David Uren in today's Australian makes a case for changing a number of taxes related to companies http://www.theaustralian.news.com.au/story/0,25197,24158137-643,00.html.

I disagree with him about dividend imputation - I can't see how a benefit given to domestic shareholders is a disincentive to international investors - but I think he's right about the rate of company tax.

And not just because it might discourage overseas investment.

Companies typically payout 60% of their income after tax as dividends. They retain the other 40% to reinvest in their activities. That makes them the biggest savers in the country. Yet increasingly they have been penalised relative to private taxpayers to fund the government budget.

With the surpluses that we are currently running, now is the time to look at reducing these company taxes. Some of the money will flow back to shareholders through dividends, but a fair proportion of it will go into investment and deliver an efficiency dividend to the whole country.

If Wayne Swan is right and productivity is linked to inflation, there should also be an inflation pay-off.

So we should lower the company tax rate to 15% or zero. Lets be honest the multinationals effectively don't pay income tax at all, they only pay payroll tax. Will the money saved in taxes trickle down through the economy?

Ooops I'm singing from the wrong hymn book - socail safety nets are not part of the neo-con lexicon.

billie,

You may be very close to the money with this: "... Lets be honest the multinationals effectively don't pay income tax at all, they only pay payroll tax." Its the fiscal equivalent of the statement in the world of personal computing, increasingly being recognised as being true, that "Windows is free!".

In saying "Ooops I'm singing from the wrong hymn book - soc[ial] safety nets are not part of the neo-con lexicon.", you may be expressing a non-sequitor. Try watching the doughnut, not the hole. Imposing company tax upon Autralian companies only puts those companies at a disadvantage in relation to the multinationals; multinationals that are presently subject in theory, but not in practice, to such taxes. Company taxation of domestic companies is presently a recipe for the export of equity in Australian business opportunities without reward - a gift, not a sale, of future business and employment opportunities for all Australians.

"You do not strengthen the weak by weakening the strong". I think that was said by a well-known Unionist of yesteryear.

Social safety nets may have much wider support right across society in this country than you seem to think. The extent of community disapproval of the electricity sell-out may well provide a case in point. It's the confusion between social safety and social engineering that needs to be made transparent for the community to approve truly equitable taxation and/or investment that will provide such social safety nets.

Should we scrap payroll tax as well, and put a withholding tax upon the repatriation of profits by foreign companies, and an investment levy upon Australian companies investing offshore?

GrahamY – I cant see how decreasing company taxes is going to increase productivity. There are only two ways to increase productivity, one being to get people to work harder for the same amount of money or using better technology to increase the amount of work done by one man in one day.

This BS about needing to encourage international investors into Australia right now is just that BS! We currently have VERY low unemployment so a need for more investment to create more jobs is meaningless.

Australia does not want to be a China where companies go to because they are “cheaper” we should be aiming to be a destination for multinational corporations because we are very skilled in a particular field.

In times of high unemployment cutting company taxes to encourage international investment maybe a good idea but right now it will serve little purposes as people are queuing up to invest there money in Australia.

I believe that our tax system should treat all businesses in the same manner. I dont believe that foreign multinationals should be subject to a lesser rate of tax than a local small business (who may not be trading through a company structure) - I just cant see where there is any benefit in this for any part of Australia.

Dividend imputation should not be scrapped entirely. Contrary to what is implied by Uren in the linked article, ALL dividends (and interest and royalties etc) are subject to a withholding tax if they are paid to foreign residents. This avoids compliance issues around getting foreigners to lodge Australian tax returns. In most cases their own jursidiction will allow them some degree of credit for tax already paid on the income (just the same way as Aust allows foreign tax credits to be claimed against foreign income earned). Unfranked dividends have a withholding tax of between 15-30% (depends on the country its going to and whether we have a double-taxation agreement with them). Franked dividends effectively have a 30% withholding tax rate. How to make them equal is more the question. Perhaps implementing a "reverse" withholding tax at the company level is the way to go - giving equal tax treatment to franked and non-franked dividends, while maintaining the status quo for resident investors (who I might add should not have to be penalised because a minority of shareholders dont like our tax system).

A social question arises from the proposal to scrap taxes for foreign companies - do we want foreginers to be able to come in and exploit our resources for their profit, and then not even pay tax for the benefit of doing so?

the best case for removing company tax is, that as a non natural entity it is not a consumer or user of government services, excepting those services which it is generally billed for direct, like licences etc.

The point with company tax is, under the uniquely Australian System, dividend imputation at present offsets the liability of the ultimate dividend recipient (natural people). Removing company tax would simply save the tax on funds intended to improve or increase the activities of the business, which would, long term be a good thing, without making huge differences in overall tax receipts.

billies point about "multi-nationals" is a furphy, the leftie's boogey-man and the cry of the ignorant.

