Don't look for tax concessions, go for grants

With the Federal Government committed to tax reform, KPMG Chartered Accountants' plastics and chemicals group partner, MrRae Vecchio, outlined possible changes he felt would improve the industry's investment climate.

Overseas companies often have a lower level of tax on inputs to their manufactured products than Australian companies, and most have some form of value-added tax that is refunded when they export.

On the plus side, the ability of companies in the Australian environment to carry losses forward to offset against future profits does encourage investment, although the strict application of the qualification tests may mean it doesn't work in some cases.

Another problem for investment in Australia is that anomalies in capital gains tax can be a block to takeovers.

I would suggest that the government allow tax losses to be carried back, for say three or four years. This might remove the necessity of two partners getting together in a partnership initially, so they gain immediate offsetting benefits from the tax losses, and then after two or three years changing over to a company. Carry-back of tax losses is not widely allowed, except in the USA and one or two European countries.

Tax costs of financing have an impact on investment, especially at the front end of the process, where the costs of raising share capital are only deductible over the period of the loss or five years, whichever is the less. Moreover, they are not included in capital gains calculations.

There is also discrimination against non-resident shareholders, as they can't get franking credits for the dividends they receive.

There is no tax concession for the cost of feasibility studies: this is generally classed as a capital expenditure.

Transfer pricing is an issue but the Australian Tax Office has gone overboard on it, raising compliance costs to daunting levels. But tax compliance costs are generally very high anyway.

The cutback in the R&D tax concession from 150 per cent to 125 per cent has been announced. Further, in place of syndication, the government has announced the START arrangements, which focus on highly innovative, technically risky projects that would not otherwise have proceeded. Collaboration between businesses also appears to be an advantage.

The government is wanting to move from tax concessions to outlays, as a result of the National Commission of Audit report, which says that tax concessions are less likely to be critically assessed by government. Bearing that in mind, and also the successes of the shipbuilding bounty and the factorf scheme in the pharmaceuticals industry, I would advise the chemical industry to seek assistance in the form of outlays by way of grants. That seems to be the way the government is going.

The pioneer concessions available in ASEAN countries may be of use in benchmarking the incentives available in Australia. Indonesia and Malaysia have 200 per cent deductions on R&D.

However, the Federal Government in the budget papers argues that this is based more on the discretion of ministers than on the rules as in Australia.

The perception is there that our concessions in a reduced form are not as good as what is available overseas.

The current income tax scheme is characterised by inequities, high compliance costs, and disincentives to invest and to save. But it's not only our income tax system that's got problems; wholesale sales tax is another area of concern. Although the costs of raw materials for manufacturing or for export products are exempt from sales tax, our manufactured goods contain sales tax in goods and services provided to the manufacturers and when they export there's no refund available.

There are two approaches one can take: one, to try to improve the sales tax system; and two, a better approach, scrap the wholesale sales tax and introduce a value-added tax. The latter would have an advantage in that it can be seen as part of an overall tax revamp.

The benefits of a value-added tax are that it can be refunded on exports, and it encourages savings and/or superannuation contributions.

In summary, I recommend the chemicals and plastics industries should develop a three-pronged attack:

1. campaign to get rid of the raft of income tax anomalies that exist
2. identify a range of products that we would like to export and perhaps push for some grants or assistance from the government
3. signal a preference for the introduction of a value-added tax.