CANBERRA OBSERVED - by News WeeklyNews Weekly
Business tax: now the 'hard sell'
, December 18, 1999
While the prospect of the start-up of the GST is giving Coalition backbenchers in marginal seats the most heartburn, Peter Costello's business tax reforms also have the potential to wreak havoc for the government.
The business tax reforms have largely slipped through the media unnoticed compared to the constant run of horror stories about the coming GST.
The Ralph reforms were hailed by most media and economic commentators as a giant step forward in helping the investment climate in Australia by both simplifying the system and cutting capital gains and company taxes.
The Government's success in getting the Labor Party to agree to its proposals in full has also given it a free ride to build up expectations about the benefits of the reforms.
For mums-and-dads investors who have been getting quite a taste for sharemarket investments in recent years, there is the gift of big tax cuts on their profits.
For the giant US pension funds, Australia has suddenly become the ideal place to tip in billions of investment dollars.
But out in the real world, there is considerable disenchantment and it is occurring right in Coalition's heartland - contractors, small businesses, and farmers.
The reforms, combined with the GST, have delivered Treasury and the Australian Taxation Office revenue raising prizes which they had long coveted. Instead of being revenue neutral, which was always the stated aim of the reforms, it is clear the package will now provide a huge windfall for the government over the next few years.
The big winners from the cut in company tax and the elimination of accelerated depreciation are wealthy companies which have low capital requirements that currently pay full rates of tax. Only a relatively small proportion of small businesses fall into this category.
Under pressure from the Opposition and the Democrats the government has to recoup the cost of the Ralph tax relief from clamping down on tax avoidence. Of course the big-end-of-town tax avoiders will be targeted (again!), but the more likely people to be hit are the little successful Australians.
And the business tax reforms are part of a mega reform which, combined with the GST, is designed to bring all businesses and individuals under unprecedented scrutiny from the tax office.
Family trusts are to be taxed on the same basis as companies for the first time from July, 2001.
The Tax Office has always hated trusts and has finally been able to drive the stake into the heart of one of the most difficult areas of tax administration.
Hundreds of thousands of Australians who currently use companies to split income that could be said to be a salary will no longer be able to do so. And consultants and others who operate as a company, but who have only one large client, will be taxed at the same high rate PAYE taxpayers are taxed.
It will be more difficult for contractors and tradesmen to employ a family member, usually a spouse employed as a secretary/business partner, to spread investment returns.
A huge proportion of Australia's small businesses - some estimate as high as 80 per cent - are operated using trusts in which cash is distributed to a family company and then lent to beneficiaries.
Hitting all these people adds up to a considerable number of Liberal and swinging voters - exactly the people the Government should not trying to antagonise going into the next election.
Most National Party MPs are also privately expressing deep disquiet about the decision to tax family trusts, which are used by tens of thousands of farmers, but which have now lost most of their attraction.
The only incentive now to form trusts will be as a means of protecting assets from creditors or from potentially profligate family members blowing the family fortune.
Labor has played a peculiar game over the business tax reforms and has not done the Australian public any favors by being so quick to agree to the proposals.
It is a long while since anyone has seen the extraordinary spectacle of the Labor Party and Australian Democrats jostling with each other to be the first party to strike a deal with the Government.
Labor's Treasury spokesman Simon Crean pipped the Democrats chief negotiator Andrew Murray to the post - but only because Labor agreed to the Costello package in full.
Labor's tactic was to avoid previous criticism that it is constantly negative and has nothing to contribute to the economic debate, and on this level alone it worked.
Costello would have much preferred to have had the Democrats on side so he could continue to denigrate Labor's 'policy free zone'.
Labor now does have a policy _ back whatever the Coalition is proposing! As a consequence there has been no real public scrutiny of the Ralph legislation, and it has been largely ignored by the media.
The Howard Government has certainly pulled off one of the greatest reform coups in the past couple of decades and in the process has won the hearts and minds of Treasury and the ATO.
Whether this triumph in Canberra translates to the wider electorate is a much more dubious proposition.