"Multi-nationals" operate in Australia through local entities, subject to the laws and regulations of Australian corporate regulators, they pay tax on the same basis as local companies and withholding taxes (at enhanced rates) for a whole range of corporate charges which, were they paid to another Australian entity would be treated as just another expense. They do not get special dispensations for depreciation costs (one of the reasons for a difference between book profit and tax profit) or any other expense.

If someone wants to complain about multinationals they should do so and address the real aspect which are the stuipid grants and favours which government use to induce them to come here or stay, like the money which Krudd & Co threw at Toyota and the tax payers funds sunk into things like the "Button Plan". All monies used to prop up the myth that governments actually know what is worth saving and what should be allowed to exist purely on its commercial merit (which, for my view and my taxes, is everything).

Graham, decreasing corporate taxation because of the current "surplus", as you have suggested, is, in my opinion, a radical and terribly shortsighted attempt at a solution for a problem that doesn't exist in Australia in the first place. To me it sounds like mere ideological game playing.

Most corporations in Australia have, over the past 20 years or so, streamlined their operations in order to get amazing productivity. We are one of the most efficient countries in the world. Can things be improved? Of course, but a major overhaul (meaning major reduction) of corporate tax liability, because we have a "current" surplus is crazy in my opinion. It's corporate "welfare" on a major scale. All companies and all able individuals should stand on their own two feet in life.......the government should basically butt out as much as possible.

I wasn't suggesting doing it because of the surpluses, just that with the surpluses you could afford to do it now. There are a limited number of good reasons for governments to run surpluses, and none of them apply at the moment, so why not utilise the surpluses.

I think you're also a little confused about productivity. In one sense it is about how many widgets per person you can produce, and giving companies more money to spend on investing in doing that is a good idea, if that is what they do.

I guess the underlying issue is who is likely to produce more wealth per a given unit of taxpayer dollars - public servants investing the money in bonds, or capitalists, investing the money directly into productive assets. I think the latter has an edge, although not as big as some think.

Any business consultant worth their salt can provide examples of how multinationals reduce their tax since the 1950s.

Joseph Lucas Australia used to import sealed beam headlamps from Canada. The headlamps would have been sold cheaply by the Canadian subsidy to the Hong Kong subsidiary where the tax rate was 15%. The Hong Kong subsidiary would sell the headlamps to the Australian subsidiary at a high price. The product would travel straight across the Pacific from Vancouver to Melbourne. In its first 20 years of existence the Australian subsidiary made a profit once, that must have been a book keeping error. In reality, the owners of the company in the UK still collected their dividends. A casual review of Australian operations showed that the operation was not run efficiently but run to maximise the tax effectiveness.

Alcoa sell their aluminium to a holding company in a low tax country. The holding company onsells the product to the consumer.

I do not see the relationship between lowering tax and increasing productivity. When New Zealand wagesdropped their productivity dropped in relation to Australia as the incentive to be efficient had disappeared.

You could make the same argument for people. With less taxes they are happier and drive the economy through additional purchases. I know where this argument is coming from and I am suspicious of it's bias.

Billie “Joseph Lucas Australia”

Australian Customs & Excise have, for many years, exercised controls over the arrangements which you refer to. I recall being advised by a tariffs expert back in the mid 1980s about the C&E policing on the illegal use of cross border costing differentials but don’t let that get in the way of your delusions

As for the era when a lot of those companies set up, the mid 1950-1960’s the commercial arrangements were designed to facilitate a protectionist attitude to trade and the development of local manufacture regardless of the cost.

My personal view to all that is governments spending tax payers money on favouring certain local manufacturers through prohibitive tariffs do not serve their electorate at all well, merely substituting the electorates own free choice with a government decreed and limited choice based around sub-economic local market production (often using second hand, recycled equipment) at significantly higher costs than those which would have been experienced through best practice and economies of scale.

Better we have smaller government and fewer bureaucrats to play Lady Bountiful and leave the reward with those who take the risks to create the wealth in the first place and as GY observes, when it comes to

“public servants investing the money in bonds, or capitalists, investing the money directly into productive assets.”

The latter do have the edge.

Graham regarding “I think the latter has an edge, although not as big as some think.”

I think the “incentive” of more retained reward for risk is where the benefit lies, than in the monetary value itself (or comparison to what some government bureaucrat might do)

Bearing in mind the nature of franked dividend imputation, ultimately if companies did not pay tax, dividends paid would not receive an imputation credit, so all would remain equal, except a loss of immediate taxable income for that element of profit retained to grow the business, which would be an reasonably healthy outcome.

