BILLS DIGEST NO. 24, 2016–17              13 October 2016

Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016

Kai Swoboda
Economics Section 

Date introduced:  1 September 2016
House:  House of Representatives
Portfolio:  Treasury
Commencement: Various commencement dates between 1 July 2016 and 1 July 2026 as set out in the body of this Bills Digest.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at October 2016.

The Bills Digest at a glance

Purpose of the Bill:

•       the main purpose of the Bill is to implement key elements of the Government’s 2016–17 Budget ‘Ten Year Enterprise Tax Plan’ including:

–      in 2016-17, the company tax rate will be cut, from 28.5 per cent to 27.5 per cent for companies with an aggregated turnover of less than $10 million. This $10 million turnover threshold will be progressively lifted over the period to 2022–23 with the effect that companies with a turnover of $1 billion or more will be eligible, at that time, for the lower 27.5 per cent rate

–      in 2023–24 the threshold will be removed, so that all companies will be subject to the 27.5 per cent rate

–      the general company tax rate will be reduced from 27.5 per cent to 25 per cent over the period 2024–25 to 2026–27, and

–      the turnover threshold that applies to determine whether certain small business tax concessions are available, which is currently $2 million, will be retained for those applying to certain capital gains tax concessions but will be lifted to $5 million or $10 million for others.

Policy rationale for reducing the company tax rate:

•       the Government’s proposal to lower the company tax rate is based on several policy goals:

–      to encourage growth and innovation, based on an understanding that small business is important in generating growth and

–      to attract investment and grow the economy, based on an understanding that lower company tax rates will make Australia more competitive with other countries as a place to invest

•       any relationship between corporate tax rates and economic benefits is complex. The role that the level of a country’s company tax rate plays in competing for investment capital and its importance in contributing to future economic growth is subject to some disagreement.

Policy position of non-government parties/independents and interest groups:

•       the Australian Labor Party (ALP) and the Australian Greens do not support the reduction in the company tax rate to 25 per cent. However, the ALP has indicated that it would support the reduction in the small business company tax rate to 27.5 per cent for companies with a turnover of less than $2 million. The Nick Xenophon Team expressed its support prior to the 2016 election for a lift in the small business turnover threshold from $2 million to $10 million

•       business groups have generally welcomed the proposed company tax rate reductions and the lifting of the turnover thresholds for eligibility to some of the small business tax concessions to $10 million. However, groups such as the Australian Council of Trade Unions are opposed to the proposed company tax rate reductions.

Key issues:

•       economic modelling by the Treasury and Treasury-commissioned consultants supports the Government’s underlying rationale that company tax cuts will improve economic growth. However, economic modelling has limited usefulness depending on the degree of simplifying assumptions made and the extent to which real events diverge from the simplified model

•       Australia’s company tax rate is higher than that of many advanced economies. The extent to which investment benefits from lowering the rate is open to some debate.

Purpose and structure of the Bill

The purpose of the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the Bill) is to amend the Income Tax Rates Act 1986 and the other related taxation legislation to implement the Government’s 2016–17 Budget commitment to progressively reduce company tax rates for small and large companies over a 10-year period.

The Bill is divided into five Schedules which implement different elements of the company tax rate reduction:

•       Schedule 1—amends the Income Tax Rates Act to reduce the company tax rate and adjust the turnover eligibility thresholds for which the lower company tax rates apply over the period 2016–17 to 2026–27

•       Schedule 2—amends the Income Tax Assessment Act 1997 (ITAA 1997) to apply an equivalent tax discount for unincorporated small businesses as the company tax rate is reduced

•       Schedule 3—amends the ITAA 1997 to increase the turnover threshold for access to some of the small business tax concessions from $2 million to $10 million

•       Schedule 4—makes consequential amendments to the dividend imputation arrangements in the ITAA 1997 to adjust imputation credits as the company tax rate changes

•       Schedule 5—makes consequential amendments to provisions that directly cite the relevant company tax rate (including examples) in the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936).

Background

2016–17 Budget announcement

The provisions of the Bill implement the Government’s 2016–17 Budget announcement—packaged as elements of the measure titled ‘Ten Year Enterprise Tax Plan’—to progressively reduce company tax rates from the current rates of 28.5 per cent for small business (as defined using a turnover threshold of $2 million) and 30 per cent for other businesses, down to 25 per cent for all companies by 2026–27.[1]

Announcing the measure in his budget speech, the Treasurer noted several arguments in favour of the company tax rate reduction including the importance of small business in providing growth, the use of the tax system to encourage this growth and innovation and the international competitiveness of Australia’s company tax system, noting:

Small and medium businesses are driving jobs growth in Australia and must continue to do so. They are also overwhelmingly Australian owned and more likely to reinvest their earnings in future growth, as they seek to build their businesses. A tax on their business is a tax on their enterprise and the jobs they provide.

… Tonight we go further and share the ambition for smaller businesses to become bigger businesses.

… We will not be able to rely on our natural advantages in resources to secure the jobs of the future like we have in the past. If we wish to continue to see our living standards rise with more jobs and higher wages, we need to ensure our tax system encourages investment and enterprise.

Australia has the seventh highest company tax rate of the 34 OECD countries and it is much higher than our neighbours in the Asian region.[2]

Some of these arguments were repeated by the Treasurer at the introduction of the Bill in September 2016. In particular, he noted that workers would also benefit through higher real wages:

This Bill forms a key component of the government's reform agenda to improve Australia's tax system for businesses and to drive investment in our economy as it transitions from the investment phase of the mining boom, as it is successfully doing, to broader based growth. The actions contained in this Bill will provide the encouragement needed for Australian businesses to grow and create jobs.

… These amendments will enable Australian businesses to reinvest more of their earnings in employing more Australians and growing their businesses—this will benefit all Australians. This will drive investment, allowing us to keep our living standards high and improve wages.

Since 2001, Australia has gone from having one of the lowest corporate tax rates in the world to now offering one of the highest. There are only five advanced countries with higher corporate tax rates than Australia, I am advised.

This Bill therefore is an important step for Australia—it will allow Australian businesses to once again be globally competitive on tax. It will assist our businesses to succeed both at home and internationally. And it will encourage businesses to remain in, or relocate to, Australia.

We are improving the tax system for business and better aligning it with a culture of business investment and development to foster jobs and growth. As productivity rises, more than half the economic benefits of a lower company tax rate will go to workers in the form of higher real wages.[3]

Further discussion about whether Australia's tax rates are uncompetitively high is set out under the heading ‘Competitiveness’ of Australia's company tax rate, below.

Implementation of the proposed lower company tax rates

The reduction in company tax rates for small and large companies will be implemented in two phases. The first phase commences in the financial year 2016–17 and involves increasing the threshold at which the small business company tax rate applies. It proposes that by the financial year 2023–24 the small business company tax rate of 27.5 per cent will apply to a company with a turnover of up to $1 billion. The second phase commences in the financial year 2023–24 and will see the threshold removed and the progressive reduction of the tax rate for all companies. Table 1 sets out the manner in which the reduction in the tax rate will occur.

Table 1: Proposed schedule of increases to eligibility turnover threshold for access to the lower company tax rate and in the reduction of the general company tax rate, 2015–16 to 2026–27

Income year

Turnover threshold

Lower company tax rate for those companies meeting turnover threshold

General company tax rate

2015–16

$2 million

28.5%

30%

2016–17

$10 million

27.5%

30%

2017–18

$25 million

27.5%

30%

2018–19

$50 million

27.5%

30%

2019–20

$100 million

27.5%

30%

2020–21

$250 million

27.5%

30%

2021–22

$500 million

27.5%

30%

2022–23

$1 billion

27.5%

30%

2023–24

threshold removed

27.5%

2024–25

not applicable

27%

2025–26

not applicable

26%

2026–27

not applicable

25%

Source: Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, p. 11.

Expected effect on existing companies

Information compiled by the Australian Taxation Office (ATO) shows that in 2013–14, almost all companies (98 per cent) would have been subject to the lower small business company tax rate at a turnover threshold of $10 million (Figure 1). Further increases to the turnover threshold only marginally change the number of companies paying the lower 27.5 per cent tax rate.

Figure 1: Cumulative number of companies meeting proposed turnover thresholds based on 2013–14 data

Source: Australian Taxation Office (ATO), Taxation statistics 2013–14, Companies, Table 6: Selected items, for the 2013–14 income year, ATO website.

Examples of Australian Securities Exchange-listed companies that may fall within each of the turnover thresholds are shown in Table 2.

Table 2: Examples of ASX-listed companies that have operating revenue within the relevant turnover thresholds, 2014–15

Turnover threshold range

Examples of companies within this threshold (including ASX code)

$10 million to $25 million

Class Limited (CL1), Medtech Global Limited (MDG), HiTech Group Australia Limited (HIT), Universal Biosensors, Inc. (UBI) and Pharmaxis Ltd (PXS).

