Published on the 17/07/2015 | Written by Beverley Head

The nexus that exists between taxation and enterprise innovation has been broached by the Treasurer, Joe Hockey, who has sent strong signals of looming changes to the nation’s tax regime…

During a recent address to the PricewaterhouseCoopers Tax Reform Forum in Melbourne, Hockey referenced the; “strong view that our corporate tax rate is uncompetitive, and that our personal income tax rates are seeing some of our best and brightest move to lower taxed countries.”

He said that while on average, OECD countries collected 34 percent of their tax from personal and company taxes, that figure was more than 70 percent in Australia, with $170 billion a year coming from personal income tax.

“Our top income tax rate is 47 cents in the dollar. By way of contrast, New Zealand’s top income tax rate is just 33 percent.”

Hockey argued that tax policies alone would not determine how much of the global talent pool located in Australia, but said that; “our tax rates should not be set at levels that push the talented away.

“Lower taxes provide a great conduit for new investment and entrepreneurship. Talent will always gravitate towards wherever the reward is greatest.

“That is as it should be. And this must be at the forefront of our minds as we chart a path towards tax reform — and, with it, an innovative, high-wage economy.”

The Government has received more than 800 submissions which will inform the Tax White Paper that it intends to take to the next election. The treasurer is clearly looking for lures for investors and innovators.

Hockey said that a more competitive business tax environment would drive innovation. He pointed to the recent Budget announcement that the Government planned to reduce tax on small businesses from 30 to 28.5 percent. It’s a start – but in the UK the Government has announced plans to cut the main corporate tax rate from 28 percent in 2010 to 18 percent by 2020.

Hockey said that Australia had; “A tax system with 1950s rules that simply don’t fit with the modern, globalised economy.”

That was particularly the case for software defined companies.

He referenced the government’s plans to apply a goods and services tax for digital products and services but noted that; “We need to make sure our tax system is set up for the next 40 years, not just playing catch up with new industries as they develop.

“One of the lessons of this digital disruption is that our tax system should not favour one type of economic activity or punish another, because what these businesses have shown is that digital disruption is real. It simply won’t work if governments try to tax or legislate them out of existence.”

The Government has made some progress with its pro innovation tax stance; since the start of the month the rules about employee share option plans have changed so that holders of the options are only taxed once the value of the option is realised. But Hockey acknowledged that this was only the start of what needed to be done to attract and keep entrepreneurs in Australia.

“We need to continue to make it easier for entrepreneurs to get new businesses up and running. The next Cochlear, the next Google or the next Facebook might already be an idea in the mind of a bright young Australian.

“But this isn’t much good if we don’t have the right tax setting to encourage bright young Australians to commercialise their ideas…we need to encourage innovation. We need to encourage new enterprises. And we must ensure that those who are behind them are being adequately rewarded for their intuition and not punished for it through restrictive tax or regulatory environments.

“This will be a key area of focus for the government in the Tax White Paper process.”