PAUL CLITHEROE:
Okay. Could we grab a seat please and we will get going on our first segment. Let's go. This section is business tax. Now, this is a bit of a basic comment. Obviously based on the submissions we've gone for a group of people who have made commentary around company tax. You will see in the six sessions we have - so if your burning passion is environmental tax, would you mind leaving that for the environmental session this afternoon, otherwise it will turn into a complete shambles. This is company tax. In particular, the sort of areas that might get us going, obviously lowering the company tax rate, supporting change, equity financing, a really important one for many of us here, small business, the great compliance issue, of course, and so on, and then finally, of course, much at Mr Swan's heart, what concessions can be wound back to fund tax reform. Could we try and be broad-ranging around the topic in this session.
We have 187 participants and 158 submissions, and the good news is, I can quote someone, self-interest groups, which I hope we won't be, most wanting to change in the tax mix in their favour, the treasurer has covered that. Starting off, we will start with three speakers. There's no need for those speakers to get up, Heather Heather Ridout, Jennifer Westacott and Jeff Lawrence. They're going to speak for about four minutes each.
Now, after we get through that, just to kick things off, I was laughing at the treasurer's description of a referee or an assistant speaker. I've watched Parliament on TV. I don't want to do that, with all due respect to our Parliamentarians, so please keep your comments short.
We can only have six mics on at once. If upfront, if you just give me the opportunity because these are logical questions, they're logical flow, just let me start off with a few and then I am going to open it up to anyone in the front row to start off with, the inner circle. As we move on, I do have a couple of questions to throw beyond this front circle. The last part of the section will be going out with roving mics to make a comment who are not in the front circle.
Starting with the Australia's Future Tax System Review Panel. Thank you.
HEATHER RIDOUT:
Thank you very much Paul. It is good to be part of this very important and very timely summit. I was actually at the last one. I was a junior researcher many years ago. I lived through that one; I suspect I could survive this one. I'm speaking partly as a member of the Henry Review Panel and partly in my role as chief executive of that wonderful organisation Australian 1Industry Group.
I am very proud of the work the Henry Panel did. It was made very clear in the report itself that the report was not a tax reform package but rather a foundation from which reform packages could be built over the next decade or two. A lot of the 138 recommendations were highly conceptual and needed to be put in place and implemented and tested. We suggested such a process. I think that needs to be very clearly understood by people in the room. So in preparing the report and releasing it, the panel had in mind forums such as this one that would find value and build on the work of the review committee to shape substantial improvements across the Australian tax and welfare system.
While the review report cannot be expected to be the last word, I think the best value from this session and from the forum as a whole will be achieved if we use the Henry Review Report as a foundation rather than trying to repeat the exercise or try and reinvent another foundation here. Everyone in this room would have reported submissions to that inquiry, we've had one big go around the merry-go-round.
I think it should be building a culture to make ongoing improvements to productivity, employment opportunities and wealth creation. As the Prime Minister and the Deputy Prime Minister emphasised, we are facing tremendous transformations around the world. We need to adapt and keep on adapting if we are to meet the challenges of these transformations if we are to rise to the task of grasping the opportunities they present.
The tax system has a critical role to play in the businesses across the economy to transform and play a role in the transformation of our economy and society. Our system of taxation should not penalise risk taking, should not impede organisations from restructuring, relocating and reorganising. More than this, our tax system should encourage the rooms of business for transformation, research and development, new businesses and new ideas both in existing businesses and through start-ups. I think that is something we need to focus on in this session.
Business is up to its teeth in the whole of the tax system and has a keen interest across the whole range of taxes. Business is the central tax collector of our major taxes, whether it's personal income tax, company tax, the GST, payroll, fuel excises, taxes; the list goes on. Businesses bear the risk of getting it wrong. There's a lot of places to get in trouble.
It is business decisions that gets distorted by inefficient taxes and inefficiently designed taxes and it is businesspeople who scratch their heads over the wisdom of taxes that add costs to restructuring, reorganising, relocating and growing. The business needs to be at the forefront of our mind at this forum and not just in this session.
On the taxation of business income, I should also like to emphasise that we should not just confine ourselves to the company tax system in our thinking. I think policy makers and participants in policy discussions often do this. Firstly, for most of Australian businesses, particularly SME, they are sole traders, partners or family businesses run through a trust. They're not taxed as companies but generally pay tax directly under the personal income tax system. Secondly, our company tax system is integrated with our personal tax system, domestic profits. Distributed domestic shareholders are therefore subject to tax at the rates, rate of tax in the personal tax scale rather than the company tax scale regardless of the tax treatment at the company level. While we're aware of these facts, it is nevertheless surprising how often policy makers do not take full account of the relationship between the business tax system and the personal tax system.
A fundamental consideration of the Henry panel was the multi-speed economy. Its main proposal was reduction in the company tax rate to 25 per cent, a move to bring us in line with many economies. The lower company tax rate would help attract investment into these sectors that are on the wrong side of our lop-sided economy and certain disadvantages that arise from this. For me it was the cornerstone reform proposal of the review panel and it continues to be a major disappointment that we're being so frustrated in moving forward with it. It is certainly an area that we will continue to advocate.
There are additional measures with particular relevance to the multi-speed economy that can and should be pursued. The Henry Review recommended a loosening of our rules around the treatment of tax losses. Some steps were taken, important steps were taken, in relation to certain infrastructure investments and in recent weeks both the Prime Minister and Treasurer has raised the possibility of reducing against losses more broadly. There is plenty of scope to go further than the proposal in the Henry Review.
Costs associated with setting up new businesses and restructuring existing business should also be able to be expensed in the year the costs are incurred. The major beneficiaries will be businesses re-inventing themselves in the face of major structural changes that we are seeing, particularly in the non-mining trade-exposed sectors such as manufacturing. Further measures for consideration include accelerated write-offs, hard deductibility, selective refundable tax offset rebate equivalent to a reduction in the company tax rate for
particular industries. Another idea is to introduce an allowance of corporate capital that is concentrated on company tax liabilities and on rates of return above a certain threshold. While very attractive and worth pursuing, this will take some time to implement and develop. Of course, the realities of a multi-speed economy will not wait until then. So there's certainly a lot of measures we can take around this space.
In relation to SMEs, AI group is very supportive of the full implementation of small business measures proposed by the review. We are also very interested in the capacity of the companies to re-invent themselves and we have a view that there should be an exploration of the possibility of improving and extending tax measures designed to facilitate the development of a strong, early-stage capital market in Australia. Of course, what will come out of this forum, I think, is a very big issue. Decisions can be made but they need to be progressed and will be very interested in the process that might emerge from it to take these ideas forward. Thank you very much.
PAUL CLITHEROE:
Thank you. Jennifer Westacott from the Business Council of Australia.
JENNIFER WESTACOTT:
Thanks very much. The central question that this session has been asked to address is what is the appropriate business tax system for Australia to maintain business revenue and economic growth, and the question is well framed and it really goes to the heart of the role of the tax system. How do we raise enough revenue to pay for services and support the social safety net and how do we do this in a way that allows the overall size of the economic pie to grow.
On business tax, Australian businesses know we have an obligation to continue to contribute to the revenue-raising task of the nation, along with the rest of the community who want to know that our taxes are being well spent. Business also believes that revenue should, to the extent possible, be raised in a way that doesn't hold back the economy. This is important because the strong and growing economy will do much of the heavy lifting when it comes to meeting the long-term fiscal challenge unfolding for Australia over the coming decades.
Once you add the spending pressures faced by states to those of the Commonwealth, that challenge is daunting and beyond the scope of the tax system alone. Let's be realistic. We're going to have to have a long, hard look at the long-term affordability and efficiency of government spending.
Before I go to some specific tax issues, I just make a couple of broader points about tax reform. In two days we are not going to nub out detailed tax policies but we could do a few critical things. First we could agree that tax reform is an essential element of a virtually unfolding fiscal challenge that will not be addressed by our current arrangements. Second, we can agree a ten-year comprehensive approach with all taxes and all options on the table and identify some clear priorities to tackle first, recognising there will be competing needs. Third, we can agree on some principles which are well documented in Henry: efficiency; equity; simplicity and so on, and recognise that there will be trade-offs amongst these.
Our view is that the most important principle is the capacity to raise sufficient revenue but through a system founded on a broad tax base with low tax rates. Finally, we can agree on the kind of independent institutions that could help progress long-term tax reform and tackle some things that might otherwise go into the too hard basket. So to turn to specific tax issues.
The priority in our view must be to focus on changes with economy-wide effects that support productivity growth and competitiveness. Let's go to corporate tax. Reductions in corporate tax will help boost overall investment, improve productivity and spur in flows of foreign investment. I appreciate that some people will say Australia is experiencing an investment boom and we don't need to lower corporate tax rates, but we need to take a step back and look at the complete picture. The latest figures show whilst mining investment is growing strongly, in the combined non-mining sector, investment is declining.
The best thing that can be done is assist every business in Australia by pulling out all stops to make the economy as competitive as possible. This means lowering the regulatory burden and lowering the tax burden on business to reduce their cost. A lower tax burden doesn't just mean lowering the company tax rate, but the abolition of other inefficient state transaction taxes like stamp duty and insurance taxes. Lowering the company tax rate to stay competitive is not a race to the bottom. In Australia's case it is more like a race to the middle. Aiming for the 25 per cent company tax rate as recommended by the Henry Review barely gets us to the average of our trading partners, but in pursuing a lower tax on corporate investment, we do have to be realistic.
The reforms that are needed will involve trade-offs. If we are to lower taxes on capital, which we believe will help improve productivity in the economy, then we will have to find ways of replacing any lost revenue. There is scope for business to fund part of this by giving up certain concessions, but this needs to be part of a more comprehensive approach. The timing of any reductions in corporate tax will also have to be subject to the economic and fiscal circumstances and will need to be taken over time.
So in overall terms, improving the tax arrangements for business essentially comes down to two choices. We can change the way we tax business by moving to expenditure taxes, such as the allowance corporate equity and cash taxes. They sound good in theory but are untried. We can make the existing system work better. One way would be to implementing change by streamlining cap allowance.
Another way of improving the current system involves more significant change by broadening the base and lowering the rate. Our view is that within the current architecture the focus on energy ought to be on option to lower the corporate tax rate, but all of these ideas have merit, all of them should be looked at and this should be done in the context of a broader tax reform. We have to approach this task with a clear focus on our central objectives, a strong future economy afforded by productivity growth and competitiveness and in the process most likely to achieve that objective. Tax policy can't be rushed and the processes including consultation must be open and thorough.
In terms of the way forward, let's not get bogged down in finer detail over the next two days. Arguments of winners and losers will be counterproductive. It is in all of our interests to improve the tax system that will raise sufficient revenue and in a way that doesn't hold back economic growth. The opportunity over the next two days is to find the areas of common ground, not the points of difference. We all want to preserve our social safety net and our living standards. What we need is a process beyond today that will gradually and carefully improve Australia's tax system over the next ten years. Thanks.
JEFF LAWRENCE:
Our approach to this forum is based on two overriding principles. The first is that we have a tax base which is sufficient to fund the public services and social wage that Australians expect. Prior to the Tax Forum, we presented in the documentation the facts establishing that Australia is, in fact, a relatively lowly tax country. The tax to GDP ratio is actually below almost all developed countries. The second point is that we need a more progressive tax system. It is, of course, a vital component of the creation of a more balanced distribution in our society and as well our research established that Australians actually want a more equal and more progressive tax system. This forum can't be allowed to be a vehicle for self-serving business interests that will lobby for a lower corporate tax rate.
With respect to Heather and Jennifer, I think they've gone a fair way down that path. We don't support, and this forum shouldn't support, Australia joining a race to the bottom on company tax. In any event, the race has actually stopped. The Global Financial Crisis actually went a fair way to establishing that. Countries such as Ireland that slash their corporate tax rate found that capital soon left. So let's have some facts about corporate tax.
