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Appointments to the Financial Reporting Council and the Australian Accounting Standards Board
September 20, 1999
Business Tax Reform
September 22, 1999
Appointments to the Financial Reporting Council and the Australian Accounting Standards Board
September 20, 1999
Business Tax Reform
September 22, 1999

Review of Business Taxation

Transcript No. 99/66






Press Conference

Tuesday, 21 September 1999

11.45 am

SUBJECT: Review of Business Taxation



Well thank you ladies and gentlemen of the press. Today the Government announces the

third leg of the historic reform of the Australian taxation system, the Reform of Business

Taxation. And really it should be seen very much as a continuation of the reforms which

we’ve already announced in relation to indirect tax, personal income tax and it

should be viewed in the totality of the changes which the Government is now putting in


This gives Australia the opportunity to produce a world competitive taxation system and

what that means is investment and jobs. And in introducing the new business taxation

system we have been mindful very much of making Australia a place for investment, for

business growth and particularly for jobs. And I particularly want to come back and talk

of some of the benefits for small business a bit later on.

The Government has decided to reduce the company tax rate from 36 per cent to 30 per

cent in two stages starting with the first stage next year of 34 cents and then the year

after of 30 cents. It will give Australia a company tax rate which is more competitive

than nearly all of the nations, the developed nations of the world, and most of our

region. It will be lower than the United States, New Zealand, Korea, the United Kingdom,

Germany and many of the countries in our region. That will be in part paid for moving

depreciation to effective life from accelerated rates and also in part paid for changes to

pre-payment rules.

The Government also announces today historic reduction in capital gains tax rates. At

the moment capital gains tax is paid by individuals at their marginal rates. The top rate

of capital gains tax for an individual in Australia is 48 per cent, the low rate is at

20 per cent. Under the reforms which we announce today a 50 per cent reduction in the

taxable gain, that is 50 per cent of the gain is not taxable, the Australian top rate goes

from 48 to 24.25 and the low rate to 10 per cent, which will give us a competitive

capital gains tax regime against competitors that are, now have better regimes than us

like the UK and the US and will put Australia back in the ball park when it comes to

capital gains tax.

The report also produces economic modeling to demonstrate the effect of these changes

in relation to various industries. As I said earlier it’s important that we look at

tax reform as a whole and look at the effects of the indirect tax changes to date and the

effects of business tax changes in relation to it. This is economic modeling from Econtech

which is referred to in the report showing huge benefits to the mining industry from

indirect tax reform, which under business tax reform are still preserved, benefits in

output greater than 6 per cent. Large benefits to the manufacturing industry, principally

as a result of indirect tax changes because the manufacturing industry was bearing the

weight of wholesale sales tax, now alleviated because of goods and services tax. Benefits

preserved under business tax. Benefits to agriculture preserved and business tax providing

some increase in output in the finance and insurance industries which nonetheless were

still beneficiaries but not to the same extent as mining and manufacturing under the

indirect tax changes to date.

The great benefit for small business in this system is the introduction of a simplified

taxation system. This is a whole new system for small business, defined as business with

$1 million in turnover or less. Small business, so defined, will have the benefit of

moving on to cash accounting; will have the benefit of immediate expensing for purchases

up to $1,000 – at the moment they can only immediately expense purchases up to $300;

will have the benefits of pooled depreciation – anything that they buy can be put

into a pool and depreciated at 30 per cent, which is in most cases an accelerated rate;

will get additional benefits in relation to capital gains – at the moment if you sell a

small business, 50 per cent of the good will is disregarded for the purposes of capital

gains, under the proposals that the Government announces today, 50 per cent of the assets

of the small business will be disregarded. And so for a small business which is owned by

an individual 50 per cent of the gain is taxable and 50 per cent of the assets are

disregarded, meaning only 25 per cent of the capital gain for the small business would be

taxed on a disposal, and we also announce provisions today for long life assets that where

a small business as an asset which is it held for 15 years, on its disposal, then where a

person is disposing of that for retirement purposes, that will not be taxable at all and

that will be of enormous benefit, particularly to the farming community who hold their

properties for quite considerable time.

In addition to these measures, the Government also announces today a huge step forward

for investment in venture capital in this country. Those pension funds that are exempt

from tax in their own jurisdictions will be able to invest in venture projects in

Australia tax-free. That means that they can be free of income and capital gains tax if

they invest in Australia and we would expect that to lead to quite new, significant

investment in that sector in Australia. To maintain the equivalent treatment for

Australian superannuation funds, Australian superannuation funds investing through pooled

development funds will also be able to invest in venture projects tax free, capital gains

tax free, which will give Australian superannuation funds the opportunity to also invest

in start-ups and bring that sector through from discovery to commencement in a way which

we hope will give new impetus to developing businesses in this country.

