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Submission No. 46 Back to full list of submissions
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23 December 1998

The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place

CANBERRA, ACT 2600

Sir,

The Federal Chamber of Automotive Industries representing the vehicle manufacturers and importers in Australia is pleased to comment on the discussion paper covering the review of Business Taxation.

As a member of the Business Coalition for Tax Reform (BCTR) the Federal Chamber is supportive of the general thrust of the BCTR submission. However, there are issues, some of which relate directly to the automotive industry, that we ask you to consider.

Fringe Benefits Tax (FBT)

Fringe Benefit Tax is presently at the same rate as the top marginal income tax rate, which applies to income above $50.001. It is at this income level and above that a significant number of taxpayers elect to package their salary to include a company car. Under the proposed new income tax rates, the marginal rate applying to incomes in the $50,000 - $75,000 bracket will fall to 40% (plus 1.5% medicare levy). If the FBT rate remains at 48.5% it will be uneconomic to package a salary to include a motor car. Noting the large number of cars purchased through salary packaging, the industry could expect a significant reduction in sales. This will also lead to a loss in revenue through lower tax collections.

To ensure a similar level of salary packaging of motor cars it is recommended that the FBT rate be reduced to 40% where it will match the income tax rate of the majority of Australians who receive fringe benefits for which FBT is paid. It should be noted that even at a rate of 40%, FBT would still be well above the 30% income tax rate that will apply to 81% of taxpayers. In addition, the gross up factor for FBT will need to be reduced to 1.88.

Depreciation Limit

The depreciation limit applying to motor vehicles dates back to 1974 when it was considered that luxury cars being purchased by businesses, were receiving concessional tax treatment. However, the introduction of Fringe Benefits Tax in 1985 overcame the problem, and a combination of FBT and the depreciation limit amounts to double taxation on that value of a vehicle which has already been subject to a luxury car tax.

It is the very strong view of the automotive industry that the depreciation limit should be removed as part of tax reform.

Deferred Company Tax

The Government proposes to introduce a "deferred company tax" arrangement whereby, all company distributions of profits (ie dividends) will be fully franked irrespective of whether there are sufficient franking credits available in the company’s Franking Account. What this will mean is either that:

  • The company will then be required to pay a "deferred tax" at the rate of 36% on any shortfall in available franking credits, or
  • The unfranked portion of any dividends paid to non resident shareholders, resident of a double tax treaty country, will attract withholding tax at the rate of 36% rather than the current rate of 15%.

These proposed tax measures conflict with the Government’s declared policy of integrating the Australian automotive industry into the wider global automotive industry.

As this results in adverse financial implications, it is clearly unacceptable of the following reasons:

  1. Increase in the Withholding Tax Rate
  • The increased withholding tax will be a direct tax on a non resident shareholder
  • This will result in unfair discrimination against non resident shareholders when compared with resident shareholders
  • From a global perspective, most jurisdictions which form part of double tax treaty networks, limit the rate of withholding tax on dividends to 15%. This increased rate will therefore be a disincentive to multi nationals wishing to invest equity capital in Australia as net rate of return will decrease and the cost of capital will increase commensurately.
  • This reduced rate of return to non resident shareholders, will do nothing to advance Australia’s intentional competitiveness.
  • The associated increased cost of equity capital will limit growth potential in Australia by companies with non-resident parent companies.
  • As the rate of 15% is set via International law under the relevant double tax treaties, any changes to this rate will need to be ratified by treaty partners, who may be unwilling to agree to an increase in the rate.
  1. Deferred Company Tax
  • It appears that this tax may be in addition to company tax and therefore there may be some element of double taxation. If this is the case, we most strongly oppose this measure.
  • As the tax will not be a "tax on profits", non resident parent companies may not be entitled to a foreign tax credit in respect amounts paid. This will result in a much lower "after tax rate of return" and accordingly influence future equity investment decisions.
  • As this tax will be an expense of the business it will result in lower Retained Earnings and accordingly, lower Shareholder Net Worth.

In Conclusion

We believe that the adverse financial implications referred to above, will inhibit international competitiveness and will be therefore be a major disincentive of multi National companies to invest in Australia.

Yours sincerely,

 

 

TERRY PENNINGTON
Executive Officer