Australia: Companies facing two tax rates
09 February 2015
Posted by: Author: David Uren
Author: David Uren (The Australian)
The Coalition is moving towards the introduction of a two-tiered corporate tax system for the first time in 40 years after Social Services Minister Scott Morrison confirmed the levy designed to fund the now-abandoned paid parental leave scheme would not be redirected to childcare.
The Australian understands the proposed PPL levy of 1.5 per cent, which would have been paid by the nation’s 3000 biggest companies, will be dropped but the government will revoke a promised cut in the corporate tax rate from 30 per cent to 28.5 per cent to ensure there is no impact on the federal budget.
Small companies outside the top 3000 will still see a cut in their corporate tax rate to at least 28.5 per cent, creating a two-tiered corporate tax structure last seen between 1948 and 1972.
Mr Morrison acknowledged that business has been left in limbo about the future of the $4 billion levy since Tony Abbott used his National Press Club speech in Canberra on Monday to announce the PPL scheme would be ditched in favour of a new childcare package. Mr Abbott did not make any mention of the future of the levy.
"I know there’s been some nervousness about the paid parental leave levy,” Mr Morrison told The Australian. "I think the business community would appreciate knowing where we’re coming from and I’m seeking to make that far clearer.
"The government doesn’t assume portability of this levy and if (a new childcare levy) were an option then you’d certainly have to make a case for it and you’d certainly have to consult business about it. But I don’t think anyone should be making the assumption that is where the government would end up.”
Mr Morrison said a levy designed to fund paid parental leave could not simply be transferred for an entirely different purpose to fund childcare.
"I don’t think that people should leap to the conclusion that a device such as this would be needed,” he said, noting that the government is already spending $7bn a year on childcare.
The Prime Minister yesterday said childcare was the government’s immediate focus. "There’ll be a families package that will focus on better childcare that puts more money in parents’ pockets,” he said. "Then there’ll be a small business tax cut. This is what we need if families are to be better off, if businesses are to be in a better position to grow, to invest and to employ.”
The government is looking at a two-tier company tax structure under which the rate for the largest companies would remain at 30 per cent, while smaller companies would pay no more than 28.5 per cent. Under the original PPL plan, a tax cut of 1.5 per cent was to be offered to all businesses, but the estimated 3000 businesses with annual profits of $5 million or more, which pay the vast majority of company tax, would have that benefit neutralised by the PPL levy.
This not only aggravated large businesses, which complain about Australia’s company tax rate becoming increasingly uncompetitive by global standards, but it also angered the politically potent lobby of self-funded retirees. While Australian shareholders get franking credits for the tax paid by companies under the system of dividend imputation, they could not get credits for a levy.
Joe Hockey was open about the government’s sensitivity to this sector following this week’s Reserve Bank interest rate cut, which he acknowledged would reduce the income of self-funded retirees.
The Treasurer said yesterday that the government was still consulting over the future of company taxation following the axing of the PPL system but he guaranteed that small businesses would get a tax cut, in line with promises made before last year’s federal election.
"I say emphatically, we will deliver the 1.5 per cent cut in taxation for small business and we want to do more,” Mr Hockey said yesterday, while visiting a small business in Queanbeyan.
"We will have more to say about the 1.5 per cent levy in the next few weeks after we’ve consulted with colleagues and stakeholders, but I can give this guarantee to larger businesses: they’ll not be paying any more tax than they are paying today.”
Tax Institute director Robert Jeremenko said there was nothing wrong with a company tax system having different rates for large and small businesses, noting Britain has for several years had a system with different marginal tax rates for companies, much like Australia’s personal income tax system.
But he noted that Britain has decided to abandon that system, cutting all company taxes to 20 per cent, 10 percentage points below Australia’s rate, which is one of the highest in the advanced world. The OECD’s tax database lists 10 advanced countries with separate tax rates for small business.
However, Mr Jeremenko said Australia’s unusual system of dividend imputation would make it more complicated and increase compliance costs. It would become harder to ensure that franking credits were calculated correctly.
"It certainly complicates the system, but any complexity needs to be weighed against the perceived benefits of the change,” he said.
University of Sydney tax specialist Michael Dirkis said splitting the rate would increase the incentives for aggressive tax planning. "One of the big problems with differential rates is that people seek to avoid the higher rate by splitting businesses into separately owned components,” he said.
Payroll tax and land tax, which both have exemptions for small business, already encourage this.
The most common structure for a small business was to use a trust to own the assets and operate the business, while an associated company is used to hold cash.
"Lowering the tax rate for small business gives another reason why people would shelter their income under this sort of arrangement. It adds more merit to that sort of activity,” Professor Dirkis said.
Research by Griffith University’s Brett Freudenberg shows there are 300,000 trusts used for small and micro businesses in Australia and 650,000 corporations, with trusts used to both protect assets and for tax planning.
Dr Freudenberg said Australia’s reliance on trusts to run small businesses resulted in high levels of compliance costs.
This article first appeared on theaustralian.com.au.