In addition, one of the other recommendations from the Report accepted and announced by

the Government is to allow scrip-for-scrip rollovers so that those companies which are

starting up that might want to go public where people might want to exchange scrip in a

private company for scrip in a public company that can be exchanged capital gains tax free

so that you’ll have a clear pathway of investment and growth for those start-up


The Government has also announced today a second stage, they are the features of the

measures that we announce today, a second stage, in relation to the recommendations,

particularly I would emphasise what’s known as, or what we call anyway, high level

reform – changing the concepts, the statutory concepts and judicial concepts of income and

capital to more accounting based treatment and tax value treatment. The Government has

announced that it will take further submissions in the next month or so and hopefully

announce its position later in the year. It is disposed to accept these recommendations

but not before 1 July 2001, recognising the work that business is currently doing with GST

compliance, pay-as-you-go compliance and giving some breathing space in relation to that.

And in addition, for those reasons we put the commencement of entity taxation back to 1

July 2001 as well.

In concluding, I want to particularly thank John Ralph, Ric Allert and Bob Joss. This

is a kind of tax reform which we’ve not done in Australia before. When we announced

our tax policy in relation to indirect tax and income tax in August of last year we were

conscious of the fact that business tax would also need reform and renewal. We asked three

leading Australian businessmen to go away and consult on that. They’ve gone away,

they’ve had focus groups, they’ve had hundreds of submissions, they’ve had

public meetings and they’ve come back with a very good report. The Government accepts

nearly all of the Report and in some areas goes a little further and I just want to

personally thank them for the work that they have done in providing this blueprint for

business tax reform which gives us the opportunity I believe to get an internationally

competitive, fair system which will create investment opportunity and new jobs for our

people here in Australia.



Treasurer now that you can be picked up by that microphone would you just repeat your

opening comments about the basic principles underlying (the main microphone for the head

camera) the basic principles underlying what you’re doing.



The Review of Business Taxation completes the work of reforming the Australian taxation

system. What we’ve been trying to do is to promote simplification, in many cases to

broaden the base and lower the rates to get a competitive business taxation system which

will lead to new investment and create new jobs. But in the process, we have done

something I think, which will be of enormous benefit to small business and rural

Australia. The introduction of a new simplified taxation system for small business which

will allow them to account on a cash basis and have a simplified regime for their plant

and equipment which will contribute to their profitability and hopefully create the

opportunity for more business growth and employment growth. This is the third leg of tax

reform. It’s the opportunity to make big changes which will create a climate for

investment in our country.



Treasurer why have you got the requirements of revenue neutrality from year two?



Well, if you look at the release that we’ve put out today, on Attachment T; the

reform is revenue neutral in the first two years 1999/2000, 2000/2001. In the third year,

and I’m reading from the third last line here, you’ll see that it’s revenue

negative by around 1.5 billion, with deferred measures raising 800 million still on the

table. Now, I’ve indicated a predisposition to all of those deferred measures which

would bring us to the bottom line of more or less revenue neutrality all across the

forward estimates.



But, I mean, the third year is 710.



Oh yes, minus, but plus 540 in the year before. And the consequence of those is some

bring forwards and push backs, but when you look across the forward estimates you’ll

see that bottom line across the 4 year forward estimates as more or less revenue neutral.



Are those numbers from Treasury Mr Costello? I mean, in the Draft Report there were a

whole series of footnotes which people would qualify as revenue estimates on incorporation

and the potential for converting income into capital. I mean, there is still that

potential though I assume, and to what extent are the figures actually reliable?



Well, all of these figures are taken from the Report. We don’t, we haven’t

produced any second set of figures, we have accepted all of the costings in the Report.

Now, I think we’re entitled to do that, and we’re not jumping in totally in the

dark because the Report sought a lot of the costings from us in the first place. Now, you

will always get an argument in relation to behavioral responses. And if you read the

Overview, the Overview says we think there’s going to be a growth dividend here, I

think they say – of a per cent of GDP, by 2000/2009 they say that the consequence of that

would be in the billions of dollars of revenue, but when they actually come to costing

these particular proposals you’ll see they’ve been very conservative in the

growth dividend. Now, we take their figures, we accept nearly all of the Report and on the

basis of those figures we give you what the cost will be on staged introduction. Now, the

only thing really in this Report that we do not accept are the changes in relation to

fringe benefits tax. I think that was signalled by the Government pretty early on. The

proposed changes in relation to fringe benefits tax were to change liability from the

employer to the employee, one of the changes, the other was to trade off a less generous

car formula for more generous treatment of meals and entertainment. We haven’t

accepted those recommendations, but those recommendations were in total more or less

revenue neutral.



