Chapter 5

Chapter 5

COMPANY TAX AND ACCELERATED DEPRECIATION

Company tax

5.1 The Treasurer's press release of 21 September 1999 announced the Government's acceptance of the Ralph company tax recommendations, to be funded in part by moving to effective life depreciation with the removal of balancing charge rollover relief. The Government is therefore proposing a stepped drop in company tax to 34 per cent in 2000-01 and to 30 per cent in 2001-02. Most of the redesigned company tax arrangements, including the consistent treatment of entities, and the Simplified Tax System for small business, are deferred to 1 July 2001, in recognition of the current demands on businesses associated with the need to address Y2K compliance issues and the introduction of the GST on 1 July 2000. [1] The fiscal impact of the lower company tax rate has been estimated by Government as follows: [2]

Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05
Tax rate 36% 34% 30% 30% 30% 30%
Fiscal impact in $m -60 -1260 -3480 -3135 -3090 -3405

5.2 This rate is to apply to other entities taxed like companies, such as trusts, from 1 July 2001. Imputation credits attached to franked dividends paid to shareholders will be based on a 34 per cent rate for 2000-01 and 30 per cent for 2001-02 and subsequent years. The value of existing franking account balances will be preserved by converting them to the equivalent franking account balance at the new rates.

5.3 The committee heard no evidence to suggest that a lowered company tax rate was undesirable. Geoffrey Lehmann of PricewaterhouseCoopers considered whether the lower rate was sustainable in the longer term, and concluded that it was. [3]

5.4 The issue which was explored by some witnesses was the decision to tax trusts as companies. The Council of Small Business Organisations of Australia (COSBOA) complained that there was no appropriate legal form for many small businesses and, as a sector, small business was being pilloried for using the form most appropriate to it, namely trusts. [4]

Accelerated depreciation and small business measures

The fiscal impact of the depreciation and small business measures is estimated by Government as follows: [5]

Depreciation and small business measures 1999-00

$m

 2000-01

$m

 2001-02

$m

 2002-03

$m

 2003-04

$m

 2004-05

$m
Depreciation measures (all taxpayers)            
Remove accelerated depreciation 30 1050 2260 2300 2610 2550
Pooling of low value depreciable assets (<$1000) 0 30 410 40 -80 -180
Removal of balancing charge offset 20 400 360 170 80 0
Allow write-off for indefeasible rights -11 -51 -37 -36 -30 -29
Sub-total 39 1429 2993 2474 2580 2341
Small business measures            
Cash accounting 0 0 -220 -320 0 0
Simplified depreciation arrangements 0 0 -60 -220 -230 -330
Small business exemption from depreciation measures 0 -219 -474 257 88 56
Sub-total 0 -219 -754 -283 -142 -274
Total depreciation and small business measures 39 1210 2239 2191 2438 2067

5.5 Accelerated depreciation is where the tax deduction allowed for the decline in value of an asset is brought forward relative to the expected decline in the value of the asset. The present scheme was introduced in 1992 in an era of high inflation. [6] To partly offset the lower company tax revenues, Ralph proposed, and the Government accepted, that the current accelerated depreciation measures be removed.

5.6 The new system will be based on one that calculates the rate of depreciation based on the effective lifetime of the business asset. This will not apply to small businesses with three-year average turnovers of less than $1 million per annum, who have in effect been granted accelerated depreciation in advance. It will apply to plant and equipment assets covered by Division 42 of the Income Tax Assessment Act 1997 except for assets acquired or commenced to be constructed before the time of effect (11:45am AEST 21 September 1999). Taxpayers will be able to reassess the effective life of their assets, having regard to changing market or technology developments.

5.7 Accelerated depreciation has provided significant benefits to capital-intensive industries such as mining and manufacturing and it is possible that some projects may not proceed without it. In the view of the Ralph Report,

    It would be more efficient to subsidise directly projects of major national significance, if such projects would not otherwise proceed, as a budget expenditure than to maintain accelerated depreciation generally – at the cost of forgoing a lower company tax rate. [7]

Effects on major projects

5.8 The committee received evidence from a number of individuals and organisations which asserted that the changed depreciation regime would adversely affect them. The Australian Gas Light Company (AGL) believes that greenfields infrastructure projects will be severely disadvantaged by the loss of accelerated depreciation. It cites the case of the proposed natural gas pipeline from Papua New Guinea to Queensland, for which a development agreement had been signed in October 1998 and proposed tariffs concluded, on the basis of a taxation regime in Australia as applicable at that time. The proposed changes significantly increase the risk of funding the project and, in the view of AGL, `the Government's taxation announcements of 21 September 1999 effectively amount to retrospective changes to the taxation laws for projects which have long pre-construction lead times'. [8]

