WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
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Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details
New Business Tax System (Income Tax Rates) Bill (No. 1)
1999
Date Introduced: 21 October 1999
House: House of Representatives
Portfolio: Treasury
Commencement:
The amendments in Schedule 1 (which reduce the
company tax rate to 34 per cent from
36 per cent) commence on 1 July 2000. The amendments in
Schedule 2 (which reduce the company tax rate to
30 per cent from 34 per cent) commence on 1
July 2001.
The purpose of
the Bill is to reduce the company tax rate to 34 per cent
from 36 per cent for the 2000-2001 year of income, and to
30 per cent from 34 per cent for the
2001-2002 and later years of income.
The rates of tax payable by certain taxpayers,
including individuals, companies, superannuation funds and trusts
area provided in the Income Tax Rates Act 1986
(ITR Act). The ITR Act also links other tax rates to the
current company tax rate of 36 per cent. The Bill amends
the ITR Act to reduce the company tax rate, and other tax rates
that are pegged to the company tax rate to 34 per cent
from for the 2000-2001 year of income, and to 30
per cent from 34 per cent for the 2001-2002
and later years of income.
The Howard Government's taxation reform agenda
has three major elements:
-
- the reform of the indirect tax system as addressed in the ANTS
(A New Tax System) package
-
- including the introduction of a broad-based goods and services
tax levied at a rate of 10 per cent with limited exemptions
-
- the abolition of wholesale sales tax
-
- reductions in fuel excises for petrol and diesel, and
-
- the abolition of Financial Institutions Duty
-
- changes to the taxation of business entities as announced in
A New Tax System
-
- including taxing trusts as companies
-
- the introduction of a deferred company tax
-
- the introduction of refundable imputation credits, and
-
- measures affecting the life insurance industry.
-
- Changes to business taxation arrangements, which the Government
announced in response to the Review of Business Taxation (the Ralph
Review) on 21 September 1999.
On 13 August 1998 the Government announced
proposals for A New Tax System (ANTS), which included the
introduction of a Goods and Service Tax. The ANTS package set out
plans for the reform of business taxes on two fronts:
-
- applying a framework of redesigned company taxation
arrangements consistently to all limited liability entities,
and
-
- Considering the scope for more consistent taxation treatment of
business investments with the prospect of achieving a 30 per
cent company tax rate and further capital gains tax relief.(1)
On 14 August 1998 the Treasurer announced that
the Government had decided to undertake a comprehensive review of
the taxation of business on the lines proposed in the ANTS
package.(2) The Treasurer specified that its recommendations should
be within the guidelines in ANTS and should also be revenue
neutral. Some of the measures in ANTS were subsequently revised in
agreement with the Australian Democrats before the passage of
legislation to reform the indirect tax system (ANTS II). On 21
September 1999 the Treasurer announced measures for A New Business
Tax System based on some of the recommendations in the Report of
the Review.
The Report of the Review of Business Taxation
(the Review) entitled A Tax System Redesigned (the Report)
was given to the Treasurer on 30 July 1999. The Treasurer released
the Report and announced the Government's responses to the
recommendations in Press Release No. 58 of
21 September 1999 titled The New Business Tax
System. The Press Releases and other documents(3) released by
the Treasurer on 21 September 1999 are available on the Treasury
Website http://www.treasury.gov.au.
The Treasurer stated that the business tax
reforms announced by the Government represented the first part of a
two-stage consideration of the Review's recommendations. He added
that the proposed reforms were broadly revenue neutral in 2000-01
and that the Government's consideration of the remainder of the
Review's recommendations will be guided by the objective of
achieving a broadly revenue neutral outcome from business tax
reform in later years.
Recommendation 11.9 of the Review of Business
Taxation proposed that the company tax rate be reduced:
-
- In relation to the 2000-01 income year - to cent to 34 per
cent, and
-
- For the 2001-02 income year and thereafter -to 30 per
cent.
The Government accepted this recommendation and
proposes that it be implemented via this Bill.
A more detailed analysis of the proposed changes
to business taxation can be obtained from 'Proposed Reforms to
Business Taxation: A Critical Assessment of Some Budgetary and
Sectoral Impacts', Current Issues Brief No 9
1999-2000.
Rationale for Reducing Company
Tax Rate
The Treasurer provided the following rationale
for reducing the level of company tax:
A 30 per cent rate of company tax will be
internationally competitive and bring Australia's rate more into
line with the rates of other countries in the Asia Pacific region.
