NO.058

THE NEW BUSINESS TAX SYSTEM

The New Business Tax System I am announcing today and the tax reforms now being

implemented will take Australia into the next century with a modern, competitive and fair

taxation system. The Government’s decisions are based on the landmark Review of

Business Taxation which was chaired by Mr John Ralph AO.

I am also releasing today the Review’s report ‘A Tax System

Redesigned’.

The New Business Tax System will provide Australia with internationally

competitive business tax arrangements, which will create the environment for achieving

higher economic growth, more jobs, and improved saving as well as providing a sustainable

revenue base so that the Government can continue to deliver services for the community.

Key Changes

The key changes to business tax are:

• Lowering the company tax rate from 36 per cent to 34 per cent for the 2000-01 income tax

  year and to 30 per cent thereafter – this will be among the

  lowest company tax rates in our region. In part this will be funded by moving to effective

  life depreciation with the removal of balancing charge rollover relief. A separate system

  for small business (see below) will be introduced.

  • Recognising the potential impact of removing accelerated depreciation on large

    capital intensive projects with long lives, the Government will be prepared to consider

    such projects in the context of an expanded strategic investment coordination process,

    including consideration of the option of targeted investment allowances.

• Improving incentives to save and invest by introducing an internationally competitive

  capital gains tax regime, including:

  • For individuals, only 50 per cent of capital gains being taxed, with the result that

    the highest rate of tax for individuals will effectively be 24.25 per cent.

  • For superannuation funds, only two thirds of capital gains being taxed, effectively

    meaning a concessional tax rate of 10 per cent.

  • Reducing complexity through the freezing of indexation and the removal of averaging

    provisions.

  • Improving the current small business concessions by replacing the existing 50 per

    cent capital gains tax goodwill exemption with a 50 per cent general capital gains tax

    exemption for all active assets (with an increased threshold). When combined with the

    general 50 per cent exclusion, this means individuals owning small business will

    be liable to tax on a maximum of 25 per cent of their capital gains when they sell

    business assets.

  • Further extending the concession for small business by introducing a full exemption

    from capital gains tax on the disposal of a business asset which has been held

    continuously for 15 years and where the taxpayer is at least 55 years of age and intends

    to retire, or is incapacitated.

  • Introducing rollover relief for scrip-for-scrip takeovers between companies and

    between trusts (whether widely-held or private entities).

  • Promoting venture capital investments in Australia by exempting capital gains earned

    through Pooled Development Funds by Australian superannuation funds, and exempting from

    capital gains tax investments in venture capital projects in Australia by non-resident tax

    exempt pension funds, such as US and UK pension funds.

• Reducing the compliance burden for 95 per cent of businesses and about 99 per cent of

  primary producers (that is, businesses with an annual turnover of less than $1 million) by

  the introduction of a Simplified Tax System involving:

  • A straight forward and less costly cash accounting regime. That is, for income tax

    purposes, income and expense will need to be recognised only when they are received and

    paid.

  • A simplified depreciation scheme where assets costing less than $1,000 will be

    written off immediately and all other depreciable assets with an effective life of less

    than 25 years will be pooled and depreciated at the rate of 30 per cent. This will

    not only dramatically reduce the paper work for small businesses by removing the need to

    maintain asset schedules, but will also effectively maintain their access to accelerated

    depreciation.

  • A simplified treatment of trading stock which will mean that over 75 per cent of

    small businesses will not have to undertake stock takes in order to value stock for tax

    purposes.

• Tightening the current 13 month ‘prepayment’ rule.
• Implementing the entity tax arrangements outlined in A New Tax System (including

  the taxation of trusts like companies, but with the removal of the inter-corporate

  dividend rebate rather than the introduction of a deferred company tax). The entity tax

  arrangements will not impact on commercially justifiable shareholder loyalty schemes such

  as those currently operated by some widely-held public companies.

• Modifying the proposed arrangements for life insurers and policyholders in A New Tax

  System, to continue to tax superannuation business of life offices at 15 per cent and

  to tax existing policyholders on the current basis.

The New Business Tax System will make a significant contribution to reducing tax

avoidance through the removal of complexities and anomalies and improved anti-avoidance

measures. The Government will also be introducing a number of integrity measures which

will commence from 22 February 1999, consistent with my statement of that date. These

will cover such matters as preventing the use of lease assignments and the use of multiple

and artificial losses to avoid tax.

Details of all the measures being announced are attached.

The Government has accepted the Review’s recommendation not to proceed with

minimum tax arrangements for companies, recognising that the reforms announced will

significantly improve the integrity of the business tax arrangements.

The Government has not accepted the Review’s recommendations covering changes to

the current treatment of fringe benefits. Nor has the Government accepted the

Review’s recommendation to remove the immediate deductibility for expenditure on

mining overburden, which would impose significant cash flow and compliance costs on some

mining ventures.

Phased commencement

The Government’s response to the Review will be in two stages, with a phased

implementation. Some of the measures I am announcing will have effect from today, some

capital gains tax measures will commence from 1 October 1999, some measures will

have effect from the date of Royal Assent of legislation and, as noted above, a number of

the anti-avoidance measures will begin from 22 February 1999. The measures being announced

today are revenue neutral in 2000-01.

In recognition of the current demand on businesses associated with the need to address

Y2K compliance issues and the introduction of the GST on 1 July 2000, the

Government will defer until 1 July 2001 the commencement of some major elements of the

package, notably most of the redesigned company tax arrangements including consistent

treatment of entities (although the removal of the inter-corporate dividend rebate and the

changes to the taxation treatment of life insurers will begin from 1 July 2000)

and the Simplified Tax System for small business.

The Government will consider the remaining recommendations contained in the report in

more detail over the coming months and will announce its response in a second stage. It is

expected that the second stage measures recommended by the Report (and not ruled out

today) will be adopted to reduce the cost of the package in the outyears in accordance

with the goal of revenue neutrality.

Second stage measures will include the Review’s recommendation for a fundamental

change in the method of determining taxable income for business. The new approach

recommended by the Review would replace the existing law based on legal definitions of

income, which is complex and inconsistent, with a more structured framework for the

treatment of expenditure and assets. The Government sees the merits of this approach and

will be considering it further with a view to any new arrangements not commencing until 1

July 2001.

The Government will also be looking at the Review’s recommendation to provide

imputation credits for foreign dividend withholding tax up to 15 per cent, from

1 July 2001. This would be of benefit to those Australian companies now earning revenue

overseas.

The Government will give close consideration to other issues raised in the Review, such

as the recommendations dealing with the alienation of personal services income and

non-commercial losses.

The Government will also maintain the more integrated and consultative arrangements

which have been central to the Review of Business Taxation. In particular the Government

will establish an on-going, non-statutory Advisory Board which would allow access to

private sector expertise on a regular basis, not only on business tax but on all aspects

of tax law. Details will be announced in due course.

Ralph Report – Draft Legislation

I am releasing today draft legislation and explanatory notes as part of the Report

which illustrates the type of legislative product achievable from more integrated design

processes and a more principle-based legislative framework.

This draft legislation does not relate to the measures having effect from either

22 February, today, 1 October or from Royal Assent. Legislation in respect

of these measures will be introduced into the Parliament as soon as possible. The draft

legislation is designed to illustrate what is achievable in terms of simplicity under high

level reform.

On behalf of the Government, I would like to thank Mr John Ralph, AO, Mr Rick Allert,

AM and Mr Bob Joss for their excellent work in providing a landmark report on the way

forward for Australia’s business tax system.

http://www.rbt.treasury.gov.au

CANBERRA

21 September 1999