The first is that our corporate tax is actually lower than many countries, including the US. Secondly, our corporate taxes proportion of GTB is less than the OECD average when you take into account Social Security taxes. Thirdly, dividend imputation is often ignored when we make these comparisons.
So we don't support a reduction in the share of total revenue derived from business. We do think, though, that there is a case for considering revenue neutral business tax reforms that would help to create and to promote secure jobs and promote investment in infrastructure. I think the Minerals Resource Rent Tax is an example of that and as well allowing firms to carry back losses as a deduction against the previous year's tax bill would be another example, and some of my colleagues will elaborate on some of those ideas, but the central point is that everybody, including business, should pay their fair share of tax. There are many opportunities to avoid tax by disguising income through company and trust arrangements, and we've documented some of those in a publication that's available for consideration of those who are in attendance of the forum as well as our analysis of the real facts with respect to corporate taxation.
So the principles that should override this discussion, it seems to us, are these: what is a tax system that will promote good and secure jobs in the future; what is the tax system that provides an adequate tax base that means that we have public infrastructure and public investment and a social wage which can be sustained; and most of all, a tax system that actually leads to a more equal society.
PAUL CLITHEROE:
Thank you very much. That's got us off to an ideal start. What I would like to do before I invite you to start pressing your buttons, is a hoard of you here do support lower company tax. Jeff, I hear, no-one is going to get ambushed in this forum. We're far too big for that. Let's take a quick snapshot. I'm going to bounce from one side to the other.
Tony Bourke(?) of the ABA, do you want to give us your view on that, please?
TONY BOURKE:
In overall terms, we don't believe that this is a tax system that is broken. We don't think there's a need for massive reforms. There are certainly some opportunities for enhancement, and the issues that we put forward in our submission, most of which has been touched on by previous speakers, were also put forward in the Henry Review. On the company tax, then, we do, as is the case with other support, a move to 25 per cent over the medium term within four to five years and we believe that we can pay for that essentially from the increased investment and revenue returns from that investment which will flow.
PAUL CLITHEROE:
Tom Pockett, Business Coalition for Tax Reform.
TOM POCKETT:
Look, I think we need a competitive corporate tax system and I think from the first two speakers what we heard today was business being exceptionally practical from not only a business point of view but also a social point of view. Their words, an architecture to promote stronger economic growth and participation in productive, I think that's the key. Businesses are not standing up in isolation about lower tax fees; it's ensuring longer growth in Australia.
PAUL CLITHEROE:
Turning to Paul, when I was calling up a speaker, I was thinking why is Paul House Introducing the company, and I realise it's Paul Howes.
PAUL HOWES:
As Jeff said, we need to remember that when you look at the OECD you take into consideration corporate tax plus Social Security payments, plus payroll tax. Australia is the ninth lowest country in terms of taxes and corporations is a proportion of GDP out of the OECD. We support amendments to the taxation system that can boost productivity, that can boost employment, but there is that fundamental principle which is if we're going to cut taxation revenue from somewhere, someone else has to pay for it.
Do we have a problem in this country about the amount that corporations are paying? I think not. Since the Global Financial Crisis there is no race to the bottom any more. You aren't having the same competition that existed previously in the company tax rates, but we are interested in looking at other options that are available, particularly for those parts of the economy that are struggling, that are doing it very tough, the non-resources trade-exposed section of the economy, issues like depreciation for local content, things that we agree with the AI group in particular on.
These are the issues that I think can really drive productive growth and also employment growth in those sectors that are doing it tough, but when we look at the overall slice of the pie we have to understand that we aren't in a bad situation as we stand today. We are below the OECD average when you take into consideration Social Security and payroll tax and we're one of the most competitive nations around.
PAUL CLITHEROE:
Louise Tarrant, United Voice.
LOUISE TARRANT:
Thank you. Our union represents workers in a very different space to many in this room. We're the people that are probably looking after your children or grandchildren in childcare, we're looking after, perhaps, your parents or grandparents in an aged facility, we're the people cleaning up in hotels and caterers providing food. There is a very compelling argument that needs to be put to argue for a decrease in the corporate tax rates. Because who pays. Either we as a society pay because our services get cut, all those things I just mentioned, childcare, aged care, health, education, infrastructure. All the sorts of things that make us a great place to live and work and invest and grow our businesses in become impacted. So either services get cut if the tax takes falls or it shifts and it shifts to the shoulders of those very people I'm talking about because they're the people that pay personal tax or it even more shifts in terms of more aggressive taxes in terms of GST, et cetera.
So at the end of the day it is the compelling case that says somebody else probably with a lot less capacity to pay has to pick up the tab. Profitability in this country is going very well overall in the business community and we just don't see what the argument is as to why suddenly over a - even if phased in over four or five years, why does somebody else who has much less capacity to pay have to pick up the tab? We're not convinced that cutting company tax actually will benefit our community or, indeed, the economy.
PAUL CLITHEROE:
Alf Capito, I know we shouldn't believe what we read in the media, but I did notice you were from Ernst & Young. I couldn't help but notice the highlighted point you made that a 25 per cent cut could be something in the order of 10 to 12 billion dollars. What's your view on this one?
ALF CAPITO:
I think on the company tax side of it, the reality is that even despite the Global Financial Crisis, other countries in the world have continued to lower their corporate tax rate. I think they understand that at the end of the day you need to keep attracting capital. In Australia with our imputation system a lower corporate tax rate gets washed out for resident investors so effectively you're giving a benefit to non-resident investors and you're trying to attract non-resident investors into the company.
You can have 50 people trying to sweep a neigh
bourhood with a broom each or you can attract capital and buy in one of those whizz bang things that you ride on and get rid of the 50 people and have one person driving the thing, but that one person is going to earn a lot more in terms of wages than those 50 people would have individually. If you attract enough capital, those 50 people then find something else that will give them a higher wage. So the fallacy is that company rate cut is about increasing real wages for the community.
PAUL CLITHEROE:
Cassandra Goldie, what do you reckon?
CASSANDRA GOLDIE:
The Australian Council of Social Service represents community services around Australia. There are a lot of people who have a strong interest in tax reform and we are delighted to be here. We also agree with Heather that we think the panel recommendations form a strong base and we want to build on that. We must ensure that when we talk about tax reform it isn't just about tax cuts. We are not a high tax income country and we want to emphasise that. We don't oppose in principle lowering the corporate tax rate as such but we want to emphasise if we are going to do that, we must ensure that business tax pays its fair share. We must maintain the revenue base and build it.
Business has acknowledged as well that into the future we need to be expanding our tax base not lowering it. There has been a lot of talk in the lead-up to the forum about the GST being a panacea. I want to put now it is a regressive tax, it will hit people on the lowest incomes in the country. We want to put on the table today, look at the way we trade-off the cost of lowering the company tax rate, look at the way we use company tax shelters. The Henry panel was very clear about that, we need to fix that.
We would also support the tightening of the thin capitalisation rule so we don't allow profits to go offshore. We should be looking at this. We should have a balanced discussion. I hope we do that today. It isn't seen as a tax-cutting exercise.
PAUL CLITHEROE:
Turning to your right, Professor . .. University of Melbourne, what is your take on all this?
JOHN FREEBAIRN:
I think one of the real challenges is we live in a global economy so some factors, production, like international capital, come in and out of Australia, South Africa, whatever, they're internationally mobile, whereas labour is pretty well fixed. When you think about tax incidence and productivity, what the law tells us is you should tax stuff that's pretty immobile, that's labour, and tax fairly low the stuff that's very mobile, which is capital. Then you get the kind of interesting result that if you drop the tax rate on mobile capital, it pours into the country and people work with better machines, better buildings, better R & D, their productivity goes up and they actually end up being the gainers from the drop in the tax and capital, not the capital owners, the tax labour. This takes a while to happen.
So I think one of the challenges in talking about reducing the tax rate on business is that it will encourage capital flow-in, how much and how quickly, and how quick will GDP pick up the tax burden and wages and can we solve that quite difficult story.
PAUL CLITHEROE:
Thank you. Mr Carnegie I can't talk to you, but I see you want me to pay more tax which I agree with, but in company tax.
MARK CARNEGIE:
I think we've come this far without talking about one thing, which is virtually everybody sitting in the room at the moment is going to be part of the increasing financial burden of the ageing population and we've got a big issue of intergenerational equity here at the moment, if we do what countries like America and some of the countries in Europe have done and kick that can down the road.
So the one thing that I would be adding to the list of the things that we need to discuss, as I've talked about before, is the sovereign wealth fund and the idea that we're investing in a time of prosperity for the time when we're sitting there drooling and needing all the help we can get. We need to as a group come together in a time of relative economic prosperity and pre-fund old and immobile years.
PAUL CLITHEROE:
I'm going to one important person and then I will hold my breath and ask you to participate. Mr Leibler, can I ask you for your views knowledge at this stage?
MARK LEIBLER:
All I can say is that what has been said so far has been fairly predictable coming from the various parties who have been speaking and I'm not sure that I want to make any further contribution other than to say I think the idea of the sovereign wealth fund has something to say for itself. The idea of actually setting aside something for the future, even if this means more tax, I view as something which is very positive. I do have something else to say, but maybe -
PAUL CLITHEROE:
Say it. What do you think? I was relying on you to be unpredictable.
MARK LEIBLER:
Are you happy for me to move into an area of one of the things that you mentioned? In your introduction to this you mentioned, because I made a note of it, the great compliance issue. Are you happy for me to say something about that now?
PAUL CLITHEROE:
No. Could I hold that?
MARK LEIBLER:
As long as you come back to me.
PAUL CLITHEROE:
Scout's honour. Enough from me. I think we've established where we are around company tax, we've heard very civilised debate about lower and higher rates. I'm confused about which set of facts are correct. Contributions please? Mr Henry.
KEN HENRY:
I think Mark made a good point when he said that much of what has been said is quite predictable and could have written the script to this before coming in. I think the source of it is in this language that we use that distinguishes business taxation from the taxation of other things, but in particular the taxation of labour. Most, I would say all, public finance people see that distinction as being entirely false, it's essentially a meaningless distinction and it characterises much of the public debate and you've seen it here this morning.
Most public finance people who think about these issues go below the business to think about where the incidence of business taxation actually falls and Alf and John have articulated this morning where most public finance people in the world, by the way, would consider the incidence of the corporation income tax to fall in a country like Australia, which has open boarders to global capital, is relatively small and is, therefore, pretty much a prize taker in respect of the cost of capital.
Thinking about the challenges confronting Australia as articulated this morning, and the Prime Minister reminded us of those challenges and the Treasurer did as well, the review panel considered that there was a need to think much more deeply about where the incidence of various taxes falls, and pretty much the incidence of any taxes are going to fall either on labour or on land and other natural resources or it's going to fall on capital. Now, we can add a few other things in, you can tax consumption as a separate base, but the incidence of consumption tax is going to be one of those three factors as well.
What we do to the company tax rate is going to affect how much tax those various factors of production are. Just to illustrate the difficulty that we're having this morning in talking about business tax versus tax on labour, isn't it incredible that the consensus of public finance theorists is that in Australia if the company income tax were to be cut, the principal beneficiaries will be workers. They would be the principle beneficiaries.
That is the consensus of public finance people. It's at a considerable distance, I suggest
, from where the consensus of thinking is in this room this morning. It suggests to me that we've got a long way to go. We need more discussion like this and only, I think, when we can get past these debates about business on the one hand versus labour on the other will we then be in a position to make sensible decisions on how we should tax.
PAUL CLITHEROE:
Thank you. Peter Anderson, before you go, as you know six mics can be on at any one time. If you do have something to say, please feel free to press that button.