This will increase Australia's attractiveness as an investment
location, strengthening Australia's prospects for investment and
economic and jobs growth.(4)
The Treasurer also argued that lowering the
company tax rate would make Australia's company tax rates among the
lowest in our region.(5) This point was also made in the Review of
Business taxation:
The 30 per cent rate has structural advantages
as it will align the company tax rate with the 30 per cent marginal
tax rate applicable to most individual taxpayers.
Moreover, a 30 per cent tax rate will make the
headline rate of corporate tax internationally competitive, both in
terms of the Asia Pacific region and compared with the corporate
tax rate operating in capital exporting countries.
By providing a competitive corporate tax rate,
non-portfolio foreign investors in Australian companies can benefit
because they will be better placed to utilise foreign tax credits
available in their home jurisdictions - reducing the possibility of
foreign tax credits being lost because the Australian tax rate is
higher than their home country rates. For portfolio investors who
receive no credit in their home country for underlying company tax,
reducing the tax rate directly increases their after-tax return
from investing in Australian stocks. More generally, a low company
tax rate is a strong signal to the foreign investor, especially if
accompanied by a clear and user friendly tax system.
By increasing Australia's attractiveness as an
investment location, a lower company tax rate strengthens
Australia's prospects for investment, economic growth and jobs.
Crucial to this are the accompanying reforms to the business
investment base because they will attract investment to where it
will be most productive, not where a faulty tax system channels it.
The strength of Australia's commercial base and the long-run growth
potential of Australia are bolstered as a result.
Reducing the corporate tax rate will also enable
Australian companies to maintain dividend flows to shareholders
while increasing the levels of retained income and
investment.(6)
The Treasurer used the following graph to
compare Australia's proposed company tax rate with the company tax
rate in other countries.
An Internationally Competitive Company Tax
Rate
Source:
The Hon. Peter Costello, Treasurer, The New Business Tax
System, Press Release No. 58 of 21 September 1999,
Attachment A 'Reducing the Company Tax Rate', p.2.
The Review of Business Taxation refers to the
'headline rate of corporate tax', thereby distinguishing it from
the actual rate of corporate tax. In fact, many companies pay a
rate of tax below the 'headline rate of corporate tax' through the
use of legitimate deductions. The following table calculates the
effective or actual rate of taxation paid by companies in
Australia.
Taxation of Taxable Companies
1996-97
|
Total profit or loss ($m)
|
Taxable income ($m)
|
Tax at 36% ($m) (a)
|
Non-refundable rebates and credits ($m) (b)
|
Net tax ($m) (c)
|
Effective rate of tax (%) (d)
|
|
Resident
|
82 859
|
77 651
|
27 955
|
8 915
|
19 039
|
23
|
|
Non-resident
|
1 081
|
936
|
337
|
1.1
|
336
|
31
|
|
Total
|
83 940
|
78 588
|
28 292
|
8 916
|
19 375
|
23
|
Source: Australian Taxation Office, Taxation
Statistics 1996-97.
-
- 36% of taxable income.
- Also includes other rebates (item introduced this year due to a
change in the tax forms).
- Tax at 36% of taxable income, less non-refundable rebates and
credits.
- Net tax as a percentage of total profit or loss.
The table shows that the effective rate of tax
for all taxable companies was 23 per cent, which is
significantly lower than the company tax rate of
36 per cent. Using a simple estimation, lowering the
company tax rate would to 34 per cent would reduce the
effective tax rate to 21 per cent, and the further
reduction to 30 per cent would reduce the effective tax
rate to 17 per cent.(7)
Financial
Impact
The following table from the Explanatory
Memorandum(8) sets out the financial impact of the reduction in the
company tax rate:
|
1999-2000
|
2000-2001
|
2001-2002
|
2002-2003
|
2003-2004
|
2004-2005
|
|
-$60m
|
-$1260m
|
-$3480m
|
-$3135m
|
-$3090m
|
-$3405m
|
There is a minor discrepancy between the
financial impact figures contained in the Explanatory Memorandum
and the Treasurer's Press Release of 21 September 1999. In the
Explanatory Memorandum, the fiscal impact for the measure in the
years 2002-03 and 2004-05 is $5 million less than fiscal impact for
the same periods provided in the Treasurer's Press Release.(9)
The Government has argued that the fiscal impact
of reducing the company tax rate will be funded by moving to
effective life depreciation with the removal of balancing charge
rollover relief.(10)
Other research prepared by the Information and
Research Service, notably 'Proposed Reforms to Business Taxation: A
Critical Assessment of Some Budgetary and Sectoral Impacts',
Current Issues Brief No 9 1999-2000, contains an alternate
view of the fiscal impact of the measures contained in the Ralph
review of business taxation. That paper concludes that:
The abolition of accelerated depreciation is
only a bringing forward of future tax collections. (Accelerated
depreciation does not give the taxpayer new concessions, rather it
brings forward the tax benefits of future depreciation claims.)
