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Submission No. 47 Back to full list of submissions
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17 December 1998

Dr Alan Preston
Secretary
Review of Business Taxation
Department of Treasury
Parkes Place
CANBERRA ACT 2600

 

Dear Dr Preston

A STRONG FOUNDATION

I am writing to provide Lend Lease’s comments on the recent discussion paper released by the Review of Business Taxation titled: A Strong Foundation.

The discussion paper proposes 3 national objectives to provide high level guidance in the design and operation of the business tax system:

  • Optimising economic growth;
  • Ensuring equity; and
  • Facilitating simplification.

Lend Lease supports the need for national tax objectives which promote an efficient business tax system. However we would like to see the proposed objectives more explicitly recognise the need for a tax system which:

  1. Encourages national savings;
  2. Promotes international competitiveness; and
  3. Recognises the importance of the interaction between the business and personal income tax systems.

Clearly the first two objectives Lend Lease has proposed could be considered to be incorporated in the Review’s first objective of optimising economic growth. Nonetheless, Lend Lease considers both these objectives to be sufficiently important for them to be explicitly recognised in identifying and prioritising the proposed national tax objectives. In particular, it is well recognised that Australia’s national savings effort needs to be significantly improved. To the extent that it is possible, the business tax system should support, not discourage, that national savings endeavour.

Globally, Australia’s tax system plays a small but important part in the international arena, particularly in the Asia-Pacific region. The elimination or reduction of international barriers to commercial enterprise, the globalisation of capital markets and the evolution of electronic commerce are already realities as we enter the next millennium. As Australia’s international competitors adjust their tax systems to compete in this rapidly changing environment, Australia must be positioned to rapidly respond. Australia’s business tax environment must be and be seen to be "business friendly" otherwise not only will investors look elsewhere but so too will Australian based multinationals.

While Lend Lease agrees with and supports the need for national tax objectives we have some specific concerns as to how those objectives and principles proposed by the Review translate into policy design. More particularly, Lend Lease wishes to understand how the Government’s business tax reforms satisfy the national tax objectives identified by the Review. We propose to make more detailed representations on these matters in response to the Review’s second discussion paper, which we understand will be released in late January 1999.

However it would be remiss at this point not to present Lend Lease’s two most significant concerns.

The proposal to tax all trusts at the corporate rate while consistent, simple and arguably equitable when compared with the benchmark of a company, is non-neutral when evaluated against the position of the individual investor. Public unit trusts are vehicles which pool the investment resources of individuals. Many of those individuals will, under the Government’s personal tax reform proposals, have marginal tax rates well below the corporate tax rate. Since imputation credits are to be refundable, the proposals will give rise to significant cashflow disadvantages to retired and working individuals who invest in public unit trusts. In effect the proposals amount to a 12 month interest free loan to the Government by individual investors.

Contrary to the Government’s desire, the proposal to tax trusts creates its own non-neutralities. Specifically, investors in Cash Management Trusts will have their quarterly cash distributions reduced by 36% while competing bank based products remain unaffected. A basic principle of the Government’s reform proposals is that similar products should be taxed in a similar way. Unfortunately the proposal to tax trusts in this instance produces the opposite result.

The proposal to tax superannuation business of life companies and pooled superannuation trusts (PSTs) at the corporate rate is also consistent with an approach using a corporate benchmark. However a corporate benchmark, in this instance, is clearly inappropriate while "stand alone" superannuation funds themselves continue to be taxed at 15%. On this basis life company and PST investors would be making a substantial interest free loan to the Government before they would be entitled to a credit or refund of their 21% excess tax payments. The benchmark for the design of the existing system of taxing superannuation provided by life companies and PSTs has always been the treatment of a "stand alone" superannuation fund. Altering that benchmark so that superannuation provided by life companies and PSTs is now compared against companies will result in unnecessary, costly restructuring of the way in which superannuation is provided by those entities.

In both these instances the reform proposals are, arguably, consistent with the proposed national tax objectives and remove existing inconsistencies. However in both circumstances Lend Lease considers that the reform propositions create greater non-neutralities than presently exist. Indeed from an equity perspective these two proposals fundamentally affect the affairs of several million Australians who have committed to long term financial arrangements on the basis of existing tax laws.

Lend Lease supports the direction of the Review’s proposals for the administration of the tax system, in particular the need for an appropriately resourced Advisory Board with parliamentary reporting responsibility. We would expect to comment in more detail on these aspects once the measures have been more fully developed.

I trust these comments are of assistance to you as you progress to the next stage of the Review. Lend Lease looks forward to working with the members of the Review and the secretariat in the months ahead.

Yours faithfully

 

 

David Higgins

Group Chief Executive