PETER ANDERSON:
Paul, thank you. We should be enthusiastic about taking the cost off business, because it's not businesses that benefit from stronger economy, but there is social benefit in doing so. I think we ought not just see this discussion as about how business may get a self-interested deal out of business tax reform. There is a social dividend from taking cost pressure off businesses in order to create a stronger economy. So we do need to look at all the ways in which the tax sector does interact with the business sector. Whilst there is a case for the reduction in the corporate tax system, the economy doesn't operate as a single corporate unit. The economy is literally hundreds of thousands of individual units, some incorporated, some not incorporated, and the interactions with the tax system are much more extensive than just a discussion on corporate tax.
Ken just spoke about the taxation of labour versus the taxation of capital. Many businesspeople are taxed for their labour, they are personal income taxpayers, so there is a powerful case to look at personal income tax as a way of strengthening the economy, not just corporate income tax reductions.
One tax not mentioned so far which needs to be on the table in this session is the capital gains tax. That tax is a tax which has been around now for 25 years or so. There are aspects of it which I think are world merited, particularly in respect to the side of capital gains, but there are some important equity issues, particularly for smaller businesses, in the capital gains tax. We concessionally tax our superannuation as employers and that is going to contribute to retirement savings and take some pressure off pensions, but for smaller businesses, the capital gains tax is effectively their retirement savings.
There are fewer, much fewer, concessional aspects to the treatment of capital gains and the asset value which is the retirement savings of small to medium businesses. There is an equity issue on the table in this Tax Forum that needs to be looked at. Of course, if you're going to look at the intersection of businesses in their myriad forms with the tax system, you have to look at the state taxes and the state charges. Those smaller taxes add up to a very significant burden, particularly for this sector. Payroll tax, which is probably the largest of one of those, is a direct tax on labour that has very little reference to business capacity to pay and as part of that broader structural reform in the system, which does involve looking at indirect tax base and does involve looking at government expenditure, you have to deal with those two big ticket items that are the elephants in this room, then you can do something meaningful on issues like payroll tax base and [indistinct].
PAUL CLITHEROE:
Dave Oliver.
DAVE OLIVER:
It comes as no surprise that we're having a discussion from the company end of town about cutting tax rates, but we don't support an overall cut in the manufacturing industry. Things are very tough at the moment. As in the opening address by the Prime Minister and the Treasurer acknowledging the patchwork economy, and I can't recall the time where we haven't been getting a significant bounce-back into the manufacturing industry from the mining activity that is happening at the moment, that's why, number one, we supported the Mineral Resources Rent Tax. That was a way of taking from that booming area of the economy and giving relief in other areas, but our primary position is it should be more targeted. It should not just be an overall cut.
So we should be targeting tax rates for companies that are actually stimulating investment. That would be the idea about using the taxation system, about stimulating employment, so the idea that has been flagged by a number of people already about accelerated depreciation through investment and infrastructure. Whether you're talking about a mining project or investment in clean technology, this is the direction that we see using the tax system to be targeted in a way that would actually stimulate investment for jobs in other sectors as being adversely affected from the mining activities happening at the moment.
PAUL CLITHEROE:
[Indistinct].
ANN SHERRY:
Thank you. From the point of view of tourism, I apologise for the sectional interest, it is probably quite instructive to talk about a sector that has been hard hit is a major employer, also is very widely distributed across the country, and as a result of the downturn in tourism government has found itself spending large amounts of money propping up rural communities and regional economies that were previously very dependent on tourism. I think in this debate about taxation, the question is where do you get your bang for your buck.
We've argued in the submission, and I would put on the floor now, that sometimes doing small things in targeted areas you could be paying for your buck - you can see the trade-off, if you like, between the money government has to put into communities versus more rapid depreciation of capital to get investors to build hotels in those places and start to drive a bit more investment to capture, again, huge opportunity on our doorstep with Asian tourism.
So as we look forward, a question I would ask is what's the outcome we're looking to drive. We're very focused on the big macro outcomes, but as you pull it back down into industries and small businesses, which tourism is ultimately made up of hundreds and thousands of small businesses, as well as a few big ones, how do you get that to drive jobs to capture the benefits available to us and to keep an industry growing that has really been the backbone of lots of regional centres and is part of our nation and international image.
So there are sometimes just very small things that I think get lost in the macro debate. I think the macro debate is well articulated by others, but for many industries it's really capturing where do you get your trade-offs to create jobs, opportunity and capture benefits that otherwise would go past if we didn't do it. Obviously, depreciation is one but there are a few others that are really on the table for discussion as well, I think.
PAUL CLITHEROE:
A good time to go to Stephen Martin.
STEPHEN MARTIN:
Our organisation obviously is 800 members and would support most of what has been said here today, but I think an issue that was raised by both the Prime Minister and the Treasurer this morning around the notion of the two-speed economy is something that is worth further consideration, particularly as two other speakers have already nominated, the issue of a wealth fund and how that might be created to see the result of the view that resources rent tax should be strengthened and that the funds coming from that particular sector should be put aside and we have spilled out how that might operate.
I would commend that again to both the Prime Minister and Treasurer for further consideration, but the second issue, I think, which is significant here when we're talking about improving productivity, recognising regional differences, and I'm speaking, perhaps, not so much from CEDA's perspective but as a recovering politician that represented others, to go through a second bout of substantial economic change.
The opportunity for investment incentives to be provided by gov
ernment where taxation breaks are given in regional areas that are going through major restructuring with manufacturing industry and the creation of jobs for the future are the sorts of issues that I think need to be looked at and the tax system might offer some of those breaks accordingly. At the end of the day it's about productivity improvement, there's no doubt about that. It's about fiscal responsibility, it is about governments being able to pay their way and the tax system has to be adjusted in a macro sense, but also there might be some micro tweaking that would give the benefits that I have just outlined.
I certainly do commend the concept of a sovereign wealth fund. It is something that as we're going through a boom, that everyone is saying this bigger, longer, harder and will continue to the foreseeable future, then let's get some benefit from that so that we don't have to have these small increases in Medicare levies to pay for disasters when they happen. If we're going to do that, put up the Medicare levy substantially and put aside some money to meet these sorts of challenges in the future.
PAUL CLITHEROE:
Peter Strong.
PETER STRONG:
Thank you very much. If I can just remind people that 96 per cent of businesses in Australia are small. There's over two million, nearly two and a half million, small businesspeople out there and they're not trust or independent contractors or sole traders, et cetera; they're people. Every one of them is a person. What we ask them to do in a tax system is a lot of work for other people, for nothing. What we're saying is let's stop and step back and listen to what people are talking about, the macro area, and I agree that is important, but also when there's two and a half million people out there who employ another five million people, we have to look at the impact upon them and the impact upon their tax such as the capital gains tax.
I agree that is a vital area for those people. They need to retire into a healthy lifestyle and if the capital gains tax doesn't work for them, then they're the ones that will suffer and they will end up working to 80 to try and keep alive.
The two and a half million people or one million employers at the moment collect superannuation for very large multi-billion dollar institutions. They do it for nothing and get fined if they don't. There would be an immediate gain if we were asked not to do that and it was put into PAYG.
We have been asked to be the paymaster for parental paid leave. That is very difficult. It makes it hard and mistakes will be made. The easiest thing is not to ask us to do that. Big business can do it. They've got paymasters, experts, and they make their use of expertise around complicated things and love it. At our end, it's annoying, complicated, and a lot of small businesses don't know what is happening around them, they're running a business, have a family and if we step back and look at how it impacts upon them, then we can increase productive immediately. We can increase jobs immediately and we can increase the health of the nation immediately by dealing with the 96 per cent of businesses that are small, working with people like institute of public accountants who are looking at a replacement for the entrepreneur's tax offset, working with people like the Australian Retail Association who represent a big employer group and a lot of them are small and they know the impact of what's happening.
We haven't really mentioned the people involved in collecting tax at all. They're people, every one of them is a person. A lot of them spend Sunday mornings doing the work of government and I think this is the opportunity to go back and say how do we help stop them doing that work so they can concentrate on their business, they can concentrate on OH & S on their business, spend time with their families or walk the dogs. They're really important issues to people. Thank you.
PAUL CLITHEROE:
Craig, you've been waiting patiently.
CRAIG LEIGHTON:
I think it's really important to remember the point that Heather raised initially which is there are hundreds and thousands of businesses in Australia that aren't run through companies, so when we talk about giving any tax relief to businesses, it's not just about reducing the corporate tax rate. If we look at what's happened with various tax rates over the last 20 or so years, the company tax rate has come down from 49 down to 30 per cent and that is an achievement. Compare that to individual tax rates. They have come down, the top marginal rate has come down from 49 to 45 per cent and that cuts in at less than three times average earnings. So it's certainly - it's not really an incentive to be successful when the top marginal tax rate cuts in at such a relatively low amount.
I think if there are to be tax cuts, it should be in the form of cuts to individual marginal rates rather than company tax rates. I think the 30 per cent company rate is a fairly reasonable rate. If there are to be tax cuts, I think we could look at some of the areas where they could be funded from.
We've had no discussion today about superannuation. I'm not quite sure where superannuation sits as between business taxes versus individual tax, but if we look at what we did a few years ago by taking out all tax on the earnings of superannuation funds and all tax on the withdrawals of money from superannuation funds by those aged over 60, what we've done is created hundreds of thousands of tax-free jurisdictions that are far better than the Bahamas within Australia by virtue of those tax-free amounts. I think we've gone far too far with tax exemptions there for tax and superannuation.
There is a section of the public that isn't pulling their fair weight when it comes to the payment of taxes. If you look at the building industry as far as it relates to private taxpayers, I think we all know that if you get somebody around to do some renovations to your house, there will be two prices: there's a price for cash and there's a price for if it goes through the books. I can't understand why everybody looks past that and we do nothing about it. Whether it's a case of there being some additional legislation required or whether it's a case of funding or a different approach from the Taxation Office, I think something needs to be done there because far from making the Australian business number system and the GST system bringing the building and construction industry into line, if anything it has made it more lucrative to stay off the books.
PAUL CLITHEROE:
Let's talk about leakage for a minute. Mr Jordon. are we leaking?
CHRIS JORDON:
I don't know how to respond to that. I think the debate is a lot more than just simply the rate, rates of tax, whether it's company or individuals. I think it touches on the issues that John and Ken has raised, that to look at what would be the most ideal tax framework or system in 10 or 20 years time. I'm not sure that the current framework of our current company tax system would be the most relevant in 20 years time, so the rate is not relevant in terms of the debate.
I think the matters that Jennifer raised in terms of what are the principles that we should be looking at around productivity growth and competitiveness, so look forward 10 to 20 years time, look at the issues that Ken and John raised as where will the benefits be had to keep our nation as growing and prosperous when we will be hitting some hard times, and the BCA has put some figures out there around some really difficult funding gaps that will be coming up for the next generation.
So if we can look at what is an ideal framework in 10 or 20 years time rather than a rate cut now to individuals of companies and develop a process. I think as Jennifer mentioned, as to how to actually monitor progress to achieving a system in 10 or 20 years time that will be ideal. The Treasurer mentioned this is a 10-yea
r process. It's not something that is going to happen overnight and if we can get some common ground as to what it might look like, there's issues around labour companies, capital, mobility of capital. As I say, the company tax system that we personally have might not be the most relevant tax system for 20 years time, so the rate is not what we should be debating now but how we actually have a process that progresses us to what will be the most ideal system to keep us a growing, prosperous nation.
PAUL CLITHEROE:
Have you considered politics?
NEW SPEAKER:
Too old.
PAUL CLITHEROE:
We've had the issue of leak.
MICHAEL D'ASCENZO:
Australia does have a very sophisticated business tax system. We're a modern country and we have a sophisticated system. Over the years we've seen a range of quite important and innovative legislative regimes being put into the system and they've accumulated over time. I think that accumulation has led to some issues with interaction, how they're meshing together. All that leads to greater complexity which leads to some agility. There are some issues about leakage under the current system.
PAUL CLITHEROE:
Cassandra.
CASSANDRA GOLDIE:
I was delighted when you said feel free to talk about superannuation because I think we have all heard a bit of a theme about finding a common ground. We have to take a long-term view here, but I do think that it's potential to be focusing on core problems that the community understands because we are talking about politics as well.