With time the $2 billion increase in revenue disappears and with it
goes the approximate revenue neutrality of the Ralph
proposals.(11)
If the abolition of accelerated depreciation
does not result in revenue neutrality, and if the revenue saved
from the removal of accelerated depreciation and balancing charge
rollover relief is to fund the reduction in company taxation, it is
arguable that the reduction in company tax rates are not being
adequately funded.
The reader is referred to the relevant section
of 'Proposed Reforms to Business Taxation: A Critical Assessment of
Some Budgetary and Sectoral Impacts', Current Issues Brief
No 9 1999-2000 for a detailed discussion of the fiscal
impacts of the proposed reforms to business taxation.
The reductions in company tax are implemented by
amending the ITR Act. This Act contains, among other things, the
relevant rates of tax that apply to companies and other taxed
entities. The Bill changes the rate of company tax and the tax rate
for entities that have a rate that is currently pegged to the
company tax rate. The tax cuts are implemented in two stages.
First, the amendments contained in Schedule 1 reduces the company
tax rate and the tax rate for entities that have a rate that is
currently pegged to the company tax rate to 34 per cent for the
2000-01 year of income. Second, Schedule 2 reduces the company tax
rate and the tax rate for entities that have a rate that is
currently pegged to the company tax rate to 30 per cent for the
2000-01 year of income.
Schedule 1-Cutting the Company Tax Rate
for the 2000-01 Year of Income
Item 1 will amend subsection
23(2) of the ITR Act to reduce the level of income tax applicable
to companies to 34 per cent.
Item 2 to 6 and items 9
to 11 and will reduce the tax rates that are currently
pegged to the company tax rate to 34 per cent. The rates
that are identical to the company tax rate are as follows:
-
- The rate applicable to the taxable income of a private company
that is neither a life insurance company or a polled development
fund (paragraph 23(3)(a))
-
- The rate applicable to the taxable income earned by a RSA
provider(12) that is a company that is a registered organisation
(ie. a non-profit friendly society or a trade union or other
organisation of employees under the Industrial relations Act
1988) (paragraph 23(4)(bb))
-
- The rate applicable to the standard component of the general
fund component of taxable income of a life insurance company that
is not a mutual life insurance company (subparagraph
23(4A)(c)(ii))
-
- Life insurance companies presently have five different rates of
company tax applicable to five different classes of life insurance
business. The Government has announced changes to these
arrangements(13), effectively removing the differential tax rates
for different types of life insurance business. Legislation has yet
to be introduced to implement this measure. This item only changes
the rate of taxation linked to the company tax rate
-
- The rate applicable to the standard component of taxable income
for a company that is a retirement savings account provider, but is
not a life insurance company nor a registered organisation
(paragraph 23(4BA)(b))
-
- The rate applicable to the amount of taxable income exceeding
the pooled development fund component for a company that becomes a
pooled development fund during the year and still is at the end of
the year of income (paragraph 23(4C)(c))
-
- The rate in respect of the net income of a trustee of a
corporate unit trust (section 24)
-
- The rate in respect of the net income of a trustee of a public
trading trust (section 25)
-
- The rate in respect of a share of net income of a trust estate
on behalf of a trustee of the trust who is liable to pay tax on
behalf of a non-resident corporate beneficiary
(section 28).
Non-profit
Companies
The company tax rate for a non-profit company
that is not a registered organisation is gradually phased in.
-
- Taxable income of a non-profit company up to $416 is not
subject to tax
-
- Where a non-profit company's taxable income is between $416 and
a given threshold, the ITR Act provides for a maximum amount of tax
payable by the company, before any tax offsets, and
-
- Where a non-profit company's taxable income is greater than the
threshold, the general company tax rate applies to the taxable
income.
At the current 36 per cent company tax
rate, the threshold is set at $1 204. Item 7
reduces the threshold to $1 089 for the 34 per cent
company tax rate.
Medium Credit
Unions
Recognised medium credit unions (taxable income
between $50 000 and $150 000) are taxed in a way that
gradually phases in the general company tax rate. This is achieved
by applying a flat tax rate to the difference between the taxable
income of a recognised medium credit union and $49 999. (The
figure of $49 999 is the threshold of taxable income above
which a credit union becomes a recognised medium credit union.)
