April 22nd 2017

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Articles from this issue:

COVER STORY The populist wedge: political disaffection comes to Australia

EDITORIAL Human Rights Commission needs to start afresh post Professor Triggs

CANBERRA OBSERVED Liberals' soul searching too painful to publicise

ABORTION Law condones the act as it criminalises the image

FOREIGN AFFAIRS Trump makes calculated response to Syrian atrocity

CHINA No easy way to reverse malignant one-child policy

FOREIGN AFFAIRS French election may determine Eurozone fate

ECONOMICS The taxing of companies: a clarifying perspective

PHILOSOPHY Rights bereft of obligations: or, Socrates versus the pig

MUSIC Classical colours: Mozart's fusion of opposites

CINEMA Beauty and the Beast: A fairytale of true enchantment

BOOK REVIEW Santamaria: a man against the tide

BOOK REVIEW The teen they would have made queen

Heartening response to readers' survey

Books promotion page

The taxing of companies: a clarifying perspective

by Colin Teese

News Weekly, April 22, 2017

I have written recently in praise of what the United States Republican Party seems to be in favour of doing in respect of what some call “company tax reform”. What I have not done is comment in detail on the Turnbull Government’s preferred position on company tax.

At the time of writing, we have heard that a largely unchanged version of the Government’s preferred position on company tax – except that companies enjoying an annual turnover of more than $50 million are excluded from the deal – will be passed in the Senate. The fate of the remainder of the original plan is in limbo.

So, the final outcome is not yet clear. On that basis, this article refers to the Government’s full proposals and considers what this scheme is actually all about.

There are two legs to the Government’s company tax proposals: an immediate reduction to 27.5 per cent in company tax for medium and small businesses (those turning over less than $10 million a year), together with a 10-year phasing in of 25 per cent tax for all companies. The Government claims that the plan will result in companies saving $48 billon in tax over the life of the scheme.

As would be expected, the financial media has expressed views on these proposals – mostly favourable. Initially, the idea was to sell the tax cuts on the basis of “job creation” benefits. However, this has proved difficult in the face of convincing evidence to the contrary.

From the beginning the proposal was destined to be hard to sell to the wider community – apart from the tax reductions for small business. Big business is having problems making its case, given that, among other things, there are practical difficulties with the proposal.

For example, it is to be implemented over 10 years, which overlooks the problem of three-year terms for our Parliament, and the fact that no government can commit future governments on policy. Recall that Mr Abbott, in government, had no difficulty repealing his predecessor’s carbon tax.

A second difficulty, no less daunting, is cost. The Government claims that companies will save $48 billion in tax – which is another way of saying that revenue will shrink by the same amount. If we have a problem with the budget deficit now, won’t this make so-called “budget repair” even more difficult?

(By way of digression, have you noticed how easily governments and special pleaders forget about the “deficit problem” any time they want to spend on pet schemes – new submarines and rebuilding the Snowy Mountains Scheme are perfect examples.)

I do not accept that we need to reduce the deficit while the productive capacity of the economy is not being fully used. Neither side of politics, however, shares this view. So, when they make new spending proposals, which on their reasoning will drive us deeper into debt, they should be asked to explain how will it be paid for.

The corporate sector has probably given up on its ambitions. However, it too must wrestle with contradictions. At one and the same time it is pressing for $48 billion in tax concessions, while emphasising the urgent need for “budget repair”.

As would be expected, it is left to the Leader of the Opposition to point out that the package is “unfunded”. Of course, voters will not need to be reminded that the same has been said of Labor spending proposals when it has been in government. Nor will they fail to recognise this for the cynical point-scoring that it is.

All things being considered, this so-called “tax reform” is beginning to look like a badly cobbled together package struggling for credibility in the wider community.  Yet even what might be called procedural difficulties turn out to be trivial compared with the even deeper concerns that threaten to turn the entire project into farce.

To understand why, we must thank commentator Ross Gittins (The Age, March 27); although, no doubt, in government circles, his observations will be considered “unhelpful”.

Unhappily for the Government, Gittins is right when he reminds us that our company tax is different from most others because it is associated with something called “tax imputation” – a fact apparently overlooked by the architects of the Turnbull tax policies.