Tax reform is never easy. I think the broader community knows that we have a real problem about ensuring that people are going to have the kind of savings they need to look after themselves into the future. The Henry panel put some representation recommendations in there about regress of tax concessions associated with superannuation. Right now, for example, we estimate 15 billion in tax breaks associated with superannuation, 20 per cent of those are going to the top 2 per cent of income earners in the company. This isn't a fair arrangement. It will be a real problem. It's a big bill into the future. The aged pension will be one of the biggest pressures on the general revenue base.
The other point, I wanted to pick up on a point that Dave talks about the way we use the tax system to provide the right incentives for investment. What is a common community problem, it is about affordable housing. There's absolutely no question. One of our big services, Anglicare, does this annual snapshot around the country in every capital city, if you're in the lowest 20 per cent of income earners, could you afford to rent. Last year they found in no capital city could people afford to rent in the private market. So how do we use the tax system to get those kinds of incentives investing in affordable housing, not the high end of the - I won't go into the complexities. Negative gearing, capital gains, let's have the courage to deal with that.
The last point I want to make, I don't want us to avoid, if we are going to go down the path of lowering the company tax rate in some kind of form, then we must tackle the way in which those companies are used as tax shelters. I agree with Mark Carnegie's contribution about the way in which the shutters associated with both private trusts and companies need to be tackled. It will only become a bigger problem and I want to urge whichever government to deal with it to be brave and deal with that one. Henry agreed with it as well.
MARK CARNEGIE:
I'm bouncing around here because I'm going back to something Peter Strong said, which is this will sound like a joke, but I really believe if anybody in either government or in the bureaucracy understood what it was like to be a small business in terms of tax compliance or tax structuring in terms of establishing your business, there is absolutely no way that they would draft the legislation with the complexities that they are talking about.
So with a deep breath for everybody laughing, one of the other things that I would be advocating here is taking 100 politicians at random and 300 or 500 people out of the tax department, give them a budget in terms of how much for the accounting firm that sets up their business and gets them into business and let them have a go at it because the scream would be heard from here to Tasmania. It is an absolute nightmare what you've created for these poor people who come to me every day looking for venture capital to expand their business and sit there and find that the government puts out there a $250,000 tax concession and the accounting firm charges them $235,000 to actually get a handle on it. It is a nightmare what you people have created and if you just spent a week understanding what it was like from Peter's clients' point of view in the world, you just wouldn't be doing that.
In terms of a Tax Forum, it is a thing that nobody can possibly walk away and say it is a reasonable thing for us to be doing to the small people on whose backs Australia's economy grows.
PAUL CLITHEROE:
Thank you. You've been too polite. Thank you for being polite. If someone said something and it really gets your goat, just stick your hand up and I will come to you straightaway because you've been great complying. I'm quite astonished.
Now is your time, Mr Leibler.
MARK LEIBLER:
Thank you, Mark. I want to talk about a nightmare. It's not just a nightmare, it's worse than that. It's a Nightmare on Elm Street. The strange thing is it's a nightmare which is easily fixable by the government, it's consistent with the parameters set by the Prime Minister and the Treasurer. There are no losers and only winners. I'm talking about something which not all of you would have heard, but a lot of you would have. It's not something that worries organisations like the BCA, but it is something which worries hundreds and thousands of small businesspeople, large business people and medium-sized businesses.
I'm talking about something called division 7A. It's supposed to be an anti-tax avoidance provision. It's designed to apply a punitive tax on those who attempt to extract funds from private companies, it doesn't apply to public companies, without paying the appropriate top-up tax after allowing for franking credits which would be payable if the funds were extracted by way of dividend. Fair enough. The concerns which I would like to raise, they do impact on not a few businesses but hundreds of thousands of Australians who rely on private companies and trusts as vehicles for their business and investment activities.
Now, why do I describe this as a Nightmare on Elm Street? The provisions are complex beyond imagination, they produce a whole series of unintended consequences, they obstruct legitimate business and commercial activities and they apply in a variety of contexts which have got nothing to do with tax avoidance. Now, the taxation of trusts is currently under review by treasury, but those problems relating to the taxation of trusts they pale into insignificance compared to the compliance problems raised by this division 7A.
The few accounting firms that actually appreciate the implications of this division find it difficult, sometimes well nigh impossible, to provide sensible and reliable advice to their clients. The costs of compliance are enormous and many accounting firms simply haven't grasped the potential reach of this division. Furthermore, the tax office has issued a series of rulings which whilst well intended, in fact, are no more comprehensible, in fact often less so, than the legislation itself.
Now, I've got no problem with the policy which underpins or at least which ought to underpin division 7A; namely, that top-up tax should be paid if funds are extracted from companies for private purposes, for private consumption. However, divis
ion 7A as currently drafted applies in a variety of cases where funds are moved between entities but nonetheless remain invested in the relevant business activities and they're not applied for private purposes. This nightmare, this horrendous and unnecessary compliance burden affects hundreds of thousands of businesses. The government can fix it all by repealing decision 7A and inserting a new division which is limited to ensuring that the anti-avoidance provisions only apply where funds are directly or indirectly extracted from private companies and then applied for private consumption.
Now, the impact of such a legislative change on minimising compliance costs for hundreds of thousands of Australians would be usually positive. Moreover, there would be no significant impact on government revenues. So all I can say is, I urge the government to accord top priority to changing the law along the lines that I've outlined. Thank you.
PAUL CLITHEROE:
I will be switching to this end in a moment. Jeff Lawrence.
JEFF LAWRENCE:
I will try and be a bit impolite, actually.
PAUL CLITHEROE:
Please do.
JEFF LAWRENCE:
Ken Henry, I think, expressed a bit of frustration with what he saw as a lack of consensus around some of the issues with respect to company tax and so I guess the difficulty I think with that analysis is that when you listen to every business representative who has spoken so far, they've spoken as if there was some sort of theoretical model, as if the assertions around are across the board reduction of company tax, would be automatically accepted, and I don't think the evidence has been future forward to justify that.
I think the other difficulty is that frankly a business doesn't come to this debate with clean hands. You only need to look at the resistance to the resource profits tax and the continued resistance for the Mineral Resources Rent Tax, the way in which wealth is to be distributed throughout the economy, you only need to look at the attempt to turn what should be a worthwhile and constructive debate about productivity into an attempt to cut wages and conditions to review the Fair Work Act and generally travel down the road back to Work Choices as against the debate against skills, investment, management, all the positive things that actually can be done to try and improve productivity.
So I say clearly you are not going to get engagement from unions or the other representatives at the forum in these sorts of issues if there is not some credibility that is shown on the business side, and I don't see any - I didn't see any evidence of it in the lead-up to this forum and I haven't seen any evidence of it so far today. We are interested in a debate about some of these issues which is a constructive debate. I still don't see any departure from what I do consider to be a self-serving business agenda which is really about increasing profits as against the benefits to the economy.
PAUL CLITHEROE:
If someone wants to address that, stick your hand up. Go Heather. Press your mic, please.
HEATHER RIDOUT:
I think what Dr Henry was really pushing to and as a member of the panel I got a real education about the incidence of tax. I've always had a view about it and as a member of the business community often that view was quite misguided, and when you try to explain to our members about payroll tax that, the incidence hasn't fall [indistinct] it's quite a difficult thing to get across. I think it is important that people open their ears and start to understand some of the basics behind this.
In terms of the company tax debate, we're not here to talk about tax cuts; we're here to talk about tax reform. What's happening is that if the Australian committee is going to have this situation with the high dollar for a sustained protracted period of time, ten years we're told, that is going to change the nature of the Australian economy and whole sections of it.
Ann's area, manufacturing, what Dave represents, they're all going to be at the sharp end of this and they have to change and they have to transform and new businesses need to be created. Now, those industries are going to have huge trouble attracting investment to build new tourism facilities to invest in high-end manufacturing facilities, et cetera, and they need to be much more competitive in attracting capital. The Henry report suggested that and allied with an increase in taxes on our non-renewable resources industries and Australia didn't have a particularly mature debate about that issue, but the issue that the tax reduction to 25 per cent was all about was a reform, not a tax cut, to line the pockets of a greedy industry. It was about supporting industry and supporting jobs in those industries and it's very important that that be understood.
Now, in relation to the broader agenda, I can rabbit on about health and education for a long time, but it is absolutely vital that we have those discussions but not here. We are here to talk about tax reform, not tax cuts, and the company tax system is not working for a whole lot of industries that are on the wrong side of this transformation, nor the asymmetrical treatment of losses. For a long time we didn't worry about that, but we do have to concern ourselves with that.
The MRRT thing is apparently settled, so we have to find some other ways to deal with this corporate tax issue because, frankly, the mining industry does not need a reduction in the company tax rate, but the manufacturing industry does, the retail industry does, the tourism industry does and a whole lot of industries do to support investment and jobs in those industries.
PAUL CLITHEROE:
Clearly I'm missing something here. I hear significant voices reasoned from both sides.
Jeff, you're correctly calling for the fact in this matter. How do you respond to that because I'm hearing reasoning here in terms of two groups talking to each other.
JEFF LAWRENCE:
I think we've shown a willingness to look at a broad range of issues, but Heather talks about reform. The proposal that I see as coming forward that's being portrayed as reform is a cut to the company tax rate, corporate tax rate. Now, we just do not see the justification for this. We've looked at all of these issues, the international comparisons, and I welcome everybody to look at this publication and go through it and you tell me the areas that you say actually in our analysis that are incorrect and we can talk about those things.
Where I think there is the ability for us to look at some constructive things are the things that Paul Howes and Dave Oliver raised which are the things that can actually be targeted at helping to create jobs and sustain industry. They're the things that I think there is the ability to talk about, but I see no justification at all for a further reduction in the company tax rate, the corporate tax rate.
PAUL CLITHEROE:
This is an important issue. What I would like to do is we've got Ken Henry here, so can we hear from you?
KEN HENRY:
I think this is very much the sort of debate we should be having and it's not the debate we were having earlier, but it takes a while to swing into these things, I guess.
When the panel was reflecting on the challenges in the Australian economy, and in particular the implications that arise or re-emergence of China and India and what they had done to Australia in terms of trade, what that had done to the strength of competition for domestic capital within the Australian economy, so domestic capital being drawn in the mining sector, for example, assisted by or promoted by or strengthened by what was happening to the Australian dollar. So when we have that in mind, when we also had in mind this post-Global Financial Crisis environment in which global capital is just as mobile as it was before
the Global Financial Crisis, but there's a heightened perception of risk, and so there's the likelihood that the Australian economy will be buffered by high levels of volumetry in pre-GFC, not just the Australian economy, by the way, but economies right around the world.
When we reflected on those things, some propositions were quite evident to us. Firstly, that it would make sense to rebalance the burden of business taxation, let me call it that and you know I don't like that label, but to rebalance the burden of business ... between capital on the one hand, movement of which are likely to be highly volatile and globally mobile, capital on the one hand and natural resources, natural endowments, including land by the way, on the other hand. That seems to be a question worth asking. The panel considered that was a question worth asking.
It was worth asking the question also where does the incidence of the company tax in Australia fall. Does it fall on capital, does it fall on labour, does it fall on land? As I said earlier, there's pretty much a consensus within the public finance community globally on this point, that in Australia it almost certainly falls on labour, to a very large extent it falls on labour. Well, as Heather said in her introductory remarks, it is a proposition that could do with some testing in the Australian community.
My sense is that there is not a consensus in this room that that's where the incidence falls, but why don't we do some work on it. We put the proposition in the review as a distillation of considered thought on the part of public finance academics globally, and that is their view. But as Chris Jordan reminds us, this discussion should not be just about the company tax rate. I've already mentioned there's this issue of the appropriate balances between taxes on capital on the one hand and taxes on land and other non-renewable resources on the other, but there are other issues and big issues to think about here.