Treasurer is it worth the (inaudible) of all the change, to get – of a percentage

point in GDP change over an extended period of time?



Well, the first point I make about that is that I think the Report itself said, and

quite rightly, that you can’t precisely model the changes, and I think it took what

it considered would be a conservative figure. A conservative figure. Having said all of

that, personally I think any increase in GDP is worth it. But I don’t consider this a

lot of pain to be frank, I think there’s an awful lot of simplification here.

Let’s take capital gains, for example, whilst we are cutting that amount of gain

which is subject to tax, we are also simplifying the assessment of gain. There is a

trade-off here, there is a trade-off between the reduction in the assessful amount, which

is a benefit on the one hand and the abolition of indexation and averaging on the other

hand. What Australia had, was, it had high capital gains tax rates on reals and what

we’re moving to is low rates on nominals. Now, one of the complexity of the current

capital gains tax system, is that you had to keep track of all your assets and index your

cost base. We can get rid of all of that time requirement. The second point that is made

in the Report, one of the great benefits of moving to a tax value system is that you can

get rid of a whole lot of measures which are designed to prevent transferring between

unrealised assets and other income taxes. There will be enormous simplification. One of

the benefits of moving to an entity taxation system is that under an entity taxation

system you don’t have franked and unfranked dividends moving around the system, with

the possibility for arbitrage in the requirement for franking laws, streaming laws and all

of those sorts of things. And what this Report says, and I totally agree with, if you

simplify the concepts, broad bases and low rates, you can take a lot of the complexity

out. Now, your point’s a fair one, getting to a new simplified system involves some

changes, but we’ve got to think about setting up simplified concepts for not just

next year, but, for the decades in the future.



Treasurer, a lot of the revenue, extra revenue in the package has come from

anti-avoidance (inaudible). Would it be fair to say that you should or would have done

that anyway?



Well, the two largest items which contribute to revenues here of course are the changes

in relation to accelerated depreciation, and changes in relation to the pre-payment rule.

The pre-payment rule was a provision, I wouldn’t call it an avoidance provision, it

was recognised in the law that allows you to ride off 13 months of expenses advance.



(inaudible) specifically talking about anti-avoidance measures on top of those.



Well, they are the two largest revenue raisers in this particular package. And if you

want to look at the Capital Gains Tax Package, the largest revenue raisers for the

reduction in rates is the abolition of indexation. Now, in addition to that there are some

other measures that are foreshadowed, for example, personal service, measures directed

against personal service incorporation, non-commercial losses, and the Government’s

view is that we in principle believe that steps will have to be taken in those areas.

But if I may say so, actually drawing the lines is a very difficult process. And

it’s one thing to say when you prevent deductions for non-commercial losses, it is

another thing to define what a non-commercial loss is, it is very, very difficult measure.

And whilst we can all agree on the principle, and we do, it’s going to take some very

fine drafting to make it work in the law. And that’s one of the reasons why we put it

out for a stage two announcement.



How do you think the Democrats, well yeah, how do you think the Democrats will react to

that because that was something that they particularly wanted?



Well, I think that the Democrats will support those measures, and as I’ve

indicated too, from the Government’s point of view, I mean we can all recognise the

situation, where somebody is an employee on the Friday and a contractor on the Monday and

say we’re opposing it, nobody has any great difficulty recognising that. But again

there are people that are not subject to direction, might work for different people and

when you’re actually trying to draw the line as to where the bona fide contractor

stops and where the employee starts, its very delicate and very difficult. I think the

Democrats agree on the principle, we agree on the principle. What we’re going to try

and do in the next month or two is try and work out where you draw these fine lines. Now

one of the difficulties in Australia is that all of the best minds in this country sit

down and try and walk their way through these things the moment you draw them. So

we’ve got to be very careful on those lines.



