Corporate Tax

The 2-tier corporate tax distorts enterprise

“Many of the companies at this level are privately owned, so the shareholder impact is critical.

“This distorts behavior during this transition period as businesses don’t have to focus on investing for growth, but instead have to decide whether to divert cash to fund dividend payments to deal with this tax problem.”

Rami Brass, director of tax services at RSM Australia in Perth, said the two-tier corporate tax system could stifle growth and complicate the tax system.

Investment decisions are skewed in the transition to the higher tax rate, and then the funds available to reinvest in growing the business are reduced due to the higher tax rate.

– Greg Travers, William Buck Tax Director

“It also fails to achieve one of its main goals – namely, to create a corporate tax rate that is more oriented towards other countries and thus encourages foreign investment,” he said.

A company with $ 49.5 million in revenue and $ 10 million in taxable income would pay $ 2.5 million in taxes, while the tax liability would be on $ 50.1 million in revenue and taxable profit would increase from $ 10.2 million to $ 3.06 million, he said.

Following a compromise passed by the Turnbull government in 2018, companies with sales less than $ 50 million pay a corporate rate of 26 percent (25 percent as of July), compared to a rate of 30 percent for larger companies.

Different approaches

Mark Molesworth, BDO’s tax partner, said the different tax rates “certainly have an incentive to behave in terms of structures – including ensuring that companies are disconnected whenever possible so that their sales are not aggregated”.

“This is compounded by the impact it has on postage,” he said.

“Occasionally this actually means that companies want to stay in the higher tax rate bracket.

“BDO supports the simplification of the system – aligning the tax rates to 25 percent would greatly simplify the tax system and make Australia more competitive in the battle for globally mobile capital.”

Alison Watkins, executive director of Coca-Cola Amatil, said it was difficult to justify the logic of a two-tier tax rate.

“I think it was a politically sensible decision and we have to iron that out,” she said.

“However, we have to be pragmatic and the political conditions have to be right for this to happen.

“But surely it’s an anomaly that doesn’t help.”

Grant Thornton, head of corporate governance at Vince Tropiano, said the system is complex. “However, we are not seeing any restructuring or otherwise changing the behavior of SMEs to avoid the tax rate.

“Especially in a post-COVID world, companies will strive for growth.

“The bigger problem is the sharp rise in taxes as companies move from $ 50 million to $ 50 million + 1.

“They still have the same problems and limitations but are not as well equipped as the big end of town – but now share a higher tax burden.”

Jolyon Dare, tax advisory partner to HLB man Judd Sydney, said when a company is holding profits or growing rapidly and not paying dividends, the higher tax rate is a major handbrake to investing.

“Even if you enjoy the lower tax rate, if you’ve withheld profits for five years, for example, you can still distribute 25 percent postage to your shareholders today, even if you originally taxed the profits at 30 percent,” he said.

“Some industries are going through consolidation and rationalization – the bringing together of companies to reduce overhead costs – which becomes less attractive when it increases the tax rate.”

William Buck’s Mr. Travers said most SMEs were longer term and decided that the benefits of growth outweighed the additional tax costs resulting from the higher corporate tax rate.

“However, investment decisions will be skewed in the transition to the higher tax rate, and then the funds available for reinvestment in growing the business will be reduced due to the higher tax rate.

“The lower corporate tax rate is aimed at businesses that run a business. It is therefore necessary to define which income is or is not corporate income that can benefit from the lower tax rate.

“This leads to arbitrary distinctions where what normally constitutes a company does not fall under the definition.

“Commercial property leasing companies would be an example.”

The two-tier system requires a company to pass the aggregate sales test so that a company’s passive income cannot exceed 80 percent of the company’s total income.

“This can lead to decisions to start operating in companies that hold passive assets, which can jeopardize investments if the business fails,” Brass said.

“An additional complication with a rate of 25 and 30 percent is the effect on the franking account, which has to be constantly monitored.

“Indeed, there can be situations where 30 percent of corporate tax is paid and dividends can only be franked at 25 percent.”

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