$25 million to
$50 million

Nanosonics Limited (NAN), Think Childcare Limited (TNK), Compumedics Limited (CMP), Brisbane Broncos Limited (BBL) and Sea Farms Group Limited (SFG)

$50 million to $100 million

NetComm Wireless Limited (NTC), Buderim Group Limited (BUG), Cellnet Group Limited (CLT), Pacific Smiles Group Limited (PSQ) and Panterra Gold Limited (PGI).

$100 million to $250 million

Baby Bunting Group Limited (BBN), Sirtex Medical Limited (SRX), Cabcharge Australia Limited (CAB), Hansen Technologies Limited (HSN) and Capilano Honey Limited (CZZ).

$250 million to $500 million

Salmat Limited (SLM), Tassal Group Limited (TGR), MYOB Group Limited (MYO), Mayne Pharma Group Limited (MYX) and Regional Express Holdings Limited (REX).

$500 million to $1 billion

Slater & Gordon Limited (SGH), Blackmores Limited (BKL), Warrnambool Cheese and Butter Factory Company (WCB), K&S Corporation Limited (KSC) and Southern Cross Media Group Limited (SXL)

$1 billion+

Wesfarmers Limited (WES), Woolworths Limited (WOW), Qantas Airways Limited (QAN), Aristocrat Leisure Limited (ALL), Bega Cheese Limited (BGA), Downer EDI Limited (DOW) and Billabong International Limited (BBG).

Note: For the purposes of this table, a company’s operating revenue is assumed to be largely equivalent to the definition of turnover for the purposes of the proposed company tax rate thresholds.

Source: MorningStar DatAnalysis.

Turnover threshold and other small business tax concessions

Existing concessions

There are a range of tax concessions currently available to small business that are based on an annual turnover threshold of $2 million (although other conditions may also apply). These include:

•       a company tax rate of 28.5 per cent rather than 30 per cent (and for unincorporated small businesses, a tax discount of five per cent, capped at $1,000)[4]

•       four different capital gains tax (CGT) concessions:

–      15–year exemption—the capital gain on an asset continuously owned for 15 years asset may be disregarded

–      50 per cent reduction—a capital gain applying to an ‘active’ asset may be reduced by 50 per cent

–      retirement exemption—a capital gain may be disregarded if the proceeds are used in connection with retirement (a lifetime limit of $500,00 also applies)

–      roll-over—allows for the deferral of a capital gain

•       certain amounts associated with the CGT concessions can be contributed to superannuation without being counted in the non-concessional contributions cap (subject to a lifetime limit)

•       a simplified and concessional depreciation regime including pooling of assets, access to the instant asset write-off threshold of $20,000 (to 30 June 2017) and

•       car parking provided to employees may be exempt from fringe benefits tax (FBT).[5]

Impact of changing turnover threshold

The proposed higher turnover threshold as it applies to the lower company tax rate will interact with some, but not all, of the other small business tax concessions that use the existing $2 million threshold. In broad terms, most of the existing tax concessions based on the $2 million threshold will be retained under the $10 million threshold from 2016–17.

The tax discount for unincorporated small business entities will be based on a fixed $5 million turnover threshold and the existing capital gains tax concessions will continue to be based on a $2 million turnover threshold (Figure 2).

Figure 2: Summary of how the proposed turnover thresholds interact with existing small business tax concessions that have a $2 million turnover threshold

Note: (a) The lower company tax rate under existing arrangements is 28.5 per cent. The proposed arrangements would see this rate reduced to 27.5 per cent for companies below the higher $10 million turnover threshold in commencement year. This threshold would increase incrementally from year-to-year to $1 billion by 2022–23. (b) Under existing arrangements the tax discount is five per cent (capped at $1,000). Under the proposed arrangements the tax discount rises to eight per cent in 2016–17 and then increases progressively from 10 per cent in 2024–25 to 16 per cent in 2026–27, but remains capped at $1,000.

Source: Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, pp. 42–43.

Dividend imputation and a changing company tax rate

Dividends represent a distribution of a company’s profits to its shareholders. In Australia, companies can attach ‘franking credits’ to their dividends, which reflect the amount of tax already paid by the business. Companies that frank their dividends pay the corporate tax rate on their profit and distribute the remainder to shareholders. The shareholder receives the credit for the tax already paid by the company and is then only required to pay any ‘extra’ tax to match their individual tax obligations. This is called dividend imputation.

The imputation system is designed to avoid ‘double taxation’ of company profits, whereby a company’s profit is taxed, and then dividends to shareholders are taxed again.[6]

In broad terms, franked dividends from Australian companies have grown significantly in the past two decades, with a stagnation of unfranked dividends (Figure 3).

When the company tax rate for small incorporated businesses was lowered to 28.5 per cent from 1 July 2015, a 30 per cent ‘franking credit’ was retained. The effect was that taxpayers who received dividends from small incorporated businesses in which they were a shareholder did not have to distinguish between those franked dividends and any others they might have received in a financial year.

Figure 3: Franked dividend growth from Australian companies, 1989–90 to 2012–13 ($ billion)

Source: K Davis, Funding Australia’s future: dividend imputation and the Australian financial system: what have been the consequences?, Australian Centre for Financial Studies, [Melbourne], October 2015, p. 11.

The proposal included in the Bill is to move to an imputation credit system where the franking credit is based on the company’s turnover in the year prior to the distribution of the franked dividend. Therefore, in general, the franking credit rate will fall from the general company tax rate of 30 per cent to reach 27.5 per cent by 2023–24, when all companies would have a franking rate of 27.5 per cent.

These arrangements will lead to some companies facing a difference in the year that they qualify for the lower company tax rate as the turnover threshold progressively rises in the franking rate of 30 per cent and the lower company tax rate of 27.5 per cent. This may create some additional incentives to utilise the higher franking rate in paying dividends to shareholders, as this differential would only apply for one year. This is discussed further later in this Bills Digest.

History of company tax rate changes in Australia

The taxation of companies as separate entities in Australia first commenced in 1915.[7] The company tax rate has been progressively reduced over time, decreasing from a high of 49 per cent in 1986 to the current general rate of 30 per cent.[8] A summary by the Treasury noted that company tax rate reductions had largely corresponded with base broadening measures, such as the removal of accelerated depreciation (Figure 4).

Figure 4: Company income tax changes, 1915 to 2001

Source: S Reinhardt and L Steel, ‘A brief history of Australia’s tax system’, Economic Round-up, Winter 2006, 4 September 2006, p. 17.

Reviews, views and responses

Proposals for a lower general company tax rate or for changes to the small business turnover threshold have been mooted previously within the general debate about the appropriate rate of company tax.

Whitlam Government

The earliest of the reviews is known as the Asprey Review. It was conducted just after changes to a single company tax rate from a system that imposed a lower rate on the first $10,000 of company income and a higher rate on amounts above this. The review noted that the previous arrangements ‘may be seen as a very crude way of providing some relief from the burden of over-taxation to shareholders in small enterprise’.[9] Members of the review did not favour a return to such a policy, and with reference to policies in Canada and the United Kingdom at the time providing for lower tax to eligible small businesses, noted:

If special provisions are to be made for small enterprises, the Committee would prefer the Canadian or United Kingdom model rather than a return to what used to be the Australian law. However, the Committee takes the view that one should not lightly introduce a new element of non-neutrality into the company tax system.[10]

Howard Government

The Review of Business Taxation (known as the Ralph Review) concentrated on the compliance cost impact on small business and recommended simplified taxation arrangements for small business (with an annual turnover of less than $1 million).[11] Also included in the report of the Ralph Review were recommendations relating to changed capital gains tax arrangements and a simplified depreciation regime.[12]

Rudd and Gillard Governments

The most recently completed tax review, known as the Henry Tax Review, recommended increasing the turnover threshold from $2 million to $5 million for access to the existing small business tax concessions as well as a general reduction in the company tax rate to 25 per cent.[13]

On 2 May 2010, as part of its response to the Henry Tax Review, the Rudd Government announced that it would cut the company tax rate to 28 per cent, with the reduction being phased in from 2012–13 for small businesses, one year earlier than for other companies.[14] This announcement also included plans for the Resource Super Profits Tax and an increase in the instant write‐off threshold from $1,000 to $5,000.[15]

On 2 July 2010, the Gillard Government altered the company tax cut proposal as part of an amended mining tax—the Minerals Resource Rent Tax (MRRT). The alteration was necessary due to reduced revenue. That being the case, the Government announced:

… the company tax rate will continue to be cut to 29 per cent from 2013–14 but will not be further reduced under current fiscal conditions. Small companies will benefit from an early cut to the company tax rate to 29 per cent from 2012–13.[16]

Legislation to implement this proposal was, however, never introduced into the Parliament. Although the legislation to implement the MRRT passed through both Houses of the Parliament in early 2012, by the time of the 2012–13 Budget in May 2012, the proposal for a company tax cut was abandoned.[17]

One of the reasons for this was that an across-the-board company tax rate reduction was not supported by the Australian Greens (the Greens). Their support was limited to a company tax rate cut for incorporated small businesses only.[18]

2013 election

In the run-up to the 2013 Federal election, each of the parties proposed to change some elements of the business tax system if they should win government.