Mr Costello, don’t you think there’ll be a lot of concerns with the

Democrats, particularly on the implications of this for negative gearing…



Yeah but you’ll also be taxed at the lower rate on nominals, don’t forget

that. There’s a trade off here between the lower rates and the nominals so that it

will be much simpler. At the moment you have to keep track of income which is taxed at

nominals not on reals, and you’ve got to index the base for your capital which is

only taxed on reals. By moving to this system you do away with keeping the track of all

indexations. So there is a trade-off in relation to those benefits. You’re also

losing the averaging provisions, and the averaging provisions gave a lot of scope for

arranging your affairs. Now I think what this capital gains tax will be great for is, you

know, is for the small investor whose never really been getting the benefit of the

averaging or not sophisticated enough to work it, who wasn’t taking advantage of

that, will now get an affective 50 per cent reduction in their rate. But there is a

trade-off for some other people. That’s the first point. The second point I make is

this; that companies’ capital gains tax rate is going to be 30 per cent and

individuals who have their rate cut. For companies there will be a cut in capital gains

tax, it’ll come down from 36 to 30. That’s a consequence in the reduction in the

company tax rate. There’s another simplification benefit of course which is now that

you take out indexation and averaging, for a company they don’t have to keep separate

track of income and capital. Whether they’ve received income or whether they’ve

had a capital gain, it’s all nominals and it’s all 30 per cent. It’s a

reduction, but it’s a reduction to 30 per cent.



Doesn’t that the 50 per cent gap though between capital gains tax rates and income

tax rate provide new scope for avoidance?



I don’t think it provides new scope. At the moment people who can, for whom it

pays, can come off 48 to a 36. Now whilst you’ve got high marginal income tax

rates you’ll always have that activity in Australia. We’ve got 80 per cent of

taxpayers in Australia now on 30 per cent. If the Senate, if the Senate hadn’t of

defeated our original plan we’d have had something like over 90 per cent.



But the wealthiest are still on 48.5 and when they see that if they transfer income

into capital they’re going to get those rates. Won’t that be the incentive for

them to do just that?



Remember, remember for individuals you go on to 48.5 at what $60,000. You’ve got a

tax-free threshold, you’ve got 17 per cent up to 20, you’ve got 30 per cent up

to 50. For companies you go onto 30 per cent from your first dollar. They aren’t

tax-free thresholds and there aren’t reduced rates. And it’s actually, I forget

the figures somebody here could tell me, it actually doesn’t pay you to become a

company until your personal income is somewhere over $100,000 because you lose the value

of those lower rates and tax free thresholds. For the number of people that are over

$100,000 I think is less than 1 per cent of Australian taxpayers anyway and I warrant to

you that many of them are already incorporated and those that aren’t, aren’t

because they can’t. Which will still be the situation. High paid journalists for

example still pay PAYE tax not because they love paying tax but because they find it very

difficult to incorporate. Their employees are unsympathetic to that kind of activity. I

point out another decision that you would have to make which is if you go into a company,

sure you might be able to get lower rates on your income but you’ll get high rates on

your capital gains under this system.



… question on the Democrats. Have you had any preliminary discussions with the

Labor Party with the prospect of passing this package?



Look the report was made available to the Labor Party this morning under embargo

conditions like it was to the press and like we do for Budgets. I’ve had some

discussions with, with the Democrats in relation to particularly the sensitive issues.

There are issues here that took effect from 11:45 am this morning and I particularly

wanted to speak to the Democrats to ensure that we could preserve the integrity of those

measures and I think the Democrats are very, very sympathetic to that. And I think the

Democrats will play a positive role. They played a positive role in indirect tax reform.

Labor of course played a spoiling role on indirect tax reform and decided to chase the

opportunistic vote. If they decide to do it on this occasion I think they’ll probably

get the same reaction as they did last time. They became irrelevant to the process.

It’s up to them. They can either play the opportunistic result or they can play a

national interest result. That’s what I’d do if I were them. I don’t know

that there are many opportunistic cheap votes in opposing this. I mean if they think they

are obviously they will try and eke them out. But I don’t think there are, I

don’t think it’s like an indirect tax and so they don’t have the motivation

to behave as they did last time.



Mr Costello, why did you go to the Democrats first?



Because the Democrats are positive on tax reform. Let’s make no bones about this.

This Government has done the biggest tax reform in Australian history and we’ve put

it all out there and we went to an election and we won an election. We won an election on

it, not because it was a vote winner but because it had to be done in the interests of the

country. And what did you get from the Opposition of this country. Did you get any

national interest argument, any economic argument? This was a policy that they themselves

had been endorsing in the eighties when they last believed in economic responsibility. And

they went the cheap road, the low road. Now, I regret the fact that they did, but what it

meant is it unleashed a new force in Australian politics. And I’ve said in the

Parliament I don’t think I would have ever have said this before, that the

responsible economic opposition party in this country is not Labor, it’s the

Democrats. There’s been a big shift here. You know from the days of the Walsh’s

and the Keating’s, when Labor was economically responsible and the Dems were

described as the fairies at the bottom of the garden. The fairies are now in the living

room, you know they’re taking afternoon tea, and it’s the hobgoblins that are

down playing behind the shed.



