This year will be significant for the investment industry because of the huge undertaking the Government has set in train to reform the entire tax system, with particular emphasis on business taxation.
Key to this will be the current Review of Business Taxation being undertaken by the Ralph Committee. Its first discussion paper, released in November, set out the broad design of a new business tax system, suggesting that the model should tax income on a comprehensive basis and that the underlying policy should be transparent.
Another paper released in December looks at how other countries approach business taxation and confirmed Australia’s status as a low-tax country when comparing overall tax burdens of OECD countries. However, it showed that our income taxes are high.
A second discussion paper is expected to be released at the end of February.
This will be the major document. It will make detailed recommendations to Government on implementating reform to the business tax system contained in the Government’s original tax reform paper (the “ANTS paper”) released in August 1998. Business will have about 2 months to respond to it.
The second discussion paper will propose solutions to the numerous issues raised in the ANTS paper. Foremost will be whether the corporate tax rate can be reduced to 30 per cent without loss of revenue by trading off presently available tax concessions. Another will be which trusts should be excluded from the proposed entity tax regime, under which companies will be taxed as companies.
The paper will also study international tax arrangements and a host of transitional issues.
Business will be hoping the Ralph Committee can overcome the serious concerns that have arisen over the proposal in the ANTS paper to introduce a deferred company tax. This would substantially increase the amount of withholding tax currently paid in relation to dividends to non-residents. But given the tightness of its reporting timetable (see below) and the magnitude of its tasks, the opportunity for the private sector to influence the Ralph Committee’s recommendations will be limited.
The committee is expected to consider proposals for the treatment of financial transactions, including prepayments, leases, rights over assets and fixed life intangibles. This has previously been the subject of considerable work, culminating in the Issues Paper on the Taxation of Financial Arrangements, which was released in December 1996. Hopefully the Ralph Committee’s recommendations will greatly simplify the proposals contained in this document.
The second discussion paper will also focus on specific reforms to to the capital gains tax (CGT) regime. These include capping the rate for individuals at 30 per cent, extending the CGT roll-over provisions to scrip-for-scrip transactions, and introducing an annual $1,000 CGT-free threshold for individual taxpayers. These proposals are contained in the ANTS Paper.
Against this backdrop will be the Senate inquiries into the GST and other proposals in the ANTS Paper. Under the proposed GST regime, financial transactions will not be subject to GST but service fees such as advice will be.
The GST may also impact on particular investments. For example, changes proposed to the excise on diesel fuels under a GST could make road transport industries more profitable.
Many of the proposed changes to business taxation will influence investment decisions over the coming year. For example, if CGT is capped for individuals at 30 per cent it makes sense to defer the disposal of investments that will generate capital gains if your marginal tax rate is higher. Alternatively, proposed changes to the taxation of trusts could force invested funds to be shifted elsewhere.
The changes eventually enacted will depend upon the determination of the Government and its relationship with the Senate. That uncertainty will make for an interesting year ahead.
Geoff Petersson is a consultant, Taxation Insititute of Australia
Important tax dates to remember for 1999
29 January Submissions due to the Inquiries by the Senate Committees into the GST and tax reform
18 February Senate Select Committee report due on stage one covering economic modelling used and assumptions associated with the GST proposals.
End February Release of Ralph Second Discussion Paper
31 March Senate Reference Committees to report specific effects of GST proposals eg zero rating of health services.
19 April Senate Select Committee report due on stage 2 covering economic impact of GST etc.
End April Submissions due on Ralph Second Discussion Paper
By 30 June Ralph Report due with draft legislation. Government will seek to pass GST legislation and legislation to remove indirect taxes.
1 July New Senators commence their terms
August-September Introduction of entity tax regime legislation and other business tax review measures likely
