​Senate committee approves changes to Enterprise Tax bill

The Senate Economics Legislation Committee has made one recommendation to the federal government in regards to the proposed changes to the Enterprise Tax Plan, advocating the Bill be passed.

In its report [PDF], the committee, chaired by Victorian Liberal Senator Jane Hume, said it considers the Enterprise Tax Plan amendments a critical reform that will improve Australia's tax system for businesses and drive investment and growth in the economy.

"There is clear and compelling evidence that the benefits of the Enterprise Tax Plan will ultimately flow through to growth in jobs and wages, helping to improve Australian living standards overall," the committee says in its report.

The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 [Provisions] makes a number of amendments to tax legislation to implement the federal government's 2016-17 Budget commitment to progressively reduce company tax rates for small and large companies under its "Ten Year Enterprise Tax Plan".

This amendment would result in an immediate reduction in the corporate tax rate to 27.5 percent for the 2016-17 tax year for entities with an aggregated turnover of less than AU$10 million and a progressive extension of the 27.5 percent reduction rate to all corporate tax entities by the 2023-24 income year, and in turn progressive reductions in the corporate tax rate to 25 percent from 2026-27.

The report explains that from the current income year, the operation of the imputation system for corporate tax entities will be based on the company's corporate tax rate for a particular income year, worked out in regard to the entity's aggregated turnover for the previous income year.

Implementing the bill would also see consequential amendments to the dividend imputation arrangements to adjust imputation credits as the company tax rate changes, and a progressive increase in the tax discount for unincorporated small businesses that is equivalent to the aforementioned reductions in the corporate tax rate.

The small business income tax offset was introduced in 2015-16 to provide unincorporated small businesses with a tax discount broadly equivalent to the 1.5 percent reduction in the small business company tax rate and entitles individuals who are small business entities, or who are liable to pay income tax on a share of the income of a small business entity, to a tax offset equal to 5 percent of their basic income liability that relates to their total net small business income, capped at AU$1000, the report explains.

Additionally, an increase in the aggregated turnover threshold for access to small business tax concessions would be pushed out from AU$2 million to AU$10 million.

According to Treasurer Scott Morrison, these amendments are aimed at improving Australia's tax system for businesses and to drive investment in the country's economy as it transitions from the investment phase of the mining boom to broader based growth.

The report states that Australia's corporate tax rate is currently one of the highest in the world and significantly above the OECD average.

"The reductions in the bill will encourage investment, economic growth and job creation, and 'make Australian companies more internationally competitive in a tough global market place'," the report says. "... This will 'result in higher living standards for Australians and an expected permanent increase in the size of the economy of just over one per cent in the long term'."

29 submissions were received by the committee, with the majority described as being in support of the amendments. One particular argument made in support of the bill was that it would help make Australia's corporate tax settings more internationally competitive and encourage higher levels of foreign investment in Australia, the report explains. Greater investment, it was also argued in many submissions, would flow through to stronger economic growth, more jobs, and higher wages for Australian workers.

In its submission [PDF], the Financial Services Council emphasised the importance of company tax rate settings given intensifying competition for foreign investment and the increasing mobility of businesses.

"Research demonstrates cutting company tax will drive capital into Australia for new enterprises, jobs, and opportunities. Workers will be a substantial beneficiary of increased investment in Australia as increased labour productivity spurred by this investment will result in higher real wages," the council wrote.

Similarly, the Business Council of Australia explained in its submission [PDF] that Australia was "falling behind in the global contest for new investment", and pointed to evidence that overseas investment in Australia had fallen 45 percent in the last year and was currently at its lowest level since 2003.

It was also argued by the Centre for Independent Studies [PDF] that Australia's comparatively high corporate tax rate discouraged international investment. It also warned that Australian companies might eventually seek to relocate to countries with more competitive tax settings.

The likes of KPMG, PwC, the Corporate Tax Association, and the Chamber of Commerce and Industry Queensland all agreed Australia's current corporate tax rate was internationally uncompetitive, the Senate committee explained.

The report explains that many submissions also argued that the Enterprise Tax Plan would drive higher levels of business investment, and emphasised the need for stronger business investment in Australia's current economic environment.

The committee said it is satisfied that the substantial economic benefits of the Enterprise Tax Plan outweighs its cost to revenue, which it said will at any rate be largely offset by higher levels of economic growth.

It was also stressed by the committee that small businesses would benefit from the whole package of measures in the bill.

On the other side of the argument, the committee said it also received some submissions arguing against the bill on the grounds it would lead to lower government revenue without necessarily delivering the promised economic benefits.

For example, the Australian Council of Social Services [PDF] opposed the bill on the basis that the lost revenue would have to be replaced from other sources such as personal income tax increases or spending cuts, contending that the proposed tax cuts contrasted with unlegislated measures that would cut AU$7 billion over the next four years from social security payments.

One of the arguments made against passing the bill was that for companies operating under a foreign tax credit system -- primarily US companies -- would in effect be required to pay any tax saving delivered by the Enterprise Tax Plan cuts to the government where the company was headquartered.

"According to this analysis, the bill would in effect result in a transfer of funds that would have been collected by the Australian Government instead being collected by the US Government," the report says.

It was also argued against the tax cuts on the basis that many corporations already pay too little tax.

Under Australia's multinational anti-avoidance laws, companies operating with an annual global income of more than AU$1 billion in Australia are required to lodge their general purpose financial statements to the ATO from July 1, 2016, if they are not already doing so with the Australian Securities and Investments Commission.

The implementation of the laws by the Australian government was part of recommendations that were made by the Organisation for Economic Cooperation and Development (OECD) from its G20-commissioned base erosion and profit-shifting (BEPS) project.

Under BEPS, the OECD expects governments to be able to retrieve as much as $240 billion in lost revenue each year through dodgy tax practices across the globe, which it claims represents up to 10 percent of global corporate income tax revenues.

The committee said that concerns over the tax cuts resulting in a transfer of revenue from the Australian government to the US government are not well founded and signed off on the report with a statement welcoming the proposed amendments.