In brief: The Federal Government's Tax Discussion Paper presents a mix of new and old themes for debate about the taxation of Australian business, and begins a new stage in tax reform. Partner Martin Fry (view CV) and Senior Associate Jennifer Richards comment on some of the key issues for corporate taxpayers in Australia.


  • The Discussion Paper is the start of a new phase in Australian tax reform.
  • The paper provides a discussion of ideas and issues for a national tax debate on Australia's direct and indirect tax settings.
  • Corporate taxpayers will need to be familiar with the key themes and monitor developments as they ripen into an options (green) paper by the end of 2015. Submissions on the paper will be accepted until 1 June 2015.


The Discussion Paper advances a mix of new and old themes for discussion on the tax settings in Australia.

A prominent new theme emerging from the paper is that the relatively high level of corporate taxation in Australia ultimately imposes a burden on Australian workers and households. The paper identifies the impact of corporate taxation on the marginal investment decision. It demonstrates that as the return on investment is negatively affected by the incidence of corporate taxation and, as investment capital is considered to be highly mobile, the level of potential investment in Australia will be relatively lower while the incidence of corporate taxation in Australia remains above that of jurisdictions offering comparable investment opportunities. Simply, the stock of viable investment opportunities will be larger in jurisdictions where the wedge between the pre tax and after tax return is smaller, and the mobility of investment capital will ensure that the level of investment in the relatively high tax jurisdiction will suffer.

The paper also contends that, over the long run, more than half of the economic burden of corporate taxation is shifted away from equity investors, through lower wages and higher prices.

The identification of these themes provides the groundwork for a discussion of the merits of lowering corporate taxation in circumstances where the discussion focuses on the benefits for all, not just corporations and their investors.

However, the paper foreshadows the difficulties involved in advancing the case for a lowering of the corporate tax rate. While it notes that revenue benefits can be expected to flow from higher levels of investment over the medium to long term, it also notes the obvious short-term reduction in revenue from corporate taxation and suggests that the former may not be a complete offset for the latter. The paper also highlights that foreign investors can expect to be the primary beneficiaries of a reduction in corporate taxation, as Australian taxation is often a final tax for foreign investors, whereas Australian investors can expect to ultimately be taxed at their marginal tax rate upon the distribution of profits (assuming the retention of dividend imputation).

It is also apparent that the national discussion emerging from the Discussion Paper will be framed by the issues that are shaping current thinking on tax reform by revenue authorities and governments around the world.

For instance, the paper highlights the growing value of intangibles for business over recent years and notes, for example, that investment in intangibles has grown at 1.3 times the rate of tangibles since the mid-1970s. The paper is suggesting that the future shape of Australia's tax systems needs to have regard to the revenue challenges created by the growing importance of intangibles. The paper points out that while the tax laws provide current tax relief for expenditure incurred in the creation of many intangible assets, the taxing point for the value created is deferred until realisation of the relevant asset. The suggestion is that this mismatch will pose an increasing threat to revenue collections as the value of intangibles in the economy increases. Further, the paper warns that the difficulty in valuing intangible assets poses challenges for revenue authorities in circumstances where they are transferred between international related parties.

Another example of the tax discussion being shaped by the issues currently facing revenue authorities is the focus on globalisation and the digital economy. The paper suggests that it is now normal for multinational companies to have their investors reside in one country, manufacture their products in another, locate their marketing and product development in a third country, and supply customers in a fourth country. The paper notes that technological developments have given rise to substantial changes in the way that businesses and consumers interact, creating new supply chains, new ways of capturing value and new ways of transacting. While highlighting these important developments in the environment in which our tax laws operate, the paper reminds us that Australia's reliance on the taxation of income has remained relatively unchanged since the 1950s.

The paper also highlights the level of foregone GST revenue, and calls for consideration of the appropriateness of the GST base and rate (noting that Australia's rate is considerably below the OECD average). It notes the growing concern in Australia and other countries that the rise in online retail expenditure will continue to increase the level of importation of low-value goods, services and intangibles, and warns that this can be expected to harm the competitiveness of Australian businesses over time in the absence of reform. It also calls for focus on the level of foregone GST revenue arising from the increasing proportion of household expenditure on GST-exempt goods and services, such as health, education, rent and financial services.


The paper also traverses territory that will be familiar to those who have lived through the Henry tax review and earlier episodes in tax reform.

It identifies the investment biases created by Australia's system of dividend imputation and, like the Henry tax review, queries whether dividend imputation is an appropriate model for Australia, in light of the increasingly open Australian economy and the globalised world economy. It notes that the relatively high corporate tax rate in Australia makes it necessary for an Australian investment opportunity to deliver a higher rate of return to attract foreign investment capital but, as dividend imputation ensures that Australian investors are not faced with a higher tax burden from company tax, the result is to increase the investment returns for Australian investors. Australian equity capital is therefore biased towards domestic investment opportunities at the expense of foreign business investment. On the other hand, the paper highlights the role that dividend imputation plays in encouraging Australian companies to pay a sufficient level of tax, and also suggests that the equity bias created by the dividend imputation system made a positive contribution to economic stability in the aftermath of the global financial crisis. Not surprisingly, the paper also highlights the revenue implications of the refundability of imputation credits.

It also asks for consideration of the concept of taxable income in Australia, and calls for consideration of whether the income/capital distinction is a desirable feature of the law. It asks whether there might be merit in having the tax and accounting definitions of income more closely aligned, and cites the Tax Value Method from the early 2000s as worthy of consideration.

The paper highlights the distinction between the taxation of passive and active income from inbound investment, and calls for a consideration of whether particular forms of inbound investment should be targeted for concessions designed to promote particular economic activity. For example, it cites the Financial System Inquiry, and other work, to highlight the highly sophisticated but relatively low export-focused funds management sector in Australia and notes the work underway to examine an expansion in the range of collective investment vehicles for these activities.

The paper reiterates the importance of reforms to the Australian taxation of employee share schemes. We note that proposed reforms are currently in a Bill before Parliament (for more detail, see our Focus: Sensible changes proposed to the Australian taxation of ESS interests).


The paper is broad in scope and we can expect the national discussion on tax reform to be far reaching. It traverses many issues not addressed above, including the impact of taxation on savings, individuals, labour participation, small business and others. Corporate taxpayers will need to keep abreast of the themes as they develop and emerge in the later options (green) paper, which is scheduled for the end of 2015. Submissions on the paper will be accepted until 1 June 2015.