employer organisation in New South Wales representing a wide range of businesses from small business proprietors to multinational corporations.

Established in 1825, the Chamber is the second oldest continuing company in Australia, representing over 100,000 businesses through a combination of its direct membership and over 300 metropolitan and country Chambers throughout New South Wales.

The State Chamber is the umbrella organisation for the Chamber movement in New South Wales, a foundation member of the Australian Chamber of Commerce & Industry and also a member of the International Chamber of Commerce which was established in 1599.

The Chamber provides an extensive industrial relations and small business advisory service. Also, the granting in 1996 of the license to the World Trade Centre Sydney, jointly to the Chamber and the NSW Department of Business & Regional Development (B&RD) makes the Chamber the leading private sector, non-profit organisation providing international trade services.

The State Chamber’ s partnership with the New South Wales Government in the establishment of the Olympic Commerce Centre will also provide an invaluable service to the business community of this State. It will help them to make full use of the opportunities and challenges of the 2000 Olympic Games.

The Chamber maintains close contact with business in New South Wales through its Board, Council and Policy Committees, on which senior business people from a wide range of professions and business activities participate.

The Chamber’s policy committees support the various areas of the organisation and allow leading members of the business community to provide significant input into the preparation and development of policy. The structure of the policy Committees has been recently revised to form four key bodies, and now includes: Economic Affairs; International Trade & Industry; Employment, Workplace Relations & Training and Transport & Infrastructure.

The Chamber regularly produces policy papers on major issues affecting business and the community. This is strengthened by the conduct of regular opinion surveys of our membership and the community.

Our focus on issues which affect the business community is further strengthened by our National Enterprising Women (NEW) Program, and the recently created Sydney Business Forum (SBF) which seeks to enhance our focus on issues affecting Central Sydney.

 

3.0 THE TAX BASE

It is acknowledged that the Review’s terms of reference exclude any serious consideration of systems other than the indicated benchmark of a comprehensive full nominal income tax base. The difficulties which the design of a comprehensive expenditure tax would have in relation to the impact on revenue, and the process of transition are also acknowledged. Nevertheless, the State Chamber would like to support the position of the BCTR in relation to defining the business tax base.

The State Chamber of Commerce would urge consideration of an expenditure based tax as a medium to long term goal. An expenditure based tax would provide substantial advantages in terms of savings and investment, international competitiveness and employment generation. The existing hybrid system is subject to inefficiencies which are not fully addressed in the RBT discussion paper. This is partly due to the numerous exceptions to the stated benchmark income tax base. While the value of retaining flexibility in the system is understood, the need for such departures underscores the value of considering an alternative system.

 

4.0 DESIGN FRAMEWORK

The State Chamber of Commerce supports the principles contained in the discussion paper relating to administration of the tax system. Compliance continues to be a significant burden on business both in terms of time lost and financial expense. Making compliance easier must continue to be a priority. Ensuring that ongoing consultation occurs with stake holders is also supported and should assist with the identification and elimination of problem areas. The State Chamber also endorses the stated views of the BCTR in relation to the amount of tax legislation in existence and the approach to enforcement.

Another important area concerns the collection of revenue. There is a clear need for a more streamlined and cost effective mechanism for collection. There appears to be no logical reason for the maintenance of several collection agencies across the tiers of Government. Their continued operation would seem to be more a product of parochial sentiment rather than economic necessity. Consideration should be given to a centralised collection agency which would act for all jurisdictions and provide its services for a fee. This outsourcing would eliminate the considerable duplication which exists and is compatible with the spirit behind the design of ‘A New Tax System’.

The design principles should also include reference to the operation of Payroll Tax. At the moment the States rely heavily on Payroll Tax for substantial portions of their total revenue. Under the new proposed system, access to revenue from a GST would largely eliminate this dependence. Most countries which have introduced a tax on consumption have collected more revenue than was anticipated. It is not unreasonable to expect the same thing to occur in Australia. In this context it appears appropriate that Payroll Tax also be eliminated.

The continued operation of Payroll Tax along side a consumption tax would represent a windfall for Government. In light of the damaging effect of Payroll Tax on the economy, the State Chamber of Commerce would encourage the RBT to consider eliminating the incentive to the States to maintain Payroll Tax imposts. This could be done by subtracting, or partially subtracting, the amounts which the States collect in Payroll Tax revenue from their share of the GST take.

 

5.0 BUSINESS TAX PROCESSES - CONSULTATION

Consultation structures should take into account the diversity in the business community and the competing interests which exist. In particular, it is important that the needs of small business are catered for in any structures which may emerge from the review process. The proposals to establish a Board of Directors is supported as are the other mechanisms for consultation which are proposed. Each of these however, should ensure some representation from the small business sector.

 

6.0 INTERNATIONAL INVESTMENTS

The taxation treatment of international investments is of central importance because of its potential impact on company location decisions. The State Chamber of Commerce is therefore supportive of the principal in ‘A Strong Foundation’ dealing with the balanced taxation of international investments.

