Bills Digest No. 84  1999-2000 New Business Tax System (Income Tax Rates) Bill (No. 1) 1999


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details

Passage History

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.

Purpose

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.

Background

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

Bar Graph: An Internationally Competitive Company Tax RateSource: 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.

  1. 36% of taxable income.

  2. Also includes other rebates (item introduced this year due to a change in the tax forms).

  3. Tax at 36% of taxable income, less non-refundable rebates and credits.

  4. 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.

Main Provisions

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.

Concluding Comments

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.

Endnotes

  1. 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.

  2. Press Release No. 81 of the Treasurer dated 14 August 1998.

  3. 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.

  4. 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'.

  5. The Hon. Peter Costello, Treasurer, The New Business Tax System Press, Press Release No. 58 of 21 September 1999, p. 1.

  6. Review of Business Taxation, A Tax System Redesigned, p. 425.

  7. These rates were calculated assuming no behavioural changes, and using the values for rebates and credits in the table.

  8. Explanatory Memorandum to the New Business Tax System (Income Tax Rates) Bill (No. 1) 1999, p. 1.

  9. See Attachment T.

  10. The Hon. Peter Costello, Treasurer, The New Business Tax System, Press Release No. 58 of 21 September 1999, p. 1.

  11. 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.

  12. 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.

  13. 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'.

Contact Officer and Copyright Details

David Kehl
19 November 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

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