Australia: Re:think Tax Discussion Paper - dividend imputation, tax rates, GST and other key issues for business

The Federal Government has heralded its 203-page "Re:think Tax Discussion Paper", released on 30 March 2015, as "opening the conversation" on tax reform. The Paper lands in a cluttered tax landscape which has seen public attention drawn to multinationals appearing before the Senate Economics References Committee inquiry into corporate tax avoidance, structures with colourful names such as the "Singapore sling"1 and Australia's participation in the OECD base erosion and profit shifting (BEPS) project.

While the Paper raises some significant "elephant-in-the-room"' questions around issues like the GST, it is unlikely to elicit answers for genuine reform in the current political and economic environment.

That said, business should be alert to some of the key areas targeted by the Paper and keep a close watch on the following five issues.

1. CHALLENGES TO THE DIVIDEND IMPUTATION SYSTEM

The Paper questions whether the dividend imputation system is serving Australia well in an increasingly global economy.

The Paper:

  • notes that the imputation system encourages Australian investors to invest in Australian shares;
  • points out that the current system creates a bias against Australian-owned companies investing in foreign companies or engaging in foreign business activities while providing little incentive for foreign investment into Australia; and
  • details a number of alternative approaches to the taxation of corporate dividends which have been adopted by other OECD countries.

Any changes to the dividend imputation system will have an enormous impact on investments in Australian businesses, particularly on "Mum and Dad" investors, including through their superannuation funds. For this reason, the Government may be reluctant to take on this issue.

2. LOWERING OF CORPORATE TAX RATE

Lowering company tax is strongly supported by the Paper. It suggests Australia's tax system relies too heavily on corporate income tax at a time when the global trend has been to reduce corporate tax rates.

The Paper also challenges the effectiveness of the current range of tax concessions for small businesses and raises the possibility of a lower or zero rate of tax for these businesses.

Countries such as Canada, China, Belgium, Japan, South Korea, the US, the UK and Singapore are cited as examples of places where reduced (and even zero) tax rates are part of small business tax policy.

The Federal Government had previously committed to reducing the corporate tax rate to 28.5 percent from 1 July 2015. However, since the release of the Paper the Government has withdrawn its plan to cut the general rate of company tax but confirmed that it will proceed with cuts to company tax for small businesses.

3. TREATMENT OF INBOUND AND OUTBOUND INVESTMENTS

The tax treatment of inbound and outbound investments is an area identified for potential reform. The Paper highlights the different tax treatments that apply to inbound investments depending on the nature of the income derived (in particular, whether the income is active or passive).

It questions the extent to which Australia's tax system should be designed to attract particular forms of investment (for example, by distinguishing between active and passive or portfolio or non-portfolio investments).

In relation to outbound investment, the Paper notes that, like the imputation rules, the taxation of foreign income may further distort decisions about foreign investments.

4. REVIEW OF GST

One of the more contentious issues in the Paper, and one that has generated much media attention, is the proposal to review the GST and State taxes.

The Paper reiterates the Government's position that it will only support changes to the GST if "there is a broad political consensus for change", including the agreement of the State and Territory governments.

Any proposal to change the GST rate will be a difficult road to navigate for the Government in the current political environment with the Federal Opposition already signalling it will not support a rate increase.

A new development since the Paper's release is the Government's announcement that it will introduce legislation to impose GST on intangibles supplied by non-residents from outside Australia. This is likely a direct response to the media attention regarding non-resident intangible players in the Australian market and an attempt to level the competitive playing field.

The Government has also committed to a white paper on the reform of the Federation (the Federation White Paper), which it says will address the division of responsibility between the Federal Government and the States and Territories. Any review of the GST and State taxes will feed into this more general review of Federation.

5. REVIEW OF R&D INCENTIVE

The Government has already said it intends to review the R&D tax incentive.

The incentive is being claimed by an increasing number of companies each year. In 2012-13, it cost the Budget around $2.5 billion and it is likely the Government will look for ways to tighten these rules.

The suggestion is the incentive should be used only to encourage R&D activities that otherwise wouldn't happen without government support.

Submissions in response to the Paper are due by 1 June 2015.

Those submissions will inform the Government's options (green) paper, expected to be released in the second half of this year, with the final white paper scheduled for release in time for the next Federal election in 2016.

We don't expect the Paper to uncover an appetite for significant structural reform of Australia's taxation system. However, given the broader media attention drawn to tax matters recently, which seems to be channelling a sentiment that Australia should get its share of the international tax (Apple?) pie, it seems certain that tax reform will be on the agenda between now and the next Federal election.

Footnote

1Australian Financial Review, 7 April 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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