Is the company tax rate set to fall?

The man charged with reviewing Australia’s taxation system has suggested lowering the company tax rate in order to boost economic growth, foreign investment and wages.

Treasury Secretary Ken Henry used a speech to an accounting conference to float the possibility of cutting the company tax rate, which currently stands at 30%.

“While a cut in the company tax rate would increase gross domestic product, it would also attract more foreign investment, increase real wages and reduce the rate of return to domestic shareholders, including superannuation funds as share prices increase due to the improved returns for non-resident investors.”

Henry argues that the business tax system has become much more complex because Australian business increasingly relies on international financing and the tax review will have to carefully consider Australia’s position in the global economy.

Of particular focus is Australia’s dividend imputation regime, the system by which some or all of the tax paid by a company is passed on to shareholders by way of a tax credit to reduce the income tax payable on dividends. Many countries, including the United States, have shifted away from dividend imputation in recent years.

When this system was introduced in 1987, Henry argues, the Australian economy was not as open as it is now.

But Henry is also aware that the tax system, designed to suit a small, very open economy, will not work for every taxpayer. Small businesses, which do not generally have access to foreign equity, do not derive much benefit.

“For small businesses, the company income tax combined with the imputation system ensures that business owners face much the same tax consequences irrespective of the form in which they receive income from the company – whether it be dividends, wages or interest.”

Henry is due to deliver his review to Treasurer Wayne Swan in December after 12 months of public consultation.

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