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Standing Committee on Economics
Impediments to business investment

CAREDES, Ms Stephanie, Tax Counsel, the Tax Institute

DEUTSCH, Professor Robert, Senior Tax Counsel, the Tax Institute


CHAIR: I welcome representatives of the Tax Institute. Although the committee does not require you to give evidence on oath, I would like to advise that these hearings are legal proceedings of the parliament and therefore have the same standing as proceedings of the houses. Giving false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. I now invite you to make it opening statement.

Prof. Deutsch : Thank you, Madam Chairman, and thank you for inviting the Tax Institute to participate in this hearing today. The Tax Institute was founded in 1943 and is the leading forum for the tax community in Australia. We at the Tax Institute are committed to representing our members, shaping the future of the tax profession and continuous improvement of the tax system for the benefit of all through the advancement of knowledge, member support and advocacy. Our membership stands at around 12,000. It includes tax professionals from commerce and industry, academia, government and public practice throughout Australia. Our tax community reach extends to over 40,000 Australian business leaders, tax professionals, government employees and students through the provision of specialist, practical and accurate knowledge and learning. Consistent with our core objectives, the Institute welcomes all constructive public discussion, scrutiny and debate about the Australian taxation system, including in relation to both policy settings and the administration of the system. As the Tax Institute's Senior Tax Counsel, I provide the leading technical voice for the institute's tax policy and advocacy activities.

The purpose of this inquiry is for the committee to gain an understanding of the current impediments to business investment. In particular, the committee is examining the role that taxation policy at Commonwealth and state government levels can have on the encouragement of new business investment. There are numerous impediments in Australia's tax system that impact on business investment. Today I propose to focus on five key areas. In doing so, I will provide some brief examples in respect of each. I'll promise to be brief in relation to each of them.

First, the incredible and, in our view, unnecessary array of taxes that apply to a range of different tax bases and in respect of different tax years, at both the Commonwealth and state/territory levels, gives rise to complexity and unnecessary additional costs to business that should be avoided. On the best estimate we have to date, there are some 125 different types of taxes levied in Australia: 99 at the federal level, 25 at the state level and one at local government level. That is an impressive array of taxes, depending on how you interpret the word 'impressive'. For example, fringe benefits tax and the Medicare levy, both of which are levied at the federal level, in my view, are unnecessary additional imposts which could and should be integrated into the income tax system.

Secondly, the difficulties arising for businesses in dealing with different state and territory revenue obligations should be resolved, wherever possible, through harmonisation of tax laws. Different rules regarding land tax, payroll tax and stamp duty, in particular, create a myriad of problems for businesses that are trying to expand to operate nationally.

Thirdly, there is an increasing complexity and volume of tax law as a result of numerous unenacted measures and unclear policy intent associated with some of the measures. This should be avoided. One example that springs to mind is the absurdly complicated small business tax concessions, which need to be radically simplified and made more easy to use, particularly for small business, which is their intended target.

Fourthly, there are new anti-avoidance measures which are targeting a minority of taxpayers. This results in increased complexity, compliance and uncertainty for all taxpayers, especially those who are not the intended target of these complex rules. These rules need to be more effectively targeted. I would include as examples here the current bill which sits before the federal parliament dealing with the complex area of hybrids, where the rules will have many unintended consequences for taxpayers investing offshore in an expanding business environment.

Fifthly and finally, I mentioned tax rates, which are very much in the public domain at the moment. At the Tax Institute of we believe that tax rates should be as low as possible. That includes not only corporate tax rates but personal tax rates as well. In the current debate personal tax rates tend to be sitting on the sidelines, but we think they're as critical as the corporate tax rates are.

