Could your business end up paying no company tax? Working group flags tax overhaul

Could your business end up paying less or no company tax?

That’s one option that could emerge from the business tax working group.

In a shakeup that will rival the introduction of the goods and services tax, The Age reports that the working group is looking at the prospect of introducing an allowance for corporate equity system.

This would mean that only corporate profits above a reasonable return on equity would attract tax.

Companies that don’t meet that hurdle would therefore be exempt from company tax.

Deepti Paton, tax counsel at the Tax Institute, cautions the discussion – although interesting – is embryonic.

Paton says the idea behind ACE is to even out debt and equity, so people don’t access debt capital driven by tax concerns.

“The effect it may have is to lead people to have a greater reliance on equity financing because it’ll be cheaper. The theoretical benefit is an efficiency dividend.”

But Paton says there are major question marks, including at what rate the reasonable rate of return would be set, how ACE would fit with the imputation system, and how its introduction would affect capital mobility.

It’s also noteworthy that few countries have introduced it, and those that have – Brazil, Belgium, Italy, Latvia – are not countries we traditionally think as having similar tax systems as our own.

“The problem with the fact that there are not many other jurisdictions who’ve done it is there are fewer comparisons,” Paton says.

Paton says the impact on small business will likely be mixed.

“It depends on what kind of returns they’re making,” she says, pointing to the wide variations in profitability among and small and medium-sized enterprises.

The business tax working group, set up at the tax forum to look at short- and long-term tax issues, will release its final report to the Government at the end of next year.

Paton adds that any change to ACE is likely only after extensive consultation.

According to the newspaper report, working group member John Freebairn from the University of Melbourne says the super tax rate could be as high as 40 to 50%, nominating fast-food chains McDonalds and KFC as companies that make larger-than-normal profits.