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Company Tax

Bruce Barbour - this updated version - March 2021

Tax Rates

We should not chase the lower rates of other countries, on some idea that companies will move off shore. Some may but most won't.

We must stop companies using related overseas company payments to minimise their Australian tax liabilities.

Suggested Reform of the Company Tax Structure

I suggest that a company's tax rate be adjusted depending on the number of people that the company directly employs locally within Australia. The more they employ, as shown through their total annual wages bill as a ratio to their profit, then the lower their company tax rate should be. It would be a sliding scale. For example, Company A has a local wages bill of $2 million and they make a profit of say $200K. They might be required to pay a tax rate of 20% ($40K). For comparison Company B has a local wages bill of $1 million but still makes a profit of $200K. They might be required to pay a tax rate of 40% ($80K). (Current company tax rate is a flat 27.5%, scheduled to decrease to 25% in the next few years - this is on lower turnover companies. I may make the top rate payable on company profits approximately the same as the top individual PAYG tax rate. What the top rate should be would require further investigation - though the top individual rate may be found to be too high after analysis.). I said it was a sliding scale - the company tax rate could even go down to zero for a company with a very high local wages bill but a low profit.

These are figures plucked from the air - what the actual figures are would take a great deal of modelling - so please don't dismiss this idea out of hand because of the numbers I have chosen here. Also I am not proposing that the aggregate company tax payments should increase or decrease under this proposal - that would be subject to separate analysis. The increase in tax payable by some companies would be offset by a decrease in tax payable by other companies.

The justification for this proposal should be obvious. It would encourage local employment rather than benefiting the companies outsourcing to oversea low wage countries or companies simply operating an importation business. If a company pays a million dollars for the import of some manufactured items then none of that million goes to the Government in local taxation. If a company pays a million dollars to its local staff to manufacture the items then a significant proportion of that million dollars goes to the Government through the PAYG tax system and also through the payments made by the company to other local companies, for the purchase of materials and services, who then employ people that pay tax and that pay tax itself.  It acknowledges and rewards local companies for employing more people.

The other benefit is the generation of higher the local employment and consequently the lower the likely unemployment benefits payable by Government. The benefits of higher local employment to Government, to Australia as a whole and to the newly employed needs to be recognised and the companies that employ more people locally rewarded. It is a social good to employ local people. The arrangement would also discourage sham contracting arrangements as payments to contractors would not count in their local wages bill. This is beneficial to Australia as Australia gets much higher tax receipts as a result of the operations of Company A that has the $2 million wages bill through the PAYG tax system compared to that of Company B even though the direct company tax paid by Company A would be less. If the average PAYG tax payable was 25% then the Government could receive, say, $500K in PAYG tax on that 2 million dollar paid in wages plus additional amounts of tax - PAYG, GST, company and payroll taxes - due to increased economic activity/expenditure on the purchase of local materials and services though other local companies to enable the local manufacture. For Company B with a local wages bill of only $1 million the government would get $250K in PAYG taxes - a full quarter of a million dollars less. This dwarfs the amount that could be lost to government due to company tax decrease on Company A, which would, at least in part, be made up for by the increased company tax on Company B. Company A benefits Australia a lot more than Company B and this needs to be recognised in our system of taxation. Companies that generate more local employment and economic activity need encouragement through a tax system rewards them for this benefit.

With this sort of calculus it can easily be seen why it is worthwhile for the commonwealth government to purchase locally manufactured plant and equipment if at all possible, even if it is 20% to 25% more expensive than the overseas manufactured equivalent. The Federal Government would recoup that amount and more from the additional local economic activity and the consequent increased tax take generated. It therefore also ensure that other levels of government - State and Local - also purchase local by providing them with a rebate on their significant local purchases of manufactured goods. Unemployment benefits payable by government would also decrease due to greater employment in the community.

Would this result in some companies keeping greater profits? Possibly. If they are paying a low tax on profit due to their high employment level (relative to profit) then prima facie they get to keep higher after tax profit. But traditional market competition may mean that they may be forced to lower their profit margins to maintain market share in the face of their local competitors being able to cut prices to boost their market share due to the more favourable tax environment. Over time it may mean that their level of after tax profit remains about what it was under the flat profit tax environment. However they will gain a competitive advantage over rival companies that are mainly sourcing stock by importing overseas manufactured goods.

I acknowledge that this is a substantial change to the company tax structure. It would have to be introduced in stages over, say, 5 to 10 years to allow businesses time to restructure their operations as they see fit to work in with the new tax structure. It would also mean that there was greater volatility in the amount of company tax received by government - which may mean government would need strategies to handle the years of lower tax receipts to balance them against the years of higher receipts.

After tax profits (from Australian businesses) paid to the owners/shareholders would be tax free in their hands on the basis that the profit should not be taxed twice.

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