An economic growth agenda fuelled by workforce participation, labour productivity and ease of business: PwC Australia’s five-part plan for tax reform to propel Australia to new heights

As Australia awaits the third-straight Federal Budget set amidst the backdrop of the COVID-19 pandemic, PwC Australia is recommending a five-part plan for the tax system to generate economic growth, get more Australians working, and bust costly compliance headaches for Australian businesses.

The plan, released as part of PwC Australia’s pre-budget submission to Federal Treasury, includes achievable and sensible amendments to Australia’s tax law settings that can be introduced quickly in recognition of the impacts COVID-19 continues to have on Australian businesses and households.

“We continue to hold the view that Australia needs major tax reform, which is critical for the economy to scale new heights and ensure we remain globally competitive, however, with the shocks of the pandemic still being felt across the nation, we know that now is not the time for such profound change,” said PwC Australia Tax Business leader Chris Morris. 

“For now, our recommendations focus on achievable but important changes to our tax laws that can be made now, without delay, in order to give our economy a boost, encourage greater workforce participation and labour productivity, and drive down compliance costs on businesses.”

PwC Australia’s five-part plan includes:

• Fringe Benefits Tax (FBT) changes to facilitate better access to mental health and wellbeing support for Australian workers, and allow families greater access to affordable childcare; 

• Attract talent from overseas by expanding the application of the ‘temporary residents’ tax rules to incentivise professional expatriates to return home;

• Help Australia realise its net zero emissions commitments, through further changes to FBT and the income tax treatment of electric vehicles;

• Give businesses the confidence they need to invest - first, by extending the temporary full expensing mechanism set to expire next year, and, secondly, by making the loss carry-back regime permanent; and

• Sensible measures to modernise and simplify the tax system in order to reduce the costs of compliance.

Fringe Benefits Tax rules can pave the way for more affordable childcare, helping more parents back to work

Currently, businesses can cover the costs of childcare for employees as part of a salary sacrificing arrangement, but will only be exempt from the associated FBT if the participating childcare facility is located on business premises of the employer, thereby making many smaller employers ineligible. If the exemption does not apply, the cash cost to the employer (which is likely passed on to the employee) is effectively doubled.

“Only large-scale, major employers such as big corporates, government departments and universities can feasibly house a childcare facility on their premises, in addition to childcare operators themselves. The vast majority of employers, including small employers, or those operating in small rural and regional communities have little if any practical ability to provide such benefits,” said Morris. 

By allowing more employers and employees to enter into a salary sacrificing arrangement that sees childcare costs paid for by business but without associated FBT costs, more parents will be able to access affordable childcare, and subsequently boost their workforce participation. 

“Affordable childcare is often a critical factor when parents are deciding whether to return to the workforce or how many hours they’ll work. With Australia’s existing labour market resources being under strain, such reforms would achieve economic benefits through increased parent participation in the workforce, particularly by women,” said Morris. 

According to PwC Australia’s pre-budget tax submission, other potential changes to FBT laws include:

• Concessions for employee benefits which promote health, fitness and wellbeing such as private health insurance, and better mental health support;

• Concessions to encourage the take-up of electric vehicles, including for example, exempting the provision of charging and charging infrastructure;

• Temporary exemptions to entertainment benefits in order to alleviate excessive compliance burdens and stimulate the hard-hit hospitality industry; and

• A new regulation-making power for the Treasurer to help support an FBT regime that is quickly adaptable to the rapidly-changing business environment.

Repairing Australia’s economy hinges on attracting international talent

As Australia begins the long road to economic recovery from the COVID-19 pandemic, Australia must act to boost its global competitiveness as a place for talent from around the world to choose to work. 

While the Australian tax system already provides measures to attract professional talent from around the globe through rules applying to temporary residents, no such incentives exist for would-be returning expatriates.

“Such a concession could provide eligible individuals with a temporary tax exemption on most types of foreign income, removing the disincentive they may face in returning to Australia. We know that there are significant Australian fund managers operating overseas, and encouraging their return could help establish Australia’s competitiveness as a financial services hub in the Asia-Pacific region,” said Morris. 

Australia has ambitious net zero emissions commitments - and the tax system can help the nation reach them

Australia meeting its net zero emissions by 2050 target will depend on a significant uptake in cleaner technologies and industries. These commitments are underpinned in no small part by the predicted take-up of 1.7 million electric vehicles by 2030. 

According to PwC Australia, the tax system can help facilitate this adoption by extending the temporary full expensing measure beyond its current expiration of June 2023 and apply it to zero-emissions vehicles and other low emissions depreciable plant and equipment. FBT concessions for electric vehicles or associated expenditure such as charging equipment, and by either increasing or removing the car depreciation limit as applicable to zero-emissions vehicles could also be adopted.

“While we expect that road-user charges for electric vehicles are inevitable in Australia, what matters most is facilitating the adoption of these vehicles in the first place. FBT rules in Australia haven’t been substantially amended in three decades - so much so, Australian businesses are currently exempt from FBT when purchasing a work-related utility vehicle, but not an electric vehicle. This needs to change,” said Morris. 

The tax system has helped save businesses from going to the wall during COVID-19; now it must help give them the confidence to invest again

Ahead of the 2020/21 Federal Budget, PwC Australia recommended the reintroduction of a loss carry-back provision as a pressure release for many businesses who made losses due to COVID-19, following in the footsteps of other jurisdictions around the world such as the USA and New Zealand. 

“This measure has helped prevent businesses from going to the wall by giving them access to cash in the form of offsetting tax losses against taxable profits made in previous years. It’s smart policy that helps unlock cash supplies for businesses who have demonstrated their viability when the tide is in their favour,” said Morris. 

PwC Australia’s pre-budget tax submission recommends this temporary measure be made permanent, in order to continue supporting businesses that experience downturns or cyclical profits. 

The submission also recommends extending the existing temporary full expensing to small and medium businesses beyond the current end date of June next year, so that small business taxpayers and medium business taxpayers continue to have the choice to claim an up-front tax deduction for the cost of depreciable assets.

“Not only does temporary full expensing encourage businesses to scale new heights and grow their operations, it also gives them the confidence to invest in new equipment that has flow-on impacts for the broader economy,” said Morris. 

Simplifying the tax system to ensure businesses spend less time on tax, and more time on doing business

PwC Australia’s pre-budget tax submission recommends that, in the absence of a comprehensive review and reshaping of Australia’s tax system, there’s an urgent and ongoing need to continue simplifying compliance requirements of businesses.

According to PwC Australia, simple and effective compliance busting measures could include:

• Harmonising core concepts in state, territory and federal tax laws to drive ease of compliance for businesses operating across multiple jurisdictions;

• FBT amendments to drive down costly compliance burdens;

• Streamlined sets of rules and consistent sets of thresholds for small and medium-sized business taxpayers;

• The introduction of a legislative safe harbour threshold on the pricing of related party cross-border debt to provide certainty for businesses and reduce the need for detailed transfer pricing analysis; and

• Simplifying the rules for aggregating taxpayers and reforming the capital gains tax rollover rules.

“Major tax reform in Australia is inevitable and fundamentally necessary, but timing is everything, and with a Federal Election nigh and major economic shocks still being felt across the country and certain sectors, what’s most important now is immediate and achievable reform proposals that can boost the economy, get more people working, and ease compliance burdens on businesses so they can focus on doing what they do best,” said Morris.