ALP

The 2013 election policies of the ALP did not include any proposals to change the general company tax rate.[19] However, policies directed specifically towards small business included increasing the instant asset write off threshold from $6,500 to $10,000 for eligible assets purchased between 8 September 2013 and 30 June 2015.[20]

Coalition

The Coalition’s 2013 election policies included a proposal to cut the company tax rate to 28.5 per cent from 1 July 2015.[21] However, at the same time the Coalition proposed introducing a paid parental leave scheme. That scheme was to be funded by a 1.5 per cent levy on companies with a taxable income in excess of $5 million. The net effect of the two policies would be that only those companies below this threshold would effectively face a tax cut.[22]

Australian Greens

The Greens were the only major party to advocate a lower company tax rate that would apply only to small business. This policy proposed a reduction in the company tax rate to 28 per cent from 1 July 2014 for companies with a turnover of under $2 million.[23] An objective of the policy was to ‘to promote the vitality of the sector and to encourage more Australians to enter into small businesses’.[24] Part of the policy was also to increase the instant asset write off threshold from $6,500 to $10,000.[25]

Abbott Government

Having won the 2013 Federal election, the Abbott Government considered the recommendations of a 2014 review of tax impediments facing small business by the Board of Taxation, which examined whether the $2 million turnover threshold remained appropriate.[26] The Board recommended that the threshold be increased to at least $3 million and that the increase to $5 million be ‘investigated’ largely based on the view that only relatively small numbers of additional businesses would benefit:

The Board considers that the small business entity concessions provide important assistance to small businesses but agrees with stakeholders that eligibility thresholds need to be monitored to ensure that the concessions remain current and appropriately targeted.

… The statistics show that there may be considerable scope to increase the turnover threshold without significantly increasing the number of businesses that can access the concessions. Importantly, this is likely to reduce the number of businesses that are at or near the turnover threshold and therefore face the greatest uncertainty. It would also assist those businesses that operate on a low margin and therefore consider themselves disadvantaged by the test.[27]

In March 2015, the Government published a discussion paper as part of the now-abandoned tax review that raises some specific tax issues relating to small businesses. These include compliance costs, choice of business structure and complexity.[28] In relation to a single lower tax rate for small businesses the discussion paper included a proposition that a lower single rate (or zero tax rate) could be put in place to replace multiple tax concessions:

Instead of multiple concessions across the tax system, an alternative option that could be considered is to apply a lower or zero tax rate for small businesses. A lower rate that replaced multiple specific concessions could encourage small businesses to spend their resources expanding their business, rather than managing their tax affairs.[29]

The discussion paper also noted the high economic costs associated with company tax and that many countries, including the United Kingdom and Canada had reduced their company tax rate in recent years.[30] The Government’s view, as expressed in the discussion paper, was that there were broader economic benefits associated with a reduction in the company tax rate:

Reducing Australia’s corporate tax rate would increase Australia’s appeal as a place to do business. It would encourage higher levels of investment in Australia and lead to capital deepening, which promotes growth in productivity, innovation, employment and wages. In the near term, lower taxes would provide an increased incentive for non-residents to invest in Australia. In the long run, increased investment would benefit all Australians.[31]

Building on the 2014–15 Budget changes

In the 2015–16 Budget, the Abbott Government included a number of changes to tax arrangements for small business (defined as those entities with an aggregated turnover of less than $2 million), including a 1.5 percentage point cut in the company tax rate, from 30 per cent to 28.5 per cent, which would take effect from 1 July 2015.[32] This was consistent with the 2013 election promise.

This measure was legislated by the Tax Laws Amendment (Small Business Measures No. 1) Act 2015.[33] The originating Bill for this measure passed the Parliament with bipartisan support, with the Leader of the Opposition noting in his 2015–16 Budget reply speech:

A 1½ per cent cut for small businesses might be enough to generate a headline but it is not enough to generate the long-term confidence and growth our economy needs. Tonight I say: let's go further—let's give small businesses the sustainable boost to confidence that they deserve, the confidence to create jobs. I invite you to work with me on a fair and fiscally responsible plan to reduce the tax rate for Australian small business from 30 to 25 per cent—not a 1½ per cent cut; a five per cent cut. That is the future. That is confidence.

I understand that this will not be easy, and it may take longer than the life of one parliament.[34]

Also part of the reduction in the company tax rate was a recognition that not all small businesses were companies, with the implementation of a ‘tax discount’ for unincorporated small businesses broadly equivalent to the small business company tax rate reduction of 1.5 percentage points (capped at $1,000). This measure was implemented by the Tax Laws Amendment (Small Business Measures No. 3) Act 2015,[35] which also applied from 1 July 2015.

Committee consideration

Senate Economics Legislation Committee

The Bill was referred to the Senate Economics Legislation Committee for inquiry and report by 10 October 2016.[36] The Committee, in its report tabled on 10 October 2016, recommended that the Bill be passed.[37] However, in a dissenting report the ALP Senators considered that the company tax rate should only be reduced to 27.5 per cent and that this rate should be limited to companies coming within the current $2 million threshold. ALP Senators also supported a more limited increase to the unincorporated small business tax discount from five per cent to eight per cent.[38]

Senate Standing Committee for the Scrutiny of Bills

In its report to the Senate on 14 September 2016, the Senate Standing Committee for the Scrutiny of Bills made no comment on the Bill.[39]

Policy position of non-government parties/independents

In his budget reply speech, made shortly after the 2016–17 Budget was handed down, the Leader of the Opposition stated that the ALP would oppose the reduction in the company tax rate, but that it would support a reduction in the rate to 27.5 per cent rate from 1 July 2016 for small businesses with a turnover of less than $2 million.[40] Mr Shorten noted:

Last year, from this dispatch box, I invited the government to cooperate on cutting the tax rate for Australian small businesses to 25 per cent. We meant it then and we stand by it now. Labor will support a tax cut for small businesses with a turnover of less than $2 million a year—because that is what a small business is [sic]. We will deliver tax relief for small businesses representing 83 per cent of all Australian companies.

But billion-dollar businesses are not small businesses—never have been, never will be. Coles is not a small business. The Commonwealth Bank is not a small business. Goldman Sachs is not a small business. As important as they are to our economy, they do not need a taxpayer subsidy which Australia cannot afford to pay, especially when our imputation system means a cut in the corporate tax rate delivers no meaningful benefit for mum and dad investors. The only shareholders who will win out of this live overseas. Labor will support a tax cut for small business but, unlike the Prime Minister, we will not use this as a camouflage for a massive tax cut to big multinationals.[41]

Prior to the 2016 election, the Australian Greens did not support corporate tax cuts and were ‘refusing to join a tax cuts arms race that will undermine public education, health and welfare’.[42]

The Nick Xenophon Team ‘policy principles’ includes the policy of supporting a lift in the small business turnover threshold from $2 million to $10 million ‘to encourage agricultural businesses to grow as agricultural output expands from individual businesses’.[43]

Position of major interest groups

Business groups

Business groups have generally welcomed the Government’s proposed company tax rate reductions.

In March 2016, the Business Council of Australia (BCA) proposed a ‘strategy for growth enhancing tax reform’ in a report on tax arrangements that included a move to a uniform company tax rate of 28.5 per cent in the short term, a rate of 25 per cent by 2020 and then a further reduction to 22 per cent by 2025.[44] The BCA’s proposed company tax rate reductions were framed around making the tax system globally competitive and the benefits that would accrue from a cut to the economy and workers (through higher real wages).[45]

Following the 2016–17 Budget, the BCA noted that ‘durable budget repair will not be achieved by increasing the overall tax burden’.[46] In relation to how the rate reduction would be implemented, the BCA noted:

The government’s 10-year enterprise tax plan is the signal that Australia’s businesses need to drive greater investment, and create more jobs, better jobs and higher paid jobs.

It’s an immediate reduction for the small and medium business that need relief now.

For big business, which operates on longer investment cycles, it’s an important signal that their investment will be more competitive down the track.[47]

In its pre-budget submission in February 2016, the Australian Chamber of Commerce and Industry (ACCI) considered that as part of tax reform ‘both sides of politics must commit to lowering the corporate tax rate to an internationally competitive level (currently 25 per cent but potentially lower in the future) by an agreed date’.[48] Following the 2016–17 Budget, the ACCI considered that the announced changes were positive, noting:

With an election looming, this Budget demonstrates that good policy can also be good politics.

