FOR MEDIA 19 JULY 1982
STATEMENT ON TAXATION AND INDUSTRY ASSISTANCE MEASURES
The Government has completed a major review of its industry
and related policies. It has done so against the background
of deteriorating economic conditions abroad and in Australia;:
and against the background of the Government's responsibility
to provide an overall policy environment conducive to the
development of Australian industries, the expansion of
employment opportunities and improvement in living standards.
Private investment is fundamental to the achievement of
those objectives and to improve the climate for investment
the Government has decided that:
under the general depreciation provisions, plant
ordered after today will, subject to certain
exclusions, be eligible for accelerated
depreciation over either 3 or 5 years;
mining and petroleum companies will benefit by
, continuing to have the option to depreciate their
-plant under the general depreciation provisions or
under the mining and petroleum provisions in
Divisions 10 and 10AA of the Income Tax Assessment
Act; allowable capital expenditure by mining companies
will be deductible by reference to the lesser of the
life of the mine or ten years, on a straight line basis;
new primary production plant will generally be
depreciable over three years;
where applicable, the investrent allowance will
continue to be available; and
new non-residential income producing buildings,
the construction of which co. mence after today,
will be eligible for depreciation at a prime cost
rate of 2 per cent. / 2
The Government had also decidedthat
the Industrial Resear~ i and Development
Incentives Scheme should continue without any
major changes;
the Export Market Development Scheme should be
significantly strengthened;
the. Export Expansion Grants SchemLe will be allowed
to lapse on 30 June 1982; and
not,* to proceed at the present with a program of
further reductions in protection.
BACKGROUND TC) THE DECISIONS
Last year thE! Government forwarded three important references
to the IAC. In line with normal practice, the Commission's
Reports are now being released to the public.
Two of those references -on Exoort Incentives and Certain
Budgetary AsSistance sought advice from the IAC on the
effectivenesS of present budgetary assistance to industry
development, and whether changes, including improvements
in depreciation provisions, would lead to more effective
use of the community's resources devoted t,-o industry
development. The other major reference sought the IAC's advice on
Approaches to General Reductions in Protection. That
reference had been foreshadowed when the Government announced
its response in 1979 to the Report of the Study Group on
Structural Adjustment.
The prospective economic environment has changed markedly
since the IAC was asked to report on the three references
and no Government could responsibly i~ nore this reality in,
reaching its decisions on these reports.
In particular, world economic conditions have deteriorated
in a way that no one could reasonably have anticipated. In
1981-82 real GNP in the OECD area increased by only half a
per cent and activity weakened during the course of the year.
The United States economy is in recession, activity in West
Germany and the United Kingdom remains depressed, while the
Canadian economy has contracted. In France, real GDP is now
falling after rising modestly in the second half of 1981.
Even the growth recorded by Japan over the past year %.. as
poor by its standards.
This subdued level of activity has been reflected in the
first decline in the value of world trade in over twenty
years. Real. interest rates in the United States and Europe
have reached historically high levels. Over thirty-million
people are c.. urrently without jobs in the OECD countries.
Responsible Economic policies h1-ave enabled Australia to
move against the international tide to some extent. Our
growth perfoi. mance has in recent years been better than
in most other countries. However, we are now feeling the
effects of weaker demand for our exports and plummetting
prices for some of our major exports;
high interest rates ( in common with overseas
pal-terns);
a deterioration in the competitive position of our
industries, primarily because wage settlements
including claims for shorter hours have been out of
line with those in the rest of the world; and
a severe squeeze on profits ( the share of company
gross operating surplus in non-farm GDP fell from
45.. 4 per cent in the September quarter 1981 to
12.3 per cent for the March quarter 1982).
Against this background it is not surprising that in recent
months growth in business fixed capital expenditure has come t~ o
a halt, construction activity has declined sharply, GDP declined
in the six months to March and ' that employment growth has
slowed down markedly.
In the period immediately ahead economic activity will continue
to reflect the slump in business profitability, as well as
prolonged int: ernational recession and increased competitive
pressures. ' Investment in the resource sector will be maintained
at relatively high levrels for a time as projects previously
started or committed are brought to completion. But while world
economic conditions remain as they are we cannot expect to see
a return to : he sort of substantial new investment decisions of
a year or two ago. Investment in manufacturing, which has been
at unsatisfactory levels for most of the 1970s, is likely to
suffer another setback as a result of the continuing squeeze
on profits. I
Investment is the basis on which Australia's growth, and
rising real incomes, ultimately depend and in reviewing its
approach to industry policy the Government has paid
particular attention to the importance of providing the best
and most stable climate for investment.
Government support for industry is based on three key pillars.
