Company tax changes, a missed tax reform opportunity?

There have been numerous inquiries into our tax system over past decades, a consistent theme has been a reduction in the company tax rate.
 
As late as 1986 the company tax rate was 49%, aligned to the top individual tax rate. We’ve seen this progressively drop through the 30% barriers and now below that barrier to 27.5%. The reduction is initially for qualifying businesses (small business) with an alignment over the coming years.
 
The ultimate goal is to have a unified rate of 25% for all companies, making us more competitive with our neighbours.
 
We also saw the introduction of franking in 1987, which removed the double taxation on dividends.
 
The above changes have been positive and take us to forward.
 
However, have we missed the opportunity for meaningful reform?
 
The recent company tax rate reduction drives a wedge between small companies, with draft legislation and the Explanatory Memorandum not addressing key ambiguities in the law such as: -
 
  • What is a business?
  • How will these changes interact with trusts and distributions?
  • Clarity over “passive” income
  • How will this interact with other measures like tax consolidations? 
On the topic of franking credits, the recent reduction has created another dilemma and dare I say, inequity. Former rate reductions resulted in different classes of accounts created for franking credits, meaning there was the ability to attach credits to dividends at the same tax rate those profits bore. This most recent change to the tax rate completely omits this; the situation we now have for small companies and will have for all companies is tax credits are lost when dividends are paid. Without a commensurate reduction in personal income tax rates, the government will be pocketing the additional tax gap from the company tax reduction.
 
Finally, in typical fashion we have legislation by announcement and retrospective application. A budget announcement with inadequate information is given May, often with immediate application. The legislation for this is often only released no sooner than 6 months after the announcement (in the case of the tax rate reduction it was almost 10 months), and advisers are expected to help taxpayers understand and navigate the changes, with nothing more than a budget announcement and press release.
 
In a world that is growing increasingly competitive, Australia requires leadership in tax reform and proper implementation more than ever.

Click here to read more about the changes.