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									29 October 1999



The Secretary
Senate Finance and Public Administration References Committee
SG60
Parliament House
CANBERRA ACT 2600


Dear Sir

INQUIRY INTO BUSINESS TAXATION REFORM

We refer to your letter to the President of the Taxation Institute of Australia (the TIA),
Mr Gordon Cooper, dated 20 October 1999 inviting the TIA make a written
submission to the Finance and Public Administration References Committee's Inquiry
into Business Taxation Reform.

In accordance with the terms of reference for this Committee, we provide herewith a
submission concerning the terms of reference (a) – the economic theories,
assumptions etc, under lying the Government’s proposal for tax reform and term of
reference (g) - further effective reduction in the research and development tax
concession arising from the Government's tax reform package.


THE ECONOMIC THEORIES, ASSUMPTION ETC UNDERPINNING THE
GOVERNMENTS PROPOSAL FOR TAX REFORM

One aim of the Government’s Business Tax Reform proposals is to reduce complexity
and compliance costs. However, the Institute is concerned that measures as a whole
may impose additional compliance costs upon business and the community generally.
This is illustrated by the onerous record keeping requirements in A New Tax System
(Integrity and Other Measures) Bill 1999. As the Explanatory Memorandum, refers to
“ taxpayers may incur some compliance costs” and “the measures may increase
compliance costs”, it is clear that there has been no attempt to measure those costs and
determine whether the benefits of the reform outweighs the disadvantages.

More importantly, little consideration has been given to the imposition of an
additional compliance burden on small and medium enterprises with high turn-overs
and low profit margins due to the operation of this so call “Option 2” (the
cashflow/tax value method for calculating taxable income). For example:
Inquiry in Business Taxation Reform
Submission by the Taxation Institute of Australia


       A petrol station, selling petrol at 72.9 cents per litre with a mark-up of 2cents
       per litre will be required to prepare details financial records under Option 2
       with a gross profit as little as $27,435. This occurs as the small business in
       earning its meagre gross profit will have passed the $1 million turn over
       threshold. Such a business would not currently prepare such detailed and
       expensive accounting information.

 In addition, the TIA believes there will also be high transitional cost on large
business.

The TIA is not convinced that the benefits of the “theoretical platform” (which Option
2 seeks to deliver, but from which most of the reforms then depart on tax policy
grounds) outweighs the compliance costs. The argued benefits of Option 2 of
simplifying the income tax law by removing a 100 years of judicial interpretation and
60 years of ad-hock amendments in respect of the income tax calculation does not
appear to be delivered. Instead, it appears that Option 2 merely substitutes legal
arguments on the income/capital dichotomy with legal arguments about whether
expenditure gives rise to an asset. The legal morass of the private or domestic
expenditure distinction still remains in this new model.

As the Option 2 proposal and the reform bills introduced into Parliament to date
appear to have increased compliance costs and complexity, the TIA will withhold
judgement on the value of the reform measures until the compliance cost issues are
adequately addressed.

The TIA believes that until any compliance costs and issues in complexity are
identified for all types of business large, small and medium it is not possible to make
an overall assessment of the package compared to the current framework.




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Inquiry in Business Taxation Reform
Submission by the Taxation Institute of Australia


RESEARCH AND DEVELOPMENT TAX CONCESSION

Introduction
This part of the submission was prepared by the Victorian R&D Group of the TIA.
The TIA expresses its concern that the recommendations of the Review of Business
Taxation (RBT) to reduce the corporate tax rate to 34% (from 1 July 2000) and 30%
(from 1 July 2001) will dilute the benefits of the R&D tax concession.

The historical benefits of the R&D tax concession and the effects of the RBT proposal
are summarised below:


               25
                                                                   1985/1986
               20                                                  1986/1987 - 1987/1988
                                                                   1988/1989 - 1992/1993
               15
                                                                   1993/1994 - 1994/1995
               10                                                  1995/1996
                                                                   1996/1997 - 1999/2000
               5
                                                                   2000/2001
               0                                                   2001/2002
                               R&D Benefit (%)




Benefits of the R&D Tax Concession
The R&D tax concession has been enshrined as a permanent fixture of the Australian
taxation system for nearly 15 years.