The glide path to a company tax rate of 25 per cent by 2026-27 will make Australia a more appealing destination for international investors and will encourage Australians to develop their enterprises at home. The improved productivity from these new investments will create more and better paying jobs, ensuring that much of the benefit will flow to households.[49]

The Australian Industry Group (AIG) welcomed the proposed changes following the 2016–17 Budget, noting:

In an important boost to the capacity of businesses to invest and create jobs, the Budget sets a gradual path to restore the competitiveness of Australia's company tax system. While the two-tiered company tax system will continue for a number of years and it will be a decade before the company tax rate will reach 25%, many small to medium-sized businesses will see more immediate benefits and face improved incentives to invest. The clear risk involved in such a gradual phase down is that the international competitiveness benchmark could well be closer to 20% by 2026-27.[50]

In a separate budget-related media release, the AIG supported the increase in the small business eligibility threshold to $10 million, although it had advocated for a $20 million threshold prior to the Budget.[51]

The Council of Small Business Australia (COSBOA) was also supportive of raising the turnover eligibility threshold to $10 million, noting:

This creates a change immediately for government support actions around tax breaks, instant tax write offs and other initiatives. This gives more businesses access to the $20,000 instant tax write off announced in last year’s budget. There is also another tax decrease for these businesses. This means that tax has decreased 2.5% in 2 years. A good message to send to businesses who want to grow and employ, or start to export and take advantage of the global economy.[52]

Other groups

The Tax Institute supported the announcement of a reduction in the company tax rate to 25 per cent following the 2016–17 Budget announcement, as well as the lifting of the small business turnover eligibility threshold.[53] In its pre-budget submission, the Tax Institute expressed its support for a reduction in the company tax rate over the medium term to 25 per cent.[54] In making this proposal, the Institute noted:

A wealth of reliable evidence indicates that the incidence of company tax falls on employees. This means that reducing the burden of company tax is expected to result in companies passing on the benefits to their employees either in the form of increased wages or additional recruitment – increasing productivity and employment.

A cut in the company tax rate would also reduce taxes on investment, increasing the incentives for savings and capital as well as innovation and entrepreneurship – all outcomes that are indisputably in the interests of all Australians. Such a cut would also reduce the incentive for profit shifting out of Australia, allowing us to retain a greater share of the profits generated here in Australia.[55]

The Australian Council of Trade Unions (ACTU) was critical of the proposed company tax changes following the 2016–17 Budget, stating:

A corporate tax cut is not a jobs plan.

It provides breadcrumbs for youth unemployment which is in double digit figures – 12 per cent nationally and above 15 per cent in some local communities like the NSW Central Coast, parts of south-west Sydney, Townsville and all of South Australia.

The Government’s own budget papers project negative or zero total business investment over the forward estimates. Where are the jobs coming from?

The Government seems to think providing tax cuts to big corporations is magically going to create investment or stimulate the economy. This ‘trickle-down’ logic is a fantasy.[56]

In a March 2016 policy paper, the ACTU did not support cuts to company tax rates and was also critical of arguments based on the competitiveness of Australia’s company tax rate:

World-class worker and management skills, infrastructure, innovation, technology, legal systems and education and training are more powerful drivers of investment and jobs growth in Australia than corporate tax rates and all of these rely on revenue from the tax system.

… Much of the new foreign investment entering Australia originates in China and other regional nations with low company tax rates. Australia’s 30 per cent company tax rate has not deterred these investments. In a world awash with investible funds and with record low interest rates, there is no compelling evidence that a further reduction in the cost of foreign capital through a reduction in the company tax rate would cause the surge in investment that proponents claim for it.[57]

Instead, the ACTU’s corporate tax proposals focussed on ‘repairing’ the company tax base to deal with base erosion and profit shifting by multinationals, better targeting of a research and development tax concession and improved tax transparency through public tax reporting of all companies with annual turnover of more than $100 million.[58]

Financial implications

The Explanatory Memorandum notes that the amendments proposed by the Bill will result in almost $5.3 billion less revenue being collected over the period 2016–17 to 2019–20 (Table 3).[59]

Table 3: Financial impact of measures proposed by the Bill, 2016–17 to 2019–20 ($ million)

Measure

2016–17

2017–18

2018–19

2019–20

Total

Phase 1: lift turnover threshold for the lower company tax rate to $10 million for 2016–17 and then progressively to $1 billion in 2022–23 after which it will be abolished

Phase 2: Reduce corporate tax rate to 27.5% from 2016–17 then further decreases from 2024–25 to reach 25% in 2026–27.

-400

-500

-800

-950

-2,650

Increase tax discount for unincorporated small businesses to 8% from 2016–17 with further increases from 2024–25 to reach 16% in 2026–27

-150

-150

-150

-450

Increase small business entity threshold to $10 million

-280

-700

-550

-650

-2,180

Total

-680

-1,350

-1,500

-1750

-5,280

Source: Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, pp. 3–6.

It should be noted that the costings set out in Table 3 above only cover the period of the forward estimates. In accordance with the provisions of the Bill, by the financial year 2019–20 a lower company tax rate of 27.5 per cent will apply to entities with a turnover threshold of $100 million or less—that is, the costings do not factor in the increases in the turnover threshold in the following three financial years to $250 million, $500 million and
$1 billion respectively. That being the case, the Explanatory Memorandum does not quantify the total of the revenue lost over the period up to the point that the 25 per cent tax rate begins to apply.

Treasury costings

A 10-year costing of the two measures to lift the small business entity threshold and reduce the company tax rate to 25 per cent by 2026–27 was provided to the Senate Economics Legislation Committee on 6 May 2016 by the Secretary of the Treasury.[60] This Treasury costing put the cost of the measures to 2026–27 at $48.2 billion in cash terms. It is important to note that this figure excludes other measures in the Bill such as the increase in the tax discount for unincorporated small businesses.

Parliamentary Budget Office costings

A Parliamentary Budget Office (PBO) costing of the ALP policy to ‘not proceed with big company tax cuts’ was included in the PBO’s post-election report of 2016 election commitments. This PBO costing, covering the period to 2019–20 put savings associated with the policy (which does not include the small business company tax reduction to 27.5 per cent from 1 July 2016 and the equivalent increase in the tax discount for unincorporated small businesses) at around at $4.4 billion in cash terms.[61] The more detailed PBO costing of this ALP policy over the 10 years to 2026–27 puts the savings at around $50 billion.[62]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth)[63], the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[64]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[65]

Schedule 1—reducing the corporate tax rate

Key provisions

Schedule 1 to the Bill is comprised of 12 Parts arranged in a chronological fashion to implement the relevant changes for each year over the period 2016 to 2026—that is the proposals in Part 1 of Schedule 1 commence on 1 July 2016, the proposals in Part 2 of Schedule 1 commence on 1 July 2017 and so on with the proposals in Part 11 of Schedule 1 to commence on 1 July 2026. Parts 1–11 amend the Income Tax Rates Act whilst Part 12 contains relevant application provisions.

Currently, section 23 of the Income Tax Rates Act sets out the rates of tax payable by companies. Item 1 of Part 1 in Schedule 1 amends paragraph 23(2)(a) of the Income Tax Rates Act, with effect from 1 July 2016, to reduce the rate of tax in respect of the taxable income of the company that is a small business entity from 28.5 per cent to 27.5 per cent.[66] The 30 per cent rate for a company that is not a small business entity is retained.

Items 2 and 3 of Part 1 of Schedule 1 amend paragraphs 23(3)(b) and 23(4)(c) of the Income Tax Rates Act to apply this lower tax rate to a company that is a retirement savings account (RSA) provider and a company that is a Pooled Development Fund (PDF) respectively.[67]

Item 4 of Part 1 of Schedule 1 amends subparagraph 23(6)(b)(i) of the Income Tax Rates Act which relates to the tax payable by a company that is a non-profit company. The effect of the amendment is that for the 2016–17 financial year the rates of tax payable by a non-profit company that is a small business entity are nil for the first $416 of taxable income, 55 per cent for the next $416 of taxable income and 27.5 per cent for all taxable income thereafter.

Item 5 of Part 1 of Schedule 1 amends paragraph 23(7)(a) of the Income Tax Rates Act which relates to the tax payable by a company that is a recognised medium credit union. According to the Explanatory Memorandum for the Bill:

A credit union is a recognised medium credit union if, broadly, its notional taxable income is between $50,000 and $150,000. A recognised medium credit union is subject to an effective tax rate based on a sliding scale, according to its level of taxable income.[68]

The amendment operates so that the amount of tax payable by a recognised medium credit union that is a small business entity is reduced from 42.75 per cent to 41.25 per cent for taxable income that exceeds $49,999.

Item 6 of Part 1 of Schedule 1 amends paragraph 25(a) of the Income Tax Rates Act which relates to the tax payable by a the trustee of a public trading trust. Where the trust is a small business entity the rate of tax payable is reduced to 27.5 per cent.

The amendments in Part 2 of Schedule 1 are to commence from 1 July 2017. Item 13 inserts proposed section 23AA into the Income Tax Rates Act to define the term base rate entity. A base rate entity is an entity which, in a year of income, carries on business and has an aggregated turnover of less than $25 million. Items 8–12 and 14 of Part 2 in Schedule 1 to the Bill repeal and replace references to a small business entity in sections 23 and 25 of the Income Tax Rates Act with references to a base rate entity. This term will be used to determine which entities meet the turnover threshold that applies to the lower company tax rate over the period to 2023–24 when the threshold is abolished and a single rate of company tax applies.