There's the form of taxation of business income which might suit Australia going forward. We haven't had a discussion about it at all this morning, but there is much discussion about this internationally. The Merlease(?) Review in the United Kingdom has gone much further than we felt prepared to go in our review in advocating that business should be taxed under an expenditure taxation method rather than an income taxation method. They have proposed specifically that the United Kingdom introduce a system. We floated this in a review but we anticipated that the Australian debate was not at the point where we could recommend that such a taxation system be implemented in Australia. It's something that we need to discuss and there has been no discussion of it again this morning.
Another proposition that seemed almost self-evident to us was that if the world is going to be a more volatile place, we have to reconsider the taxation treatment of losses. We have to give some thought also to how we deal with costs which businesses, whether they're incorporated or not, costs which they incur in order to restructure, either because they have been hit by some cyclical volatile element or because they find that because of what's happening in the mining sector and the competition to their capital and the exchange rate and so on, they have to adjust permanently.
Finally, we thought it also pretty clear that in such a world there was a pretty good argument for removing traffic taxes as much as possible. There's a whole set of issues here that Chris reminds us of, I think, that we need to take into consideration when we're reflecting on the appropriate design of Australia's future business tax system. Corporate tax rate is one of those issues. It may not be the most important of those issues.
PAUL CLITHEROE:
We're getting into the treatment of company tax losses and equity financing is something we want to talk about.
If we just stick with this idea of - you stuck your arm up, so I'm assuming, sorry about this, but I'm assuming you've got something directly to --
PETER ANDERSON:
Yes. I wanted to respond to the point that Jeff Lawrence made. Whether the union movement want to accept it or not, business taxes and charges are a constraint on investment, and that's investment in both capital and an investment in both labour. The consequence of those constraints is that fewer people are employed and the economy doesn't grow as it should. I think it's simply wrong to suggest that because many in the business community oppose the first iteration off the resource profits tax, they don't come to this table with clean hands. That's absolute nonsense.
We come to the table with clean hands because the first iteration of the resource super profits tax was a redistribution of wealth and tax reform is about growing wealth, not just redistributing wealth, and we shouldn't be apologetic about putting on the table a need for the tax system to help grow our national wealth because that creates jobs.
Where I will accept Jeff's point is that it's not all about the company tax rate because many businesspeople who will grow the economy as well as employees who the trade union movement represents are personal taxpayers, and a point that Craig made about the relative changes in the rates of personal income tax compared to corporate tax are relevant points which creates equity issues for people who are paying high rates of personal tax.
PAUL CLITHEROE:
I see you jumping up and down there, Jeff. Clean hands/dirty hands; do you agree with Mr Carnegie?
JEFF LAWRENCE:
It's just a question of transparency, I think. If people want to argue a particular agenda they should be upfront about what the agenda is and they should provide facts for that agenda. In this analysis that we've done of the corporate tax rates through all the OECD countries, when you include employers, Social Security, which we don't have in Australia and comparable countries, it shows we're considerably below the OECD average. So what is the argument, other than assertion that says - Peter says, well, we really need to have lower tax, we do that and then we will invest. Where is the limit to that, Peter? If 0 tax, it would mean you could provide jobs and so on, what does that mean for our society?
So let's have an argument which is based upon facts and the facts show that Australia is not internationally non-competitive in this area. Where there is some ability, I think, to do something is in those areas that actually will promote jobs that are specifically targeted and that's something that we are prepared to consider.
PAUL CLITHEROE:
Treasurer, I imagine someone listening to this at home is thinking, hang on a sec, how can it be this hard? We've got an argument that lower company tax may, in fact, cost people, and we've got an argument that it will be terrific. Ken Henry is proposing that we do a bit more work. Can we answer that question?
WAYNE SWAN:
Can I just say what a great conversation this has been. And I think it demonstrates why we should be here today having this conversation. Because when the Henry report came down, we did accept the central thrust that they put forward that in a patchwork economy or two-speed economy, which was a consequence of enormous structural change impacting on Australian industries, that it was smart to actually look at those industries which could pay a bit more that were super profitable, if you like, and take that benefit and spread it right around our economy. So that's what we decided to do, that was the central thrust of the report.
We said that the super profitable mining companies could afford to pay a bit more for the resources that the Australians own 100 per cent and that we should then use that revenue to spread it right around our economy, and recognise in particular that many businesses were doing it tough because they weren't in the fast lane of the
resources boom and that is truer today than it was 18 months ago. So I have a lot of sympathy for what Heather has had to say and what Peter has had to say about small businesses, about businesses in the manufacturing industry, what has been said about the tourism industry.
What we wanted to do then, which is what we're doing now, but not with the same amount of money, or with the same cut if you like, is actually spreading the opportunity of that boom around other businesses so that they can continue to employ and continue to invest.
Now, I think in terms of the discussion we've had today, where there's a bit of conflict here is that people say, well, is it the right time, for example, to say that we should be cutting the corporate rate from 30 cents in the dollar to 25 cents in the dollar across the board, across every company in the country, or should we think about, given the fact that there is enormous structural change, given the fact that the dollar is so high, should we think about at least in the short-term putting in place some business measures which reflect the pressure those businesses are understand so that they can continue to employ and invest. That's where I think there is some real common ground here today.
That is, I think, a very good thing. I think everybody recognises that in the environment we are in, the structural change that we anticipated 18 months ago is far bigger than what anybody thought would happen at that time. I'm pleased the government got ahead of the game then and today I think it's good to have a discussion about what we can do further to recognise, for example, that some businesses can't actually use their losses appropriately, we may need to make some changes in that area. The government is interested following that up because we understand what is happening to many businesses. That's why, for example, the instant asset write-off we're talking about is so important, the $6,500 asset write-off. That's an enormous benefit to small business who come under the pressures that Mark was talking about before. It’s a big simplification of the system. And many more of those things need to be done. So that is why I think this is such a good conversation and I think we're going down the road where there is some common ground.
PAUL CLITHEROE:
So Ken, do you think we can resolve this, that everyday people like me, if we lower company tax rate, we do lower unemployment, et cetera?
KEN HENRY:
I really don't know. I think more likely, though, we can, as the Treasurer just said, we can find common ground on at least other elements. Now, that might involve a cut in the company tax rate in order to, obviously, secure support for other elements, but it does seem to me that there is enough common ground in this discussion for something useful to emerge in the space of business taxation, but I don't think it's going to be just one element, I don't think it's going to be something straightforward as well as the company tax rate. We're not going to get consensus on that.
ALF CAPITO:
There is common ground in what is being said. Coming back to something that Dave said, this notion about focusing on those people struggling in the economy, because at the moment our country - some parts of the country is bathed in sunshine and others are under floods, people being swept away. So what we've been talking about, if I can just put the company tax rate to one side, but the notion of assisting an economy transition, assisting businesses who are transitioning from having to ditch one sort of service line and start up a new one, innovate their products, introduce a new partner, to do something different, I think that's what we've got to focus on in the short-term, but I think also these measures we talk about in the short-term may also be long-term issues.
The notion of increasing the ability to use losses and, therefore, encouraging people to take risks, is not just something we desperately need now but I think something that should be part of our tax landscape going forward. The notion of helping companies with getting an immediate deduction or a faster deduction for transition costs is not something we should just do now because we really need to now, but something going forward may be a long-term feature.
We've put in a submission that really didn't deal with the long-term stuff because there was enough submissions on the long-term stuff, but our submission is basically on three items: losses, about this black hole in transitions, but also about this notion that Henry writes about, allowable capital equity and, again, to go back to Dave's point, if you're looking at transitioning a corporate tax rate to a lower effective rate, because the US has got a big 35 per cent rate and a lot of these countries look like they've got a lot of high tax rates, and then if you go to their effective rates they're quite low.
One way to do it and target it is this notion of allowable equity, because you're trying to target those companies that are struggling as opposed to the industries that are making super profits. I think that's a dialogue and a discussion and some work that should be done on that around this whole economy transition, including the notion of do we go a lower corporate rate or do we go something such as an ACE.
PAUL CLITHEROE:
Paul.
PAUL HOWES:
I just want to pick up on a couple of points. Peter's justification for why he opposed the issue is that it was a distribution of wealth. That's a good thing. That's what taxation, in essence, is. When we're looking at the current problems with business taxation in particular sectors, and no-one can deny the problems that our trade-exposed sectors are feeling at the moment, there is justification for removing the burdens on those industries and boosting up participation and productivity of those sectors, but there isn't any ... you have 200 billion dollars planned investment, a projected 400 billion dollars of projected investment over into the future. That is not a sector that has any difficulty attracting capital.
What I'm interested in hearing is whether we can use those sectors that are doing well to create incentives, like accelerated depreciation, in the regions that are having difficulty attracting investment and being viable into the future, manufacturing, of course, being the key area of the moment that has been receiving, but other areas like tourism and others affected by the high dollar. That's why a flat cut and tax reform, I mean it's a cut and if you're going to reduce it from one rate to another, it is a cut, a bit like me saying having a pay increase, it's not a pay increase, it's a pay reform.
Across the board doesn't make sense to me because I do think we need to mobilise the capital that is available in those sectors that can afford to pay to make the services boom work for all, not just the west but also to the south-east of the country. There's a whole bunch of areas that tie into here. I was interested in what Steve Martin had to say about the sovereign wealth fund and it's something in principle I'm attracted to, but we should also accept the premise that these things cost money and where does that come from.
We also should think about what vehicles we have available to us to fill that gap. In terms of a sovereign wealth fund, at the moment we have 20 million plus superannuation accounts in this country with over 1.3 trillion dollars in investment. This is something that we haven't used properly. There is an argument for a form of the way we need to use the superannuation to make it work better for the investments, a sovereign wealth fund would be a fund and has been funding other jurisdictions. Whilst in the constrained time in the budget, these are the types of discussions we should have, how to get that superannuation to fund those things.
PAUL CLITHEROE:
Grattan Institute, can you just stand
? I want to come to you. I know you proposed two rates of tax and so on. Can I come to you after this question? Can someone get a mic to Saul, please? Sorry Jennifer.
JENNIFER WESTACOTT:
I just wanted to reframe the problem here. So we started this task without actually a self-interest task. We said what's the cost and role of the tax system, what is going to be government, so we recommissioned the report and looked at state and Commonwealth outcomes. We started this in the national interest. What does the tax system have to do to maintain. Our view is that the current system and the current approach to government expenditure is not adequate. If we start with that proposition, that's the first thing to solve.
The second thing is in the short-term we're going through this transition in the economy that everyone has covered well and the question I guess we're asking is why wouldn't you take every action you could to lower business costs, lower transaction costs, make it easier for capital labour to move as the economy transitions and take a package of reforms there. So company tax rates is one thing, treatment of losses, what is the way to actually support the transition underway but most importantly starting to plan for the long-term challenge of paying for the social safety net. That's really what we're arguing.
By all means let's have a conversation beyond company tax rates. We haven't even talked about the productivity-sapping state taxes that are hurting our productivity so badly. That's the package of things that we should be talking about. How to we lower costs, how do we make it easy for capital labour.
PAUL CLITHEROE:
Mr Oliver, you have been surprisingly quiet there. Are you trying not to annoy me? What are you thinking?
DAVE OLIVER:
I think it goes back to the first point that I made, that we acknowledge that there is significant transformation occurring in this country and you will not fix it by just simply applying the universal cut right across the board. As Paul has alluded to, there are some sectors of the economy that are doing quite well. There are some sectors in the manufacturing industry that are doing quite well. But there are areas that are under significant pressure.
It's a bit hard to in this forum. We're not going to come up with all solutions if we're just focusing on tax because there are other elements that need to be addressed. I always like to refer to one of the best examples of recent times is what happened in our automotive industry. At a time where we had car plants closing around the world, we had government programs in place where there were incentives to attract investment, where we had new car plants and new models being announced at the time when the automotive industry worldwide was shrinking. That was because it was a targeted measure to a specific area designed to attract investment and it worked, in the same way that we are hopeful that it will work in regards to building a clean technology industry in this country.
