The complex corporate tax system in Australia is in need of reform as it is impeding economic growth and investment, according to a new report by tax services company, Ernst & Young.
The report, Ensuring Australia’s economic sustainability – Government Agenda 2014, outlined the economic challenges Australia is facing such as the cost pressures associated with an ageing population and the loss of Gross Domestic Product as a result of the declining mining boom.
“While the past 40 years have seen annual average growth in real GDP of 3.3 per cent, in the next 40 years growth is projected to slow to 2.7 per cent, as a direct consequence of an ageing population,” the report stated.
The report said an ever-changing tax system only exacerbates these challenges by creating uncertainty and a lack of confidence among businesses to invest and grow jobs.
Tax changes being made without proper consultation, being cancelled or postponed due to being unstainable, taking a long time to be implemented due to government resources being cut and a lack of transparency around the legislative status of tax changes is what results in “‘deadweight costs’ and distortions for Australian economic activity”, according to the report.
“For example, the 2013 Budget saw a proposal to deny Australian companies certainty about tax deductions for borrowings to finance overseas subsidiaries, unless the subsidiaries generate assessable income for the Australian parent.
“However, the use of borrowed funds was expressly authorised in 2002 tax law. The 2013 announcement had no provision for Treasury consultation to fine-tune the policy impact. So companies relying on the 2002 law, with long-term financing structures locked in, have the risk of major permanent tax disadvantages as the changes apply to existing debt not just new debt.”
The Australian tax system also impedes foreign investment in the country, the report said. “The IMD World Competitiveness Survey ranked Australia only 29th for ‘ease of doing business’.
“Australia has the highest percentage of corporate tax to GDP of any country in the OECD apart from Norway (where the percentage is influenced by the petroleum resource rent tax). Our ratio is over 60 per cent higher than the OECD average, 45 per cent higher than Canada, over 70 per cent higher than the USA and over 50 per cent higher than the UK. And that’s even before considering our Asian neighbours, which compete for foreign investment with Australia.”
“It is extraordinary that, at a time when Australia has one of the most resilient Organisation for Economic Co-operation and Development (OECD) economies, foreign direct investment actually declined by 13 per cent from 2011 to 2012.”
The report pointed out that Australia does not have a large population size like China, India and the United States, making it unattractive for non-resource companies looking to invest overseas.
The report made some recommendations in urging the government to make corporate tax reforms. These include:
- Releasing a transparent list of announced tax changes and their status
- Using the New Zealand Generic Tax Policy Process as a structured approach to managing tax reforms, as well as managing announced tax changes
- Establishing an external tax policy governance board to ensure tax reform processes are methodical and properly resourced
- Identifying concerns and anomalies to tax law before they become widespread
- Strategically reviewing tax policies to encourage jobs, growth and investment
- Achieving better tax rules for international businesses in Australia and globally
- Working with the states (and territories) to help replace inefficient taxes and to fund the responsibilities of the states
- Creating tax incentives to encourage workforce participation to improve productivity and reduce reliance on social welfare.