Items 16–20 in Schedule 1 amend proposed paragraph 23AA(b) of the Income Tax Rates Act to increase this threshold progressively from the $25 million threshold in 2017–18 to reach $1 billion in 2022–23.

Part 8 of Schedule 1, which is to apply from 1 July 2023, includes those amendments required to move to a single company tax rate of 27.5 per cent for all entities for the financial year 2023–24. This includes repealing the definition of base rate entity (at item 21) and section 23AA (at item 28) that were used as the turnover threshold was progressively raised.

Parts 9 to 11 of Schedule 1 include the relevant amendments to then reduce the single company tax rate from the 27.5 per cent rate that applies in 2023–24, to 27 per cent in 2024–25, 26 per cent in 2025–26 and then 25 per cent from 2026–27 onwards. Amendments to paragraph 23(6)(b) (about non-profit companies),[69] subsection 23(7) (about recognised medium credit unions)[70] and section 25 (about the tax payable by a trustee of a public trading trust) of the Income Tax Rates Act are also made to ensure that the tax payable is equivalent to the general company tax rate.[71]

Key issue: impact of the measure on the economy

Part of the Government’s argument for lowering the company tax rate is that it will support economic growth by enabling Australian businesses to reinvest more of their earnings to support higher levels of employment, investment and higher wages.[72]

Argument in favour of lowering company tax

This view was also put by former Treasurer Swan, who noted in May 2010, shortly after the Rudd Government had included a budget measure to reduce the company tax rate from 30 per cent to 28 per cent:

Our plan will also improve the competitiveness of the entire economy. It will deliver a company tax rate cut for all companies.

… These changes promote growth across the entire economy, giving some of our other industries a better chance to compete on the world stage, even with the continued success of our resource industry.[73]

Any relationship between corporate tax rates and economic benefits is complex. The research is not conclusive and support can be found for various views. Those noting the benefits to economic growth of a lower rate included the Henry Tax Review (which recommended lowering the rate to 25 per cent over the short to medium term). The Henry Tax Review noted:

Reducing taxes on investment, particularly company income tax, would also encourage innovation and entrepreneurial activity. Such reforms would increase income for Australians by building a larger and more productive capital stock, and by generating technology and knowledge spillovers that boost the productivity of Australian businesses. A lower company income tax rate would also reduce incentives for foreign multinationals to shift profits out of Australia.[74]

The OECD also offered some support to the link between corporate tax rates and growth in a 2010 report, Tax Policy Reform and Economic Growth, which examined the growth impacts of various taxes (such as property and consumption taxes) based on their distortionary nature.[75] The OECD’s view on corporate taxation noted:

Corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements. In addition, most corporate tax systems have a large number of provisions that create tax advantages for specific activities, typically drawing resources away from the sectors in which they can make the greatest contribution to growth. However, lowering the corporate tax rate substantially below the top personal income tax rate can jeopardize the integrity of the tax system as high-income individuals will attempt to shelter their savings within corporations.[76]

Argument against lowering company tax

The role that the level of a country’s company tax rate plays in increasing economic growth is subject to some disagreement. In a March 2016 paper, Company tax cuts: What the evidence shows[77], the Australia Institute made comparisons between OECD country company tax rates and economic growth and long-term analysis of investment and growth in the Australian economy to examine these links. The Institute was critical of calls for reductions in the company tax rate to stimulate growth, concluding:

[T]here is no evidence to suggest that lower rates increase economic growth. Secondly, a historical analysis of Australia’s own corporate tax rate shows that, if anything, lower rates have a negative impact on the kind of economic indicators spruiked by their proponents.

… The evidence presented here suggests that if there are any growth dividends of lowering the company tax rate they are so weak as to be outweighed by other factors. Neither cross-country comparison nor Australia’s own history lend any support to the ‘tax-cuts-are-good’ thesis. If the aim really is increased economic growth, then Australians would be better advised to ignore the business lobby’s call for lower company tax rates and look seriously at other policies.[78]

Economic modelling of reductions in company tax

Treasury released modelling at the time of the 2016–17 Budget that examined the impact of the proposed company tax rate reduction on the economy.[79] The impact was modelled assuming budget neutrality, with three different scenarios considered to offset the budget cost of lowering the company tax rate. These were that the cost is met through changes in government spending (assumption 1), changes in personal income tax (assumption 2) and changes in non-distortionary taxes (assumption 3). In addition to their own modelling, Treasury also commissioned modelling by two consultants—Independent Economics and KPMG.[80]

Included in the Treasury modelling report were the results of the modelling by Treasury and the two consultants. These results generally showed gains in economic activity, investment, wages and household consumption associated with the company tax reduction (Figure 5).

Figure 5: Results of Treasury and Treasury-commissioned economy-wide modelling of the proposed company tax rate reduction to 25 per cent

Note: The various scenarios are for the cost of reducing the company tax rate being met through changes in government spending (assumption 1), changes in personal income tax (assumption 2) and changes in non-distortionary taxes (assumption 3). IE = Independent Economics.

Source: The Treasury, ‘Economy-wide modelling for the 2016-17 Budget’, The Treasury website, 3 May 2016, p. 4.

Criticisms of these modelling exercises have been made at a number of levels including that assumptions made in some of the modelling, such as the ‘morality dividend’ associated with the tax rate reduction—the level of additional tax voluntarily paid by companies due to their assumed reluctance to engage in profit shifting—may be unrealistic.[81]

An alternative modelling exercise on the impact of a reduction in the company tax rate by the Centre for Policy Studies at Victoria University in April 2016, which explicitly took account of the dividend imputation system, concluded that a cut in the company tax rate would have a positive impact on the rate of economic growth. However, this modelling, which did not make assumptions about how the cost of the cut was funded noted:

The cut in company tax stimulates GDP by increasing the post-tax return to investment, which leads to a long term increase in the capital stock. With more capital stock in place, there will be an increase in both output and real wages. So far, a cut in the company tax rate looks like a winner. However, we have three concerns. The first is that foregone taxation revenue will add to government deficits, creating pressure for spending to be cut or alternative taxes to be raised. The second is that the cost of additional capital stock will add to the current account deficit, and should not be treated as manna from heaven. This leads to our final concern, which is our finding that despite the expected increase in GDP, real national income will fall under a cut to company tax.[82]

While these economic modelling exercises are useful in understanding the potential impacts of policy changes on different parts of the economy, they are of limited use for policy makers depending on the degree of simplifying assumptions made and the extent to which real events diverge from the simplified model. The International Monetary Fund notes:

All economic models, no matter how complicated, are subjective approximations of reality designed to explain observed phenomena. It follows that the model’s predictions must be tempered by the randomness of the underlying data it seeks to explain and by the validity of the theories used to derive its equations.

… No economic model can be a perfect description of reality. But the very process of constructing, testing, and revising models forces economists and policymakers to tighten their views about how an economy works. This in turn promotes scientific debate over what drives economic behavior and what should (or should not) be done to deal with market failures.[83]

Key issue: ‘competitiveness’ of Australia’s company tax rate

One of the arguments put by the Government in lowering the company tax rate is that the current Australian company tax rate is ‘uncompetitive’, with the rate being higher than that of other countries which may be competing for investment opportunities.[84] Introducing the Bill, the Treasurer noted:

Since 2001, Australia has gone from having one of the lowest corporate tax rates in the world to now offering one of the highest. There are only five advanced countries with higher corporate tax rates than Australia, I am advised.

This Bill therefore is an important step for Australia—it will allow Australian businesses to once again be globally competitive on tax. It will assist our businesses to succeed both at home and internationally. And it will encourage businesses to remain in, or relocate to, Australia.[85]

Assessments about the competitiveness of Australia’s company tax rate can be based on a number of different measures. There are a range of views about the importance of the level of the company tax rate in attracting investment and about whether such a focus should be pursued.

At a high level, some economists have criticised the notion of ‘competition’ between nations when used in a similar context of competition between firms. Professor Paul Krugman noted in 1994:

The idea that a country's economic fortunes are largely determined by its success on world markets is a hypothesis, not a necessary truth; and as a practical, empirical matter, that hypothesis is flatly wrong. That is, it is simply not the case that the world's leading nations are to any important degree in economic competition with each other, or that any of their major economic problems can be attributed to failures to compete on world markets. The growing obsession in most advanced nations with international competitiveness should be seen, not as a well-founded concern, but as a view held in the face of overwhelming contrary evidence.

… [T]rying to define the competitiveness of a nation is much more problematic than defining that of a corporation. The bottom line for a corporation is literally its bottom line: if a corporation cannot afford to pay its workers, suppliers, and bondholders, it will go out of business. So when we say that a corporation is uncompetitive, we mean that its market position is unsustainable—that unless it improves its performance, it will cease to exist. Countries, on the other hand, do not go out of business. They may be happy or unhappy with their economic performance, but they have no well-defined bottom line. As a result, the concept of national competitiveness is elusive.[86]

Headline company tax rates in other countries

The ‘headline’ company tax rate is the tax rate that applies to company profit, not taking into account the ability of companies to take advantage of tax deductions that may apply within a country. A simple comparison of the headline company tax rates that apply in selected OECD countries shows that company tax rates have come down since 2000 in almost all OECD countries but that Australia’s rate of 30 per cent is at the higher end, exceeded only by the United States, France, Belgium, Italy and Germany (Figure 6).

