The Business Tax Working Group has recommended scrapping the R& benefit for companies with turnover of more than $20 million, capping interest deductions and removing some deductions for exploration and prospecting in order to fund a company tax cut.
The release of the BTWG’s discussion paper comes after reports emerged last week it would recommend scrapping R& benefits to pay for the cut – a move several employer groups spoke out against.
The new report recommends that in order to pay for the cut, the Federal Government should abolish the 40% non-refundable tax offset, which is available for businesses earning more than $20 million.
“Companies would instead be entitled to deductions for R& expenditure under the normal deduction provisions in the tax law,” it says.
But it also gives other options, including imposing a turnover threshold above which the 40% cannot be claimed, which would affect a “small number of very large companies with very large R& spends”.
It also suggests imposing a cap on smaller SMEs for their own R& spending, or reducing the non-refundable tax offset to just 37.5%.
“Reducing the rate of the non-refundable tax offset recognises that companies with an aggregated annual turnover greater than $20 million generally have greater capacity to undertake R& and therefore may require less assistance than is currently provided.”
If the government cuts the corporate tax rate to 25% would cost $26 billion, although cutting it to 28% – as originally promised by the government – would cost just $10.4 million over the next four years.
Cutting to 29% would cost $5.4 billion.
“It is inevitable that a company tax rate cut funded through measures that broaden the corporate tax base will generally involve a redistribution from those who benefit from existing concessions to the broader corporate taxpaying base, at least in the short term,” it says.
The recommendations are broken into three key parts: interest deductibility, capital allowances and treatment of expenditures, and the R& tax incentive.
The recommendations include removing arm’s length tests and reducing safe harbour gearing levels for general entities, which would reduce the safe harbour maximum debt limit for general entities from 75% to 60%.
It also recommends reducing safe harbours for financial institutions, capping interest deductions for all business taxpayers, with or without including banks – it recommends either way could work.
Depreciating assets and capital expenditure
As for deductions, the report recommends reducing the diminishing value rate for depreciation from 200% to 150%, and removing the capped effective life provided to certain depreciating assets.
As for exploration, the report suggests removing or reducing the “first use” exploration deduction, and the removal of immediate deductions for exploration conducted by large companies.
One option recommended would see building depreciation deductions, or allow a uniform rate of depreciation of 2.5% per annum.
R& tax incentive
There are four key proposals for the R& concession: Abolish the 40% non-refundable tax offset; impose a turnover threshold for the 40% offset; impose a cap for all other SMEs; and cut the rate to 37.5%.
Businesses have been invited to submit responses to the discussion paper, with a final report due in October.