The Ralph Report Depreciation Proposals and Investment Neutrality

The Review of Business Taxation chaired by Mr John Ralph has suggested sweeping changes to business taxation in Australia. In particular it has been proposed that accelerated depreciation provisions be removed to finance a reduction in the company tax rate. If some degree of accelerated depreciation is to be retained, it is suggested that this should involve a uniform loading on depreciation rates for all assets. The aim is to provide a more uniform treatment of assets with different economic lives. This paper examines the neutrality of these proposals for unincorporated enterprises and companies owned by Australian shareholders. It is shown that with positive inflation, the proposal to remove accelerated depreciation altogether would provide a bias favouring longer-lived assets. In the absence of inflation a system of uniform loadings would provide a bias favouring shorter-lived assets although at very low rates of inflation, this bias can be reversed. The biases created by a system of non-accelerated depreciation or a system of uniform loadings would, however, be small relative to those created by current depreciation provisions