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- The Working Group's terms of reference require it to consider the merits of a business expenditure tax, including an allowance for corporate equity (ACE). The Working Group undertook its consideration through an examination of the economic literature, consultation with overseas academics and an examination of how an ACE would operate in the Australian taxation system. These considerations were set out in the Discussion Paper.
- The Working Group also considered international experience with the ACE. There has been limited international experience in implementing an ACE to date and no experience in implementing an ACE in a system that provides full dividend imputation. An ACE's interaction with the imputation system and how an equity base may be defined are just some of the design challenges that would need to be overcome.
- Further, full implementation of an ACE would not be possible within the revenue neutral constraint imposed by the Working Group's terms of reference with the base broadening options identified in this paper. The Working Group would not advocate increasing the corporate tax rate to fund the implementation of an ACE. Recent studies and reviews that have considered an ACE have concluded that the introduction of an ACE paid for through a higher corporate tax rate may be counterproductive.
- For these reasons, the Working Group considers that an ACE should not be pursued in the short to medium term but may be worthy of further consideration and public debate in the longer term.