Tax incentives under spotlight in company tax rate review

Cutting the company tax rate to 25% would cost the Federal Budget $26 billion in revenue over four years, according to the Business Tax Working Group, which today released a discussion paper.


The Business Tax Working Group, which was formed following last year’s tax reform, was tasked with looking at how corporate tax cuts could be funded through the existing tax system. 


Innes Willox, chief executive of Australian Industry Group, says that the business lobby group supports the prospect of a 25% reduction in the company tax rate.  


“This would bring our company tax rate down to be more in line with those of other small and medium-sized OECD countries,” Willox said in a statement.


“Such a move would assist in alleviating some of the structural pressures much of our economy is currently facing, it would add to investment and would help lift productivity.”


However, Willox was quick to point out that while AIG supports a reduction in the company tax rate, it is not something that should be pursued at any cost.


Willox was particularly concerned about reductions to the R&D Tax Incentive, insisting Australian businesses need to undertake R&D activities “like never before”.


“Cutting back on the R&D tax incentive to finance a reduction in the company tax rate by a fraction of a percentage point would make no sense,” Willox said.


The Working Group has now released a discussion paper that canvasses a number of ways in which a company tax cut could be funded.


Preliminary estimates included in the consultation paper estimate the revenue impact of lowering the tax rate to various levels between 2012/13 and 2015/16.


Each 1% cut appears likely to cost about $5 billion over four years, and if the rate was cut to 25% the cost would be $26 billion.


Meanwhile, recommendations are broken into three key parts: interest deductibility, capital allowances and treatment of expenditures, and the R&D tax incentive.


There are four key proposals for the R&D 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%.

The recommendations for interest deductibility 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.


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.


With regard to 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.


The Working Group is now inviting written submissions from businesses and the wider community in response to the discussion paper.


Submissions should be provided to the Working Group Secretariat by close of business on September 21.


The Working Group plans to release a draft of its final report to the Treasurer in late October. That report will provide a summary of the key themes from consultation on the discussion paper.


The final report to the Treasurer is due in December.


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