After a summer of tennis and cricket, we have been reflecting on how different the current attitudes are to sport versus taxation competitiveness.
For instance, ask an Australian about how competitive they expect our cricket, rugby union or Olympic team should be, and the possible answers range from “it would be embarrassing if we weren’t” variously: in the Top 10, competitive with Great Britain…, dominating New Zealand, to punching above our weight for our population.
Yet, when it comes to taxation competitiveness and particularly corporate taxation, we have pretty modest goals and aims – to be a bit competitive (but not too much).
When Parliament returns in February one of the big items on the agenda is the Enterprise Tax Bill. This Bill sets out a pathway for a reduction in the company tax rate over an eleven year period from 30% to 25%. From a competitiveness perspective it moves us to “the middle of the (OECD) pack”, and that assessment is based on OECD tax rates now, not what they could be in 2026.
The Bill is notable for its conservative approach, with large companies not benefiting from the lower 27.5% rate until 2023-24, and the 25% rate until 2026-27. It was engineered to give it the best chance of being passed in Parliament whilst still achieving its economic objectives. For business it should provide certainty as to what tax rates would be in the next decade, thereby stimulating investment now on the basis of a future business friendly tax environment. For Parliament, it defers the larger direct costs of the rate cut until eight to eleven years in the future, presumably when Australia recovers from its current budget difficulties and transitioning economy. What is not costed (again on a conservative basis) is the presumption the cuts will also in part pay for themselves due to the increase in economic activity they should stimulate.
The rate reductions (and costs) are modest in the first few years and focused on small business, but even these modest changes are being resisted by some political parties. The Bill estimates the costs over the four year forward estimates period will grow from $400 million in 2016-17 to $950 million in 2019-20 (the period where the 27.5% rate is extended to companies with turnover up to $100 million). If we are measuring these costs against other tax yardsticks, contrast the cost of the GST exemption for food at approximately $7 billion, or the estimated value of bad or doubtful tax debts of $3.5 billion.
In order to get the behaviour change it is designed to generate, that is, stimulate investment, enhance productivity, and increase the level of economic activity, it’s critical the Bill is passed in its entirety.
We know too, whilst the tax settings are themselves important, political leaders’ rhetoric around them is also critical. Both factors send a message that a country is open and encouraging of business. Like Australian cricketers who have long known the value of talking up the game when it comes to gaining an edge on field, so too do the leaders of our traditional trading partners. From Trump’s “make America great again” campaign to Theresa May’s post Brexit agenda, it is clear many leaders are taking a more active role in assisting their countries attract and compete for business and investment. Consider May’s recent speech “For government, it means not just stepping back and leaving you to get on with the job, but stepping up to a new, active role that backs British business…”
Australians love to compete on the world’s stage whether in sport or business. This Bill together with our leaders backing it in, will provide us with a more attractive investment climate which together with Australia’s other advantages enables us to better compete for business. We won’t be Top 10, nor besting Britain with their 2020 tax rate of 17%. But we will be in the game and this Bill will give us a better chance of winning.