Billie, there is a complex transfer-pricing taxation regime in place to help reduce the practice that you are referring to with low-tax destinations. I dont know it well, just that it operates to deem profits/sle prices where they have been artificially constructed for tax avoidance.

Col, thinking through your analysis of the imputation system, I am inclined to agree, however stand by my comments that all businesses should have a mechanism to trap profits at a non-taxable level where they are to held for use within the business, rather than paid out to the owners.

Whilst I agree that there is no point propping-up inefficient local businesses, I do think that there is a need to do a proper evaluation of the reason why a foreign product is cheaper, before deciding not to support a local producer. Differences come down to labour laws (OHS, pay, conditions etc), treatment of the environment etc. If we decide that Australian workers deserve certain conditions (eg a reasonable pay and be able to expect not to die on the job), then we shouldnt then do thse workers out of a job by expecting some poor labourer ina third-world country to take less than those same conditions. Short-term it has supported the growth in our standard of living, but long-term its a false economy, as well as being morally unjust. I believe that there is a role for tariffs etc to play in providing a true level-playing field.

There is no evidence that reducing tax will increase productivity, on the contrary there is evidence that decreasing company costs reduces productivity if we compare australia and New Zealand in the 1990s.

Australian commodities are still exported at a much lower price to holding companies in tax havens. Companies like Lucas were so inefficient they dragged the whole automotive industry down, in the days of 100% tariffs.

If we take Victoria as an example the drive to small government has lead to
1. privatisation of electriicty in 1992 - the electricity generator has warned of blackouts because of poor maintenance
- consumers have a choice of electricity retailers but you can't change when you feel like it, the companies shift customers around at their leisure
- the meter reading has been outsourced so one fella walks down a street reading all the meters then there is an electricity meter reading exchange
- this complexity is more efficient?

2. privatisation of public transport - we import rolling stock from France ie trams and trains - the trams are longer, seat less passengers and slower because it takes longer to open and close the sliding doors at tramstops
- trains are imported and more rolling stock will arrive in 2009

Public private partnership to build Eastlink resulted in a toll road that is more expensive than if the government raised the money on its own

Another legacy of the Kennett years is the way casual nurses are hired. In NSW contract nurses get their roster for the next fortnight, in Victoria nurses are rung at the start of the shift. A great way to reduce costs but no way to be employed.

Country Girl “imputation system, I am inclined to agree,”

Thanks CG, ultimately, there would be no imputation because, there would be no income tax paid by the company.

Re trap profits,

retained earnings (enhanced by lower taxes) is the alternative to extra commercial borrowings or new share issues.

Billie “decreasing company costs reduces productivity . . . australia and New Zealand”,

I worked for a manufacturing company in the mid 1980’s, shipping product to NZ from Australia.

Aussie manufacturing prices were high compared to UK and higher still compared to USA but were about 1/3rd the price of the local NZ manufactured product.

Reason domestic population (at that time)

USA 250 million
UK 60 million
Aus 20 million
NZ 3 million.

The productivity of NZ manufacturing was disadvantages by the economies of scale it was set up to service.

The one machine we used to make an aussie product was dependent upon doing regular tooling changes, where the Americans ran 6 machines 24 hours a day for the same product.

NZ could not cost justify buying new equipment to begin with and used older, second hand machines, 20 years out of date, which had been written off elsewhere (and a lot of that happened in Aus too).

“- the meter reading . . . . then there is an electricity meter reading exchange
- this complexity is more efficient?”

Innovation changes many things and the benefits fund the cost of doing things differently. You can cherry pick examples all you want but the point is, ‘reading meters’ is part of the delivery process, not the product being sold.

“we import rolling stock from France ie trams and trains - the trams are longer, seat less passengers and slower because it takes longer to open and close the sliding doors at tramstops
- trains are imported and more rolling stock will arrive in 2009”

If you are talking about Victoria, the capital equipment is owned and funded by government.

It sounds like more typically stupid socialist largesse, without regard to any cost/performance standards or the tax payer, more than “privatization”

Hi Col, you miss my point about profit taxation. Companies are the only entities that "trap" profits, ie they dont immediately filter down to the ultimate owner. Other business vehicles - sole traders, partnerships and trusts - do have immediate taxation at the individual taxpayer level. These entities are more commonly used by smaller business, thus removing company tax completely will put small business at an immediate disadvantage to large corporates, which I dont believe is a good outcome. It may just be that a re-think on entity taxation as a whole is needed, but it is an issue that needs to be addressed in any discussion on business taxation.

Well, here is my situation:

I have a small company, I worked through it for many years and except for the company expenses (including my salary), I kept most of the money invested in the company, treating it as an informal form of superannuation and expecting to draw it in old age when I have no other income.

