Why company tax cuts just became urgent

8th November, 2017

If Australia wants to continue to attract capital, then it needs to continue down the path of ongoing tax cuts.

That’s the call from Treasurer Scott Morrison, who in recent times has been making the case for company tax cuts for bigger businesses.

Heralding the launch of a new Productivity Commission report, the Treasurer said that unless productivity and new investment in Australia lifts, wage growth will remain low.

So far, the Senate has passed $24 billion of the government’s proposed $50 billion schedule of company tax cuts, so that company tax for SMEs will drop from 30 per cent to 25 per cent.

These measures have already come into effect this financial year, as businesses with a turnover of less than $10 million have had their company tax reduced to 27.5 per cent.

READ: How will the small business tax cuts work?    

That’s a positive, but if that’s the end of the tax cuts then the benefits will be left very much in isolation.

Australia risks becoming “uncompetitive tax island

But unless the entire program of tax cuts is passed, larger businesses will continue be taxed at the higher rate.

And with many of the world’s largest companies trading across borders with increasingly little barrier to entry (think tech companies like Amazon, Facebook and Google), it’s only to be expected that they seek to reduce their global tax bill.

According to the Treasurer, if Australia doesn’t moved to bring its company tax rates in line with the likes of the UK, France and the US, it would risk becoming “an uncompetitive tax island”.

In the US for instance, Donald Trump is currently trying to push through changes which would lower the tax rate there to 20 percent, while other countries are thinking about changing their own rates in response.

Collins SBA Adviser Sean Devenish told The Pulse that the Treasurer hasn’t proposed anything new, but instead is doubling down on the government’s original aim of reducing the tax burden for all businesses, not just SMEs.

“The tax element of these reforms doesn’t present anything new, but given the big business tax cuts haven’t passed the Senate, the Treasurer is really building fresh ammunition to justify why the government’s original proposals were necessary,” said Devenish.

“It’s really about the comparison of our company tax rates and what’s going on overseas. The government’s plan has always been to reduce the rate down over the course of the next decade.

“In the last couple of federal budgets, the government has proposed tax cut measures that are two-fold: firstly, to bring the small business company tax rate down, but secondly, to also reduce company tax rates at the big end of town.”

Tax cuts would also allow larger companies to invest more in people and R&D.


Reforms won’t come easily

Given the timeframes involved in introducing company tax cuts for big businesses, Devenish said the government needs to find ways to communicate their benefit to the public, or risk having the reforms rejected.

“Talking about tax cuts for big businesses isn’t usually considered palatable to the public, so the Treasurer is trying to position the discussion as to why these reforms need to happen,” said Devenish.

And the Treasurer has also acknowledged the government will be fighting an uphill battle, as he cited a “generation of Australians growing up without ever having known a recession” that are “now more sceptical of change”.

“Whenever governments mention the word ‘reform’ or ‘productivity’, they get nervous,” said Devenish.

In the short term, we aren’t likely to see additional cuts to company tax for SMEs beyond those announced in the last budget.

What the Treasurer is trying to do right now is build the case for tax cuts for bigger businesses’ something that has the potential to have all sorts of flow-on effects.

If bigger business has more money to invest in people and R&D, the more money will be freed up in the economy rather than just going into the government books.

The planned company tax cuts are aimed at encouraging greater investment in Australia by these bigger businesses, with any short-term losses in tax revenue outweighed by the net gain to our economy in the growth of jobs, wages and productivity overall.

But as hurdles to setting up in other jurisdictions continue to be lowered, the price of doing nothing may just be too much.