Business Tax Working Group proposals spark debate, with R&D cuts high on the agenda

Business groups say the first report from the Business Tax Working Group provides a solid framework for debate, but are disappointed the cuts recommended in order to finance the company tax rate are so severe.

The working group’s discussion paper, released yesterday, puts forward several options for reducing the corporate tax rate, including scrapping deductions, interest benefits and getting rid of R&D tax concessions for companies earning more than $20 million.

Several business groups spoke out against the report last week, including the Australian Industry Group, the CSIRO and Universities Australia. Reports suggest even billionaire Clive Palmer criticised the report.

But Institute of Chartered Accountants tax counsel Paul Stacey says it’s important to keep in mind this is only a discussion paper – and it provides a good starting point for debate.

“This is not a list of recommendations yet, just the start of a process. Going from here the working group will meet with various industry groups and ultimately produce a final report.”

“I think it gives some scope for debate.”

While the report puts forward several controversial proposals, perhaps the most severe are the proposed slashes to R&D spending. One of the proposals suggests capping the amount of benefits an SME can access under the R&D scheme.

Although Stacey himself says the report is only a starting point, he is wary the proposals may stretch benefits too thin for SMEs.

“All three of the recommendation categories are continuations of previous tightening, but the difficulty is that there isn’t a lot left in the kitty within the business sphere to cut.”

“When you’re talking about specific industries, any cut backs do hurt.”

Some other proposals include removing arm’s length tests and reducing safe harbour gearing levels for general entities, capping interest deductions for all business taxpayers and removing or reducing the “first use” exploration deduction for oil and gas companies.

The Australian Industry Group has continued its opposition to the proposals, saying although the report is a “good foundation for an informed debate”, having businesses give up concessions means benefits will be “diluted”.

“A very careful assessment is needed of the costs and benefits of the options put forward in the paper. Not all proposals to broaden the tax base will be worth the reduction in the company tax rate that they will finance.

In particular, chief executive Innes Willox said the R&D proposals are a concern.

“Our research indicates that this incentive plays a very important role in raising the overall level of business R&D. At this time of increasing global economic stress and in view of the tremendous internal pressures for structural change and adjustment, boosting innovation is more important than ever.”

In any case, Stacey says the Federal Government may have staved off an argument by focusing the debate on the broader business community, rather than the minerals industry.

The original business tax cut was meant to be funded by the Minerals Resource Rent Tax.

“The government has clearly learned its lesson through this debacle…and it’s moved the debate to something between industry sectors, and that approach has deflected any heat away from itself.”