When company-tax dropped from 36% to 30%, I lost 6% of my savings, that is money that was paid as tax which I will never see again as a personal tax credit (unless company-tax goes up again).

Now with this scare of reducing company-tax again, or even eliminating it altogether, I am trying to hastily move my savings from the company to a "proper" superannuation fund, but only that much a year is allowed. At the moment my company does not need much capital to operate, but if I succeed moving the money out of the company in time before the company-tax reduction and later come opportunities/need for the company to make new business investments, the money to do it will simply no longer be there!

Yuyutsu,

You havent lost 6% due to rate changes. When the rate was changed, the remaining franking credits were converted to the existing rate, which means that you havent lost them. I would expect that if company tax is reduced to zero and imputation done away with, there will be a phase-in period and allowance for credits accumulated in the past. Generally its bad business practice to retain profits in an operating entity, as it leaves all your accumulated savings available for payout if your business is sued for whatever reason. Superannuation is a good way to protect them. Superfund money can be used as business investment funds to a small extent if you have a self-managed fund. You still need to give consideration to an investment strategy, but you can use the funds to buy business real property (for example) and lease it to your company (at market rates). I suggest you find yourself a good accountant - they can cost a bit but they will usually pay for themselves many times over.

Country Gal, thanks for the advice!

I know that my company now have heaps of franking credits, but that's all on paper: what is the use of such credits without cash to back them up? For every $100 earned (after expenses) I paid $36 in tax, but if I take it out now as dividend, there are no $70 to take, only $64, and since I can only claim 30% franking in my personal tax-return, I can only recover 64*(10/7)=$91.42 of the original $100.

Anyway, I must admit that it was not such a bad deal after all, because personal tax-rates have dropped as well since, and superannuation was not a feasible option at the time either.

I agree that superannuation is now a great option and if I earned that money today, I wouldn't hesitate to put it straight away into superannuation (subject to super-limits), but at the time it was a nightmare - you could only deduct 3/4 of the sum, but had to invest the other 1/4 as well and pay income-tax on it from other sources; there was superannuation-surcharge; and the exit-terms were complex beyond human comprehension.

Thanks again.

Ross Gittins Sydney Morning Herald economics commentator says

http://business.smh.com.au/business/tailormade-taxes-better-than-fashion-20080810-3t08.html?page=fullpage#contentSwap1

"And where's the evidence we're missing out on our fair share of foreign investment?

"Our company tax take is exaggerated by our full imputation system, something no other country has, bar New Zealand. That system means local shareholders (including everyone with superannuation) have nothing to gain from a cut in the company tax rate.

"Only foreign shareholders stand to benefit (and probably not those whose country's company tax rate is higher than ours, with their government appropriating the difference).

"Our mining companies are reaping super-profits from our mineral riches and are heavily foreign owned. We'd be mugs to cut the company tax they pay unless we first made them subject to a resource rent tax.

"And the push to make us "internationally competitive" by cutting the tax on capital simply doesn't fit with the push to cut our taxes on property.

"If it's true we need to tax capital less because it's now so mobile in a globalised economy, all the more reason we should stick to our taxes on the one resource that's immovable - real estate.

"If we weren't so desperately keen to be dressed in the latest world fashion, we would see that our high reliance on property taxes - including conveyancing duty - puts us at a competitive advantage."

CG I understand your profit trap point.

I disagree with the disadvantage of large v small companies, my business is small but I use a Pty/Ltd entity and apply dividend imputation every year.

The differences it would make would be to encourage more sole traders etc, to regularizes their businesses.

As for partnerships etc. most of them operate in parallel with pty/ltd entities, to limit unlimited liability exposures and the many trusts who are not “not for profit” operate on (post tax) dividend incomes etc only.

Ultimately the difference if companies did not pay income tax on profits, whilst dividend imputation applied, would be the relieve the retained earnings of the company (used for growing the business) from income tax liability, what in the past would have been offset by dividend imputation would instead leave nothing for D/I to be offset against.

Yuyutsu, you need to change your tax accountant.

Instead of paying yourself a salary, you should pay yourself a dividend (from any previously retained profits). This will save you paying income tax on the salary and the tax on the dividend gets offset against the company income tax already paid. The worst that happens is you end up with some cash adjustments between you and the business at tax payment time (this is what I do every year).

Billie “That system means local shareholders (including everyone with superannuation) have nothing to gain from a cut in the company tax rate”

But share holders would lose nothing either. However, the wealth generating business operation would be better off because the element of profits retained to expand and grow the business on would no longer be subject to tax and that becomes a significant difference, saving either dilution of owners equity (from issue of additional shares to fund growth) or the interest payable of loan finance.

Payments to overseas are subject to withholdings tax separate to company income tax.