But Australia can’t afford to give up on a 25% rate for all companies
After an exhausting Senate debate, the Government’s deal with the Nick Xenophon team and independents in the Senate will see phased company tax cuts delivered to small and medium sized companies with turnovers up to $50 million.
According to the Federal Treasurer, these cuts will help around 3.2 million small and medium Australian businesses. The Treasurer also said he had received ATO advice stating it was not necessary for the House of Representatives to return to Canberra before the next sitting date (9 May 2017) and pass the Bill in order for the ATO to implement the changes agreed to by the Senate. Mr Morrison said: “This is a fairly standard procedure, it is often done, usually in terms of personal income tax cuts, where there is bipartisan support and the Tax Office is able to go about their business of putting those arrangements in place”.
For bigger businesses however, that part of the Government’s original company tax reduction roadmap which ultimately promised a 25% company tax rate for large companies by the 2026-27 income year and later years has not been agreed to.
Political support for the government’s entire 10 year roadmap was always going to be difficult in an environment where the debate was all about the rate and not accompanying trade-offs in the tax system. However, Chartered Accountants ANZ reiterates its long-standing support for lowering the company tax rate for all companies.
Opponents of the target 25% rate have used a range of arguments. Some of the debate – such as ignoring the fact that some companies currently pay little or no tax because of carry forward tax losses – has been misleading. But there have been legitimate concerns expressed about the tax windfall for existing inbound investors and whether the expected investment boost really translates into more jobs.
But the bottom line is this: Australia’s comparatively high 30% large company tax rate means our economy will continue to lose out because some investment opportunities will not be considered viable.
At a practical level, many aspects of a CA’s work will be impacted by the Senate deal. Decisions about whether to incorporate, the tax-adjusted yield from proposed investments, budget forecasts, the valuation of certain assets and liabilities, the impact on franked dividends paid to shareholders and year-end tax planning – these are just some of the client conversations which will now occur.
However, the Labor Party’s stance on the tax cuts in the lead-up to the next Federal Election (expected in 2019) will bother long-term planners and should be clarified sooner rather than later.
The Senate deal also means extra complexity is being built-into Australia’s tax system. An on-going two tier company tax rate system will raise problems for the ATO and tax advisers alike. Examples which spring to mind include poor decision-making around the incorporation of personal services businesses and splitting operations into multiple companies below the $10 and $50 million threshold, incorrect franking account and franked dividend distribution statements, and problems for companies operating close to the $50 million turnover borderline.
Bipartisan political agreement on a company tax reduction roadmap which eventually lands all companies at the 25% tax rate would be a big help, but doesn’t seem at all likely.