That concludes my five points. Just to summarise, the right tax system for Australia's future would stimulate productivity and economic growth. To achieve this, complexity in the tax system and other impediments to growth need to be removed. A simpler, fairer and more efficient tax system needs to be designed. We believe that the approach which we've suggested would help in this regard, particularly reducing the number of taxes, harmonising state and territory taxes, reducing complexity in the drafting of tax law, targeting new anti-avoidance measures with more clarity and focus and reducing both corporate and personal tax rates to the extent possible. We welcome any questions the committee might have and we will endeavour to respond to them as best we can.

CHAIR: Thank you very much, Professor. I will start by asking you, what are the benefits of lower taxes, both corporate taxes and personal income taxes?

Prof. Deutsch : There are a number of aspects to that, but the international environment is probably the most significant, in that we need to have a competitive tax system. I'm particularly referring to corporate taxes. If you look around the globe, particularly at our major competitors, their corporate tax rates are significantly lower than ours in most instances. On the personal tax front that is also the case. One needs to look no further than New Zealand, Hong Kong, Singapore, and now even the United States to some extent, where personal tax rates, and corporate tax rates in particular, are significantly lower. If we are to remain internationally competitive in attracting both capital and a mobile workforce, we will need to look very carefully at our corporate and personal tax rates. That's part of the reason why I think it's critical that we lower them to the maximum extent possible. Just to explain in more detail, our argument is that the rates should be lower but the base should be broader. I haven't dealt with the aspects of broadening the tax base so far in this presentation. But they're the main reasons why I think we should lower corporate and personal tax rates.

CHAIR: You speak about the difficulties with the complexity of tax legislation and rules and the number of pages of tax law. I ask you to reflect on the proposal by the Labor Party in relation to the abolition of the tax concessions on franking credits?

Prof. Deutsch : The Labor Party has a number of proposals, and that is one of them. Just to be clear, it's to eliminate any excess imputation credits. To the extent that you get an imputation credit that wipes out your corporate tax responsibilities, that will stay. What will go is any refund above and beyond that amount. That is a proposal that has met with some resistance. It will have many implications, particularly for superannuation funds that are investing in Australian shares, because the net consequence of that will be to diminish the returns that are available to superannuation fund members. I understand where the policy's coming from, but it will cause some major ructions in the Australian markets, particularly in relation to the equity markets.

CHAIR: Can you expand on that a bit more? Are you saying that this is not just an issue for those who suffer the loss of their tax refund, but also more broadly for investments in Australian equities?

Prof. Deutsch : It will have a very important impact on Australian equity investments generally, because it will make investment in companies that produce fully franked dividends less attractive—particularly, I emphasise, for superannuation funds, but will be more general than that. That, of course, will lower prices, and that will be across the board, so everybody will be impacted. That will be a transitional consequence until the market adjusts to accept the new reality. That's normally the way tax changes happen: It takes some time before the new reality is accepted and understood. There will be that impact from that particular proposal. There will also obviously be impacts from the Labor Party's plans to deal with negative gearing. I'm not saying that we are necessarily opposed to these things unequivocally, but I'm simply pointing out that all these things will have impacts both on the share market and, in relation to negative gearing, in the property market. We can't assume there will be no impact. There will be impact. How lengthy that impact will be is a question that I don't think anyone can answer with any degree of certainty.

Mr THISTLETHWAITE: I don't think anyone is disputing that there would be impacts. Good policy determination and announcement involves giving people plenty of lead in time, which is what Labor has tried to do with both negative gearing—our negative gearing reform package has been around for three years now—not only negative gearing reform but capital gains tax discount reform as well. The franking credit changes have been around for six months now. That's right thing to do, isn't it—give people plenty of time to adjust their circumstances if there are any effects?

Prof. Deutsch : I absolutely agree with that. I think you do need to provide a long lead time. Nobody could argue that Labor hasn't done that. They've provided plenty of time and plenty of opportunity for people to consider their position and adjust their circumstances as they see fit. The question that the chair asked me was about immediate impacts. I still believe that there will be immediate impacts, but I'm not suggesting that there is something fundamentally wrong with what Labor is proposing. I'm just reflecting on the fact that they will be the immediate impacts. Yes, they have provided a very ample leading time.

