Australian Tax Reform
- This note outlines “feasible” tax reform measures which the Group of 100 (G100) considers can be pursued by our Federal Government. The measures we have outlined are targeted and relatively self-contained (rather than sweeping reforms) which, in our opinion, have good prospects of being acted upon successfully by the Federal Parliament.
- Any approach to tax reform will need to navigate certain political realities, such as the changing priorities of government, the media, perceived voter reaction, the cross-bench and the election cycle. As such, successful reform in any of the identified areas will require careful persistence and a close watch of the mood of the Parliament.
- We have sought to be brief when outlining these measures, limiting our comments to a singular proposition which is then followed by several sentences of rationale for this change.
- Broadly, our suggestions for items of tax reform can be split into the following subject areas:
- corporate tax;
- employment taxes;
- Goods and Services Tax (GST); and
- Stamp Duty.
- Finally, at the conclusion of this letter we outline several measures which are more ambitious in their scope, both in terms of the political agenda they pursue and the extent of change to the existing Australian income tax system. These measures would require considerable additional thought and development. These are:
- a deduction for wage increases in excess of the consumer price index (CPI); and
- additional deductibility for wages paid in regional areas.
- We address various reform items in relation to each of these subject areas under the headings below.
- In relation to corporate tax, the various areas for reform are:
- corporate residency;
- the Controlled Foreign Company (CFC) rules;
- reporting of information by Significant Global Entities (SGEs); and
- asset swap roll-over relief.
This priority order has been determined based on an assessment of the scale of legislative change required to address the issue, the likelihood of achieving legislative reform given the current political climate and the negative consequences which arise under the current legislative position.
- Proposition: Legislate to simplify the corporate residency test by reverting to the place of incorporation as the sole test.
- Rationale: Following the High Court decision in Bywater Investments Ltd v Federal Commissioner of Taxation (2016) 260 CLR 169, the ATO have issued taxation ruling (TR) 2018/5 and draft Practical Compliance Guidelines (PCG) 2018/3 regarding their approach to the application of the ‘central management and control’ element of the residency test. The approach of the ATO to this concept is likely to substantially increase the compliance costs for many MNCs. Adopting a sole ‘place of incorporation’ test over a test which includes the ‘central management and control’ element was recommended by the Board of Tax in 2003 but further consideration of this matter was deferred on 13 May 2003 (coinciding with the Federal budget) and has not been taken up since.
- Proposition: Modernise the CFC rules in line with the OECD guidelines Designing Effective Controlled Foreign Company Rules, Action 3 – 2015 Final Report.
- Rationale: The CFC rules have been reviewed many times but no substantial reform has ever been successfully pursued as a result of these reviews. Given that the OECD have now published guidelines which can be used for the purposes of a comparison against international standards, this process has been simplified when compared with prior attempts to reform the CFC rules. Our rules continue to be a disincentive for Aus MNCs as they are perceived as relatively harsh.
- Proposition: Introduce more valuations safe harbours.
- Rationale: The increasing focus of the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth) (together “the Acts”) on valuations and pricing has added to the burden on taxpayers to seek external valuation advice in relation to the pricing of their transactions. A limited number of safe harbours are provided in the Acts and also by the Australian Taxation Office (ATO), however further measures are required to balance out the heightened demand on taxpayers’ resources. The Board of Taxation could be engaged to conduct a review to identify existing safe harbours and recommend how these could be better aligned and extended to achieve an appropriate balance between the pricing requirements of the Acts and the administrative burden on taxpayers.
Reporting of information by SGEs
- Proposition: Legislate to clarify that foreign general purpose financial statements can be lodged to satisfy the section 3CA obligation of a SGE.
- Rationale: The ATO have accepted that section 3CA of the Taxation Administration Act 1953 (Cth) permits Australian subsidiaries of multinational groups to provide the consolidated financial statements of an overseas parent entity to satisfy their obligations. However, they concluded that the financial statements must comply with AAS which will require the significant and costly task of converting, say, US GAAP parent company accounts into AAS-compliant accounts. The ATO has acknowledged these difficulties, additional costs and the risk of substantial penalties, and so has provided a one year amnesty. This amnesty should be extended to allow this practice indefinitely as a further government initiative to encourage foreign investment in Australia.
Asset swap roll-over relief
- Proposition: Enable assets to be ‘swapped’ by introducing ‘asset swap’ roll-over relief from capital gains tax.
- Rationale: By allowing tax payers to exchange assets for revenue-producing assets, Parliament is facilitating the efficient allocation of resources amounts business and optimising economic opportunity. Effectively, the introduction of an asset swap roll-over removes tax barriers business faces when assessing whether to offload assets and replace them with more productive ones. Removing these barriers enables business to become more productive, ultimately expanding the value encompassed by the Australian tax regime.
- In relation to Employment Taxes, the various reform areas for reform are:
- FBT and car parking benefits;
- FBT and entertainment;
- payroll tax deduction threshold; and
- employee share scheme (ESS) threshold.
FBT and car parking benefits
- Proposition: Remove of the current range of taxable value calculation methods, replacing them with a zoned approach designated by FBT Regulations that define the taxable zones across the country and the taxable value of parking in each zone.
- Rationale: The law has become outdated due to modern car parking scenarios and legislative reform is required to end the expansion of FBT on car parking benefits into low value areas (eg. hospitals, universities, hotels, shopping centres, airports – including park and shuttle services, etc). Since the FCT v Qantas Airways Limited (2012) 247 CLR 286 (Qantas) decision of the High Court in favour of the Commissioner of Taxation the ATO have been re-drafting TR 96/26 which is at odds with the decision. The Qantas decision highlighted that the legislative provisions do not currently deliver a result that was the original intention of Parliament, being to effectively only tax high value, typically CBD areas. Treasury may consider including a personal income threshold for the application of FBT to car parking benefits. However, this may increase the administrative burden on taxpayers in applying this threshold.