The first and most fundamental . is the general stance of7
economic policy. The main elements ofL-the Government's economic
policy over -the period ahead will, of course, be fully revealed
in the forthcoming Budget. All I wish to stress here is that,
while current economic circumstances must be given due weight,
we will not weaken in any way our resolve to maintain
economic policies directed to the winding down of inflation and
inflationary expectations, and providing a stable environment
for business to operate in. / 4
DEPRECIATION PROVISIONS
The second pi'llar is budgetary assistance. With the aim of.
improving the overall climate for private investment the
Government has decided that, subject to certain specific
exclusions, plant ordered after today will be eligible for
accelerated cf. epreciation over either 3 or 5 years. Under
these arrangEments, eligible plant will qualify for a 20 per
cent prime cost rate of depreciation or, where under existing
law such plarLt would attract a rate of more than 20 per cent,
a 331 j-per cent prime cost rate.
New primary production plant that would otherwise qualify
for the special 20 per cent deduction basis introduced in 1980
will, under the new system, qualify for deductions on a 33-1 per
cent basis.
Where applicable, the investment allowance will continue to be:
available ' and, its future will be reviewed prior to its
scheduled-' terrination date. In those cases where the existingdepreciation
arrangements confer greater benefits than would
be the case under the new scheme, a person will be entitled to
retain the benefit of the existing arrangements. Benefits from
these new arrangements will be available to all sectors of the:
economy. After today, plant used in manufacturing and elsewhere
in the economy will be eligible for either 3 or 5 year write-off
according to its present depreciable life, while most new plant
used by primary producers will be depreciable over three years..
Benefits will, also be available to mining and petroleum
companies as they have the option to depreciate their plant
under the gerieral depreciation provisions or under the mining
and petroleum provisions in Divisions 10 and 10AA of the Income
Tax Assessment Act.
The Government has also decided to modify the write-off
provisions in Divisions 10 and 10AA. The Income Tax
Assessment Act presently states that allowable capital
expenditure is deductible by reference to the lesser of
the life of the mine, or ten years, on a diminishing value
basis. The Government has decided to amend the Act so that
expenditure Will be deductible by reference to the lesser of
the life of the mine, or ten years, on a straight line basis.
In addition t~ o those changes the Government has also decided
that new non-residential ihcome-producing buildings, the
construction of which commence after today, are to be
eligible for depreciation at a prime cost rate of 2 per cent
on a similar basis to that presently applying to traveller
accominodation buildings. This will provide a greater incentive
for firms to ensure that structures remain up to date and will.
contribute co~ nsiderably to productivity and improvements in the
working environment for employees.
The Treasurer will be announcing further details of ' the
proposed changes and the Ministers for Industry and-Commerce
and Trade and Resources will be issuing statements on aspects
of particular relevance to their portfolio responsibilities.
An indication of the benefits to business, and costs to
revenue, of th-. e measures I have outlined above is provided
itn e atached table. Alth-ough these m.~ easures will not
have their full effects on revenue for some years, the
incentive thEy Will provide to new investment will be
immediate and substantial. The benefits to investing
firms, and costs to revenue, will build up progressively
during the 1980s.
This new depreciation package will significantly enhance the
long term climate for investment in Australia and will put
Australian businesses on a more competitive basis With their
overseas counterparts. It will assist business to adapt more
readily to nE! w technological and other changes in the economic:
environment, and enable them to approach investment decisions
with greater flexibility and confidence. The boost to future
business cash flows should also help cushion investment from
the full effects of the downturn in the international economy
and encourage firms to put themselves in a position to take
maximum advatg of recovery in world economic conditions,
when it comes.
These decisions reflect the Government's belief that higher
levels of priLvate investment are the key to higher living
standards and increased job opportunities in the future.
Those objectives, however, cannot be achieved without the
co-operation of business and organised labour. The Government
looks to business to respond positively to these new measures..
It also looks to labour by moderating its demands for higher
wages and shorter hours to resist the temptation to seek the
fruits of newa investment before they are available. Particularly
if that co-operation is forthcoming, the Government is confident
that these new measures will make an important contribution to
the objectives we a11 seek more jobs and increasing real
incomes. INDUSTRIAL RESEARCH AND DEVELOPMENT
The IAC found the Australian Industrial Research and
Development Incentives Scheme to be making an effective
contribution to the achievement of the Government's industry
policy objectives. The Commission's conclusion is consistent
with the views expressed by previous expert committees,
including, most recently, the Committee of Inquiry into
Technological Change in Australia. The scheme was
comprehensively reviewed by the Government as recently as
1980 and an improved program was introduced for five years
from 1 July 1981. Accordingly the Government has decided
that the AIRDIS should continue without any major changes.
EXPORT INCENTIVES
When considering the report of the IAC on what changes should
be made to the current methods of assisting the development
of exports through the EMDG and EEG Acts the. Government had
particular regard to its desire to foster a healthy ' export
industry'sector. ./ 6
The Gover-nment has decided that, given thiis objective, the
EMDG scheme should be significantly strengthened. The main,
decision on the EMDG is to raise the grant ceiling to $ 200,000.
The present ceiling has remained unaltered since 1974. The
EEG scheme will be allowed to lapse on 30 June 1983. The
improvements to the EMODG scheme will take effect from the
grant . year 19182/ 83 which is the year in which the EEG scheme
will operate at half rates.
