R&D incentive spared after company tax cut scrapped

No changes will be made to the R&D Tax Incentive after the Business Tax Working Group failed to find a “revenue neutral” way to fund a company tax cut, which has been pushed for by lobby groups.

The Business Tax Working Group, established by the Federal Government after a tax forum last year, was asked to make recommendations on how the business tax system could be improved.

The government asked the working group to prioritise consideration of a cut to the company tax rate, accompanied by measures that fully offset the cost.

In a discussion paper released in August, the group made several recommendations to fund a company tax cut, including controversial reductions to the R&D Tax Incentive.

But in its draft final report released today, the group said it was unable to recommend a “revenue neutral package” to lower the company tax rate, thus sparing the R&D benefit.

“Several factors have been important to the working group in reaching this conclusion,” the report said.

“First, changes to depreciation arrangements could have a significant impact on the after-tax return on investment.”

“Second, reductions in the company tax rate during the 1980s and 1990s were paid for by making the business tax base broader.”

“As a consequence, the working group has found it difficult to identify support for measures that would further broaden the business tax base.”

“Third, the economic benefits from a reduction in the company tax rate from the current rate are likely to be smaller than when the rate was much higher in the 1980s and 1990s.”

Innes Willox, chief executive of Australian Industry Group, says AIG is relieved the R&D Tax Incentive will not be scaled back to pay for a company tax cut.

“This measure would have detracted from longer-term economic activity by much more than activity would have been boosted by the small rate cut its removal could have financed,” he says.

“We are, however, disappointed that the decision to cut short the Business Tax Working Group’s deliberations means that the modelling foreshadowed by the working group was not completed.”

“This modelling was a valuable opportunity to progress the tax debate by assessing the extent to which a revenue-neutral change to business taxation could be expected to lift overall economic performance and productivity.”

That being said, Willox says AIG is not surprised the report found little support in the business community to finance a company tax cut from within the business tax system.

“Our members were never convinced that raising tax on business was a sensible way to finance a cut in tax on business,” he says.

“We need to look more broadly… at our tax system to find ways to finance cuts in our company tax rate, which is now alarmingly higher than the majority of OECD countries.”

“Reducing the company tax rate should be our top tax reform priority. Finding a sensible way to finance it will require looking beyond the business tax system.”