MINING CHRONICLE, March 1999

Ralph Review seeks industry submissions by 16th April

By Brian Jenkins

The third of the Howard Government's big, ground-breaking papers on tax reform opens a furious round of consultative seminars in March and a do-or-die challenge to commerce and industry to work up their submissions by 16 April. Then, the Ralph team will present its final report to the Government on 30 June.

It will not be easy going for industry respondents because, while 'good in parts' for the resources sector, the brief behind the Ralph Review of business taxation is clearly aimed at increasing taxgathering efficiency by carving out some current grey-area concessions.

'A Platform for Consultation' follows hard on the heels of 'A Strong Foundation' (November) and 'An International Perspective' (December). Both necessarily conform to the GST reform strategy outlined in 'A New Tax System' (August 1998).

A key parameter follows Treasurer Costello's determination to bring company tax back to 30% - seen as necessary to position Australia as a competitive regional financial centre.

However, to achieve this lower rate, matching Singapore and other trading rivals, there must be swings and roundabouts, bringing productive industry sectors into conflict with each other over which options will get the nod when the Budget is framed.

END ACCELERATED DEPRECIATION?

For instance, in Chapter 2, the review contemplates a major recoupment from curtailment of the accelerated depreciation provisions from which mining industry now benefits.

• Accelerated depreciation provides significant benefits to capital intensive industries such as mining and manufacturing while being of little benefit to service industries such as finance, tourism or retailing. A company tax rate reduction would provide benefits across all industries in proportion to their taxable income. If the trade-off were done on a revenue neutral basis, it follows that the relatively more capital intensive industries would suffer a net disadvantage and the relatively less capital intensive industries would gain

However, the current patchwork of arrangements makes a disciplined study of comparative impacts very difficult, which is why the consultative process becomes a crucial event.

2.11 Different capital assets are [at present] eligible for varying levels of accelerated depreciation and are covered by different depreciation regimes. For example, one accelerated depreciation regime applies in the case of plant and equipment. A different regime applies to some capital expenditure incurred by the mining and resource sector— but accelerated depreciation only occurs if the project life exceeds 10 years in the case of mining and petroleum, 20 years in the case of quarrying and 25 years for timber mills.

Then, the positive spin-offs from major developments are put into the melting-pot, with the suggestion that these 'externalities' could be considered more specifically.

2.15 Mining, manufacturing and some infrastructure provision industries, such as power generation, are probably the largest beneficiaries of the accelerated depreciation provisions. Arguments could be made that there are possible externalities associated with these industries such as technology spin-offs and the importance of high quality infrastructure in attracting further industry. However, the extent of any externalities will differ markedly from one industry to the next. It needs to be considered whether a broad ranging concession for investment in capital assets is an appropriate means of addressing such externalities.

So the Ralph Review is very much a litmus exercise. Mr Costello has revealed the Government's electoral sensitivity by flagging a cautious approach to cuts in capital gains tax except to 'mums and dads'. A recommendation to shift the burden of fringe benefits tax to employees has also sunk like a lead balloon. Faced with reporters hot on the scent of a splash, the Treasurer backed away, calling the proposal 'a reticent duck'.

The key issues raised in the new paper include:

• the extent to which the annual tax value of investments should have more consistent regard to the commercial considerations underpinning them;
• the capacity of reforms in this area to provide for, in a revenue-neutral way, reductions in the company tax rate (bearing in mind the Government’s goal of achieving a 30% rate);
• the possible need for capital gains tax reforms, to achieve a better functioning capital market, again within a revenue neutral setting;
• whether there are better approaches to taxing fringe benefits; and
• considerations around the impact on collective investment vehicles and foreign investment in Australia of the new entity tax regime announced in 'A New Tax System'.

There is also a discussion of structural and remedial solutions to tax-avoidance, and the treatment of tax losses.

NON-RESIDENT FOREIGN INVESTORS

Options proposed for non-resident investors are (a) freeing them from dividend withholding tax (DWT) and/or (b) reducing entity tax payable on profits. The former is seen as giving a revenue benefit to their country of residence and not to Australia, while the taxpayer may not get the tax relief which is an important incentive to invest.

The review team therefore favours the idea of imposing DWT and reducing the amount of entity tax payable. Foreign shareholders generally receive a tax credit in their own country for DWT but not for their payment of entity tax in Australia. Thus, by rebating a non-resident investor tax credit (NRITC), shareholders obtain an advantage.

A portfolio company would be given the refund on condition that it was transferred to shareholders as a supplementary dividend. The DWT would then be levied on that component as well as the original dividend, at the rate of 15%. There would no longer be categories of dividend which were exempt from DWT.

Two tables (30.1 and 30.2) are presented to show that this option gives a portfolio shareholder a net return of $45.15 per $100 of pre-tax company profit, for either fully franked or unfranked dividends, assuming the current 36% company tax.

"Overall, there would be an increase in Australian tax of $2.10 ($3.60 in respect of non-taxable investors such as US pension funds which are currently generally exempt from DWT). For taxable non-resident investors this increase should be more than offset by the higher foreign tax credits for DWT," the discussion paper says.

ENDS