The proposal in the Federal Government’s ‘A New Tax System’ document concerning full dividend imputation requires some comment. While the Government’s objectives here are acknowledged, the proposal that all dividends be fully franked brings with it some dangerous implications for investment.

The proposal would have the effect of undermining earnings per share and by extension the share prices of Australian companies, forcing many to consider moving offshore to avoid being taken over. It may also have the effect of prompting an outflow of earnings from locally based international businesses to their parent companies offshore because the tax paid by foreign investors on unfranked dividends will be lifted from 15% to 36%. The end result may be to discourage foreign investment into Australia.

Australian companies with overseas operations will be forced to pay two sets of company tax - one in the foreign country of operation and one in Australia - in order to pay shareholders fully franked dividends. This may deter Australian companies from expanding offshore. Similarly, dividends coming into Australia which were fully taxed overseas may then have to be taxed again in Australia in order for a franking credit to be attached. It appears unusual to be moving to such a system at the same time as other countries such as the United Kingdom have abandoned it, owing to it’s unpopularity with multi-nationals.

In addition, the proposal is prejudiced against companies that derive foreign source income. These companies may have paid foreign tax on that income but will not be able to claim that tax as a franking credit. Australian companies generating a large proportion of their earnings offshore may be forced to pay tax above the bottom line to allow them to pay fully franked dividends to shareholders regardless of their nationalities.

The Federal Government’s tax package proposed re-negotiating international treaties to ensure that other countries grant credits for the increased Australian tax due to full dividend imputation. Some experts say that such re-negotiating is unrealistic. Non-resident taxpayers may be worse off if they are tax exempt in their home country or, if taxable, they are likely to encounter problems in obtaining foreign tax credits.

7.0 TAXATION OF TRUSTS AS COMPANIES

The taxation of trusts in the same manner as companies would impact most heavily on small investors because a majority of trusts are held by small business. The impact of this proposal would be as profound as it is negative and should not be underestimated.

The fact that only Chile and New Zealand tax investment trusts the way that the Government is proposing to do may also place Australia at a competitive disadvantage. Investment dollars may flow out of Australia as a result, thereby harming the level of national savings. Balanced funds and international share funds will be adversely affected as foreign tax credits will be lost, increasing the Australian tax liability.

This proposal would also particularly impact on public investment trusts and may disadvantage public trusts in relation to other investments. Public trust deeds require all unit holders to be treated equally and all income is taxable in the hands of unit holders at their marginal tax rate. It would also be likely to lead to the collection of more tax at ‘entity level’ than will be required at final assessment, in effect forcing small business to make a permanent loan to government.

 

8.0 COMPANY TAX AND CONCESSIONS

The Review of Business Taxes will need to reach a conclusion on the question of whether Australia will be better off in the long-run with either keeping the company tax rate at the current level and maintaining tax concessions; or removing the tax concessions and reducing the company tax rate.

Capital is generally responsive to changes in relative tax rates, thus cuts in company tax are more likely to attract foreign investment. Australia could suffer substantial costs over the long term if it does not make its capital taxation more internationally competitive.

The revenue-neutral requirement does not keep the ‘playing field’ level. Removing tax concessions would hurt the mining and manufacturing industry while reducing company tax rate would benefit banks and other companies in financial services because they do not receive the tax concessions.

The December Quarter 1998 St. George Bank NSW Business Expectations Survey, which included over 600 separate businesses, revealed:

  • 61.7% of respondents supported a lowering of the company tax rate at the expense of abolishing existing business tax concessions, such as the research and development tax concession;
  • the retail/wholesale industry most supports a lowering of the company tax rate at the expense of abolishing existing business tax concessions, while the communication services industry least supports it;
  • medium-sized businesses most supports a lowering of the company tax rate at the expense of abolishing existing business tax concessions, while very large business least supports it.

The State Chamber of Commerce supports the lowering of the rate of company tax as the overriding priority. Having said this, it is important to emphasise the importance of incentives to some industries and the superiority of incentives over direct grants or subsidies. The latter system forces governments to ‘pick winners’ and to administer an inevitably complex system.

 

9.0 ONGOING REFORM

The inclusion in the discussion paper of various mechanisms for ongoing consultation with business, and the development of policy are applauded. It is important that tax payers are treated as partners in this process rather than merely the targets of ATO activity. The perceived lack of consultation and the apparent making of ‘legislation by media release’ have been significant criticisms of government in the past.

It should be expected that the Australian system of taxation will continue to evolve over time. It is natural that the tax system should change as the economy changes. No system can be designed to meet the needs of the community at every point in the future. The challenge for the present is to design a system which is fundamentally sound and which is receptive to orderly growth and transformation.

The State Chamber of Commerce would like to reaffirm its support for the review process and for the position of the Business Coalition for Tax Reform. Business is not a monolith, and bringing together the various interests of the business community is not a simple task. However, there can be no doubt that business is completely united on the issue of reform of business taxation. By improving the design, administration and consultation processes associated with taxation, it will be possible to generate substantial benefits for the economy and for the Australian community as a whole.