The rate set in subsection 23(6) provides for
the same amount of tax payable on the difference between
$150 000 and $49 999 as the general company tax rate
would on $150 000. (The figure of $150 000 is the
threshold at which a credit union becomes a recognised large credit
union.) The rate currently set at 54 per cent to reflect
the current 36 per cent company tax rate. Item
8 reduces the rate to 51 per cent when the
general company tax rate is reduced to 34 per cent.
Item 12 states that the
amendments made by Schedule 1 apply to the 2000-01 year of
income.
Schedule 2-Cutting the Company Tax Rate
for the 2001-02 Year of Income
Schedule 2 contains the proposed amendments to
the ITR Act to give effect to the 30 per cent company tax
rate for the 2001-02 and later income years. The amendments
proposed by items 1 to 6 and items 9 to 11 exactly
reflect those explained in the discussion of Schedule 1, except
that these amendments provide for a 30 per cent rate
instead of a 34 per cent rate.
Non-profit
Companies
The reduction to a 30 per cent company
tax rate requires a change to the threshold for non-profit
companies along the lines of that explained above in the discussion
of Schedule 1. Item 7 sets the applicable
threshold for a 30 per cent general company tax rate at
$915.
Medium Credit
Unions
The reduction to a 30 per cent company
tax rate also requires a change to the rate for recognised medium
credit unions along the lines of that explained in Schedule 1.
Item 8 sets the applicable rate for a
30 per cent company tax rate at
45 per cent.
Item 12 states that the
amendments made by Schedule 1 apply to the 2001-02 year of
income.
From the financial impact statement contained in
the Explanatory Memorandum to the Bill, the proposed reductions in
company tax result in companies paying a total of
$14.43 billion less tax over 6 years. This is a significant
amount of revenue being returned to companies. However, as noted in
the Background to this Digest, it is arguable that the reduction in
company tax is not being adequately funded, and that due to the use
of legal deductions and tax credits, the effective rate of taxation
for companies is 23 per cent. It is arguable that in the absence of
other legislative changes, the effective rate of taxation would
fall with the cut in the company tax rate. In light of these
uncertainties, it appears questionable whether the aim of revenue
neutrality can be met. Only time will tell whether the reforms will
benefit the nation in the manner that the Government outlined.
-
- Tax Reform, Not A New Tax A New Tax System: The Howard
Government's Plan for a New Tax System, Circulated by the Hon.
Peter Costello MP, Treasurer of the Commonwealth of Australia
(AGPS) August 1998, Chapter 3, pp. 107-127.
- Press Release No. 81 of the Treasurer dated 14 August
1998.
- Publication: Review of Business
Taxation - A Tax System Redesigned; Explanatory
Memorandum: A New Tax
System (Income Tax Assessment) Bill 1999; Legislation: A New Tax System (Income Tax
Assessment) Bill 1999; Treasurer's Press Release:
The New Business Tax System; Treasurer's Press
Release:
Small Business and Primary Producers to Benefit from the New
Business Tax System; A New Business Tax System: Press
Releases A New Tax System: Time Line.
- The Hon. Peter Costello, Treasurer, The New Business Tax
System, Press Release No. 58 of
21 September 1999, Attachment A 'Reducing the Company Tax
Rate'.
- The Hon. Peter Costello, Treasurer, The New Business Tax
System Press, Press Release No. 58 of
21 September 1999, p. 1.
- Review of Business Taxation, A Tax System Redesigned,
p. 425.
- These rates were calculated assuming no behavioural changes,
and using the values for rebates and credits in the table.
- Explanatory Memorandum to the New Business Tax System
(Income Tax Rates) Bill (No. 1) 1999, p. 1.
- See Attachment T.
- The Hon. Peter Costello, Treasurer, The New Business Tax
System, Press Release No. 58 of
21 September 1999, p. 1.
- Proposed Reforms to Business Taxation: A Critical Assessment of
Some Budgetary and Sectoral Impacts, Current Issues Brief
No 9 1999-2000, Department of the Parliamentary Library, p. 14.
- A retirement savings account provider is a provider of
retirement savings accounts (simple low cost capital guaranteed
superannuation products) regulated under the Retirement Savings
Account Act 1997.
- The Hon. Peter Costello, Treasurer, The New Business Tax
System, Press Release No. 58 of
21 September 1999, Attachment N, 'Broadening the Taxation
Base of Life Insurers'.
David Kehl
19 November 1999
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
© Commonwealth of Australia 1999
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