So it will be a whole range of things. Yes, the taxation system, we will need industry policy, incentives to attract investment to be targeted, skills, infrastructure, we will deal with the productive issue, not the productivity false debate that has been around at the moment, about IR. So they're the areas about trying to be more specific and targeted with a whole range of issues, taxation system, both government intervention and industry as well.
PAUL CLITHEROE:
I think we're all aware how much tax changes can cause behaviour to move rapidly. You might have seen on the weekend that Norway has announced a fat tax which is increasing tax on saturated fats and as a result they have run out of cakes and ice-cream due to panic buying in supermarkets, and if you're wondering, that is true. Saul.
SAUL ESLAKE:
I didn't always support the idea that Australian people should get a fairer share of the returns from the exploitation of resources which they owned, especially during a period when China and India were willing to pay such extraordinarily high prices to gain access to those resources, but it struck me that the Henry Review's recommendation wasn't the option subsequently taken up by the government to achieve that, and were extraordinarily complicated. As it turned out, it was fairly easily turned over by a political process.
What I've suggested is simply an alternative of achieving the same objective, that the government could stipulate for as long as the mining boom lasts, which it can do by reference to commodity prices, that the rate of company tax paid by mining companies, which again you can define, could be some higher rate than the present one and that the revenue thereby derived should be used to stipulate that companies who are not in the mining business pay a lower rate by an amount that, in effect, makes the whole thing revenue neutral.
There's a precedent for that in the way that between 1933 and the early 1990s, the company tax system drew a distinction between income produced by goldmining, to which the tax was zero, and income produced by everything else, for which the tax was whatever the tax rate was at the time. It would seem to me that doing something like that would be much administratively simpler, would get around the arbitrary exclusion from the MRRT from other highly profitable mining activities such as even at present prices, goldmining and other mines that might happen to be particularly profitable, and would actually be transparently seen as fulfilling the objective of redistributing income from areas of the economy that are doing particularly well because of entirely external factors that China and India are doing, and assisting those industries that are on the other end of that process to survive through that period.
PAUL CLITHEROE:
We do need to move to tax losses and equity and so on. Michelle, in particular, you've been waiting patient. My apologies. Michelle Wilson.
MICHELLE WILSON:
I wanted to talk about tax rates aren't important to small businesspeople. It makes a big difference, consistency in the way tax policy is applied. It's very important that we don't have with every change of government new tax policy coming in because it's a bit of a roller-coaster every time that happens.
The other thing that we find is difficult is where there's a delay in the implementation of a policy. A media release comes out, and 1 July 2012 is a classic example of that, where people are now delaying decisions to buy vehicles because the $5000 immediate depreciation doesn't come into effect until then or they're not buying a new computer server because it's a $6500 write-off that is available at that time. We need to be very mindful of how we're creating spikes in the economy with the tax decisions that are being made.
And just on the definition of small business, we have very inconsistent definitions of what a small business is. For tax purposes, it's a turnover of less than two million dollars. Whereas if you look at the tax office small and medium enterprise group, they look at businesses between two and 250 million dollars. So basically under two million dollars are micro businesses, and I think by putting that artificially low capital on businesses you're actually holding people back. Unless we increase the cap or get rid of it altogether and if we look at the CGT concessions, put a dollar value on the value of the transaction that can comply with the concessions if you meet all of the other equity and distribution criteria, but don't hold small businesses back because we have this artificial line in the sand of only two million dollars. That really needs to be addressed.
PAUL CLITHEROE:
Thank you.
PETER STRONG:
If I can add to that. One of the problems is that the people who are complaining about the system designed the
system, so it's big business, big unions, it's big government that signed the system that doesn't take small business into account. They say they have to do it or they're stupid. You hear from accounting firms and they say the problem is they don't understand it, they can't understand it and the debate this morning has been about big macro issues by big business associations, by big councils and big government who designed the system in the first place. Maybe they should leave the room and the small business people can sit down and design a system that works and if I can refer to the speech by the Prime Minister, which gave great heart to the Council of Small Business, where our Prime Minister said an outcome for a worker, aspiration for a worker, is a decent job.
Also aspiration is a decent small business. That's putting a human face on small business you don't see. There's no human face being put on small business today. It's a group of people. They're baristas, truck drivers, bookshop owners, people that work at home, look after their kids and try and run a business from home. They are people, and to hear other accounts of people talking about them as people is a wonderful thing and we need more of that. We need more recognition, and big business will fit in.
PAUL CLITHEROE:
I think we will hear more about people. There's a request, as you're speaking, just pull the microphone a bit closer. Your strong voice is fine but some of the people at the back are having trouble.
LOUISE TARRANT:
It's with some temerity I will challenge Henry, but I must say when you made the comment earlier that the consensus is that cuts in company tax benefit works, I must say I took a very deep breath and couldn't quite reconcile that with the experiences, I guess, where the members of our union sit in the labour market. I guess I just want to talk very much about individuals, and if you reflect on the last 20 years or so, what we've seen is economic growth in this country, we've seen profits doing well, we've seen productivity increases, all of that people might argue about how much and whether it's enough, but it's certainly all been positive, and yet for many of our members in the labour market, what they've seen is a growth of low income, insecure and quite poor-quality jobs.
So when people talk about benefits, it's not an automatic assumption that that will then be inferred and carried on to everybody in the community. We can't just assume you do something and there's going to be economic gain, that it's going to be fairly shared, and that's what the tax system is about, is actually ensuring redistribution is not a dirty word.
I guess the bit where workers have gained in our industries over the last 20 years or so has ironically been around the minimum wage, around the awards, all the things that have been incredibly contested by the same players in this room that are advocating for tax cuts. They've been the ones opposing those initiatives. So I've got to say that at the level of lack of trust from - I know if I went and sat in a workplace kitchen at the moment and talked to members about these issues, they're not going to be incredibly enthusiastic about giving tax cuts to the bosses, I've got to say.
I leave with the question that I think Wayne posed to all of us this morning, cut these taxes and what else has to give? From my point of view, what has to give is either some very important services that are important to the community and to business or it comes onto the backs of workers, many of whom can't pay.
PAUL CLITHEROE:
Workers and small business. David, you've been waiting a while. David Lynch from the Australian Financial Markets Association.
DAVID LYNCH:
Thank you very much. I work in the financial markets area. We've got a mix of domestic and foreign players in companies operating in those markets. One thing quite clear from working with them is that the tax system needs to be competitive to attract business into Australia. There's a range of business activities in this area that can be conducted in locations like Singapore, Hong Kong as well as Australia. So this is tax matters from that perspective which is what Alf touched on in the discussion.
There's another point which is that Mark Johnson for the Australian National Centre Forum demonstrated that Australia has a very strong capability in financial services. Part of that capability drives from the quality of education system, the quality of the employers that are available to businesses that want to conduct business [indistinct]. Another point that Mark also made through his report was that well-targeted measures can deliver employment and income opportunities in Australia, you don't always need to have very expensive or very large change in this system to deliver very helpful and productive outcomes.
However, there is a question, whereby the capacity of our system always delivered in a timely way some of the small changes that [indistinct] to some degree that touches on a point that Michelle made in relation to small business and the question of having announcements made and waiting a long time to see the effects of those affected. Those issues go to the costs of doing business in Australia and if they can be addressed in a more efficient way, I think we can achieve significant progress.
NEW SPEAKER:
[Indistinct]
PAUL CLITHEROE:
[Indistinct] it isn't a laughing matter. Small business is an issue for us, things like financial literacy and teaching small business about ways to use superannuation. Very often they're working so hard with so little resource to do their job. Paul would love you to come and talk to us but we don't have time. It really is a pressing issue.
Ann-Maree.
ANN-MAREE WOLFF:
A couple of speakers now have indicated a preference for the mining industry to be subject to further taxes or higher taxes in order to fund structural adjustment in the economy. I suppose my first question I pose, and I don't know the answer to this, is how efficient the use of taxes would be to actually force structural adjustment in the economy in the first instance, but in terms of using the mining industry to pay for those mechanisms of structural adjustment, I'm assuming that they're predicated on a premise that the mining industry is not paying its fair share now and as you'd expect.
I'm going to defend that presumption by pointing out that the mining industry will pay about 23 and a half billion in taxes this year at a 41.5 per cent tax rate. When you add the taxes on top of that that's an extra five to six billion a year that the mining industry will pay in taxes.
I'm sure that everyone will agree that the MRTT process was quite less ideal. The fundamental issue with the concern was that the rate of the tax, and I think that the argument that the industry put to government and was accepted by government is that there's a point at which you can't cross before you start impacting investment. What I find interesting about the mining industry to pay more and higher taxes is the fact that we've spent a lot of the morning talking about how important the industry is to the economy and to the future growth of the economy and how important it is to encourage investment.
I suppose I would just simply caution to say that the mining industry is now at the very top end of tax rates globally and increasing that any further it doesn't take a rocket scientist to work out what the consequences to investment would be in that type of scenario.
PAUL CLITHEROE:
That's a fair balanced view. [Indistinct]
TERESA DYSON:
Trying to take some of the discussion away from purely focusing on rate, I think it has been raised by a few, perhaps there should be a discussion about structure. We approached the whole submission that we put in on the basis of principles of simpli
city, achievability, equity and transparency, and in relation to business tax, the areas that we thought structurally could deliver some real change going forward, and in that sort of 10 and broader year framework rather than just looking more closely at the rate in relation to the use of losses or the treatment of losses and also funding.
In relation to the losses perspective, it's an acute issue at the moment in relation to the volatility that we've had in the economy and the fact that so many people find themselves in losses whereas previously they haven't. The carry-back idea that was in the Henry report we fully support. Our submission does extend to a two-year carry-back which we think is achievable again and equitable, and limiting it to franking credit balances means that there's an affordability level there that we don't come across in arguments about cutting rates in one sector and trying to find the savings elsewhere.
We're also finding that because of the need for businesses to change, the existing same business test is very, very difficult to apply. So businesses are in situations where there have been ownership changes and because of the need to restructure to get back on track, they need to make changes to their businesses, in some cases very fundamental, and perhaps the test should not apply in those, but in a lot of cases they're making changes that the current interpretation of the test would not allow them to carry those changes forward. That is relevant to consider as well as the present value of losses.
So we've seen in a couple of regimes now, certainly in MRRT and the proposal in relation to infrastructure, to a carry forward promise with a current uplift. In terms of this sort of discussion, it's nice having a discussion about rate, but if there are structural things we can take out of it, that will lead to a more robust framework and regime going forward in the business sector then that would be useful to bring to the table as well.
PAUL CLITHEROE:
Ross Greenwood has been patient. Could we switch to these issues, the treatment of company tax losses and also the longer-term directions around equity financing. I think we've had a really pretty good discussion here and I would like to tighten it up a little. Mr Greenwood.
ROSS GREENWOOD:
The most radical thing I've heard here today, and I'm concerned that it was Ken Henry who gave it, was the notion that its expenditure in corporates that should be taxed and not income. There has been no radical or creative thought. It is almost as the system is as it should be. As a result they had a sectional interest that have all argued their points. I've been disappointed by that, that there has been no creative thought on how to actually encourage small business.
The way in which a two-speed economy in this country has been dealt with is about imposing an additional tax on one sector of the economy which admittedly is the fastest-growing sector of the economy now, but may not be in the future as well. Why not think a little bit radically about corporate tax, think about the vast majority of the small businesses don't care about the tax rate because they don't make any money and the fact is they're the people who would employ and still have to pay the payroll tax, stamp duty, all of these taxes sitting out there imposed upon them.
The whole point of trying to think radically about corporate tax is to be thinking about the tier factor of tax. That's not what we want because we're trying to get rid of that, but surely one way of being able to deal with the aspirations of small business, yet trying to call it a two-speed economy without it being focused on one industry, is to contemplate the tiering of corporate taxation because ultimately corporate taxation is a pot of money, the money goes into the pot and you can throw into there payroll tax, any stamp duty from the states as well, reallocate the money back to those states. You would have a larger pot of money from which the money could be allocated.