The concession has been widely used by companies and there is overwhelming,
documented evidence that it has contributed significant national benefits by way of
additional employment, investment and the commercialisation of technological
developments.

It is our understanding that Treasury’s costing of the R&D tax concession does not
take account of the fact that R&D claims reduce franking credits, thereby increasing
shareholder tax liabilities (ie. the tax concession may not actually result in foregone
revenue).

Level of R&D Tax Concession
The slashing of the R&D tax concession from 150% to 125% in 1996 evoked a
passionate response from industry.

Significant R&D projects have either been abandoned or deferred and Australia’s
relative attractiveness as an R&D centre has diminished.

The recent BERD figures, the AIG’s recent survey (Trends in Research and
Development Expenditure in Australian Manufacturing) and the recent House of
Representatives Standing Committee on Industry, Science and Resources Report*
clearly support this view.
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Inquiry in Business Taxation Reform
Submission by the Taxation Institute of Australia




Importantly, the TIA is not aware of any robust, industry policy reasons for the
halving of the concession and the failure to reinstate the 150% rate, once the
Government’s budget reverted to a surplus position.

Perpetual lobbying by the business community over the last 3 years, together with the
Mortimer and Goldsworthy Reports and submissions to the RBT has unequivocally
urged the Government to re-instate the 150% tax concession.


Inadequacy of the 125% Rate
An R&D tax concession of 7.5¢ in the dollar (125% at a corporate tax rate of 30%) is
wholly inadequate.

Taking into account the cost of compliance, many companies will view the concession
as marginal, and will cease to rely on the concession to undertake ongoing R&D.

R&D is pivotal to Australia’s future and our major international competitors continue
to encourage R&D through tax incentives (eg. the United Kingdom recently
announced a 150% R&D tax credit scheme).

In a global economy, further dilution of R&D incentives is likely to be detrimental to
Australia's future.



The Need for a Minimum 150% Rate
The TIA’s preference is that the R&D tax concession be increased to 180%, thereby
providing a total tax deduction of 54¢ in the dollar (equivalent to a 150% tax
deduction at a corporate tax rate of 36%).

As an alternative, the restoration of a minimum 150% rate would, at least, provide a
significant impetus to R&D in Australia.

The Government’s estimated annual gross cost of the R&D tax concession is $363
million, based on 125% at 36% (note – this excludes the offset of increased
shareholder tax, as a result of reduced franking credits).

Consequently, the increased gross cost of increasing the concession to 150% would be
approximately $240 million.

The TIA’s view is that funding for the R&D Start program should be reduced to fund
the increase in the tax concession to 150%.

If this does not occur, the gross cost of increasing the tax concession to 150% is likely
to be more than offset by significant reductions in R&D claims by companies
accessing other forms of assistance (which preclude them from claiming the R&D tax
concession) such as:

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Inquiry in Business Taxation Reform
Submission by the Taxation Institute of Australia




   the $2 billion Automotive Competitiveness & Investment Scheme (ACIS);

   the $700 million Strategic Investment Program (SIP) for the Textile Clothing &
    Footwear Industry; and

   the $1 billion R&D Start program.

The TIA fully endorses any initiatives to provide additional R&D incentives, above a
minimum 150% rate, to support targeted initiatives such as:

   increasing levels of R&D spending (based on turnover or previous R&D
    performance); and

   an incremental rate for R&D salaries, to increase employment.


The TIA thanks you for the opportunity to provide input into your Inquiry into
Business Taxation and will be happy to make representatives available to appear
before any hearing of your Inquiry or to clarify or expand on any of the issues
contained in this submission. Should you require any further assistance, please
contact me on 02 9232 3422 or by email at: taxtechnical@taxia.com.au.


Yours faithfully


Michael Dirkis

Michael Dirkis
Tax Director




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