Mr THISTLETHWAITE: People often say we've got a complicated taxation system, particularly around not only business investment but personal income tax as well—deductions, proposals. I noted in your submission to Treasury for the budget that you're proposing a standardised deduction process. Do you want to elaborate on that?

Prof. Deutsch : The Tax Institute has looked at this at various stages. Other countries have gone down this path. Most notably, the United Kingdom to some extent and New Zealand are the two examples that are most immediately apparent to me. The argument would be that we would have to set a standard deduction. You would have to work out what amount you would pick. For example, if it were $1,000, everyone would be allowed to claim $1,000. If you want to claim any more than that you're perfectly entitled to, but then obviously you will be put to greater proof. The benefit of a standard deduction of that nature is that it takes away the shoebox receipts problem that we've had for decades. I would imagine that if you went down that path of a standard deduction—everybody gets $1,000; if you want more, prove it—I think the take-up would be substantial. I couldn't give you a figure, because again one can't anticipate that, but I would think well over 50 per cent of individuals would take up a suggestion like that. Somebody needs to do some fairly significant number crunching to work out what the global number is that that would give rise to. It would take away a lot of the argument that currently exists relating to deductions. If you look down the court lists and tribunal lists you will see a multitude of cases constantly going through on the question of whether something is or is not deductible. Quite frankly, the rules are not very clear. I'm not sure whether I've fully answered your question.

Mr THISTLETHWAITE: You point out in your submission also that there's still quite a bit of detail from the Henry tax review that hasn't really been looked at by government and taken up, and you advocate having a look at some of that. Do you think it's the case that even since the Henry review a lot's changed in the world, particularly if you look at the increasing uptake of electric vehicles and the effect that's having on fuel excise revenue, and changes to the workplace around the gig economy, Uber and other organisations? Do you think the time is ripe in Australia for us to have another look at a comprehensive overview of our taxation system? I understand that New Zealand did that some years ago, and it took some time, but they made some changes that simplified their taxation system that appear to have broadly been accepted in New Zealand. Do you think that that's something government should look at in Australia again?

Prof. Deutsch : I've been around a long time, so I'm quite cynical about these things. I think the answer to the question, in theory, is yes. I think we need to have another look, for all the reasons that you've articulated. Electric vehicles and the gig economy are two very good examples of why we urgently need that kind of review. I'm very cynical about the prospects for any genuine reform arising from that. I simply make the point that New Zealand, which you've drawn our attention to, has a very different political system. Without a Senate they can achieve a lot more in the way of tax reform than can we. I say that quite openly and bluntly because with the way the Senate operates, politically it is really at the whim of the crossbenchers, and that seems to be a position that is going to continue for some time. Whilst that is the prevailing position, genuine tax reform, no matter how many reviews you have, is very unlikely to happen.


CHAIR: Mr Evans, do you have any questions?

Mr EVANS: Yes, I have many. I may be picking up on the scepticism around picking up some big reforms. I've read your organisation's reports and many other fellow travellers' reports and things over many years. You mentioned before a list of about 99 federal taxes, 20-something state taxes and one local tax. Do you have that laid out somewhere in a publication or document?

Prof. Deutsch : We can certainly get hold of it. I've got some information here, but we can certainly provide additional information about that because it is in a report that was prepared some time ago.

Mr EVANS: Going into the main intention of this review, if you were to identify some just at the federal level which you see as the low-hanging fruit or the most important ones, specifically around encouraging business investment, which would they be?

