Is a company tax rate cut justified?

Will a company tax cut be included in the upcoming federal budget? It’s not certain at this stage but there are already strong arguments both for and against.

There is increasing speculation that the federal government may include a company tax rate cut in the upcoming federal budget, and it is a proposition that has found favour with industry groups.

“Australians want a stronger economy that can meet global challenges and deliver opportunity, jobs and wages. That’s why they deserve a balanced debate on company income tax,” Business Council Chief Executive Jennifer Westacott said recently.

“Australians benefit when Australian businesses are more globally competitive. It results in more jobs and better paying ones. As we approach the Budget and an election it is vital the community is presented with a balanced argument on company income tax.”

Ms Westacott echoes the views expressed in the March 2015 Tax White Paper released by Treasury, which stated:

“Who pays tax and how much of the burden they bear are fundamental questions for a community to consider. Meaningful tax reform can only occur if the community takes part in a genuine conversation — both directly and through our Parliament.”

In relation to company tax, the White Paper noted that the taxes with high long-term costs for living standards (measured as the ‘marginal excess burden’) are company income tax and stamp duties.

“Company income tax has a high marginal excess burden because of the relatively high company tax rate of 30 per cent in Australia, combined with the high level of mobility of the underlying tax base,” the report noted.

“In the long run, much of the burden or incidence of company tax falls on Australian workers. This is because, over time, the amount of capital investment in Australia (for example, the construction of buildings and purchase of equipment for production) is affected by the company tax rate. Lower amounts of capital investment in the Australian economy will reduce the output or productivity of labour and, in turn, reduce the real wages of workers.”

Company tax not the highest priority for business

According to the results of BDO’s 2016 Tax Reform Survey, released in late March, revealed the thoughts of 523 respondents representing businesses from around the country and across sectors and business sizes. Interestingly, the company tax rate didn’t make the top three tax issues on their collective agendas.

BDO National Tax Director Lance Cunningham said multinational profit shifting was identified as the number one priority issue, with GST and state taxes rounding out the top three areas most in need of reform.

“With the fast-tracked Federal Budget on 3 May, and potential double dissolution election in July fast approaching, I would urge Prime Minister Turnbull and Treasurer Morrison to outline how they plan to tackle tax reform as a matter of urgency,” he said.

Recently, the Federal Government has hinted that company tax rate cuts could be included as part of this year’s Federal Budget, however the BDO survey revealed that, while a company tax rate cut would be welcome, businesses identified other areas as more urgent priorities.

“Respondents had varying thoughts on the current 30 per cent rate for companies with annual turnover of $2 million or more – perhaps due to smaller businesses already enjoying the 28.5 per cent rate from last year’s federal budget,” Mr Cunningham said.

“28.18% of respondents agreed the current company tax rate was appropriate, with 50% in disagreement.”