IFSA – In pursuit of world’s best tax system

The recent holiday period saw two crucial developments in the Ralph review of business taxation unfold.

The first was a press release based on the whistle-stop tour of meetings held in each of the capital cities. Critically, it acknowledged widespread public concern that the review should consider the impact on national savings of any proposed changes to business taxation. These concerns were expressed by representatives of the investment sector, business leaders and the Australian Shareholders Association (ASA).

The national savings issue

The Ralph review is cognisant of the fact that national savings has two components: public (government) savings and private-sector savings. The latter in turn has two elements: household and corporate.

In a strange twist, the review has virtually no mandate to review corporate savings per se, but because of the government's decision to drag public-offer unit trusts into the review it can make recommendations on the tax environment that will operate for individual private savers. So far the great majority of the 2.75 million individuals who will be affected by the reforms do not realise the game is about to change.

Those who save via unit trust products will be hit with a "double whammy"; they may have invested in public-offer equity trusts containing top-100 equity stocks already subject to corporate tax, but the new proposal means their basket of shares will also be hit. Many will no doubt decide to go outside the trust system - their penalty will be loss of the investment expertise and diversification that add value to managed investments. This would be contrary to the principles of boosting national savings.

TCA, PCA and BCTR join IFSA

Fortunately, IFSA and the ASA are not alone in their quest to achieve a sensible outcome for unit trusts. The voice of commercial property owners, the Property Council of Australia (PCA), has also come out strongly against. The Business Coalition on Tax Reform (BCTR) has submitted that the changes could reduce Australia's competitiveness as a capital-raising nation.

In a post-Christmas salvo, the head of the Trustees Corporation of Australia (TCA), Kerrie Kelly, warned the government to think twice before embarking on this risky course. IFSA looks forward to working with these and other groups to achieve an outcome consistent with the Government's objectives of having a world's best business tax system..

An International Perspective

The Ralph Review's second paper was released just before Christmas. It is a pity the late release did not allow for wider media coverage, as this document is truly a 'value adder'. In keeping with the Government's commendable commitment of adding private sector expertise to the Ralph review, this paper on international comparisons was developed by high profile tax expert Phil Anderson and his team from Arthur Andersen consulting.

Andersens found that if Australia goes down the path of taxing of public trusts it will do so alongside only Chile and New Zealand. Clearly, the 'flow-through mechanism' is a well established method of treating investments in the world's $US7 trillion mutual funds industry.

Andersens' observation in An International Perspective is worth noting:

Trusts represent the only collective vehicle, in the form of unit trusts, available in Australia as a flow-through entity. This is an important reason why they are commonly used for widely held investment vehicles for the holding of real property and securities.

If events go as planned, the Ralph review should release its third issues paper early in February and address in greater detail the proposals to tax unit trusts as corporations and to treat life companies in a similar ways. IFSA hopes that the propositions outlined in this document will reflect the strong feedback already received by the Review team on these issues.

By the end of June the Ralph Review will have released its final recommendations - just in time to be reviewed and analysed at IFSA's annual conference, which will combine retail, investment management and life insurance issues. It will be held on 19-21 July at the Melbourne Convention Centre, and the theme will be cooperation and competition in financial services. Contact Annabel Stokes on 02 9299 3022 for more information.

<I>Richard Gilbert if deputy chief executive officer, Investment and Financial Services Association.