FBT and entertainment
- Proposition: Remove entertainment from FBT, leaving it non-deductible.
- Rationale: This measure removes the need to perform minor benefit exemption analysis, a process that takes many employers weeks to review thousands of lines of data at FBT year end. The Board of Tax (FBT De-regulation Committee) recommended this same measure to Treasury a couple of years back, but this recommendation was not acted upon. While this measure would represent a modest cost to revenue, it delivers a very large administrative cost reduction to business taxpayers which has the effect of delivering on the government’s commitment to improve business conditions for corporate taxpayers by lessening the burden (be that financial or administrative) on these organisations.
Payroll tax and deduction threshold
- Proposition: Remove the permitted deduction threshold from taxable wages, accompanied with a small reduction in payroll tax rate.
- Rationale: The removal of the deduction threshold removes the requirement to consider grouping, calculate the apportionment of thresholds, gather wage information from other group members and eliminates the risk of members not realising they are part of a group. It will also save State Revenue Authorities much time by removing the need to consider de-grouping applications, a number of which progress to Administrative Appeals Tribunals / Courts. The downside of this measure that small businesses will be required to comply with payroll tax obligations from day one – this could be addressed by implementing a turnover threshold (as is done with GST). Further, unlike other measures outlined in this letter, payroll tax is a State issue and so will need to be pursued with members of each State’s legislature.
Employee share scheme threshold
- Proposition: Increase the current ESS threshold from $1,000 to $10,000 where the recipient employee’s income is not (to any extent) subject to tax at the top marginal rate.
- Rationale: Currently, employers are limited to a standard $1,000 deduction on the discount provided to employees for ESS interests issued to them in a ‘taxed upfront’ scheme. This limits the incentive for employers to provide ESS interests as a method of compensating their employees. By expanding the threshold from $1,000 to $10,000 the Parliament would diversify the methods available to business to compensate their employees – in particular, this would benefit early stage businesses who are often cash-poor and in need of additional labour.
- In relation to GST, the various reform areas for reform are:
- Lift the GST registration turnover threshold;
- Introduce mandated GST recovery rates for financial services; and
- Introduce a safe harbour GST instalment rate.
Lift the GST registration turnover threshold
- Proposition: Lift the existing GST registration turnover threshold from $75k to $500k (and arguably to $1m).
- Rationale: Implementing this measure would release small business from the administrative burden of GST compliance. GST on their acquisitions would become a cost of their business (with no corresponding refund arising) but the projected administrative savings would offset this substantially. Additionally, this measure would in part combat the cash economy issue currently on the ATO’s radar.
Introduce mandated GST recovery rates for financial services
- Proposition: Introduce mandated GST recovery rates for financial services entities to replace the convoluted apportionment methodology regime.
- Rationale: This measure already partially exists in the Reduced Input Tax Credit (75% credit) regime on a variety of costs for these types of entities. Implementing this measure would put Australia in line with other international jurisdictions in Asia-Pacific (i.e. Singapore). The rate could be set differentially based on the relevant industry, for example local institutions with retail presence versus foreign banks with lower cost bases. This could provide welcome relief to an industry which is expected to see increased scrutiny and regulatory oversight.
Introduce a safe harbour GST instalment rate
- Proposition: Allow for a “safe harbour” net GST rate (eg 5%) to be paid as monthly/quarterly liability on all supplies for any fully GST taxable business.
- Rationale: This would streamline the collection of GST which could have substantial benefits in industries that operate with tight margins (retail etc) wihch can poorly support the asymmetric cash flow outcomes of the current system. This measure could be coupled with an optional annual “true up/adjustment plus interest rule” allowing taxpayers to prove the net rate should have been a lower (or otherwise) and allow for a balancing payment. This measure would also greatly improve compliance costs and allow for automation.
- Proposition: Standardisation of Reporting Requirements and Systems
- Rationale: While the 8 Australian State and Territory have significantly different duty regimes, the collection of tax across the jurisdictions relies on the submission of a baseline level of data. Each State and Territory collects different data and requires it to be submitted either manually (paper) or electronically in varying formats (pdf, web based form or secure portal transmission), which creates inefficiencies for both taxpayer and revenue and raises compliance costs. Our proposal is that the States and Territories agree to a baseline level of data to be collected and a common system, format and process for the collection of this data. This could be accompanied by wider harmonisation of concepts amongst the States.
More ambitious reform ideas
Additional deduction for wage increases above CPI
- Proposition: Allow an additional deduction to corporate taxpayers when offering a wage increase above CPI to employees whose income is not (to any extent) subject to tax at the top marginal rate. Alternatively, offer an additional deduction for salary and wages arising from new investment (possibly in association with an investment allowance regime).
- Rationale: This measure is targeted at addressing Australia’s persistent wage growth problem by incentivising offering greater wage increases to corporate Australian taxpayers. By limiting the measure to taxpayers who are not (to any extent) taxed at the top marginal tax rate the measure ensures that these benefits flow only to low-to-middle income earners.
Additional deduction for wages paid in regional areas
- Proposition: Offer corporate taxpayers an additional deduction in respect of wages paid to employees engaged in regional areas.
- Rationale: The reasoning behind offering an additional deduction to employees situated in regional areas (a concept to be defined) is to encourage corporate taxpayers to structure their operations in ways which support regional communities. Not only does this support existing communities, it also eases the burden on urban infrastructure by encouraging business to invest in regional areas (rather than in traditional urban centres).
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