Cutting Australia’s rate of corporate tax from its present level of 30% to 25% would cost A$26bn over a period four years, according to Treasury estimates.
The figure was calculated by Business Tax Working Group, which reports that cuts in other corporate tax deductions could be used to offset the reduced headline tax rate. The Federal Government tasked the panel with finding options for savings that could make a reduction in the 30% rate feasible.
In response, the panel has listed depreciation allowances, exploration allowances, research and development tax breaks, interest deductibility and corporate profit shifting as prime targets. None of the panel’s options yet constitute a recommendation, as it is seeking feedback from businesses and experts on its draft proposals, although they suggest the direction business tax reforms may take.
In the area of expense depreciation, one of the panel’s suggestions is that reducing the rate of depreciation to 150% of the corresponding prime cost rate, which would reverse a recent change to 200% and save an estimated A$2.18bn over the next four years as tax deductions would be spread over a longer period.
Other options put forward by the panel include:
- Removing special depreciation regimes for planes, trucks, ships, tractors, water facilities, gas production and more, for a saving of almost A$1bn over the next four years.
- Changes to mineral exploration depreciation proposed that could save up to A$2.9bn over four years, depending on what model was adopted.
- Removal of the building depreciation deduction, which it is estimated would save A$270m by 2015-16.
- Restricting research and development tax offsets to companies with an annual turnover of less than A$20m, which would save A$2.25bn over four years, while setting the threshold at A$20bn would still save A$450m.
The above suggestions for reducing concessions appear to demonstrate that, even if the most severe reductions in concessions were adopted, the necessary cost savings are well below the A$26bn needed to fund a 25% corporate tax rate.
The panel suggests that Australia’s current threshold for how much debt a company can hold before losing its interest deduction is too high compared with other jurisdictions, still allowing some degree of profit shifting and tax avoidance. It also says the current rules tend to give a tax advantage to multinational companies over their purely domestic rivals.
It also comments that a significant overhaul of how interest payments are treated by the tax system could not only level the playing field for domestic companies and raise significant extra revenue, but also discourage excessive use of debt financing by corporations.
The panel has called for submissions from interested parties on the various reform proposals, with responses due by 21 September. A final report is due out by the end of the year.
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