Submission to Department of the Treasury on the 2004 Federal Budget

• Date:24 Oct 2003
• Type:Policy & Advocacy: Submission

Submission to Department of Treasury on 2004 Federal Budget

• to initiate research and formulate policies that facilitate improved director performance

• to provide timely, relevant and targeted information and support services to members and, where appropriate, government and the community

• to maintain a member's code of professional and ethical conduct

• to uphold the free enterprise system

• to represent the views and interests of directors to government, regulatory bodies and the community

• to develop strategic alliances with relevant organisations domestically and internationally to further the objectives of AICD.

Executive summary

Australian Institute of Company Directors advocates a wind back of government spending as a proportion of Gross Domestic Product (GDP) to below 25% including Goods and Services Tax (GST) revenue and distribution to the States as if it were defined as a federal tax. This compares to its current level of close to 27% which is far above the average of the past 30 years.

Australian Institute of Company Directors fully supports the government's proposal to sell its remaining stake in Telstra. However, the proceeds must be used in full, to repay federal debt. They should not be allocated elsewhere.

Australian Institute of Company Directors urges the federal government to announce in the 2004 budget firm proposals for coordinating the complete implementation of the 1999 Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (IGA) and also a process to carry out a national examination and review of state taxes and charges with a view to their being streamlined to assist business.

Australian Institute of Company Directors encourages the government, for international competitiveness reasons, to embark upon substantive reform of Australia's personal tax system, and to announce such a project either in the budget or sooner.

Australian Institute of Company Directors' submission on the 2004 budget provides recommendations on three other areas which are vital to our economic well being:

• superannuation
• international tax competitiveness
• integrated tax design.

Australian Institute of Company Directors urges the government to address several major issues in the 2004 Federal Budget, and to introduce significant reform measures in a number of areas.

Superannuation

Australian Institute of Company Directors urges the government to recognise that the superannuation system requires large scale reform. The increasing aging of the Australian population will put ever greater pressure on the retirement incomes system. Recognising this, AICD has prepared a comprehensive superannuation policy which outlines solutions to the current systemic problems. Australian Institute of Company Directors encourages the government to introduce a range of significant measures in the 2004 budget. The changes AICD proposes centre around the issues of:

• taxation
• access
• equity
• adequacy
• complexity
• certainty.

International tax competitiveness

Australian Institute of Company Directors believes four objectives need to be addressed in order to improve Australia's international tax competitiveness. These issues are:

• easing the compliance burden
• ensuring that the Australian international tax system is sufficiently competitive to attract levels of foreign investment commensurate with desired rates of economic growth
• minimising the impact of taxation on investment decisions, particularly on the ownership and domicile of Australian multi-nationals
• allowing maximum integration of Australian and global financial markets.

One of the most pressing areas for reform in the area of international tax is the way in which the existing dividend imputation system interacts with foreign sourced income. Australian Institute Of Company Directors urges the government to make progress on reform of this aspect of the dividend imputation system in the 2004 budget. Such reform has been supported by the Board of Taxation and, as noted in the Treasurer's press release on the Review of International Taxation Arrangements, future consideration of this issue was not ruled out. We urge the government to re-consider this important area. If Australian investors are dissuaded for tax reasons from investing in Australian companies expanding offshore, these companies will eventually have a preponderance of offshore investors and it will be inevitable that they will cease to be resident in Australia. This must eventually be contrary to Australia's longer term best interests, politically, culturally and economically.

Integrated tax design

Although significant changes have been made to the Australian tax system over the last few years, the process of reform in terms of governance and administration is far from complete. Australian Institute of Company Directors urges the government to address this in the 2004 budget, noting as priorities:

• effective governance structures
• genuine consultation
• simplified legislation
• sound tax administration.

Australian Institute of Company Directors' perspective on 2004 Federal Budget

Australian Institute of Company Directors recognises that it is to Australia's great benefit and to this government's credit that our federal debt to GDP ratio is one of the lowest in the world, and that, in most years there has been a surplus not a deficit.

In this context, AICD's concerns regarding the budget are twofold:

• at this stage of the economic cycle, the federal budget should be recording a substantial surplus

• although federal tax collections have been rising significantly, the government continues to allow spending to grow.