Prof. Deutsch : I'd have to go back and have a look in detail at the list, because you're asking me which one is the low-hanging fruit. I'm not sure I would call it low-hanging fruit, but in the presentation we put forward earlier, I alluded to fringe benefits tax and the Medicare levy. Firstly, on the Medicare levy, the idea that the Medicare levy somehow is a pot of gold that is separated and kept for one purpose, and that's to provide health benefits to Australians, actually is just not the case when one looks at what happens to the revenue that is raised from it. There is no segregated pot of gold, so there is no reason why the Medicare levy could not just be integrated into the income tax system. Quite frankly, the only reason that it exists as a standalone tax nowadays, from my point of view, is political as much as anything else.

Mr EVANS: Agreed. I suppose I'm just thinking that certainly the Medicare levy and maybe, to an extent, fringe benefits tax are not as directly relevant to the topic of encouraging business investment as some of the others that might be on the list.

Prof. Deutsch : To be honest, I'd have to go back and have a look at the list, which I don't have with me at the moment. We can take that on notice, if you like, and come back to you on that.

Mr EVANS: Can I ask a couple of questions just to draw out your thoughts around the word 'certainty', which you used a number of times both in your initial opening statement and in answer to some of the questions that you were asked. I see that there's some credit being taken for giving lots of years notice of tax changes, and I guess you could say that an opposition that stays in opposition for many years is therefore giving lots of years notice of the tax changes that they would wish to make. I want to compare and contrast and get your thoughts on that approach compared to, say, that of the government, which has been bringing in its changes to company tax rates and to personal income taxes not just with a long lead time but transitionally over a plan, whether it's seven years or 10 years. That provides certainty on one hand, but it also provides an additional layer of complexity, so there's a temporary complexity in the system as the transition is taking place. So there is this trade-off between certainty and complexity. The other place where that same trade-off arises, I suppose, is in relation to the grandfathering of people's tax concessions or entitlements such as they are at any point in time. You can ring-fence people's existing entitlements and concessions. That increases the certainty that they provide, but over time, if you continue to do that, I would have thought it also adds to the complexity of the tax system as a whole.

Prof. Deutsch : I'm not quite sure what your question is, but I can see that there's a lot of argument there about complexity versus efficiency and fairness. I think there is always a trade-off to be had there. I'm not sure that I would see that necessarily in the context of the reduction in the corporate tax rate. To me, the way this has happened, from a policy perspective, is really not a very good thing for Australia as a whole. We are now in a position where the corporate tax rate is being reduced but it's going to take, even under the current arrangement, a number of years. To my mind, there's really no tangible benefit in having it delayed that long. I understand why it's happened, and it's largely been as a result of a compromise that was reached through the Senate. But I'm not sure that, from a public policy point of view, it's actually a very efficient way of achieving a corporate tax rate reduction.

Grandfathering is normally done for reasons of equity and fairness so as to preserve something that has been around for a long time for the benefit of people who have that benefit, but it adds quite substantially to the complexity of the system, because it makes it more difficult to define exactly when the new measure starts and stops.

Mr EVANS: With respect to corporate tax rates, are you saying you'd like to see 25 per cent for everyone right now?

Prof. Deutsch : I would. I've thought that, if we wanted to go down that path, that should have been the path that we went down immediately. But, of course, it couldn't happen and it's not going to happen immediately. That's fairly clear now. It will take a number of years, but it's created a lot of problems for small and large businesses with changes to the franking rate. I don't really want to bore the committee with all that detail at the moment, but every time we change the company tax rate it does have spin-off effects for companies in relation to the franking of their dividends. That now is a problem that will persist for many years to come because we've got a declining corporate tax rate for at least the next three or four years.

Mr EVANS: Thank you.