Imputation, introduced by Hawke/Keating in 1987, transformed our company tax regime. In practice, imputation means that the tax paid by companies rather than being paid into Consolidated Revenue, becomes an offset against the tax obligations attached to the dividends paid to Australian shareholders.

Here’s how it works. Companies pay tax on profit, after allowable expenses have been deducted. Before imputation was introduced, these collections joined other tax collections and became part of Consolidated Revenue. Australian shareholders then paid personal tax on the dividends distributed by the company.

Hawke and Keating argued, correctly, that this was in effect taxing the same income twice – once in the name of the company and again in the name of the shareholder personally.

Imputation became the means of correcting the anomaly of double taxation.

As things stand (except in respect of foreign-owned shareholdings), company tax collections, at whatever rate, effectively become an offset against the tax payable by the shareholder. Accordingly, the only remaining tax on companies relates to foreign-owned shareholdings not taxed in Australia.

But there is more. The full Turnbull tax reductions, phased in over 10 years, are from 30¢ in the dollar of tax to 25¢. Let’s assume that the company paying 5¢ in the dollar less will be able correspondingly to increase its profit. As a result, its dividend payments to shareholders will increase: however, given the tax offset for the shareholder taxpayer will be calculated on 25¢ in the dollar rather than on the previous 30¢, the overall gain to shareholders will be small.

And this will apply to shareholders in big and small businesses alike.

Foreign shareholders will benefit from the lower tax rate if it indeed results in greater profits because they do not pay tax in Australia. It might be said that foreign shareholders will benefit most from our government’s proposals for lower company tax rates.

But there is more. Gittins contends that given imputation, company tax is really a withholding tax companies pay on behalf of their shareholders. That being so, there’s no particular case for reducing the level of tax for Australian companies – large or small.

There is another more telling point. Given the facts stated above, the overall cost to revenue is likely to be much less than the government’s estimate of $48 billion over 10 years. For those with budget concerns, that should bring a sigh of relief.

So, there it is. Small benefits to Australian shareholders; larger benefits to foreign shareholders not paying tax here; probably small negative implications for the budget; and, on the basis of reliable estimates, almost no contribution to job creation. MPs and Senators of all political persuasions, please take note – especially those calling so loudly for “budget repair”.

With these facts in front of us, it makes one wonder why the Government and the Business Council of Australia are pushing so hard for the package? Both have argued that our company tax headline rate of 30 per cent is too high. As a consequence our businesses are at a disadvantage compared with international competition operating with lower headline company tax rates.

Note my qualification: “headline”. I make this qualification because our tax imputation system bears fundamentally on the measure of company tax. To the extent that other countries with which we compete internationally do not have the same imputation system, headline company tax rates cannot be a valid basis of comparison.

The crucial question then becomes: which countries apply imputation systems strictly comparable with ours? To find out I checked and discovered that only Australia, Malta, Chile and New Zealand apply a strictly comparable imputation system. Thus the assertion that our company tax rate of 30 per cent renders Australian businesses internationally uncompetitive is unsustainable. In our system, it is the shareholder not the company that pays tax.

What can be concluded is that, like Australia, only Chile, Malta and New Zealand have effectively eliminated company tax. Accordingly, they and we cannot be bettered when it comes to competitive company tax rates.

What sort of changes will the Turnbull plan bring? Australian shareholders’ dividends will attract a tax credit of 5¢ in the dollar less than happens now. This will apply equally to shareholders in large and small businesses.

As a matter of practical effect, the deal now on the table excludes only big business, which, for now, will be stuck with 30¢ in the dollar company tax. The changes will not make the original package better or worse for taxpayers or companies, regardless of tax rates applied or the size of companies affected. It might be said much ado about not very much.

So what, if anything, has been gained?

Well, actually, politics has been the big winner. Labor can rail against the outcome, but you can bet against it repealing the legislation in office. A politically stressed Government can claim a “win” and an independent Senator can pretend he has scored a victory for South Australia.

And the loser? Good government.

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Last Modified:
April 4, 2018, 6:45 pm