Australian Institute of Company Directors advocates a wind back of government spending as a proportion of GDP to below 25% including GST revenue and distribution to the States as if it were defined as a federal tax. This compares to its current level of close to 27% which is far above the average of the past 30 years.

Australian Institute of Company Directors fully supports the government's proposal to sell its remaining stake in Telstra. However, the proceeds must be used in full, to repay federal debt. They should not be allocated elsewhere.

Australian Institute of Company Directors also believes that State taxes remain of concern to Australian business because:

• revenue raised by the states is rising and there is no certainty that the state taxes scheduled for abolition under the 1999 IGA will indeed be abolished on schedule

• there remain a plethora of "nuisance" state revenue measures.

Accordingly, AICD urges the federal government to announce in the 2004 budget firm proposals for coordinating the complete implementation of the IGA, and also a process to carry out a national examination and review of small state taxes and charges with a view to their being streamlined to assist business.

A further long-standing issue of concern to AICD members is that the 3 per cent duty on business inputs is an impost that adds to business costs. Yet it does nothing to protect Australian industry, because there is no domestic manufacture of these inputs. This duty represents an impediment to economic efficiency and a negative influence in terms of international competitiveness. Australian Institute of Company Directors strongly supports its removal as a priority.

Additionally the 5 per cent general tariff rate is an anachronism and the government has already stated that it accepts the Productivity Commission's views that there are benefits to be obtained from its removal. Notwithstanding that the benefits may be relatively small, because the tariff rate is relatively low; there is little justification for leaving this outdated tariff barrier in place.

As part of its program to strengthen Australia's international competitiveness, this government has introduced a consumption tax, reformed company tax, and - albeit only in a limited way at this stage - also begun to address international tax. Australian Institute of Company Directors has supported all of these initiatives. It is now becoming increasingly apparent that there is a real need to address the uncompetitiveness of Australia's personal tax regime.

Australia's personal tax system is full of disincentives and does not align with the goals of sound tax policy. The system is not simple. The system encompasses such high marginal rates for significant proportions of working Australia, and thus acts as a disincentive. Overall the system is not efficient.

Australian Institute of Company Directors encourages the government to embark upon substantive reform of Australia's personal tax system, and to announce such a project either in the budget or sooner.

Superannuation

Australian Institute of Company Directors urges the government to recognise that the superannuation system requires large scale reform. The increasing aging of the Australian population will put ever greater pressure on the retirement incomes system. Recognising this, AICD has prepared a comprehensive superannuation policy which outlines solutions to the current systemic problems. Australian Institute of Company Directors encourages the government to introduce the following measures in the 2004 budget:

Taxation

• the replacement of the current system of tax deductibility for superannuation contributions with a flat 30% rebate applicable to all contributions regardless of origin

• the removal of the superannuation contribution surcharge and termination payment surcharge, together with the removal of the maximum deductibility limits for superannuation contributions.

Access

• the removal of the work test for contributions so that individuals can contribute to superannuation regardless of whether they are in the work force, and its replacement by a simple test prohibiting contributions after reaching the age of 70.

Equity

• the relaxation of the cashing rules to enable those whose work force status changes or who work intermittently may continue to remain as accumulating members in a superannuation fund up to the age of 70.

Adequacy

• that the government undertake a comprehensive review of the level of income regarded as a minimum adequate level of income in retirement and that the level of compulsory superannuation contributions be progressively increased to enable all Australians to have a retirement income deemed adequate by the government.

Complexity

• that the government allocate resources for investigating methods of disclosure of information to members of superannuation funds with a view to developing a best practice model for the provision of information to members regarding their financial position in a user-friendly manner.

Certainty

• that the government undertake a review of superannuation fund members' rights with a view to ensuring that the concessional tax treatment of superannuation is not removed and that compulsory and voluntary contributions are treated equally.

International tax competitiveness

The Review of International Taxation Arrangements is scarcely a year old and decisions flowing from it have yet to be implemented. However, in this dynamic world, our international tax system is falling further behind the rest of the world in terms of favouring globalisation of business. This is not an issue that can be looked at once a decade. It requires constant monitoring to ensure we are sensitive to the pressures that are driving global investment decisions.

The Australian Institute of Company Directors supports the government's decisions on international tax reform and is opposed to threats by opposition parties to resist these changes. However, AICD believes the government must go further and submits that the 2004 budget should address international tax competitiveness under four main headings: imputation system, outbound investment, conduit investment, and executives.

