An extended senate session on Friday saw the government make a deal with the Nick Xenophon Team to implement a phased reduction to the company tax rate which is currently 30 per cent for all businesses, apart from those with a turnover of less than $2 million which pay 28.5 per cent.
The deal will mean businesses with turnovers up to $10 million will pay 27.5 per cent this financial year. From July 1, companies with turnovers up to $25 million will pay 27.5 per cent and, from 2018-19, the tax rate will apply to those with $50 million annual turnovers.
The CEO of MYOB, Tim Reed, said that while a positive first step, he still wants to see more commitment from the government.
“It’s great that the Federal Government recognises the importance of SMEs in helping to drive the Australian economy,” Mr Reed said.
“The confirmed changes will encourage small business to invest, take on more employees and grow. It’s a good day for Australian small to medium sized businesses, their employees and the whole community.”
Last Monday the parliament’s lower house passed the Turnbull government’s 10-year corporate tax plan, reducing the corporate tax rate to 25 per cent for all companies over the next decade, however this was not agreed to in the deal made on Friday.
“We’d liked to have seen confirmation of the whole 10-year plan to cut the rate from 30 per cent to 25 per cent for all companies by 2026-27, however the political realities in the Senate meant the government got the best deal it could for Australian businesses,” Mr Reed said.
Michael Croker, who is the head of tax at Chartered Accountants Australia and New Zealand, agreed that political support for the government’s entire 10 year roadmap was always going to be difficult in an environment where the debate was all about the rate and not accompanying trade-offs in the tax system.
Mr Croker said that opponents of the target 25 per cent rate have used a range of arguments.
“Some of the debate, such as ignoring the fact that some companies currently pay little or no tax because of carry forward tax losses, has been misleading, but there have been legitimate concerns expressed about the tax windfall for existing inbound investors and whether the expected investment boost translates into more jobs,” he said.
“The bottom line is this: Australia’s comparatively high 30 per cent large company tax rate means our economy will continue to lose out because some investment opportunities will not be considered viable.”
Mr Croker believes that maintaining a two-tier tax rate with phased cuts is simply building more complexity in Australia’s tax system.
“An on-going two tier company tax rate system will raise new problems for the ATO and tax advisers if overseas experience is any guide.”
However, looking at the positives Mr Croker said that the decision means accountants can now advice their clients with certainty.
“At least CAs can now start advising their clients with more certainty about the headline company tax rate,” he said.
“Decisions about whether to incorporate, the tax-adjusted yield from proposed investments, budget forecasts, the valuation of certain assets and liabilities, the impact on franked dividends paid to shareholders and year-end tax planning – these are just some of the client conversations which will now occur.”