The classic statement of this doctrine is provided with all the easy authoritativeness of a harangue at the pub by Alex Sanchez, a former Mark Latham staffer.
In today’s world, paying more than the company tax rate of 30 per cent is optional. After you’ve gone beyond that threshold, you merely incorporate and be done with it.
As I’ve explained in columns before this, and as Jerome Faher of Allen Consulting explained at a presentation recently this is (almost) complete bollocks.
ACCI want to . . . cut the top marginal rate to the corporate tax rate of 30%. But, despite the ubiquity and respectability of the case for ‘alignment’, I think it’s based on a simple misunderstanding. People ask “if you can ‘choose’ to pay tax at a 30% rather than 48.5% why wouldn’t you?” But the money in a company is hermetically sealed from its owners. That’s the point of it. So you can’t use any profits in your company until you pay them to yourself as dividends. Get it? When you pay yourself dividends that’s income on which you pay personal tax whereupon the tax advantage of the company disappears.
People also think that somehow owning a company enables you to ‘write off’ more expenditure in the company. But the company is a red herring in this story. Tax avoiders and evaders (oops I nearly wrote ‘We’) will claim personal expenses as business expenses irrespective of the corporate structure. Indeed the immediate benefits of doing so within a company are less because of the lower rate.
The one remaining lurk is the way in which a company’s ‘undistributed profits’ provide its owners with free loan from the tax man. Personal tax is not payable on company profits until they’re distributed as dividends. But, as Bob Hawke’s Finance Minister Peter Walsh used to point out in response to Paul Keating’s agitation for alignment, that problem can be addressed directly by re-introducing the surtax on undistributed profits that we abolished in 1985 when we aligned the personal and company rates it turned only briefly. (The additional revenue this generated could be used to lower company tax further and/or offset any additional tax burden a surcharge imposed on new investment).
I’m writing next week’s column and arguing that far from aligning the company rate, we should continue to move the company and top personal rates further apart, but cutting company tax and leaving the top personal rate where it is. It occured to me as I did some reading that there’s a reason this argument comes most forcefully from people like Sanchez and Bill Shorten. (I presume) they haven’t got much experience with company tax structures. Malcolm Turnbull [pdf] likes to throw in the idea of alignment where it suits his argument, but he’s more circumspect about the argument for alignment and mentions those who don’t support alignment or at least tolerate the idea that transactions costs mute the case for alignment. Malcolmn Turnbull knows about running companies.