The pros and cons of a reduction in Australia’s company tax rate have been hotly contested in recent years. David Loneragan turns to the experts to explore what recent developments in federal tax policy could mean for the manufacturing sector.
In October, the federal Coalition government announced that it was bringing forward by five years its planned cut in the company tax rate for small and medium businesses – a policy introduced in 2016, passed in 2017 and initially slated for completion for 2026-27. The cut will mean businesses with an annual turnover of less than $50 million will see their tax rate drop from 27.5 per cent to 25 per cent by 2021-22.
Promoting the proposal to fast-track the planned tax cut to 2021-22, prime minister, Scott Morrison, and treasurer, Josh Frydenberg, said in a statement that the policy would lead to “more investment, more jobs and higher wages”. A small business making $500,000 a year, they said, would have an additional $12,500 in profits that could be invested back into the business or in staff wages or to manage cash flow.
Federal Labor, which had at one time considered repealing the already-legislated company tax cut for businesses making between $10 million and $50 million, announced a day after the government’s announcement that it would in fact support the acceleration of the policy.
“We’re prepared to compromise in the national interest,” declared opposition leader, Bill Shorten.
While the government was initially able to pass its tax cut for small and medium sized businesses back in 2017, its plan to extend this rate cut to larger businesses – those earning over $50 million in annual revenue – has been persistently thwarted by the Senate. Politically speaking, there is little consensus regarding the desirability of lowering the company tax rate on bigger businesses. These companies will, for the foreseeable future, pay a tax rate of 30 per cent.
The impact on competitiveness
The government’s pitch for the expanded tax cut for larger companies was threefold: first, reducing business tax for all businesses would be an important pro-growth reform for the Australian economy; second, the primary beneficiaries of business tax reform would be wage-earners, shareholders (including self-funded retirees through their superannuation) and consumers; and, finally, Australia had to guarantee its future economic prosperity in a fiercely competitive global environment, one where Australia’s company tax rate is relatively high.
There are concerns from industry and economic observers that the failure to institute a globally competitive tax rate will mean Australian businesses – including manufacturing businesses – will fall behind and miss out on attracting the investment needed to create jobs and generate growth.
In June, the chief executive of the Business Council of Australia, Jennifer Westacott, warned that the rates companies were paying in Australia could disincentivise investment at a time when other countries are lowering their corporate tax rates.
“The simple truth is our regions depend on thriving businesses, which can keep investment ticking up, so they can support local jobs. We are kidding ourselves if we think Australia will remain a competitive place for investment with an increasingly uncompetitive tax rate,” Westacott said.
“Every company tax reduction overseas is equivalent to a tax increase in Australia. Our global competitors are leading the way by cutting their rates; unless we do the same, we risk falling to the back of the pack.”
The average company tax rate in Asia is 21 per cent. The US has a federal company tax rate of 21 per cent, while the UK’s tax rate of 19 per cent will go down to 18 per cent in 2020. France is planning on reducing its current rate of 28 per cent to 25 per cent by 2022.
The Australian Industry Group (Ai Group) considers the rejection of the expansion of the tax cut to larger companies to be a major setback for Australia’s economic competitiveness and, ultimately, living standards.
“The drive to improve the fundamentals of our economy cannot stop with this setback. But, to be more successful, there is a clear need to reassess how this drive can gain more traction,” Ai Group chief executive Innes Willox said.
“In particular, proponents of measures to lift productivity and encourage greater investment as a critical foundation of future social progress now need to reassess how to build a wider base of support. We need to create much greater recognition of the links between business success, employment growth and improved opportunities and living standards.”
Prior to the release of the 2018-19 Budget, Ai Group’s annual survey of large and small businesses from across Australia’s manufacturing, construction and services industries showed that 46 per cent of firms ranked company tax reduction either their first or second highest priority.
Peter Burn, head of influence and policy at Ai Group, told Manufacturers’ Monthly that Ai Group was firmly of the view that a reduction in the company tax rate should be a central component of a broader plan to improve Australia’s tax arrangements. “Company tax cuts would definitely be a positive for manufacturing companies operating in Australia,” Burn said. “If Australia lowered its company tax rate for larger businesses, it would make us more competitive. This would attract more capital, more investment and more productivity. By stopping it at companies making $50 million, we will probably miss out on where the big impact of the original proposal was, that is, in foreign investments in Australia.”
Burn said that a key reason for this was that the impacts of company tax rates are much greater for non-resident businesses than it is for resident businesses due to the dividend imputation system. “When a company pays Australian company tax, they also get imputation credits that they can distribute to their domestic shareholders; and domestic shareholders can basically claim a refund of tax in respect of the tax paid. However, if you’re not an Australian shareholder, you can’t do that, so cutting the company tax rate also reduces the amount of imputation credit that companies have to distribute to shareholders.”
While shareholders on distributed profits are no better off than before a company tax cut, said Burn, foreign shareholders receiving the cut are much more enthusiastic about investing in Australia. “They don’t get imputation credits and the imputation credits don’t offset the company tax cut as they do for domestic companies,” he said. “We at Ai Group think that the measures that were announced – the fastracked cutback measures – are better than nothing, but we would have been better off, by a considerable margin, going for the broader cut for larger companies.”
Professor Miranda Stewart, from the Tax and Transfer Policy Institute at the Australian National University (ANU), said that the key driver and incentive for a lower corporate tax rate was international tax competition in global markets. “The corporate tax rate is relevant there because there is evidence that it does drive foreign investment into Australia. There is no doubt that countries around the world are lowering their tax rates to attract investment,” Stewart said.
