Australia Announces Major Tax Reforms

by Mary Swire, Tax-News.com, Hong Kong

04 May 2010

At the same time as releasing the Henry tax review, the Australian government has announced what it says are the first steps in a ten-year tax reform plan, aimed at strengthening the economy and making the tax system fairer and simpler.

In essence, the government is to introduce a resource super profits tax (RSPT) in the mining sector, and use part of the funds generated to provide more superannuation savings, lower taxes for all companies, especially small businesses, and investment in infrastructure needs, particularly for mining states.

The 40% RSPT will be introduced from July 1, 2012, to yield annual revenues of AUD3bn (USD2.8bn) in 2012-13 and AUD9bn in 2013-14. Under the RSPT, the government will provide a refundable credit to mining companies for existing state royalties, and will also guarantee to contribute 40% of the investment cost of a resource project. In effect, it says, “the Australian community will share in the costs of, and returns from, realizing the value of resource deposits.”

There will be a staged consultation process over the course of this year to work through detailed design issues, particularly the transition for existing projects, and the government will work closely with the states to organise the royalty rebates.

The government will introduce a new resource exploration rebate (RER), from July 1, 2011. Under the RER, companies can receive a refundable tax offset at the company tax rate for their exploration expenditure. For example, for a company in a tax loss position that spends AUD1m on exploration, the RER will provide an immediate cash benefit of AUD300,000. It is hoped that the RER will significantly benefit small, pre-profit exploration companies that currently do not get a tax benefit from their deductible exploration expenses until they become profitable.

A new resource state infrastructure fund (RSIF) will be established, to which annual contributions starting at AUD700m from 2012-13, and AUD735m the following year, will be made. The RSIF will be able to invest more than AUD5.6bn over the next ten years to help build roads, rail infrastructure, ports, electricity and water supply, and other facilities, in mining areas.

The tax revenue from the RSPT will also be used to provide a phased cut in the company tax rate to 29% for the 2013/14 income year and to 28% from the 2014/15 income year, to assist the competitiveness of all Australian industries. The government will also seek to cut the company tax rate further, as revenue allows.

Small businesses will get a head start on the company tax cut, with their 28% rate applying from 2012-13. In addition, the government will introduce instant write-off for small business assets worth up to AUD5,000 from 2013-14, meaning that many small business investments will be able to be written off in the year of purchase. And small businesses will be able to depreciate all other assets (other than buildings) in a single pool, at a rate of 30%.

Part of the additional tax revenue will also be used to boost pension savings. From 2013-14, the superannuation guarantee will be gradually increased to 12% (from the current 9%) by 2019-20. In addition, around 3.5m lower-paid Australians will receive a concession on their superannuation guarantee contributions for the first time. Together with other concessions, the superannuation measures will cost the government AUD2.4bn over the next four years, while, over the next ten years, AUD85bn can be expected to be added to Australia’s pool of pension savings.

Net tax revenues from the above measures are estimated by the government to be AUD635m in 2012-13, and almost AUD2.6bn in 2013-14. The government has said that, in the coming months, it will have more to say on a number of other areas.

However, in what is probably to be an election year, the government has also said what it will not do, despite recommendations within the tax review. For example, the government advises that it will not, among other things: introduce land tax on the family home; reduce the capital gains tax discount or apply a discount to negative gearing deductions; remove the Medicare levy; remove the benefits of dividend imputation; introduce a bequests tax; or index fuel tax to the consumer price index.

In particular, the government has also reaffirmed that it will never increase the rate or broaden the base of the goods and services tax, or remove tax-free superannuation payments for the over 60s, both of which were outside of the tax review’s terms of reference.

Recommended