Imputation system

the introduction of imputation in the late 1980s simultaneously removed double taxation of domestic corporate earnings for resident shareholders and drove a wedge between the taxation of domestic versus foreign income of corporations. The result has been a desire to stream imputation credits to those most able to use them, essentially resident investors. However, increasingly complex tax measures have been adopted to prevent almost all forms of streaming of credits. The policy behind these restrictions on streaming has often not been well thought out or explained, at times to the detriment of domestic investors with offshore investments and foreign investors with interests in Australian multi-nationals. The Government has rejected the Board of Taxation's recommendation on providing a 20% tax credit to shareholders on unfranked dividends or allowing dividend streaming of foreign sourced income, it did not rule out future consideration of the review of the imputation system. We believe this review should be commenced sooner rather then later to enable Australian companies and investors to make decisions about globalisation free from taxation distortions.

Outbound investment

• whilst we appreciate the proposed changes in Tranche 1,2 & 3 in the current reform program to do with the Controlled Foreign Corporation/Foreign Investment regimes, the reforms should acknowledge at the policy level that these regimes are anti avoidance measures and not general taxation measures. This will help ensure that the measures are designed to meet their specific policy intention. These measures continue to be extraordinarily complex, out of line with the type of taxation system we should be pursuing.

Conduit investment

• Australia should thoroughly review the impediments caused by our current tax system to conduit investment, We encourage the government to further explore the feasibility of more targeted Capital Gains Tax exclusions for capital gains as declared in its Press release with respect to conduit investment

• acknowledging the progress that has been made over the last twelve months, Australia should continue to renegotiate its Double Tax Agreements as rapidly as possible to achieve substantial reduction in the taxation of cross border transactions

• changes are required to be made to some aspects of the system of capital allowances and amortisation of goodwill to provide greater encouragement to inbound investment.

Executives

• the taxation treatment of foreign expatriates is a disincentive in attracting key personnel to work in Australia. A set of reforms has been before Parliament for some time and AICD supports the passage of those measures. Australian Institute of Company Directors urges the government to give priority to the passage of the measures

• the tax treatment of share options for individuals moving between countries needs to be improved. Australian Institute of Company Directors appreciates that the government is awaiting Organisation for Economic Cooperation and Development agreement on this issue. The government should now be addressing this issue with the intention of including reforms of domestic legislation in the Budget.

Integrated tax design

Although significant changes have been made to the Australian tax system over the last few years, the process of reform in terms of governance and administration is far from complete.

In order to develop and maintain a more efficient, equitable and sustainable tax system, it is essential to have an ongoing and integrated process of tax reform aimed at continuous improvement of Australia's tax system. The main priorities are:

Effective governance structures

• governance arrangements both within and between the key government departments and agencies involved in the design and administration of the tax system are deficient and in need of reform

• in the short term, the main priority should be to implement the proposed 'integrated tax design process' and clarify the respective roles of the numerous parties involved in that process. In particular, it is important to clarify which group of officials is responsible for the overall co-ordination of that process. Such information would be of considerable assistance to taxpayers and their advisers

• in the medium term, consideration also should be given to improving governance arrangements within the Australian Taxation Office (ATO) through the establishment of an advisory Board to assist the Commissioner of Taxation with the management of the ATO.

Genuine consultation

• the current consultation process is not delivering the outcomes it should and requires radical overhaul. While the government has accepted the Board of Taxation's recommendations relating to improved consultation processes, there is little evidence that those 'best practice' guidelines have been implemented and are being followed.

Simplified legislation

• the performance and integrity of the tax system ultimately depends on the ability of taxpayers to understand their obligations as set out in legislation. Previous attempts to simply tax legislation have failed largely due to the government's reluctance to consider legislative reforms that would involve a policy change. The government needs to develop a detailed tax simplification work program, make a commitment to principle-based legislative drafting and accept that legislative simplification may involve some policy change and revenue cost.

Sound tax administration

• an efficient tax administration is another key component of a good tax system. Australian Institute of Company Directors believes there is significant scope for the ATO to improve its administrative efficiency by benchmarking its activities against 'international best practice' systems employed in other jurisdictions and monitoring and reporting on its performance against those best practice benchmarks.