I've only been disappointed this morning that there has been conservative thought about the way that the system works as distinct from reform that would not add to the costs of government but at the same time could create the aspiration for small business while, if you like, also addressing that two-speed economy.
PAUL CLITHEROE:
Let's just jump into Ross. Two things, taking a step back from the wise words about being more radical, we certainly are being very conservative. I did chuckle a bit about all the fuss in the media about GST not being mentioned. It has been explained but it's been said feel free to raise whatever you wish. I do think in terms of areas of change you've spoken already about the company tax losses.
Professor, I notice in your submission you also talk about the tax deduction allowance. Could you step us through that?
JOHN FREEBAIRN:
The idea of the allowance of corporate equity or the expenditure tax is that the return on capital has really got two components. One is it's the sort of normal rate of return. What have I got to give up to consume tomorrow. Then above that is essentially an above normal rate of return. That's partly a read on natural resources, but it's also partly a monopolistic-type rent. It's a short-term rent that you've developed a new product that cashes in.
So the idea of the ACE system is that you would essentially lower the tax rate on the normal rate, which is the stuff that flows around the country, and anything that is above the normal rate of return, whether it is because you're acting as a natural resource, or you've got a new tech breakthrough, you get hit with that. That would be a rate that's much higher than 30 per cent. It might be more towards 40 or 50 per cent.
Now, there's a challenge in doing all that: how do we design it, because it's got to interface with the rest of the world; so what are going to be the withholding rates on international investment and so on; what is going to be the rate that we charge residents when their dividends come; how do we transmit this stuff from the current classical corporate tax system of imputation to this new system. Those are all challenges. Who will be the winners and losers; how much will we stimulate investment?
So I think this is a kind of a framework that would take quite some years to work its way through. Just to indicate to everybody, I'm a rent seeker too because I'm an academic and we think we should get some money to study this stuff. So I'm in the debate with the rest of you.
I think it's an exciting idea and it has been tried in a couple of European countries, so it's not as if we're breaking new ground, but it's not something that is going to be done tomorrow. There are a few things to be worked through.
PAUL CLITHEROE:
Anything to be said on that? Any other points you want to make? We're swapping around two issues. I'm happy to take comments. Ross, I'm hoping everyone is pondering the great breakthrough that you're looking for.
TERESA DYSON:
In terms of the treatment of losses, we certainly recognise that there is a strong need for integrity measures. You don't want to create a situation where there's ability to trade in loss companies or anything like that, but the rules that we have at the moment are very restrictive and very tough on all businesses and probably particularly small businesses. The innovations, I suppose, to the current model would be the carry-back. A lot of other countries have that. It could be well managed in implementation by limiting it.
So as we've said, and I think Henry did as well, limiting it to franking account balances, that may well require a shift in the way that companies declare dividends. They may be mindful going forward that they want to keep some balance in their franking account for future years when they may want to pull back on the amount of tax that is sitting
in the balance. So it is something that would require a structural change, both in the tax system but as well as in corporate Australia, and the loss position as well severely impacts on trusts.
So at the moment we've got very restrictive, much more restrictive rules in relation to using losses that sit in trust and a lot of businesses do operate through trusts and at the moment it's diabolically, virtually impossible to be able to use losses from one year going forward through trusts. So that's the other area that really needs a lot of attention in relation to the loss position.
PAUL CLITHEROE:
Ann?
ANN SHERRY:
I'm contemplating how do you give a radical proposition when everybody is struggling even to understand the bits of it that touch it. I think that there's a piece of this which is how do you get the current system simpler, lined up so that the policy that the government talks about actually flows through the tax system. If I give you two very quick examples on that.
FBT on employers wanting to support employers to use public transport seems completely at odds with the public policy position that says we want more people on public transport, or biofuels for aviation is excluded when we want biofuel for everything else. So I think for me the radical proposition is let's actually get the system lined up with the broad objectives, the sort of Australia we want to be in the long-term, and simplify lots of the bits and pieces.
Payroll has come up for mention a couple of times. We talk about the creation of jobs yet we know that we've got a tax on jobs effectively at every state government level as well. So how do you pull together the big policy proposition back through the system and then let's talk about how you might recreate it in the more fundamental way, but I'm not sure that you can when that complexity gets in the way of even working out what the current system is.
PAUL CLITHEROE:
We all want simplification, make it happen. Now, Charles from the National Farmers Federation. You're an important man. Lunch is coming up shortly.
CHARLES MCELHONE:
From our perspective, this whole debate, we're a bit concerned about the looking at individual issues in isolation. It has been raised on a number of occasions throughout the morning, look at the company tax rate, making modifications on those issues. From our perspective, the reality is that we're in a competitive market for resources, let alone capital, and that's not just between sectors, but it's also within sectors. We just urge caution when we're going through this whole process of making sure that we're looking at the broader suite of measures.
Peter has mentioned from the Small Business Council perspective, looking at the whole range of issues that it's coming through. We've heard from Dave earlier as well about looking in the context of what's actually making us an attractive investment option across the board. It's not just about the taxation rate, but it's also about those infrastructure developments, about the regulatory reform agenda as well.
So from our perspective we urge caution about looking at individual issues in isolation and I think that's a point that has been reinforced earlier this morning.
PAUL CLITHEROE:
Thank you. A couple of people, Ann-Maree, speaking of ageing, we will come to you [indistinct].
ANNE MARIE O'CALLAGHAN:
I just want to follow-up on Ross's comment about tiered tax system or tax rate. Also what Dave has been saying in relation to a targeted policy, targeted to industry, but I'd also like to see targeted to regions. Most of the natural resources are located in rural and regional areas and there's certainly an opportunity there for businesses and labour to move to those areas and to locate in those areas, and I would like to see a strategy which encourages people to either start up businesses in these regions or relocate to those areas, and the incentives to do so would have to be significant to encourage that type of move.
CHARLES MCELHONE:
Just on that very issue, I couldn't agree more with that. We talk about competition for limited resources between and in sectors, but we're also talking metro-regional, and the inequity of living and working and doing business in regional Australia is an important issue for the National Farmers Federation as many. There is a tax zone rebate system in place at the moment, but even the Henry Review ignored it and it's out of date, it needs to be relooked at and revamped to make sure that there is a real need for it and there is some real pressures that are occurring there as again the competition for labour, land and capital.
PAUL CLITHEROE:
Mark Smith.
MARK SMITH:
One of the things I struggled with is a whole bunch of recommendations that were made in the Henry Review, but what I struggled with to determine is what the actual economical benefit of each of those initiatives will be. I suppose off the back of that, what the costing is. So what would be, I think, really useful to push this debate forward also from perhaps the labour perspective, is to understand what the flow-on economic impacts would be.
For example, if we did reduce the company tax rate, what the cost would be, what time horizon would it take for those economic benefits to flow through, because at the moment I look at all these initiatives and they seem to make sense, but there seems a process that we can't afford it at the moment and there's a question of prioritisation. I would be really interested in furthering this debate on a number of these initiatives to actually see what the cost is and what the economic benefits are, so over some time horizon what the net costs will be.
PAUL CLITHEROE:
Frank Drenth from the Corporate Tax Association of Australia.
FRANK DRENTH:
Thanks Paul. Just a couple of points. One on the loss issue, that is one that has been around for a number of years. It's certainly not radical. A number of other countries have introduced it and the Global Financial Crisis has certainly put that into sharper focus and it would be a good policy for the government to take up. It would reduce the corporate tax rate.
Jennifer did make the comment right at the outset that there may be some scope for financing at least part of the costs of reducing the corporate tax rate by looking at existing features of the corporate tax system. I'm not saying it would be fully funded, but I think maybe we should go through that process away from this place and we might end up getting a lot closer than we think we can without wandering off in class warfare issues which is probably not necessary.
It's quite appealing because it will go some way to dealing with the two-speed economy because of exemptions on your normal return on equity. There are a lot of companies doing it tough at the moment and there are losers sitting on the other end of the table. There are a lot of wrinkles that would have to be sorted out, one of which you would need to think about whether you want to be doubling your bet on commodity prices because we're already been through the company tax system and [indistinct] pretty reliant on what's happening with commodity prices.
If you put high tax on profits through an ACE it would fall on mining or petroleum companies and other areas. You need to think about Australia as a place in the global economy. There are issues around inbound investment. If you are charging global companies less, you might be handing over tax from ACE to the IRS where there is a [indistinct]
So there would be a lot of issues to consider, but it's certainly worth looking at and it could be worth a small investment in people like John to study it.
PAUL CLITHEROE:
Thank you. Margaret, Australian National Retailers Association.
MARGARET OSMOND:
Just to return to something that was mentioned a number of times around the room, the need to recognise that some businesses genuinely are in the slow lane and I think it would be fair to say that retail is in that slow lane and has been for quite some time, regardless of whether we are large or small. While we're the subject of the Productivity Commission Review at the moment, which is looking at a range of issues, clearly there are some taxes which are not specifically business that are having a huge affect on us, things like the low value threshold on imported goods. It's a difficult subject to grapple with, but it is having a huge impact on any number of retailers in small and large sectors.
The other issue is whatever does come out of the Tax Forum, there needs to be a sense of certainty. We have nervous consumers and flagging business confidence in those business areas being affected in the retail sector. We need, returning to Ann's point, to understand what is going to be the future path. We need some clarity here so that people aren't left with an ongoing sense of uncertainty about the tax system.
PAUL CLITHEROE:
Thank you for that. We've got the accountants world over here. Are you waiting to talk about equity and deductions?
NEW SPEAKER:
Yes. Very briefly, I agree with everything that Theresa said. The Prime Minister and Treasurer have made it very clear that whatever we're proposing has to be revenue neutral. If you can't pull money out of the system, then there isn't any money to pull out of the system. When we're talking about things like loss carry-backs, whether we can't think laterally about targeting these concessions and making them available maybe to particular industries which are especially affected by the current dislocation that is taking place; in other words, it ought to be targeted to, if we don't have enough money, to industries which are impacted on by this dislocation and not simply made available to companies because they happen to be suffering losses. So I think that's worthwhile thinking about.
PAUL CLITHEROE:
Going to your neighbour.
NEW SPEAKER:
Basically to bring the focus back on small business, as already stated, the company tax rate is not a big issue. If you take the premise that small business risk capital and the costs of compliance is real, and as accountants we see it every day, it's the disproportion of costs compliance that is the issue here. Given the business income, the invested capital, subject to miscompliance, just the proposal that small business income is subject to a preferential tax rate.
I know that there's a lot of small business concessions in place. Some of them are not really effective to small business when you're looking at the reduction in company tax rates for business, again it's a non-event. The biggest and best one is the small asset write-off. The government is about to abolish the ... offset so the machinery is in place to put that proposal forward and that is a rate of tax that applies to small business income. The definition is already in the Tax Act. Unfortunately it hasn't been indexed but it's still at 2 mil and that will probably be a good place to start for some preferential tax stream that applies to the small end of town would be something that I think should be considered.
PAUL CLITHEROE:
James MacKenzie.
JAMES MACKENZIE:
Thanks. If I could make one observation. I think the elephant in the room we haven't discussed is that the Prime Minister clearly laid out the opportunities and the challenges and this is not going to be something that will be done in one political term, and she also made reference to the fact that we have achieved a lot in this country over the last 30 years. A lot of that has been achieved with some form of bipartisan political support. Unless we get some of that support to take advantage of the opportunities we have, we're not going to get anywhere. That's just an observation.
If I can follow that with a suggestion, one of the things that surprised me when I was preparing over the last couple of days for coming here and engaging with some of my former partners and the people who advise me was just how, and I'm not blaming the tax office and I'm not allocating blame, but just how rancid the relationship between those who deal with the tax authorities, the Australian Taxation Office, the advisers and the corporate community has become. I can remember back in my days in practice, which was some time ago, the relationship between the tax advisor and profession and the tax office was functional, it was efficient and it was quite conclusive.
