Ai Group was determined that the issue of the pressures of the multi-speed economy on manufacturing would be at the forefront of the two-day Tax Forum held in Canberra in October.
As a result, the Treasurer’s announcement of the Business Tax Reform Working Group to develop immediate and longer-term business tax reforms has recognised this important policy area and the role the tax system can play as part of a wider solution.
The tax system is critical to the ability of businesses across the economy to transform and to play a role in the broader transformation of our economy and society. Our system of taxation should not penalise risk taking; it should not impede organisations from restructuring, relocating and reorganising.
More than this, our tax system should encourage the engine rooms of business transformation – research and development, entrepreneurship, the emergence of new businesses, and the commercialisation of new ideas – both in existing businesses and through start-ups.
The multi-speed economy was a fundamental consideration of the Henry Tax Review panel, of which I was a member. Its main proposal in this regard was the reduction of the company tax rate to 25% – a move that would have brought us into line with many other smaller OECD economies. Our thinking was that this would help attract investment into those sectors on the wrong side of our lopsided economy and partly offset the disadvantages that arise from this.
For me, it was a cornerstone reform proposal of the review panel and it continues to be a major disappointment that we’ve been so frustrated in moving forward with it. It is certainly an area that Ai Group will continue to advocate as the Working Group constructs its recommendations.
There are, however, important additional measures with particular relevance to the multi-speed economy that can and should be pursued. The Henry Review recommended a loosening of our tight rules around the treatment of tax losses to reduce the bias against risk-taking in our tax system. Some important steps have been taken in relation to certain infrastructure investments, and discussion at the Forum has raised the prospect of further progress.
Costs associated with setting up new businesses and restructuring existing business should also be able to be expensed in the year the costs are incurred. The major beneficiaries would be businesses that are reinventing themselves in the face of the major structural changes that we are seeing, particularly in the non-mining trade-exposed sectors such as manufacturing.
Ai Group is very interested in the capacity of these companies to reinvent themselves, and we believe there should be an exploration of the possibility of improving and extending tax measures designed to facilitate the development of a strong, early-stage capital market in Australia.
Further measures that Ai Group put forward for consideration at the forum include accelerated write-off provisions for investment by industries on the wrong side of the multi-speed economy; heightened deductibility – for example, 150% of particular classes of expenditure by such industries; and a selective refundable tax offset rebate equivalent to a reduction in the company tax rate for particular industries.
Another idea worth considering is to introduce an allowance for corporate capital that concentrates company tax liabilities on rates of return above a certain threshold. While intuitively very attractive and certainly worth pursuing, this would take some time to implement and develop. Of course, the realities of the multi-speed economy will not wait until then; they are burning holes in our industrial structure right now.
Certainly, Ai Group believes the Tax Forum was worth the trip to Canberra. But while the dialogue was useful, we will need to see the policy results before we can judge the true worth of these two days of talk.