Business Groups Challenge Scope of Productivity Commission Inquiry as Tax Debate Intensifies

The Productivity Commission’s inquiry into business dynamism is examining regulation, insolvency and start-up finance while leaving tax and workplace relations outside its remit. That boundary is now central to the response from business groups, which argue the inquiry cannot identify the biggest barriers to investment if it cannot assess two areas they say shape business decisions.

The commission published its interim findings on Friday, after Treasurer Jim Chalmers directed it not to examine tax, industrial relations or business merger laws. The report instead recommends changes including simpler information requirements for businesses dealing with regulators and an appointed liquidator as a last resort for companies unable to pay for one themselves.

Those proposals address practical frictions, but the Australian Chamber of Commerce and Industry (ACCI) and the Business Council say the inquiry’s boundaries leave its central question only partly answered. Their criticism comes as business groups oppose proposed changes to the taxation of discretionary trusts and capital gains.

Business groups say the inquiry misses key causes

ACCI chief executive Andrew McKellar described the exclusions as a serious limit on the review. “Assessing business dynamism without looking at tax and workplace relations is like a doctor being blocked from checking the heart or lungs. You can ease symptoms, but you miss what is killing the patient,” he said.

Business Council chief executive Bran Black called tax and industrial relations “the elephant in the room”. He argued that improving productivity requires addressing barriers to investment and higher living standards, not sidestepping them.

The commission’s focus on regulation, insolvency and venture capital still covers issues that affect company formation and growth. But the business groups’ objection is that these measures cannot, by themselves, capture the full effect of policy settings on risk-taking, expansion and business exits.

The report found that Australian business dynamism has declined, pointing to fewer business entries and exits and reduced job mobility. It says productivity growth depends in part on an economy’s ability to renew itself as businesses enter, expand, restructure and close. The commission also states that governments don’t create entrepreneurs, though policy can influence the conditions in which businesses operate.

Trust tax hearings put the policy dispute in focus

The inquiry’s limits are drawing attention as parliament considers a proposed 30 per cent minimum tax on discretionary trusts. Hearings are due to conclude on Friday, with the government intending to pass the measure in the final parliamentary sitting period of the year in mid-November. A proposed capital gains tax concession for start-ups is also scheduled for consideration.

ACCI and the Council of Small Business Organisations Australia (COSBOA) say trusts are important to small businesses because they let users manage and distribute wealth with flexibility. The proposal includes exemptions. A trust can also avoid the minimum rate by giving up some of its discretion to distribute money, which is a way to reduce tax.

Business and accounting groups argue that the available carve-out is too narrow. Representatives of Chartered Accountants Australia and New Zealand told a hearing on Thursday that businesses should have more flexibility in how they qualify. They also called for discretion to remain available in cases of family breakdown.

Friday’s hearing schedule includes the Australian Council of Trade Unions, the Australian Council of Social Service and tax academics Sonali Walpola, Kathryn James and Dale Boccabella. The three academics specialise in tax law, including trusts. Their views are understood to have influenced the Greens, whose Senate votes will be decisive. The party broadly supports the proposal’s aims but has raised concerns.

Boccabella told the ABC in October that the government should resist exemptions where possible to limit loopholes. He warned that “a small minority of downtown lawyers and accountants” could exploit gaps in the rules.

Start-up concession draws criticism over its reach

The government’s proposed capital gains tax carve-out is meant to address concerns from start-up founders about changes announced in the May budget. Under the proposal, people classed as investors in innovative start-ups could choose to retain the existing 50 per cent capital gains tax discount instead of using the new inflation-based discount. That approach adjusts an asset’s starting value for inflation so that only real gains are taxed.

Founders have raised a particular concern: a new business may begin with an initial value close to zero. If the starting value is indexed, there may be little value left to discount when the company is sold.

Independent MP Allegra Spender supports providing a carve-out but says the proposed eligibility rules are too narrow and complicated. “Having run a business, I don’t want to think about the government when I’m running a business,” she told the ABC. She argued that businesses should not have to determine whether they meet a government definition of innovation.

Spender is concerned that technology companies with the potential to serve large markets could fall outside the criteria, despite their role in productivity growth. Her alternative is a flat 40 per cent discount for “active” assets, a category already used in tax law for assets involved in running a business.

The government points to Treasury analysis suggesting the inflation-based discount won’t always be less favourable than a flat 50 per cent discount. It also argues that allowing eligible start-ups to choose between the two systems offers more than the current arrangement. Some founders may also qualify for a separate 50 per cent capital gains concession available to small businesses when they sell.

Treasury Secretary Jenny Wilkinson has cited an OECD finding that capital gains tax rates are not a major factor in determining a country’s level of innovation. The competing arguments leave the practical design of the start-up concession, and the boundaries of eligibility, as central issues in the debate.

What the inquiry can still change

The commission’s interim recommendations target administrative and insolvency problems. Its proposed “tell us once” approach would reduce the need for businesses to provide the same information repeatedly to government regulators. For companies unable to fund a liquidator, the report proposes that an official liquidator be appointed as a last resort.

Those steps could ease specific costs and make it easier for struggling businesses to close. The business groups’ criticism, though, is that such reforms address only part of the conditions behind declining business entry, exit and job mobility.

The forthcoming decisions on trust taxation and the start-up capital gains concession will put those competing views into practice. For the Productivity Commission’s inquiry, the immediate question is whether its recommendations can make a meaningful difference within the narrow scope it was given.