I think a lot of things went off the rails and I can understand why the culture has changed, but I do look at the inefficiencies that come from the sorts of examples Mark gave, from the costs of compliance that have come with the taxes that have been introduced over the last 20 years and legislative anomalies. I was surprised that the companies that I'm interested in that were highlighted to prepare me to be able to talk.
It would seem to me that something that could be thought of is the way that the tax office governance system works and could be revisited. We've got an inspector-general, an Ombudsman, Board of Taxation, Commissioner of Taxation, yet it's turgent and formidable the processes that business has to go through from a transactional perspective. I'm talking about major and minor small business and big business transactions purchases and sales, the difficulty in getting the rules, interpretation inconsistencies, they are a drag on the ability of the Australian economy to respond to the challenges and the opportunities that the department has highlighted.
PAUL CLITHEROE:
I think the throw here is fairly obvious, so ...
NEW SPEAKER:
It's not. It's not only to the tax office.
PAUL CLITHEROE:
This is good stuff. I'm looking for a bit of debate, okay. So Michael, maybe we let the foxes into the chicken coop and kick them out again.
MICHAEL D'ASCENZO:
I think the bipartisanships is a good point. We try hard as an ATO to create very close working relationships. In fact, when the gentleman was speaking, Frank said is this the time we should be shaking hands. I mean, the reality is that there is a very good relationship with many people in the profession in representative groups. If there's ways to improve that, we're happy to listen.
PAUL CLITHEROE:
Chris, did you want to add anything?
CHRIS JORDON:
I think we have to take a relatively mature approach to the relationship with business and the tax office. We've heard from small business commentary, a number of times, about how tough and how complex dealings are, and I think that is a fact of life. Point me to a simple tax system in a modern industrialised western country, point me to one.
PAUL CLITHEROE:
That's Ross's radical challenge, how do we fix it.
CHRIS JORDON:
That's why I said let's move away from the notion of the rate and actually look forward and see what is a realistic framework in 10 or 20 years time to carry us forward. It might be quite radically different from now. I don't know, because I'm not aware of any simple system, I'm not aware of any particular country where the relations between business and the tax office are just wonderful. There is always friction there, and so let's be realistic. Whether you have another board or another body overlooking it, that's a matter for another time, but various people were mentioned but you left out the auditor-general. All bodies have input in there, so throw another one in, if you like, but I'm not sure that that will make any radical differences to that friction that should be there in the
system.
The complexity that we heard about in small business, the board of tax did a report on the compliance costs to small business a few years ago and the results were actually quite surprising. We were expecting a lot more, that if you just fix this aspect of the federal income tax system it would be very useful. I say it was surprising because the results showed that it was a combination of a whole lot of issues. It is tough being a small business, it is tough finding and maintaining a customer base, but what we found was it was really things of concerns with the state issues of OH & S, payroll tax, workers compensation insurance, dealing with local governments. When it came to the federal taxes, that's not a problem, I just give that to my accountants. The accountants will say that they've got problems in terms of the complexity, but the small business says we just give it across. It's the combination of those that cause the problems.
Some of the problems with complexity of small business is self-imposed. People say "I want a company because I want limited liability. By the way, I want a trust as well because I can split my income. In fact, I want a company as a beneficiary of a trust because that enables me to hold some income at 30 per cent rates rather than 45". You then get the problems that Mark says. "I don't want to leave it in the company because I need to live off it and reinvest in my business. By the way, I might throw a partnership in there as well. I might have a partnership, a trust, a company as a beneficiary of that trust".
So should we be looking at sort of designing an entity that has some of the attributes but you've got one of them. Maybe for a small business, whatever the definition of that is, you have an entity that gives you limited liability, allows you the flow-through that a trust does but eliminates all of the problems that you have.
PAUL CLITHEROE:
How would tax partners eat? Speaking of which [indistinct].
MARK GOLDSMITH:
Handling the federal tax compliance burden as described here is exactly what you're talking about. It's a tax. It just happens to go to the accounting profession. You end up with that cost and you hand it over to them. It's now $300 an hour. It merely strangles you and to turn away from this, exactly the point, which is the way the design is designed at the moment for the average small business, he ends up with a company, a trust, a partnership, all this other stuff, and the point about this is in the same way as if anything was this regressive in the personal tax system, you would be out there in outrage and rebellion.
I think there's a whole series of reasons why the small business representatives should be up in arms about this and should be pushing the government for a change and to turn around and say "It's not a tax because I pay it to my accountant rather than I pay it to the government" doesn't change the fact that it's an absolutely huge impost for small business at the moment and it needs to get fixed if you're trying to find some way of digging yourself out of this two-speed economy because the place that we're going to find the solution is in small business and innovation.
PETER STRONG:
If I can say that it amazes me that the people heavily involved in designing it and has said give it up, it's too hard, it's not too hard. You can just do it like that but nobody wants to. You [indistinct] come to my shop and I'll sit with you for a couple of weeks and you will discover the world of small business. It's not about which structure we've got. Most people don't have a structure. Most people are just individuals driving a truck, running a solicitor's firm in a country town and they choose not to have a structure because they're clever enough not to do that, there might be accountants somewhere.
These are people and you can't say, "Get over it and do some work" to anybody. Especially if you're asking these people to collect your money for nothing, which is what we do. We can take this out of many parts of the taxation system, we can listen to Ross Greenwood and what he is saying makes sense, and we can listen to other people from the taxation system, but don't say "Get over it".
PAUL CLITHEROE:
Thank you. [Indistinct]
ROSHEEN GARNON:
I think the debate to date has been interesting. There is real challenges for us. Standing back and thinking about what the system should look like in 10 to 20 years really does mean that we have to in some ways stand back and say, "We have got to where we are. What are the sorts of things that we can look at holistically and think about changing in a consistent way that would make a real difference?", and so Chris's point about is there a way for small business to come up with a methodology that would give us an entity to allow some flow-through taxation, some limited liability, stand back and really think about it from scratch.
The challenge we've got, though, is every time we tinker with this system there is a winner, there is a loser. Every time we tinker with it, we have to add words to the legislation. I think it is time that we have people come together and really participate in deep dive on some of these issues.
One of the points that we haven't talked about is how we make Australian business competitive in the region. I think it really is important that we sit back and think about what government can do to help business immediately. One of the things we haven't talked about is the differences you get for Australian business, working with different countries across the region, the inconsistencies through the double tax treaties, the inconsistencies we get across Interest Withholding Tax, Royalty Withholding Tax, depending on which country you're dealing with and the impost that that can put on Australian business.
We do need to be able to move far more quickly around some of those treaties, we need help from government, particularly as we deal with other developing economies where their governments are only starting to get to groups with some of the detail that we're talking about in our tax system, how we help them to understand what our issues are, how their tax system may not equate, have the same sort of principles, how we deal with those to remove barriers from our businesses, being able to do businesses across the region.
PAUL CLITHEROE:
Thank you. Now, we're rapidly running out of time. Michael, you've had your mic on. Please.
MICHAEL JOHNSTON:
[Indistinct] in terms of tax administration, just going back to James' points, I mean from an Australian perspective we judge by virtue of both our tax policy and the complete tax administration. I think we do have very competitive tax administration in many respects and many taxing authorities in the world come to the Australian Tax Office to get their input on things, but equally for various elements of the business world, it is very, very complex, as other people have said, to small business, for international businesses in terms of the interaction between Australian's tax system, the administration of it and the host countries, and I think just in terms of the certainty that's available within the Australian tax environment.
The point that James raised in terms of an Oversight Board, I know that Chris wasn't necessarily in agreement with that, but a Tax Oversight Board to some extent would go to cultural respects of the tax office. There's certainly nothing at this point, in terms of the Oversight Boards or oversight institutions that deals with the tax office, that can assist the tax office in terms of getting a more business-like culture going or perhaps understanding the business culture. Most people, I think, in senior positions, or for that matter within the tax office, grow up within that organisation and therefore may not necessarily have a good perspective on the sorts of issues that businesses are co
nfronting day in and out, whether they're small business, medium, all those businesspeople in terms of their compliance pressures they face or time pressures they face in trying to do things.
So I certainly support the suggestion in terms of a Tax Oversight Board, perhaps bringing people in as you see in any revenue office around the world, IRS where people often go from the private sector into the IRS and back out, there's a good transition both ways so that there is a better understanding and appreciation of the pressures each side face with a view ultimately to try and streamline the structures and improve the interaction.
PAUL CLITHEROE:
Now, before we break, I've just got one more person. Michael, if there's anyone who has a soapbox, you will have to get off quick. Chuck, I know you were saying you come from the Australian conservation.
CHARLES BERGER:
We've heard a lot about the two-speed economy or the patchwork economy, and I've been trying to keep track. I think I counted seven suggestions for accelerated depreciation for various industries or assets. Now, some of those might be good ideas or bad ideas, but I think the one sector that nobody could claim as doing it tough is the oil and gas sector, but they're one of the current largest beneficiaries of accelerated depreciation. Folks who were around about a decade ago will remember there was a grand bargain struck, there would be a rejig in company tax rate by getting rid of depreciation.
Business, in particular the oil and gas industry, has been having its take for the past decade and got the company tax cut and they managed through legislative override of the [indistinct] to retain their accelerated depreciation benefits. In research that we have completed and released yesterday we projected that this is costing 10 billion dollars a year by 2018 due to the oil and gas industry right now. One of the quickest and easiest ways to fix some structural issues in the committee is to actually complete the reforms that we started a decade ago and get rid of these accelerated depreciation provisions for the oil and gas industry. If I'm not mistaken that might be the first revenue-positive suggestion of the day. Happy to be of service.
PAUL CLITHEROE:
What a terrific note to finish on.
Mr Pascoe, do you have a question?
MICHAEL PASCOE:
We’ve heard a lot this morning about the for-profit sector. I would like to make a call on behalf of the not-for-profit sector. The Henry Review did look at the sector and make some recommendations. The sector would really like some clarity and simplicity. It's an incredibly difficult area. We have to decide which not- for-profits are going to get tax concessions and then we have to decide which tax concessions are going to apply. The one that comes up in this area is the income tax.
PAUL CLITHEROE:
I've been promised by Mr Drum here a final quick statement.
PAUL DRUM:
Thanks Paul. Just a comment in the context of this Asian century in the two-day forum. It's very interesting how up until this point at least we've been talking about OECD benchmarking, but I think against the background of the Asian century, we really need to benchmark what we heed to do over the next five or 10 years in our tax system, not the next 20 years, against our neighbours and our competitors and our trading partners. So, for example, of course we put China in that but also Vietnam, Singapore Hong Kong and a raft of others. We need to have a look at all of those aspects.
PAUL CLITHEROE:
That is our time. Thank you for being so kind to me. Treasurer, Prime Minister, I thought their behaviour was wonderful. Seriously, though, I certainly would not pretend to be a tax expert. A range of things interested me but in particular it is this ongoing discussion of Jeff, Ken and so on about reduction in company rate taxes. Is it a dreadful thing or wonderful thing because it creates more jobs? Jeff has got a set of facts there. Do you have a copy of your information for everyone here? Where do we find that? You will give them out? Fantastic.
I do think, Ken, your comment about work being needed there is one of the issues in the debate. There may be a solution to that that helps us to make use of that. Louise, I get what you're telling us about people, I really do. So with that, thank you very much. I hope you thought the session was interesting. I thought it was successful. Thank you.
Now, very important, time for lunch. We do get underway very sharply at 1.20. Next is state taxes, then personal tax, then transfer and then environmental and social then Tax System Governance. Some of the issues will be taken to a greater level in other sessions. Those who haven't had a chance to get involved will, but for now let's get involved in lunch. Head around the curtain. See you there.