These decisions will improve the effectiveness of our direct
assistance to) the export sector; will free some savings for
re-direction to improved depreciation provisions which, of
course, will assist exporters; are in line with the
international position regarding export performance based
schemes; and represent a modest step by Australia toward
the multilateral winding back of subsidies to
international trade proposed under the Governent's recent
trade initiat~ ive.
My-colleague the Minister for Trade and Resources will elaborate
the decisionS taken with regard to the EMDG scheme.
PROTECT ION
The third ma * jor pillar of Government industry support is
protection policy. The Government's broad approach to
protection policy is based on its recognition that, together with
the provision of industry development assistance, gradual
reductions in protection have a part to play in encouraging the
development of a stronger, more specialised and competitive
manufacturing sector. The Government remains committed to those
objectives -the more'so in view of the difficult economic times
ahead.
After giving the most careful consideration to the options
for further reductions identified by the IAC, the Government
has come to the view that-these objectives would not be best
served by proceeding at present with a' program of further
reductions in protection.
While recognising the role that reductions in protection
can play in improving the structure and competitiveness of
industry, the Government was also conscious of the significant
reductions in protection that a wide range of industries have
experienced over the past decade.
This process is continuing, with further reductions already
in train as a result of decisions that have been taken on
IAG reports in recent years, including those arising from thE!
recent completion of the Tariff Review Program. More than
separate product groupings are currently subject to phasing
down of tariff, quota or bounty assistance. In addition, thEsectoral
policies for the textile, clothing and footwear
industries and passenger motor vehicle industry which have
been separately determined by the Governinen after careful
and detailed review contain built-in pressures for
structural change, including increased market access for
imports. Those established programs of adjustment for o/. 7
these industries will continue.
* In concludinc that no further general reductions in protection
are-practicab) le at this time, the Government was also conscious
that the cape-city of the community to accommodate the economic
and social consequences of such unilateral reductions is
necessarily reduced in periods of subdued economic activityand
at a time! when our own exporters are facing increasing
restrictions on their access to overseas markets. Non-tariffrestrictions
on trade in particular have proliferated in the last
three years, and as much as 50 per cent of Australia's export
trade is now estimated to be affected by such measures.
The Government's concern about the international economic
situation, and these increasing impediments to trade, prompted
it earlier this year to promote an initiative aimed at
acceptance by the world trading community of the need to wind
back trade d-fstorting measures of all kinds. The Government
made it clear that it did not have in mind unilateral action by
Australia; , nor did it look to any other country to act on its
own. Rather, it promoted the concept of broad intei~ national
action with a view to providing a stimulus to world trade.
The decisions I have announced today are compatible with that
initiative. They involve a winding down of direct assistance
to exports, and, as noted, earlier, decisions already taken will
lead to some further gradual reductions in protection in certain
areas.
The Government is firmly committed to the pursuit of its
initiative, and will press its views in the GATT Ministerial
Meeting in Geneva in November. Our initiative has already
gained suppo:--t in the preparatory meetings now in progress.
It is up to countries meeting at the GATT Ministerial in
November to decide whether they wish to act together and take
the necessary steps to implement the prop . osals. In the event
that the major industrialised countries do so, Australia has
made clear that it will support them.
ESTIMATED EFFECTS () ON REVENUE OF
NEW DEPRECIATION PACIKAGE
million
1983 1984 1985 .1986 1987 1988 Ultimate
-84 -85 -86 -87 -88. -89 Annual Cost
5/ 3 depreciation 60 270 640 1020 1390 560
3 year write-off for
primary producercs 50 90 130 80 30 30
year straight line
write-off under ( 2)
Division 10 and 10AA 10 20 30 40 60
Depreciation on
buildings 15 43 69 92 113 132 315
() Actual revenue effects in these years will be subject to
the outcome of a review of the investment allowance prior
to its current expiry date in 1985-86. Cost of the
investment allowance is currently $ 600 million in a full
year. Estimates apply to newly acquired plant and are in 1981-82
prices assuming constant real expenditure at 1981-82 levels.
Estimates assume businesses have sufficient income to
enable earliest write-off. To the extent that such income
is not available effects would be deferred.
The estimates indicate the full year effects on revenue
of each of the measures. Because of the considerable lead
times involved for much investment, it is likely that the
main impact of the measures would not be borne until 1984-85.
However, revenue in 1983-84 would also be affected to some'
extent and 1982-83 collections from individuals could also
be reduced slightly through variation of provisional tax.
Peak annual cost of around $ 130 million will occur somewhat
beyond the period shown in the table.
DECISIONS ON EXPORT INCE'NTIVES: FINANCIAL IMPLICATIONS
( Estimated)
Termination of EEG on 30 June 1983:
Savings $ 100 million in a full year
Effect felt in Budget from 1984-85 onwards.
Improvements to EMDG Scheme from 1982-83 grant year:
Additional costs Sm
grant ceiling to
$ 200,000
other 1i
Total $ 36
Effect felt in Budget from 1983-84 onwards.