Ms KEARNEY: Thank you, Professor Deutsch, for your submission and for your time today. One thing that nobody's really mentioned today as a barrier or a problem for business growing in this country is the terribly low wages growth in this country, which is a major concern of everybody from the RBA to the Treasurer. Every economist is writing about this right now. It seems to me that the last thing you need for wages growth, if you look at what's happened around the world in all those low-taxing countries, is to cut taxes right now. If you look at where wages growth is strong and the economies are strong, it seems to be those higher taxing countries: Germany, Belgium, Sweden and Finland. They have less inequality. Those countries that have well-established organised labour can bargain up wages quite well. They have less inequality. They have stable economies. Some of them, like Germany, for example, even have quite productive and profitable manufacturing sectors that do very well, with high wages and high taxing—even corporate taxes. So, to me, it just seems to be the wrong time to simply argue that tax cuts for corporations are going to be the be-all and end-all saviour for the economy or are necessary right now. When you look at the hole in the revenue base that the latest tax cuts are going to cause to the US tax base, I think it's of great concern, because we can hardly argue that the low wages and the low tax regime in America has actually delivered good economic prosperity for the people of that country. In fact, it has created terrible diversity in wealth and inequality.

Prof. Deutsch : I have a couple of comments on that. The first is that we're not arguing that a corporate tax cut is a fix for everyone and for all our problems. Not at all. I think this is part of a much broader jigsaw puzzle that needs to be considered in totality. It's not just a matter of the corporate tax cut.

Also, with the US, I think there are two things I'd say to that. The first is that it's probably a little bit early to tell what exactly is going to be the impact of the corporate tax cut there. Whether that is really going to have any long-term benefits for the economy, and for workers in particular, still remains an open question. We're also talking about a much larger corporate tax cut in the US. I can't remember exactly where it's coming from, but it's going to 21 per cent. I think it was somewhere well up into the 30s. So it's a very substantial corporate tax cut which is much larger than that which is being proposed here. The US also has the additional complexity that they have state taxes, which eat into whatever is the benefit from the reduction in the corporate tax. Also, still on the US, there are a number of other changes that have been introduced that, in a sense, go the other way, as part of that package that led to the reduction in the corporate tax rate.

Looking at Germany, I think there are a lot of other things that go on there as well that have some impact on wages growth. But, coming back to your central point about wages growth, I don't know that I can give you any tangible evidence to suggest that a reduction in the corporate tax rate will lead to wages growth. I can sense from your question that you don't think that is the case, but certainly there is evidence from some countries that that has been the result of a reduction in corporate tax rates. I know there's a lot of cynicism and scepticism about that, but I've seen no compelling evidence to suggest the contrary.

Ms KEARNEY: There's quite a bit of compelling evidence coming out of the IMF, the OECD and even, strangely, the World Bank these days that wage rises are needed, and the Reserve Bank governor has said that we need a wage rise.

Prof. Deutsch : Yes. But I'm referring to the point that a corporate tax cut will or will not lead to wages growth. I'm not sure there is any clear-cut evidence in either direction on that particular argument, but I stand to be corrected.

Ms KEARNEY: It seems to be a big risk. America itself is interesting, because, as we know, there are states there that have taken the decision to raise state taxes and raise wages, and it has benefited those economies greatly. I have just one other quick question on that. I think a big concern with regard to wage growth is that it is decoupling from productivity now, and has been for some time. Basically, the businesses are doing quite well out of labour and multifactor productivity here. Still, for me, the question is: why do companies need a tax cut when the situation in Australia right now is quite good for companies, particularly with regard to wages and productivity?

Prof. Deutsch : As we've advocated, we believe that tax rates should be lower across the board for companies and, in particular, I should emphasise, for individuals. We believe that a tax rate of 47 per cent, which will effectively go up to 49 per cent under Labor's proposals, is too high as a top marginal tax rate. We just don't believe that that is sustainable in the long term. But we believe that lower rates are important for Australia on a competitive basis, when we look to our international comparisons, and the imputation system simply adds to that impetus rather than takes away from it.

CHAIR: I'd like to thank you both very much for appearing before the committee today. If you've been asked to provide additional material, could you please forward that to the secretariat. You'll be sent a copy of the transcript of your evidence and you'll be able to make corrections to grammar and fact. Again, thank you both very much for appearing today and for your submission.