Government needs to encourage business spending and investment to drive jobs growth
We recently provided our Pre-Budget submission to The Treasury on key issues and policy areas most important to you ahead of the 2021-22 Federal Budget.
While the economy is slowly recovering from the impacts of COVID-19, we believe the next Federal Budget still requires a change of focus to encourage small and medium businesses to spend and invest in job-creating growth activities. This is particularly pertinent now as Reserve Bank of Australia Governor Phillip Lowe outlined in his statement at the RBA’s February meeting that wages growth will need to be “materially higher” before the Board increases the cash rate. These conditions aren’t expected to be met until 2024 at the earliest.
If the contrasting performance of global markets compared to economies since the Global Financial Crisis is any indication of the efficacy of low rates to stimulate economic growth, it’s critical that the Government acts now to foster an environment in which the businesses that employ most of Australia’s workforce are encouraged to spend and invest in growth.
Introduce policies with a meaningful impact on business and employment
In our pre-2020 budget submissions to the Treasury on 19 December 2019 and again on 24 August 2020, we outlined three important areas that we believed the Government needed to focus on to support business growth and the creation of jobs. This included a focus on:
- Increasing the competitive capacity of Australian business through investments in science, education, and innovation
- Funding critical longer-term infrastructure projects
- Reducing compliance costs for the middle market and ordinary salary and wage earners by way of significant simplification of the tax system
While we still believe these three areas are of critical importance to Australia’s economy in the longer term, the challenges of COVID-19 necessitate a continued change in focus in the upcoming Federal Budget.
Reduce the corporate tax rate to encourage business expenditure
We believe that one simple change, being a reduction in the corporate tax rate, could provide additional cash to businesses which would assist working capital needs. To that end, we have encouraged the Government to consider:
- Bringing forward the planned reduction in the corporate tax rate for base rate entities to 25% so that it applies for the 2020/21 income year.
- Further reducing the corporate tax rate for base rate entities to 20% for the 2021/22 income year (“small business special tax rate”).
- Whether the small business special tax rate be limited to relatively more active base rate entities (e.g. by reducing the base rate entity passive income threshold from 80%, to say 60% of assessable income).
- Placing a cap on total franking credit benefits that a base rate entity may pass out to its shareholders. Together with the impact of the change in the application gross up rate, this would provide a disincentive for base rate entities to pay out the cash savings as dividends.
Although we encourage the Government to consider making a permanent change for small business taxpayers, we noted that these changes would not have to be permanent. Instead, these changes could be introduced on a temporary basis, to allow a reduction of costs for businesses during the transitional recovery period post COVID-19. Further, this would encourage businesses to reinvest earnings in the business, which will contribute to growth.
The corporate tax rate reduction proposal outlined in our Pre-Budget submission is broadly in line with the corporate tax rate policies offered in other jurisdictions, such as the United Kingdom, that provides for a small profits tax rate of 19%. The United States also provides for a corporate tax rate of 21%.
Conclusion
Reducing business costs to support working capital requirements, along with encouraging people to reinvest profits in their businesses for further growth will be a key component of meaningful and lasting economic recovery in Australia.
It’s clear, based on the ever-increasing divergence between markets and the economy that the Government’s policies need to effectively contribute to an accommodative business environment that puts Australia’s middle market businesses – those that employ the majority of Australia’s working population and contribute just over 40% of corporate tax – in a strong position for future growth. We have strongly encouraged the Government to consider this through our proposal outlined above as it structures its policy measures for the upcoming Federal Budget.
Access our Pre-Budget submission via the download button.
