Treasurer Wayne Swan needs to find billions to return the Federal Government’s budget into surplus and big business is the most likely to pay the price.
Con Paoliello, a tax partner at RSM Bird Cameron, says, “The Government’s initiatives are to support low income workers, and the war of words between Wayne Swan and [mining boss] Clive Palmer suggests the Government has big business firmly in its sites.”
Paoliello says “everything is up for grabs” as the Government struggles to rebuild the surplus in time for its self-imposed deadline.
The Business Tax Working Group has uncovered lots of places for the Government to find its much-needed revenue – about $1.7 billion from two measures alone.
Reduced foreign investment is one potential impact that would result from increasing taxes and reducing deductions for medium-sized and large companies, Paoliello says. Some proposed laws could inhibit companies expanding overseas; instead, they may move their entire operations overseas to another tax regime, he says. “It might cause more businesses to do so, with the resulting loss in jobs and tax revenue.”
AMP Capital Investors chief economist, Shane Oliver, says high income earners and big businesses will pay for the budget surplus. “Economically speaking it is a risk. The Government is to be praised for bringing in a budget surplus, but it might come at the expense of longer-term growth. Large businesses are already paying a price via the carbon tax.”
Oliver worries about the top talent leaving the country – a brain drain. “High income earners have already had the impost of removing the private health insurance rebate, and paying the flood levy, as well as changes to superannuation tax levels. Of course, those impacts take awhile to show up.”
The recommendations affecting medium-sized and big business include:
Cancelling or postponing business tax reductions
Small business will get a business tax reduction of 1% on July 1 this year, but the Government could cancel or postpone the 1% reduction – scheduled for July 1, 2013 – that applies to companies with revenue over $1 million.
Carry-back loss changes
Limit the law that allows companies that made a loss in the current financial year to apply it to profits made in the previous financial year – called a carry-back loss. The BTWG recommended that the carry-back law be restricted to small companies with revenue under $2 million. They also recommended the losses be limited to $1 million and can only go back two years.
Reduce claims for mining and resources exploration
Currently, mining and resources companies can claim 100% of their exploration costs immediately. The working group recommended that this be changed so that companies write off their exploration costs over time. Big miners, such as BHP Billiton and Rio Tinto, use this deduction alongside junior miners. The BTWG estimates a $1.2 billion saving from this measure alone.
Reduce the non-refundable tax rebate for research and development (R&D)
Companies with revenue under $20 million get a 45% refundable rebate on R&D expenditure, while those above $20 million currently receive a 40% non-refundable rebate. The BTWG recommended dropping the 40% rebate to 37.5%. The working group estimates this measure would deliver $500 million to government coffers.
Limit which companies can make an R&D claim
The working group recommended that companies with revenue over $30 billion be ineligible to make any claim for R&D. Companies that fall into this category include Woolworths, BHP Billiton, Wesfarmers and Rio Tinto.
Limit the amount of R&D that can be claimed
Under this recommendation, an eligible company can claim no more than $100 million in R&D expenditure.
Reduce capital expenditure claims for oil and gas companies
At present, oil and gas companies claim depreciation on their assets, which include big ticket items such as oil rigs, under a special arrangement that deems their effective life to be 20 years. In fact, most expenditure would have a longer life, so the cap is a tax benefit. The BTWG recommended removing the effective life cap so that oil and gas companies would have to claim depreciation over the full life of their assets, reducing their depreciation expenses, and increasing their taxable profit.
Thin capitalisation rules say that companies in Australia with some foreign ownership must have a maximum debt to equity ratio of 3:1 (or 75%). Under the working group recommendation, this would increase to 1.5:1 (or 60%). It would also be widened to apply to companies that are investing in expanding overseas. This reduces the amount of interest that can be offset against income.
Source: RSM Bird Cameron and LeadingCompany.