Stewart said that while the manufacturing sector was running up against several pressures that were leading to offshoring, such as high labour costs and skill gaps, Australia’s relatively high company tax rate rated among them. Stewart gave the example of Australia’s largest biotechnology manufacturer, CSL, who argued in 2015 for a substantial reduction in the corporate tax rate for companies engaged in advanced manufacturing to 10 per cent. At the time, CSL said such a move would convert Australia’s world leading research and development into fully fledged advanced manufacturing industries. CSL’s chief financial officer, Gordon Naylor, cited Australia’s corporate tax rates as a major factor in the company’s decision to locate a $500 million manufacturing plant in Switzerland, where corporate tax rates average around 18 per cent.
Giving manufacturing its fair share
A recent report on the most recent federal Budget, from the tax advisory group Grant Thornton Australia, registered concern that the government had not included any significant support for the manufacturing sector, despite the fact that it remains one of Australia’s largest employers. According to the report, while it was a positive step that the amount of research and development (R&D) expenditure eligible for concessional R&D tax offsets was lifted in the Budget from $100 to $150 million, an inclusion of concessional taxation of export sales would have been a boon to the industry. Further assistance to help companies invest in plant and equipment, it said, would help manufacturers operating in Australia automate their operations.
Hayel Smair, CEO of RoboHelix, a small manufacturer whose robotic innovations won industry recognition at this year’s Endeavour Awards, told Manufacturers’ Monthly that the company tax cuts would be helpful, the R&D offsets were more important to for the company’s growth. “The R&D tax incentive is huge for us as a growing company. We are extremely focused on our in-house R&D and any boost we can get here is critical for us,” Smair said. “For a smaller business, these incentives are crucial, but a lower tax rate does help us as well. All these little things all tie in together to help us along.”
Professor Stewart said deductions could provide a pathway within tax policy that could help support the growth of the manufacturing industry. “For manufacturing, it’s often the case that there is heavy investment in capital equipment, plant equipment, machines, as well as other inputs,” she said. “Therefore, a key issue for that sector is how investment or reinvestment in upgrading equipment is treated in the tax law, along with what the rate is on profits.”
Dale Boccabella, associate professor at UNSW’s School of Taxation and Business Law, also suggested that manufacturing, compared to other sectors of the Australian economy, was not getting its fair share in this regard. While the resources and primary production sectors generally tend to receive a number of concessions in the tax act for capital expenditure, manufacturers are left out. “Primary producers are essentially receiving a form of accelerated depreciation. Our manufacturing sector, on the other hand, does not get the same range of concessions and acceleration,” Boccabella said. “Manufacturing is potentially not getting its fair share of tax concessions for capital equipment. Manufacturers should get a bigger share in this regard.”
Boccabella said that measures in this area could have more practical impact for manufacturers than a reduced company tax rate. “The arguments are much the same for the company tax cut as they always have been: you give businesses a bit of a tax cut and they be able to pay employees a little bit extra, they will be able to employ some more workers, and they might be able to expand. But it’s very hard to say with precision what the impact will be for manufacturing companies,” Boccabella said. He said that Australia’s dividend imputation system meant that, for domestic shareholders, the lower rate of company tax was irrelevant, as their share is taxed at the personal income tax rate. “If the higher after-tax profits are distributed to a company’s owners, then it’s generally of no major benefit in that regard.”
Getting back on track
Ai Group’s Peter Burn said that while a cut in the tax rate for larger companies would certainly help generate more investment, there was more that could be done. Further, focusing solely on company tax, he said, was more likely to damage the prospect of taxation reform.
Burn said that granting tax concessions to larger businesses was generally out of favour with the Australian public – a trend that has not been helped, he said, by the narrowing of debate around tax policy in recent years. “Several years ago, the national tax conversation was very broad-ranging, with the government inviting very broad-ranging submissions. And this led to a broad-ranging discussion in the community,” said Burn. “And then that went nowhere. All focus was placed solely on company tax, which narrowed and isolated the debate considerably. And, as the wider questions about equity and fairness went out the window, reform in the area of company tax itself became extremely difficult.”
According to Burn, it was essential to bring the community along with discussions in company tax cuts by introducing a broader mix of reforms to tax policy. “That would potentially mean reducing the reliance on income tax at both the personal and company level and shift the burden to indirect taxation. And, taking fairness into the equation, that would also mean compensation for those on lower-incomes.”
While tax cuts for larger companies seem increasingly out of favour, both at the political level and in the wider public, consensus has begun to solidify in parliament regarding concessions to smaller businesses, especially following Labor’s acceptance of the tax cut for businesses earning $50 million a year.
However, according to Boccabella, the tendency towards granting tax concessions to smaller businesses and not for larger businesses actually makes less sense from a macroeconomic perspective. “To some extent we’ve got things a little bit twisted. Big businesses, including large manufacturing firms, really have a greater capacity to actually hire more people and generate more economic activity. That’s the reality,” said Boccabella.
“You would need a lot of small businesses to make up the equivalent of one big business. You can make the case, very strongly, that small businesses are not the ones that should be getting the tax rate cut. A big business can have a much greater impact on economic growth and on employment growth than small business.
“What we really should be talking about are how these companies are in fact conducting very large activities, and they are doing so for actual individuals: shareholders and employees. But that’s the debate that we’re not having at the moment.”
Reigniting a broader taxation debate in Australia appears to be a difficult task. If this could be achieved, Burn said, it would make the government’s effort of cutting rates on larger companies a great deal easier. “The argument that relates company tax levels to our international competitiveness can be made to fit better with broader community goals if there is a broader debate about how to make the taxation system fairer for everyone,” Burn said.
“Otherwise it just looks like we’re just giving tax cuts to multinationals. And, while that may be a short-term and narrow view, and one that simplifies the situation considerably, at the moment it is a view that does have a certain amount of resonance.”