Figure 6: Corporate income tax rate, OECD countries, 2000 and 2016 (per cent)

Source: OECD, ‘Tax database: table II.1. corporate income tax rate’, OECD website.

It should be noted however that a number of countries have already implemented further reductions in their company tax rates to come into effect in future years. These countries include:

•       a proposed reduction in the company tax rate in the UK to less than 15 per cent (currently legislated to fall to 17 per cent in 2020) following the Brexit referendum[87] and

•       a reduction in the company tax rate in Spain from the current 28 per cent to 25 per cent in 2016.[88]

Other measures of tax competitiveness

A broader measure of tax competiveness is provided in an annual publication by the Tax Foundation that examines competitiveness based on headline corporate, property and other tax rates as well as a more subjective assessment of a country’s international tax rules. In the Foundation’s assessment of 2015 arrangements, while Australia was ranked 25 out of 34 OECD member countries on the basis of the headline company tax rate, overall Australia was ranked seventh.[89]

Another measure for making international comparisons of how attractive the company tax environment is for investment is to use the ‘marginal effective cost of capital on corporate investment’, which identifies the tax cost of the next dollar of investment by a company, taking account of the nominal tax rate, expense and depreciation deductions and the tax treatment of debt and equity finance.[90] Based on this measure, which incorporates broader features of the tax system, Australia still has tax rates at the higher end compared to other countries (Figure 7).

Figure 7: Marginal effective tax rate on corporate investment, selected countries, 2005 and 2014

Source: D Chen and J Mintz, ‘The 2014 global tax competitiveness report: a proposed business tax reform agenda’, University of Calgary: The School of Public Policy, 8(4), 6 February 2016, p. 6.

Importance of the corporate tax rate in attracting investment

There is a body of academic literature that has made assessments about whether the corporate tax rate is an important determinant in attracting investment and whether previous downward shifts in rates by individual countries have been associated with increased investment.

In the discussion about corporate tax rate competitiveness using the example of the US auto industry, Michael Knoll distinguished between investment choices made by a multinational company looking to make a specific investment across several countries—where the relatively high US corporate tax rate discouraged investment in the US in favour of investment abroad—and the incentives for the holders of capital looking to allocate investments across a range of countries in any type of asset.[91] For the latter type of investment, tax considerations were seen to favour investment through the lowest taxed entity, which needed to take account of tax rates in different countries but also crediting arrangements for foreign source income in countries where corporations were domiciled.

A 2010 study of corporate taxes on investment and entrepreneurship summarised much of the previous academic work on the issue, noting a number of studies since the early 1960s and making the general statement that ‘this research finds adverse effects of corporate income taxes on investment, although studies offer different estimates of magnitudes’.[92] Using data on effective corporate income taxes in 85 countries in 2004, the authors found that (their estimates of) the effective corporate tax rate has a large adverse impact on aggregate investment, foreign direct investment, and entrepreneurial activity and that higher effective corporate income taxes are also associated with lower investment in manufacturing but not in services, a larger unofficial economy, and greater reliance on debt as opposed to equity finance.[93]

Schedule 2—Tax discount for unincorporated small businesses

Key provisions

According to the Explanatory Memorandum:

The small business income tax offset was introduced in the 2015–16 income year as part of a range of tax measures to help small business in the 2015–16 Budget. It entitles individuals who are small business entities, or who are liable to pay income tax on a share of the income of a small business entity, to a tax offset equal to 5 per cent of their basic income tax liability that relates to their total net small business income, capped at $1,000.[94]

Schedule 2 of the Bill includes the necessary amendments to subsection 328–360(1) of the ITAA 1997 to increase the rate of the tax discount for unincorporated small businesses to reflect the lowering of the company tax rate. Item 1 of Part 1 of Schedule 2 to the Bill amends subsection 328–360(1) of the ITAA 1997 to increase the tax discount rate from the current 5 per cent to 8 per cent with effect from 1 July 2016 so that the higher rate applies to the 2016–17 financial year and subsequent years.

Item 2 of Part 2 of Schedule 2 amends subsection 328–360(1) of the ITAA 1997 to increase the tax discount rate from 8 per cent to 10 per cent with effect from 1 July 2024 so that the higher rate applies to the 2024–25 financial year.

Item 3 of Part 3 of Schedule 2 increases the discount rate to 13 per cent from 1 July 2025. It will be increased again to 16 per cent from 1 July 2026 by item 4 of Part 4. Importantly, despite the rate of the discount increasing, it will remain capped at $1,000.[95]

Schedule 3—Access to small business concessions

Key provisions

Small businesses are eligible for a range of tax concessions to reduce their tax liability and cost of compliance. Currently, entities can access these concessions if they are carrying on a business and have aggregated turnover of less than $2 million.[96] Schedule 3 of the Bill amends the ITAA 1997 to adjust the turnover threshold for access to most small business tax concessions.

CGT small business entity

Items 1 to 13 relate to the continued use of the $2 million turnover threshold for eligibility to the capital gains tax (CGT) concessions. To this end, proposed subsection 152-10(1AA) is inserted into the ITAA 1997 to create the new term CGT small business entity to ensure that the $2 million threshold continues to apply for small business capital gains tax (CGT) concessions.

Threshold for small business entity

The $2 million threshold which is used as the basis for access to various ‘small business’ thresholds is established in Division 328 of the ITAA 1997, where the term small business entity is defined to be an entity that has an ‘aggregated turnover’ of less than $2 million in an income year.[97] Items 15, 17 and 18 amend section 328–110 to increase the aggregated turnover amount from $2 million to $10 million with effect from 1 July 2016.

Threshold for individuals that are a small business entity

Item 19 of Schedule 3 repeals and replaces section 328–350 of the ITAA 1997. The amendment provides a summary of Subdivision 328-F of the ITAA 1997, which relates to the small business income tax offset. Proposed section 328-350 explains that under Subdivision 328-F, an individual may be entitled to a tax offset if:

•       they are a small business entity or

•       their assessable income includes a share of the net small business income of an unincorporated small business entity or

•       their assessable income includes an amount because they are a partner in a partnership, or a beneficiary in a trust that is a small business entity.

Proposed section 328-350 provides that in determining whether an entity is a small business entity for the purposes of the tax offset, proposed section 328-357 imposes a $5 million turnover threshold.

Key issue: additional complexities in defining small business

There are a number of definitions used to describe a small business including statistical definitions and for other regulatory purposes. The proposed changes may add to the complexity of definitions.

Australian Bureau of Statistics

The key definition of small business used by the Australian Bureau of Statistics (ABS) is largely based on the number of employees, with a small business defined as an ‘actively trading business with 0–19 employees’.[98] Based on this definition, there were around two million small businesses as at 30 June 2014, accounting for 97 per cent of businesses in Australia.[99] Of these small businesses, around 62 per cent were non-employing businesses, 28 per cent had one to four employees and ten per cent had five to 19 employees.[100]

Other Commonwealth usage

There are a number of other definitions that are used in other Commonwealth laws and programs. These include:

•       Privacy Act 1988—defines a small business as one whose annual turnover for the previous financial year is $3 million or less[101]

•       Australian Securities and Investments Commission Act 2001—defines a small business as a business employing less than 100 people if the business is, or includes, the manufacture of goods, or a business employing less than 20 people otherwise[102] and

•       Fair Work Act 2009—defines a small business employer as an employer with fewer than 15 employees.[103]

In addition, the Small Business Superannuation Clearing House, a free service provided by the ATO to receive superannuation contributions by ‘small business’ uses a threshold of 19 employees or a turnover threshold of $2 million.[104]

Tax law

A key element of the creation in 2007 of a standardised $2 million turnover threshold to define a small business for tax purposes was to simplify what were five separate small business tests that applied at the time to various tax concessions.[105] Announcing the measure in November 2006, the then Treasurer and the Minister for Small Business and Tourism, Peter Costello, noted:

Small businesses will only have to apply one eligibility test to access a range of small business concessions. This demonstrates again the Government’s commitment to reducing red tape and compliance costs for small businesses.[106]

From 1 July 2016, the amendments in the Bill operate to create three different turnover thresholds—that is, the retention of the $2 million threshold for capital gains tax concessions, the $5 million threshold which will apply to the tax discount for unincorporated small businesses and the $10 million threshold for entitlement to a lower company tax rate.

This multiplicity of thresholds applying to small business may create additional complexity, reversing the simplification that was implemented a decade ago.

Schedule 4—amendments relating to imputation

Key provisions

Schedule 4 to the Bill includes the relevant amendments to the ITAA 1997 to continue the operation of the dividend imputation system over the next decade as the company tax rate reductions included in Schedule 1 to the Bill come into effect.