(inaudible) on capital gains. Can you . . .



. . . I’ll take two last questions and then I just want to acknowledge some other

people and wrap it up. One from Steve and one from George.



You mentioned as a trade-off in capital gains. There’s transitional measures for

assets acquired prior to the implementation so people get a choice between the two







Can you guarantee people who purchase an asset after implementation that they

won’t be paying more capital gains subsequently (inaudible) under the old rules?



Well, I think it will be a better system. I’m not going to enter into guarantees

because you can always work out permutations and combinations, certain inflation rates,

certain appreciation rates, certain marginal income tax rates and mathematically you could

construct an example. But the point I would make, is after the 30th of

September you will only be paying capital gains tax on half your gain, half your nominal

gain. At the moment you are paying full marginal rates on full real gain. Now, this report

itself costs the changes at a cost of around $300 million. So it’s got to be of

enormous benefit to substantive numbers of people. It then says, on reputable economic

analysis, that you are going to get an activity change which will actually give you more

revenue. More activity at a lower rate will work out to the same revenue. And we accept

that and we make our decision accordingly. But it’s got to be of benefit. Sorry,




Capital gains tax, Treasurer, a two parter if I could. First of all, in terms of the

decision to exempt U.S. pension funds from paying any taxation. Do you think you’ve

got the argument to sell that to the average Australian given that I think you in the past

have raised some concerns about the actual politics of selling that particular

proposition. And secondly, more generally speaking on capital gains tax. This Government

up until quite recently was very hesitant in supporting any capital gains tax reforms. Can

you explain the, I guess, the conversion to supporting capital gains tax reform, given

Labor took to the last election a policy to exempt U.S. pension funds which at the time, I

think, was ridiculed by the Government, or criticised by the Government?



Well, I’d have to go back and look. I do recall ridiculing Labor’s capital

gains tax policy in the last election, which as I recall it was to un-grandfather

pre-September ’85 assets.



That was one aspect of it.



Well, it was a pretty big aspect of it as I recall. It rather excited the public as I

recall and quite excited me. You know, they are two memorable policies of the Labor Party

in the last election. One was to un-grandfather pre-’85 assets and the other was to

put, you know, higher taxes on Land Rovers. And after the election they said both of

their policies was wrong. I mean, two policies both wrong. We’re lucky they

weren’t elected. In relation to, it’s not just U.S. pension funds by the way,

it’s any pension fund that is exempt in its own jurisdiction which . . .



But you’d expect most of the capital to come from U.S. . . .



Yes, the U.S. are the biggest ones, yes. And we will give them the same treatment in

this jurisdiction. And the argument is this. That if they’re exempt in their own

jurisdiction, they’re taxable in yours, they’re most likely to stay in their own

jurisdiction. And if they stay in their own jurisdiction the fact that you’re taxing

them here won’t raise you any more revenue. And it doesn’t raise you any more

revenue not having them here. So, if you don’t tax them here and they come, you

don’t lose any revenue. And I think that is a respectable argument. The concomitant

of that, and you actually raised it yourself is, what about domestic institutions?

It’s a little unfair on your domestic institutions if the overseas pension funds are

tax-free but your own domestic institutions aren’t. And so, we are announcing that we

will allow Australian superannuation funds to be capital gains tax-free too, where they

invest through the pooled development fund. The pooled development fund is basically again

focussing on start-ups and ventures and so on. And that is a way of giving them equality

of treatment in that area. I make the point in relation to the U.S. pension funds that

they have always been capital gains tax-free on portfolio investment. I don’t think

it’s been commonly understood, it’s only direct investment. And so what we are

allowing is the treatment on direct investment for projects which are less than $50

million for the reasons that I outlined before.

Now I might just end it there if I can and I’d like John Ralph and Rick Allert to

come across. Bob Joss can’t be with us today because I think he’s at Stanford

where he’s no doubt now giving lectures on tax reform to American post-graduate

students. But I just want to introduce John Ralph who is the Chairman of the Review of

Business Taxation and travailed with this, I think, for about 12 months. And Rick Allert

who joined him and provided the second limb of the three member panel. I want to thank you

both very much for your work with the report and I think all of Australia owes you our

very great thanks.

Now I think I might leave it. I think Mr Ralph will probably be available to answer

questions a bit later in the day, but if he can come with me I’d appreciate it very


Thanks very much.