One of the most discussed elements of the Turnbull government’s tax agenda is its proposal to reduce the corporate tax rate for businesses with an annual turnover of more than $10 million. If implemented, the proposal would see the corporate tax rate drop from 30% to 25% over a 10-year period.
In 2015–16, taxes on corporate profits represented around 17% of federal tax revenue, or around $64.5 billion. Although this may seem like a small proportion of total tax revenue, it represents a significantly higher level of corporate taxation than almost all other advanced economies. This is both as a proportion of the total tax collected and as a proportion of GDP.
We strongly believe that a rate reduction is long overdue. Australia’s current rate of 30% is uncompetitive when benchmarked against those of our trading partners and the OECD average of 25%. The United States recently dropped its headline rate to 21%, and the United Kingdom lowered its rate to 19% in April 2017.
We also call on the government to fast-track its proposed rate cut. Australia follows a three-year election cycle, so businesses would need to wait for four terms of government before the proposed tax cuts are fully implemented. We would prefer the government to be bold and seek to implement the proposed cut over the next three years.
This is important because companies make decisions based on the expected after-tax return on investment. Tax rates are not the only factor in this calculation. However, all other things being equal, the higher the corporate tax rate, the higher the pre-tax return on investment needs to be for a company to invest.
Capital is highly mobile, and competition for investment is substantial. Australia is losing traditional manufacturing jobs to offshore locations and its mining and resources industry is slowing down, so it urgently needs foreign investment.
Several countries have drastically reduced their rates to encourage foreign investment. Ireland, for example, has corporate tax rates as low as 12.5%. Reducing Australia’s corporate tax rate to this level would not equip the nation to maintain a sustainable and appropriate tax and transfer system. However, a cut to 25%, as the Turnbull government proposes, is certainly a step in the right direction.
More importantly, we would argue that the government needs to better support mid-sized businesses, which we define as having an annual turnover of between $10 million and $500 million. The Australian economy does not operate in isolation, but is subject to global volatility and competitive challenges. For example, while the exit of large car manufacturers such as Toyota, Holden and Ford from Australia was due to several contributing factors (such as the comparatively high cost of labour), the lower return on investment caused by Australia’s high corporate tax rate played a role. This is something over which the federal government has direct control.
In recent years, the small business sector has benefitted from tax cuts and other specific tax concessions, such as the $20,000 immediate write-off for business asset purchases that was introduced in the 2015–16 federal budget. Furthermore, small businesses are less likely to be subject to competition from overseas.At the other end of the spectrum, larger businesses may not have received these benefits, but they do enjoy greater access to capital, workers and opportunities by virtue of their size.
Mid-sized businesses are a vibrant and dynamic business segment. They are the fastest growing sector in the economy, make a significant contribution to national GDP, and are major employers throughout Australia. Yet policymakers often overlook them.It is this group of companies that will be looking to consolidate their position in the Australian economy and potentially expand overseas.
As an advisor to mid-sized businesses, we see the challenges they face in competing with larger domestic and international companies while simultaneously looking to invest in new technology and products. We believe that reducing the corporate tax rate will help mid-size businesses achieve their full potential.
Importantly, we are not advocating major new tax concessions – we simply believe that the federal government should fast-track the proposed rate cuts. This will promote the growth of an important part of Australian business, one that is long overdue for appropriate recognition and support.
Grant Thornton have partnered with NineSquared to develop a series of papers outlining our thoughts about the opportunities and issues flowing from the 2018-19 Federal Budget.
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