The arrangements for the dividend imputation system are included in Part 3–6 of the ITAA 1997. In broad terms, the imputation system allows Australian corporate tax entities to distribute profits to members after corporate tax has been paid in the form of a ‘franked’ dividend. These franked dividends can then be used by the recipients to offset their tax liability, thereby avoiding double taxation, where tax is paid on profit earned by a corporate tax entity, and again when a recipient receives a distribution.[107]

Under existing arrangements, the amount of franking credits that can be attached to a distribution is limited by a formula linked to the ‘standard corporate tax rate’—currently set at 30 per cent.[108]

Under this Bill the corporate tax rate reduces to 27.5 per cent for an entity as they come within the increased turnover thresholds. As the Bill will result in some entities having a corporate tax rate of 27.5 per cent and others having a corporate tax rate of 30 per cent, the operation of the imputation system has to change.

Item 28 of Schedule 4 to the Bill inserts a new definition of corporate tax rate for imputation purposes into the definitions provision in subsection 995–1(1) of the ITAA 1997. The definition proposes that the corporate tax rate for imputation purposes means the corporate tax rate that applies to the entity in relation to its turnover threshold for the previous year.[109] The use of the previous year’s turnover to determine the franking rate means that companies making a distribution could face an imputation rate that is the same, or lower than, the corporate tax rate for the relevant year, depending on how their turnover changes from year to year as the turnover threshold is lifted.

To illustrate these different outcomes, we can use the example 1.1 at page 25 of the Explanatory Memorandum as a guide and make different assumptions about the turnover for 2017–18 to show that the company tax rate for imputation purposes can be the same or lower than the applicable company tax in 2017–18 (Table 3).

Table 4: Examples of the company tax rate for imputation purposes under different turnover assumptions for 2017–18

Example 1—company tax rate and imputation rate the same

Year

Hypothetical turnover

Threshold for lower company tax rate in this year

Company tax rate in this year

Company tax rate for imputation purposes in this year

2015–16

$18 million

$2 million

30%

30%

2016–17

$20 million

$10 million

30%

30%

2017–18

$24 million

$25 million

27.5%

27.5%

Example 2—company tax rate and imputation rate different with higher turnover in later year

2015–16

$18 million

$2 million

30%

30%

2016–17

$20 million

$10 million

30%

30%

2017–18

$26 million

$25 million

30%

27.5%

Source: Parliamentary Library estimates based on example 1.1 of the Explanatory Memorandum.

As noted in the Explanatory Memorandum, this change ‘does not alter basic operation of the imputation system. Distributions to members who are domestic shareholders will continue to be ultimately taxed at the member’s marginal rate’.[110]

Some tax professionals have been reported as considering that companies would be under pressure to ‘use it or lose it’, potentially giving companies an incentive to fully distribute dividends with the higher franking credit, rather than retaining the profits for re-investment.[111] In commenting on this issue, the Australian Shareholders Association (ASA) was reported as stating:

We appreciate that this appears to be a complex issue for companies, but the ASA has often been critical of companies who have retained franking credits and not extended distribution to their shareholders in a timely way.

… We hope that the tax reduction changes that have been signalled in the interests of long-term growth will prompt companies to give immediate attention to retained franking credits and the benefits to which shareholders are entitled.[112]

In the 2023–24 income year, a corporate tax rate of 27.5 per cent will apply to all corporate entities. The amendments to the ITAA 1997 in Part 2 of Schedule 4 to the Bill reflect the single tax rate for all companies.

Schedule 5—other consequential amendments

Schedule 5 makes various consequential amendments to the ITAA 1997 relating to dividend imputation as the tax rate changes from 1 July 2016 and then over the period 1 July 2023 to 1 July 2026. The Schedule also makes amendments to the ITAA 1936 where the level of the general company tax rate is referenced (item 9).

Concluding comments

The level of company tax in Australia is at the higher end compared to other countries. The proposed company tax cuts included in the Bill are implemented in a way that any benefits on investment and profitability will be firstly experienced by smaller companies. While the economic literature generally supports the view that company tax cuts can lead to higher levels of investment, the magnitude of the effect is open to some debate.

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[1].              Australian Government, Budget measures: budget paper no. 2, 2016–17, May 2016, pp. 36–43.

[2].              S Morrison, ‘Second reading speech: Appropriation Bill (No. 1) 2016–2017’, House of Representatives, Debates, 3 May 2016, p. 4255.

[3].              S Morrison, ‘Second reading speech: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016’, House of Representatives, Debates, 1 September 2016, p. 250.

[4].              These changes were implemented from 1 July 2015, and are discussed later in this Digest.

[5].              Australian Taxation Office (ATO), ‘Small business entity concessions’, ATO website, last modified 4 October 2016.

[6].              ATO, ‘Imputation’, ATO website, last modified 11 November 2015.

[7].              S Reinhardt and L Steel, ‘A brief history of Australia’s tax system’, Economic Round-up, Winter 2006, 4 September 2006, p. 17.

[8].              Ibid.

[9].              Taxation Review Committee, Full report: Taxation Review Committee, (the Asprey Review), Australian Government Publishing Service, Canberra, 1975, pp. 241–242.

[10].              Ibid., paragraph 16.100, p. 242.

[11].              Review of Business Taxation, A tax system redesigned: more certain, equitable and durable: report, (the Ralph Review), The Review, Canberra, July 1999; pp. 575–589.

[12].              Ibid.

[13].              K Henry, Australia’s future tax system: report to the Treasurer, (Henry Tax Review), vol. 1 of 2, ‘Part two detailed analysis’, The Treasury, Canberra, December 2009, pp. 167, 174.

[14].              K Rudd (Prime Minister), Stronger, fairer, simpler: a tax plan for our future, media release, 2 May 2010.

[15].              Ibid.

[16].              J Gillard (Prime Minister), W Swan (Treasurer) and M Ferguson (Minister for Resources and Energy), Breakthrough agreement with industry on improvements to resources taxation, joint media release, 2 July 2010.

[17].              Minerals Resource Rent Tax Act 2012; Australian Government, Budget measures: budget paper no. 2: 2012–13, May 2012, p. 22.

[18].              P Coorey, ‘Eyes on Wilkie over company tax cuts’, The Sydney Morning Herald, 2 May 2012, p. 6; M Grattan, ‘No hope of tax cut for big business: Milne: Greens leader attacks supermarkets’, The Age, 16 April 2012, p. 3.

[19].              Prime Minister Rudd did however announce a proposal for the creation of a ‘Northern Special Economic Zone’ for which tax incentives would apply ‘with the objective of reducing the company tax rate for Northern Territory-based companies in five years’ (K Rudd (Prime Minister of Australia), Growing the north: a plan for Northern Australia, media release, 15 August 2013).

[20].              Australian Labor Party (ALP), Boosting investment by small business, ALP policy document, Election 2013, p. 2.

[21].              Liberal Party of Australia and the Nationals, The Coalition’s policy to lower company tax, Coalition policy document, Election 2013, p. 2.

[22].              Liberal Party of Australia and the Nationals, The Coalition’s policy for paid parental leave, Coalition policy document, Election 2013, pp. 6–7.

[23].              Australian Greens, Standing up for small business: lower taxes, Australian Greens policy document, Election 2013, p. 1.

[24].              Ibid.

[25].              Australian Greens, Greens focus on small business, media release, 8 August 2013.

[26].              Board of Taxation, Review of tax impediments facing small business: a report to the Government, The Treasury, Canberra, August 2014, pp. 40–43.

[27].              Ibid., p. 42.

[28].              The Treasury, Rethink: tax discussion paper: better tax system, better Australia, The Treasury, Canberra, March 2015, pp. 105–120.

[29].              Ibid., p. 119.

[30].              Ibid., p. 26.

[31].              Ibid., p. 78.

[32].              Australian Government, Budget measures: budget paper no. 2, 2015–16, May 2015, pp. 19–20.

[33].              Tax Laws Amendment (Small Business Measures No. 1) Act 2015.

[34].              B Shorten, ‘Second reading speech: Appropriation Bill 2015–2016’, House of Representatives, Debates, 14 May 2015, p. 4185.

[35].              Tax Laws Amendment (Small Business Measures No. 3) Act 2015.

[36].              Senate Standing Committee for the Selection of Bills, Report, 6, 2016, The Senate, Canberra, 15 September 2016, p. 1.

[37].              Senate Economics Legislation Committee, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 [Provisions], The Senate, Canberra, 10 October 2016, p. 32.

[38].              Ibid., p. 33.

[39].              Senate Standing Committee for the Scrutiny of Bills, Alert digest, 6, 2016, The Senate, Canberra, 15 September 2016, p. 41.

[40].              B Shorten, ‘Second reading speech: Appropriation Bill (No. 1) 2016-2017’, House of Representatives, Debates, 5 May 2016, p. 4620.

[41].              Ibid.

