There is no such thing as a free (business) lunch. Measures proposed by the Federal Treasurer, Peter Costello, this week to reform business taxation have caused widespread anguish in the business and farming community in direct contract to the reception he got in September this year when he revealed the first part of the Government’s overall business tax plan. In September Mr Costello revealed his aim for a 30% corporate tax rate and a halving of the Capital Gains Tax rate. These measures, of course, were received very warmly by the business community. However, tax reform can never be just a case of reducing taxes. There have to be swings and roundabouts. This week Mr Costello announced the nasties to pay for the earlier proposed changes.
To his credit Mr Costello has had a firm eye on the bottom line. He knows that reductions in corporate tax and capital gains tax will have to be funded without blowing out the Government deficit. Destroying the Government’s good record on fiscal responsibility would only result in worse anguish later for the business community.
Of equal importance to addressing the bottom line Mr Costello has focused on fairness and simplicity in the tax system. He has announced a range of anti-avoidance measures which are long overdue. For far too long in Australia PAYE tax payers have been shouldering an unfair burden. As the burden has got greater more people have attempted to avoid tax through artificial schemes in particular becoming contractors instead of employees. Mr Costello now wants to call a spade a spade and any “contractor” who receives more than 80% of their income from one source will be deemed to be an employee and will be required to pay PAYE tax.
Further, family trusts will be treated as companies. This is an important reform. It will prevent people from artificially ascribing income to family members who have little or no income of their own to reduce the overall tax burden. Instead the overall enterprise will be treated as one taxable entity, as it should. Moreover, it will pay the full company rate on all of its income from the first dollar earned.
This change has caused the especial ire of the agricultural sector in which many farms are run as family trusts. However the measure should not be seen as being particularly aimed at agriculture but rather as a reform dealing with what is essentially an artifice to reduce taxation.
The Government will also tighten up on accounting methods so that businesses will not be able to hide income through transfers to asset values and goodwill. Rather they will have to pay full tax on the total increase in the value of their business and the income it received over any given year. That is a sensible approach to taxation. Small businesses may feel it is particularly directed at them however the principle behind the proposal is sound. The fact that small business cops most of the burden is incidental.
Small business and farmers cannot argue these measures are especially directed at them because Mr Costello has also directed his attention to large international corporations. He intends to chop out their avoidance schemes based on attributing high debt levels to Australian operations while housing income in low-tax overseas branches. This is a long overdue reform.
Overall Mr Costello’s changes accord with sound taxation principles to broaden the bases of taxation while lowering the rate of taxation. These reforms will at once reduce the number of shelters for avoiders and reduce the incentive to avoid.