Two simultaneous tax systems and two different tax rates will kill incentives and increase complexity, and all for nothing

The Productivity Commission’s proposal to introduce a new type of company tax, as well as taxing companies with larger turnovers at higher rates than those with smaller ones, will increase complexity and punish success and could have been written by Lewis Carroll.

Australian Institute for Progress Executive Director Graham Young said that the proposal appeared mad, while its stated aim – to increase capital expenditure – could be achieved more rationally, fairly and efficiently, by instituting accelerated depreciation.

“All Australian businesses from the backyard hairdresser turning over maybe $50,000 through to  BHP with its $78 billion will have to comply with two different systems for paying tax.

“One system will be the one they already know where tax is calculated after all expenses, including depreciation. The second system will take 5% of the difference between their cash takings and their cash expenses.

“Except that BHP will be rewarded for being such an exceptional Australian company by paying an income tax rate 40% higher than the hairdresser’s because its turnover is higher than $1 Billion.”

Mr Young said that the stated aim of the cash flow tax was to encourage investment, but this could be achieved within the current system by allowing companies to write-off their investment over whatever period best suits them.

“You don’t need a whole new tax system just to encourage investment. The current system will do that perfectly well.”

Mr Young also said that the worst feature was that company tax increased at an arbitrary turnover figure of $1 billion.

Many companies with fat margins and turnover of a fraction of a billion will be making more money than many companies with turnover greater than one billion.

“A company like a supermarket with a 4% net margin before tax and $1 billion of turnover would make $40 million, while a software company with a 90% margin, would make that on $44 million of turnover.

“All it will do is add to the cost of food and staples, while making computer entrepreneurs even richer!”

“It will also produce pressure for companies to adopt structures where turnover stays below $1 billion introducing more unnecessary complexity.”

Mr Young said that the Productivity Commission appeared to be trying to avoid tax measures which would decrease the federal government’s tax revenue in the short term.

“They should be looking at the long term. A tax cut for companies now would have a negative impact on next year’s budget, but would boost it in succeeding years, while accelerated depreciation has been demonstrated to successfully bring forward capital investment.”

For further information contact Graham Young 0411 104 801 or graham.young@aip.asn.au.