BDO’s 2019-20 pre-budget submission

02 February 2019

We refer to the invitation by the Assistant Minister for Treasury and Finance in a Media Release on 19 December 2018, to submit ideas and priorities for the 2019-20 Federal Budget. Informed by, amongst other things, the outcomes of the 2018 BDO Tax Reform Survey (and surveys past), we make the recommendations summarised below under the following headings and elaborated upon in the Appendix, in respect of taxation priorities in the upcoming Budget period.

Our major recommendations are the reigniting of the tax reform process, not as one off but rather as an ongoing process that sees tax reform as a Government priority. To achieve this, we specifically recommend the establishment of an independent Tax Reform Commission to provide ongoing tax reform recommendations to Government. The remainder of our recommendations are issues that we recommend be considered as part of the holistic tax reform process.

Category Recommendation Page
Tax reform #1 - The Australian tax reform process needs to be reignited and there needs to be a holistic review of all the taxes in both the Federal and State tax systems.  This needs to includes an education process for the general public so they understand the good policy reasons for the tax reform changes. 4
  #2 – The Government should establish an independent Tax Reform Commission that has an ongoing role to develop tax reforms recommendation for the Government. 4
  #3 – Changes to tax rates should not, on their own, be seen as tax reform. 5
  #4 - Certain income tax laws which have been the subject of prolonged review and discussion such as the Controlled Foreign Company rules should be implemented. The prolonged process of re-enacting the provisions of the Income Tax Assessment Act 1936 (ITAA 1936) into the Income Tax Assessment Act 1997 (ITAA 1997) should also be expedited. 5
Company Tax #5 - There should be a clearer plan on how the proposed large business corporate tax rate cuts will be beneficial to the Australian economy and in particular an education and media plan to identify the importance of a reduced corporate tax rate to ensure Australia is competitive in attracting international capital to develop our economy.  6
Personal Tax #6 - Personal tax thresholds should be significantly simplified and reduced by indexing the marginal tax rates to average earnings. 7
  #7 – The current Medicare levy system should be reviewed and consideration could be given to the Henry Review suggestion of replacing it with a new model whereby it is applied as a fixed proportion of income tax payable. 7
Dividend Imputation #8 – The imputation system should be reviewed to identify its effect on debt and capital markets and whether it affects company’s decisions to either invest their profits or pay franked dividends.  Any changes to refundability of franking credits should only be done with appropriate transitional rules to allow time for existing investors to rearrange their investment portfolios. 8
Superannuation #9 - Capping of superannuation contributions should be reviewed with the benefit of research into the effect of such capping on superannuation income stream adequacy and also consider the replacement of annual contribution caps with a lifetime contribution cap. 9
Small to medium businesses #10 - Small to medium businesses should be given a ‘safe harbour’ in respect of the application of s45B of the ITAA 1936 where they undertake a demerger under Division 125 of the ITAA 1997. 9
  #11 – The structures used by small to medium businesses should be reviewed and the establishment of a “small business company” concept introduced, allowing small business companies to choose to be taxed like partnerships; and/or allow trusts to choose to be to be taxed like companies. 11
  #12 – There should be simplification of small business concessions, even if it means losing some concessions. 11
Capital Gains Tax #13 - Where a beneficiary of a trust has CGT event E4 apply to it solely due to a tax timing difference, such CGT event should be reversed when the timing difference is reversed in a similar way to the rules for AMITs. 12
  #14 – There should be measured reform to the 50% CGT discount. 12
Value Shifting #15 – Investment allowance rules should be permanently included in the income taxation law with the ability of the Government to turn these allowances on and off as required by the current economic conditions. 12
Capital Allowances #16 - The value shifting rules should be simplified and there should be a higher de-minimis thresholds. There are de minimis rules that have the effect that where the value of a value shift is less than a set value, the value shifting rules will have no application, however these de minimis levels are low and have not been revised since they were introduced in 2002. 13
Loss Integrity Measures #17 - Consideration should be given to the removal of the quarantining of capital losses of companies where such companies are prepared to forgo any residual indexation of the cost base of their CGT assets. 13
  #18 - The complicated loss integrity measures in Subdivisions 165CC and 165CD ITAA 1997 need to be re-examined. 13
  #19 – Tax loss carry-back rules should be reintroduced 14
Franking #20 - Revise the 45 day holding rule so that it only applies to the specific situations it was meant to stop and is re-written into the ITAA 1997. 14
R&D #21 - There should be reform of R&D to address the ATO’s and AusIndustry’s tightening of eligibility for R&D claims. 15
Investment #22 – The Government should consider introducing tax discount for individuals that applies across the board to all savings income and capital gains which should be done in conjunction with a review of both the CGT discount, CGT small business concessions & imputation. 15
Employment Taxes #23 – Consideration should be given to a repeal of the FBT, with fringe benefits, instead assessed to employees as salary and wages. This should be done in a way so as not to disadvantage not-for-profit entities that currently rely on FBT concessions to attract staff.  16
State Taxes #24 – The Federal Government should seriously negotiate with the State Governments to reform their inefficient taxes, particularly payroll tax and stamp duties. 17
GST #25 - The GST rate should be increased and the base broadened in line with other jurisdictions.  17
Trusts #26 – The review and reform of the rules around taxing trustees and beneficiaries should be reviewed with urgency. 18
  #27 - Section 99B of the ITAA 1936 should be revised so that it does not apply when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income.  This provision should be redrafted so that it applies only to the mischief it was aimed at. 18
  #28 - The current uncertainty surrounding the interaction between Division 7A and UPEs should be resolved by either deeming UPEs to not be Division 7A loans and thus allowing Subdivisions EA and EB of Division 7A to apply in the manner in which they were originally intended to apply. 19