5.9 In the Treasurer's 21 September 1999 press release, the potential impact of removing accelerated depreciation on large capital intensive projects with long lead times was recognised. The Treasurer stated `the Government will be prepared to consider such projects in the context of an expanded strategic investment coordination process, including consideration of the option of targeted investment allowances'. [9] The committee notes that the strategic investment coordination process has limited its approval for Government financial support to two projects to date: Visybord's pulp mill at Tumut - $40 m; and Comalco's alumina plant at Gladstone - $100 m. The committee notes that no funding has been provided by the Government to meet the cost of special assistance for major projects. Nor has the Government indicated what characteristics a major project needs to have, in order to qualify. In evidence to the committee, Mr Ralph suggested that projects should be of an order of magnitude of $1 billion plus, and expected the order of funding magnitude in the budget to be a few hundred million `at the most'. [10] The impact on the budget will therefore be significant.

Sectoral effects

5.10 The Australian Livestock Transporters' Association pointed out that livestock transporters would move from a depreciation rate of between 30 per cent and 40 per cent on new trucks to around 7.5 per cent per annum. They went on to advise that the $1 million per annum turnover threshold would result in the break-up of small businesses, with major capital items (trucks) put in the hands of individuals to run their own even smaller business to utilise the higher depreciation rates. [11]

5.11 COSBOA, although welcoming the proposal for a simplified regime for small business, also indicated that the $1 million per annum turnover threshold was far too low. COSBOA supported a threshold of $10 million, noting that the Australian Taxation Office already used this figure in separating smaller businesses from larger ones.

5.12 The Ralph Report devoted a section to reporting on the Econtech modelling commissioned by the Department of Industry, Science and Resources in May 1999 on the long-term effects of business tax reform on Australian industries. It found that removing accelerated depreciation would increase the burden of taxation on those industries employing a relatively large proportion of assets currently benefiting from accelerated depreciation, such as long-lived plant and equipment. Total costs to business in 2004-05 from the removal of accelerated depreciation were estimated at $2550 million, of which the lion's share would be borne by manufacturing ($662 million) mining ($385 million) and transport ($285 million). These costs were not completely offset by the lower company tax rate estimated at manufacturing (-$554 million) mining (-$316 million) and transport (-$87 million). The modelling suggested an estimated reduction in production of about 0.2 per cent against the benchmark for the transport, electricity, gas and water, and mining sectors. However while the taxes paid by mining and manufacturing are expected to increase as a result of the business tax reforms, each industry is estimated to benefit from a small increase in international competitiveness, arising from the broader economic effects of the business tax measures. [12]

5.13 In its overview, the Ralph Report suggested the decision as to whether a reduction in the company tax rate or the continuation of accelerated depreciation would deliver the strongest economic growth was a judgment call and that if accelerated depreciation were to be eliminated, other recommended changes would be relevant, including:

  • entities which lost through the removal of accelerated depreciation would have offsetting gains through the lower tax rate and recommended treatment of blackhole expenditures;
  • elimination of accelerated depreciation will eliminate a major source of tax-preferred income; and,
  • the simplified depreciation provisions for small business (including 99 per cent of primary producers) will continue to provide accelerated depreciation. [13]

Whether the modelling on which these views were formed is accurate has been hotly debated. [14]

5.14 One submittor suggested that revenue gains produced by the elimination of accelerated depreciation would reverse out in later years when deductions deferred by lower depreciation rates were claimed. He went on to say, however, that small upward variances in growth rates and extra revenue over the next few years could compound and easily accommodate a reversal of the extra revenue from eliminating accelerated depreciation. [15]

Footnotes

[1] Treasurer, The New Business Tax System, Press Release no. 58, 21 September 1999.

[2] Treasurer, Introduction of Legislation on Business Tax Reform, Press Release no. 69, 21 October 1999, Table 1.

[3] Evidence, 11 November 1999, p. 130.

[4] Evidence, 11 November 1999, p. 149.

[5] Treasurer, Introduction of Legislation on Business Tax Reform, Press Release no. 69, 21 October 1999, Table 1.

[6] One Nation Statement, February 1992, p. 186.

[7] Review of Business Taxation, A Tax System Redesigned, July 1999, p. 306.

[8] Submissions and Documents, p. 117.

[9] Treasurer, The New Business Tax System, Press Release no. 58, 21 September 1999, p. 1.

[10] Evidence, 22 October 1999, p. 8.

[11] Submissions and Documents, pp. 23-24.

[12] Review of Business Taxation, A Tax System Redesigned, July 1999, section 25.

[13] ibid, p. 25.

[14] See, for example, Evidence, p. 20.

[15] Lehmann, in Submissions and Documents, p. 95.