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Proposals for the reform of the taxation of goodwill in Australia

by Michael Walpole

One of the most widespread and indeed burgeoning forms of intangible property is goodwill. Goodwill is not a concept that is new on the tax landscape but as more and more value finds its way into property that cannot be seen or touched, goodwill is one of the items of intangible property that attracts increasing attention - from tax authorities and taxpayers alike.

This work demonstrates how aspects of the law of goodwill infuse the tax law - from the duties on property levied by Australian States, through income tax laws to the federal capital gains tax, international tax and Goods and Services Tax. This unique cross sectional study of goodwill across the tax laws shows how these laws throw up anomalies and sometimes conflicting treatments of goodwill, with states taxing what the federal system relieves from tax and mixed signals and incentives being provided by the tax system in its application to goodwill. And yet there is not widespread agreement amongst the professions involved in tax as to what goodwill is. The legal and accounting meanings of the term parallel one another and often overlap but they are not the same.

The author argues that tax operates at the crossroads of accounting, law, and economics and there should be agreement on what goodwill is – and how it should be taxed. Any leakage of value from goodwill to some other related asset sets the tax system up for manipulation and distortion. Developing a coherent policy for the taxation of goodwill challenges us to agree on what it is - and how best to treat it consistent with desirable canons of taxation. This work identifies a set of desirable principles and tests the Australian tax treatment of goodwill against them. It concludes that reforms are required and identifies several options for consideration - principally a statutory definition of goodwill that will mean the professionals dealing with the tax system will have a common understanding, for tax purposes, of what goodwill is.

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Australia's Aggregate Tax Burden: Measurement, Interpretation and Prospects

Greg Smith

Is Australia a relatively low tax country? What does the “tax to GDP ratio” really mean or matter in any case?

Whether Australia qualifies as a relatively low tax country depends on how and when we make the comparisons. What the tax-to-GDP ratio means or matters depends not just on the direct effects of taxes but also on the range, scale and timing of the government services that taxes pay for.

This paper briefly explores these issues, looking at a range of government tax and service issues from the point of view of comparing “aggregate tax burdens”. It discusses the use of the tax-to-GDP ratio as an indicator of tax burden and some of the problems that this measure can present. It argues the tax-to-GDP indicator has a range of weaknesses that can give misleading impressions of government size and tax burden. The paper also provides a brief survey of some other issues that may have affected Australia’s tax burden in the past, and which may influence the future scope for change.

The aim of the paper is to get a better understanding of the measures and the issues they address. It does not ultimately takes sides in the debate about whether tax burdens are too high or too low. The intention is to provide a high level map of the issues, to better inform the political discussion rather than directly participate in it.

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The States and the GST: Demystifying Australian Federal/State financial arrangements

David Collins and Neil Warren

While there is considerable debate in Australia about the role of the States and their relationship with the Commonwealth, in the Australian community at large, and even among tax professionals, there is a widespread lack of understanding of the way in which the financial relations between the Commonwealth and the States are organised.  As a result, there is a general inability to assess the criticisms being made of the 1999 Intergovernmental Agreement (IGA) under which the current earmarking of GST revenue to the States has been agreed with the Commonwealth.

The objective of this publication is to assist in remedying this lack of understanding.  It provides an explanation, in terms comprehensible to the intelligent layperson, of the workings of the system under the 1999 IGA, its financial implications, criticisms which have been made, and reform proposals. The publication attempts to take a balanced and neutral approach, rather than to recommend a particular package of reforms. Its intention is to inform, not to persuade.

Priced at $10.00 incl. GST

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