[42].              Australian Greens, Budget principles: our approach to the 2016 budget & election, Greens policy document, Election 2016, p. 1.

[43].              Nick Xenophon Team, Policy principles, Nick Xenophon Team policy document, Election 2016, p. 2.

[44].              Business Council of Australia (BCA), Realising our full potential: tax directions for a transitioning economy, BCA, Melbourne, March 2016, p. 25.

[45].              Ibid., pp. 44–45.

[46].              BCA, BCA Statement on the 2016–17 federal budget, media release, 3 May 2016.

[47].              Ibid.

[48].              Australian Chamber of Commerce and Industry (ACCI), 2016–17 Australian Chamber pre-budget submission, ACCI, Canberra, February 2016, p. 9.

[49].              ACCI, Enterprise budget fuels the engine room of the economy, media release, 3 May 2016.

[50].              P Sullivan (Australian Industry Group), A good budget for business, media release, 3 May 2016.

[51].              P Sullivan (Australian Industry Group), Tax changes will help grow Australian scale in manufacturing, media release, 3 May 2016.

[52].              Council of Small Business Australia, Small business budget II – more than a sequel, media release, 3 May 2016.

[53].              The Tax Institute, A Budget for now and the future, media release, 3 May 2016.

[54].              The Tax Institute, 2016–17 federal budget submission, The Tax Institute, Sydney, February 2016, p. 8.

[55].              Ibid.

[56].              Australian Council of Trade Unions, Fudge it budget: Turnbull fails working Australians and gives golden handshake to big corporations, media release, 3 May 2016.

[57].              Australian Council of Trade Unions (ACTU), Tax reform for a fairer society and stronger economy, ACTU, Melbourne, 8 March 2016, pp. 19–20.

[58].              Ibid., pp. 21–22.

[59].              Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, p. 54, paragraph 4.40.

[60].              J Fraser (Secretary of the Treasury), Evidence to Senate Economics Legislation Committee, Budget Estimates 2016–17, 6 May 2016, p. 11.

[61].              Parliamentary Budget Office (PBO), Post-election report of election commitments: 2016 general election, PBO, Canberra, 5 August 2016, p. 21.

[62].              PBO, Post-election report of election commitments: 2016 general election, ‘Appendix F: costing documentation for Labor’s election commitments’, PBO, Canberra, 5 August 2016, pp. 209–211.

[63].              Human Rights (Parliamentary Scrutiny) Act 2011.

[64].              The Statement of Compatibility with Human Rights can be found at pages 32–33, 39–40 and 45–46 of the Explanatory Memorandum to the Bill.

[65].              Parliamentary Joint Committee on Human Rights, Report, 7, 2016, The Senate, Canberra, 11 October 2016, p. 100.

[66].              A business is a small business entity as defined in section 328-110 of the ITAA 1997 if the business is carried on in the current year; and either the business was carried on in the previous income year and the aggregated turnover for the previous year was less than $2 million or the aggregated turnover for the current year is likely to be less than $2 million.

[67].              A PDF is a fund used to raise capital and make equity investments in Australian small and medium-sized enterprises. The PDF programme was closed to new registrations in June 2007. However, Funds registered under the program continue to operate. An RSA is a low-risk, low return superannuation product, generally offered by the major banks.

[68].              Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, p. 16, op. cit., paragraph 1.32.

[69].              Item 37 of Part 9 of Schedule 1, item 45 of Part 10 of Schedule 1 and item 53 of Part 11 of Schedule 1 to the Bill.

[70].              Item 38 of Part 9 of Schedule 1, item 46 inserted by Part 10 of Schedule 1 and item 54 inserted by Part 11 of Schedule 1.

[71].              Item 40 inserted by Part 9 of Schedule 1, item 48 inserted by Part 10 of Schedule 1 and item 56 inserted by Part 11 of Schedule 1.

[72].              S Morrison, ‘Second reading speech: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016’, Debates, House of Representatives, 1 September 2016, p. 11; Australian Government, Budget measures: budget paper no. 2, 2016–17, op. cit., p. 250.

[73].              W Swan, ‘Ministerial statements: Economy’, House of Representatives, Debates, 24 May 2010, p. 3707.

[74].              K Henry, Australia’s future tax system: Report to the Treasurer, (the Henry Tax Review), ‘Part one: overview’, The Treasury Canberra, December 2009, pp. 39–40.

[75].              Organisation for Economic Co-operation and Development (OECD), Tax policy reform and economic growth, OECD Publishing, Paris, 3 November 2010.

[76].              Ibid., p. 22.

[77].              D Richardson, Company tax cuts: what the evidence shows, Australia Institute, Canberra, March 2016.

[78].              Ibid., pp. 15–16.

[79].              The Treasury, ‘Economy-wide modelling for the 2016-17 Budget’, The Treasury website, 3 May 2016.

[80].              C Murphy, Company tax scenario report prepared for the Department of the Treasury, Independent Economics, Canberra, 28 April 2016; KPMG, Modelling the macroeconomic: impact of lowering the company tax rate in Australia, KPMG, [Canberra], 2 May 2016.

[81].              R Denniss, How will the corporate tax cut be funded?, Briefing paper, The Australia Institute, Canberra, May 2016, p. 5.

[82].              J Dixon and J Nassios, Modelling the impacts of a cut to company tax rates in Australia, Working paper, G-260, Centre of Policy Studies, Melbourne, April 2016, p. 1.

[83].              S Ouliaris, ‘Economic models: simulations of reality’, International Monetary Fund (IMF), IMF website, updated 28 March 2012.

[84].              Explanatory Memorandum, op. cit., p. 47.

[85].              S Morrison, ‘Second reading speech: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016’, House of Representatives, Debates, 1 September 2016, p. 250.

[86].              P Krugman, cited in M Knoll, ‘The connection between competitiveness and international taxation’, Tax Law Review, 65(3), 1 April 2012, pp. 352–353.

[87].              W Schomberg and C Humphries, ‘UK plans lower corporation tax to cushion hit from Brexit’, Reuters, 4 July 2016.

[88].              PriceWaterhouseCoopers (PwC), Worldwide tax summaries: corporate taxes 2015/16, PwC, [London], 1 June 2015, p. 1894.

[89].              K Pomerlau and A Cole, International Tax Competitiveness Index 2015, Tax Foundation, Washington DC, 28 September 2015, p. 2.

[90].              M Stewart, A Moore, P Whiteford and R Quentin Grafton, A stocktake of the tax system and directions for reform: five years after the Henry Review, Tax and Transfer Policy Institute, Australian National University, February 2015, p. 62.

[91].              M Knoll, ‘The Corporate Income Tax and Competitiveness of U.S. Industries’, Tax Law Review, 63(4), 1 July 2010, pp. 771–796.

[92].              S Djankov, T Ganser, C McLiesh; R Ramalho and A Shleifer, ‘The effect of corporate taxes on investment and entrepreneurship’, American Economic Journal: Macroeconomics, 2(3), July 2010, pp. 31–32.

[93].              Ibid., p. 59.

[94].              Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, p. 35.

[95].              The maximum amount of $1,000 is specified in subsection 328–360(2) of the Act.

[96].              Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, op. cit., p. 41.

[97].              Sections 328–110 to 328–130 define several terms connected with this definition including the meaning of ‘aggregated turnover’, ‘annual turnover’, ‘connected with an entity’ and ‘affiliate’.

[98].              Department of Industry, Innovation, Science, Research and Tertiary Education (DIISRTE), Australian small business: key statistics and analysis, DIISRTE, Canberra, December 2012, p. vii.

[99].              Australian Bureau of Statistics (ABS), Counts of Australian businesses, including entries and exits, June 2010 to June 2014, cat. no. 8165.0, ABS, Canberra, 2 March 2015, p. 21.

[100].              Ibid.

[101].              Privacy Act 1988, section 6D.

[102].              Australian Securities and Investments Commission Act 2001, subsection 12BC(2).

[103].              Fair Work Act 2009, subsection 23(1).

[104].              Australian Taxation Office (ATO), ‘Small business superannuation clearing house’, ATO website, last modified 22 September 2016.

[105].              B Pulle, Tax Laws Amendment (Small Business) Bill 2007, Bills digest, 156, 2006–07, Parliamentary Library, Canberra, 23 May 2016, p. 3.

[106].              P Costello (Treasurer) and F Bailey (Minister for Small Business and Tourism), Making tax compliance easier for small business: the new small business framework, joint media release, 13 November 2006.

[107].              ATO, ‘Imputation’, ATO website, last modified 11 November 2015.

[108].              ITAA 1997, section 202–60 and subsection 995–1(1).

[109].              If a corporate tax entity did not exist in the previous income year, the entity’s corporate tax rate for imputation purposes will be set the rate specified in paragraph 28(2)(a) of the Income Tax Rates Act — that is, 27.5 per cent.

[110].              Explanatory Memorandum, Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, op. cit., p. 25.

[111].              J Mather, ‘Company tax cut threat to franking credits’, Australian Financial Review, 14 September 2016, p. 3.

[112].              Ibid.