Australia's Future Tax System

Consultation Paper Summary

6. Taxing business and investment

Overview

The tax system needs to evolve to respond to the opportunities, as well as challenges, arising from globalisation. Attracting investment to Australia, directed to activities with the greatest national return, will improve the returns to Australians from working and saving.

An internationally competitive business environment is necessary to attract investment and international businesses, consistent with an objective of increasing national income. Achieving an internationally competitive business environment depends, in part, on getting the right balance of tax bases and rates.

The quality of investment is equally important. Improving the allocation of resources and investments, not discouraging risk taking, and removing tax biases that negatively affect business and household investment decisions, offers the potential to increase productivity and Australia's long-term prospects for economic growth.

Consultation questions

Q6.1 Can the tax system be structured to better attract investment to Australia in a way that increases national income, and if so how? For any given revenue outcome, what are the relative merits of broader base/lower rate (comprehensive income tax) or narrower base/higher rate (a narrow income tax or an expenditure tax) approaches?

Q6.2 What changes, if any, to the tax system would improve the ability of Australian companies to operate internationally orientated businesses? How should the tax treatment of companies and shareholders be integrated in an open economy?

Q6.3 Can the tax system be restructured to improve resource allocation within the economy and minimise operating costs, and if so, how? What changes would reduce distortions to risk taking and encourage entrepreneurial activity?

Q6.4 What principal goals should inform the taxation of capital gains in Australia, and what, if any, changes should be made to capital gains tax as a result?

Q6.5 Should the tax system provide a more neutral treatment of different financing arrangements (debt, equity and retained earnings), and if so, how? What principles should inform approaches to entity taxation?

Q6.6 Should the tax system be structured to cater for the specific circumstances of small business, and if so, how?

Q6.7 Should the tax system be restructured to deliver a more neutral tax treatment for the different forms of return on household savings and investments, and if so, how?

Key messages in submissions

The key theme in most business submissions is the need to promote increased international tax competitiveness. Submissions point to world‑wide reductions in capital income taxation, citing the steady decline in OECD company and withholding tax rates.

To achieve international competitiveness, many submissions support both reducing the company tax rate (generally by 5 or 10 percentage points) and narrowing the company tax base (through more generous write‑off and loss arrangements).

However, some submissions prefer reducing personal, rather than company, tax rates. Some non‑business submissions contest the need to cut capital income taxes. Equity considerations or reducing tax on those working is seen to be more important.

Many submissions support retaining and enhancing the dividend imputation system, while a few remain open to considering alternatives to dividend imputation.

Many submissions indicate current depreciation arrangements, particularly for intangible assets (such as acquired goodwill) are inadequate, thereby reducing international competitiveness. They also propose increased recognition of losses.

Submissions propose enhanced or new tax incentives for a range of other activities or sectors, including for small business, shipping, the environment, R&D and infrastructure. However, some non‑business submissions suggest limiting tax concessions for business.

Submissions suggest compliance costs and risks imposed on taxpayers arising from the business tax system — its administration, complexity and uncertainty — should be reduced.

A number of submissions propose considering allowing a flow‑through treatment for companies and possibly other entities, including for small businesses. Some non‑business organisations express concern over the tax advantages arising from the use of certain entities, particularly discretionary trusts.

Many submissions note that interest‑bearing accounts and assets are taxed heavily compared to other investments, with implications for equity and incentives to save. They suggest a variety of means of providing more favourable treatment for interest income.

A number of submissions raise concerns regarding the capital gains tax (CGT) exemption for principal residences, the 50 per cent CGT discount available for individuals, and negative gearing. These submissions are primarily concerned that the concessions favour the wealthy. However, other submissions support current arrangements.

A number of submissions also support stepped rates for CGT (that decline the longer an asset is held) to discourage short‑term investments. However, some express concern over disincentives to sell assets ('lock‑in').

There is some interest in considering alternative approaches to taxing capital income, including providing an allowance for corporate equity or otherwise taxing economic rents, or moving to a dual income tax system.