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Global Tax Topical Focus – Australian Budget

By Editorial
May 15, 2012

Faced with strengthening economic headwinds, plunging tax revenues and a wider-than-anticipated budget deficit, Australian Treasurer Wayne Swan has just performed that manoeuvre so familiar to politicians around the world faced with adverse circumstances at budget time – the u-turn.

Announcing the 2012-13 Budget in parliament on May 8, Swan surprised the business community and the political opposition by explaining that a planned cut to business tax rates will not go ahead as the government seeks to redirect projected mining tax revenue to help families and small businesses.

The Budget will redirect AUD33.6bn (USD33.9bn) across the economy, with AUD5bn earmarked for new payments to households, AUD714m to help companies compete, and AUD3.7bn for small business tax breaks. In addition, a new AUD3.6bn “Spreading the Boom” package will use proceeds from the controversial Minerals Resource Rent Tax (MRRT), which had been intended for a company tax cut, announced earlier this year.

Back in March, Swan had announced that Australia was to lower its corporate tax rate by 1% with draft legislation to that effect released by the Treasurer on March 14. The draft legislation amending the Income Tax Rates Act 1986 would have cut the corporate tax rate for all companies from 30% to 29%, applying to small businesses from the 2012-13 income year, and to all other businesses from 2013-14. Swan said that dropping the small business rate a year earlier "will help up to 720,000 small business companies by allowing them to reinvest more of their profits to grow their businesses and employ more Australians".

Swan said at the time that the rate reduction will "help Australian businesses right across the economy - including the many businesses that are not in the mining boom fast lane and face challenges such as those flowing from a higher dollar", and stressed that "cutting the company tax rate will increase productivity, promote broad-based economic growth and encourage more investment and jobs across Australia's entire economy."

The government’s priorities in the intervening two months have seemingly shifted, however, and Swan told parliament in his speech that the focus of his Budget is “discipline and restraint… ensuring precious funds are re-directed to the purposes and people that need them most”.

The government did, however, offer businesses a small crumb of comfort in the form of new corporate tax rules allowing companies to carry back losses to offset past profits. Under Australian current tax law, loss carry-backs are not permitted, but the proposed changes will mean that from July 2012, small businesses can offset current year tax losses of up to AUD1m against tax paid in previous years and receive a refund of up to AUD300,000. From July 1, 2013, companies will be able to carry back up to AUD1m worth of losses against tax paid up to two years earlier. The government estimates that this measure will relieve the corporate tax burden by AUD714m.

Also confirmed in the Budget is a write-off scheme originally announced alongside planned rate cuts in March. From July 1, all small businesses will be able to write off any new business asset costing less than AUD6,500, for as many assets as they purchase. Swan anticipates this tax break to be worth around AUD1bn in its first year alone. Small businesses will also be able to instantly write-off the first AUD5,000 of the cost of a new motor vehicle, from July 1.

Swan said of the loss carry-back initiative that it “will support businesses facing challenges in our patchwork economy. It will encourage businesses to invest and adapt, boosting productivity and strengthening our economy as it goes through a period of major transition”, while the write-off scheme will “help small businesses - whether they operate as sole traders, partnerships, companies or trusts - to invest to compete”.

The Budget received a predictably frosty response from the business community, however. Australia's Tax Institute slammed the government for shying away from delivering a Budget that simplifies and reforms the tax system, criticizing its failure to alter the tax return process and introduce a lower corporation tax rate. Tax Institute President Ken Schurgott, was also critical of the government’s decision to scrap plans to allow a standard tax deduction for work-related expenses. According to Schurgott, this "confirms that the government is not concerned about making it easier for millions of Australians to fill out their tax returns”. He believes that it was an important simplification measure that would have acted as a step towards fairer and simpler tax returns. Unsurprisingly, Schurgott was also scathing of the announcement reversing the planned corporate tax cut, observing that a rate around 25% should be the government's medium-term target, as recommended by the Henry Review of the Australian tax system.

Meanwhile, the Australian Industry Group, which represents the interests of around 60,000 businesses, responded that, while the government's commitment to fiscal discipline was welcome, the way it was going about it presents “considerable risks” to the economy. “In particular, the additional taxes and costs imposed on industry will undermine the ability of business to make the critical longer-term investments needed to boost productivity, improve our global competitiveness and lift employment," Australian Industry Group (Ai Group) Chief Executive, Innes Willox said. "The government has made a strategic decision to favour a short-term boost to consumption at the expense of the longer-term drivers of economic growth. "The scrapping of the company tax cut that was to be financed from the Minerals Resource Rent Tax is a major blow to business. It will reduce incentives to invest and innovate and is a particular set-back for businesses in non-mining, trade exposed industries such as manufacturing that need to invest to lift productivity to overcome the impacts of the strong Australian dollar, weaker global demand and the impending carbon tax. 

Innes went on to argue that while the loss carry back provision will provide some relief to businesses, this will not provide immediate relief, and it will be “overwhelmed” by the maintenance of the company tax rate at a level well above that of similar developed economies. "The lack of commitment to reaching consensus on business tax reform is deeply disappointing. Australia clearly needs an agreed long-term path to substantially lift the competitiveness of the business tax system,” he said.

Also predictable was the Opposition Liberal Party’s hostility to Swan’s Budget, which Shadow Treasurer Joe Hockey described as “confused… with no coherent economic strategy to deliver stronger growth and higher productivity”.

The Liberals have been particularly scornful of the Labor government’s tax policies, with Prime Minister Julia Gillard’s u-turn on the carbon tax, which will impose a AUD24 per tonne tax on carbon emissions from 2014, a frequent target of their attacks, along with the 30% MRRT on coal and ironing extracting companies. “Julia Gillard has dumped her promised company tax cuts,” Hockey continued. “Less than two months ago she said: ‘If you are against cutting company tax, you are against economic growth. If you are against economic growth, then you are against jobs.’”

Setting out his defence of the government however, Swan described in his speech how a budget surplus remains the best defence against challenges in the global economy, pointing to moderate recovery in the US and ongoing issues in the eurozone. A high dollar is also causing problems, with billions “ripped” from the Australian tax base, and tax receipts as a share of gross domestic product (GDP) not expected to recover to pre-crisis levels for some years. Swan explained that tax as a proportion of the economy will be 22.1% this year, in comparison to the 23.7% the government inherited from its predecessors, a difference of AUD24bn. Taxes are a further AUD12bn down since Swan’s last update, meaning that the total write down figure since the economic crisis began has now reached AUD150bn. As a result, the 2011-12 deficit was AUD44bn, with net debt expected to peak at 9.6% of GDP. The economy is projected to grow by 3.25% in 2012-13 and 3% in 2013-14, while unemployment will remain at 5.5% over the next two years. The intention is to return to an AUD1.5bn surplus in 2012-13.

“It is these responsible decisions which return the Budget to an AUD1.5bn surplus in 2012-13, and growing every year after that,” Swan declared. “This delivers on our commitment to the Australian people on time, as promised, and ahead of every major advanced economy.”

Despite the protestations of business and the Liberal Opposition, Australia appears to be in better economic shape than many of its main trading partners in the West with the global economy about to enter perhaps a critical phase of the crisis - especially the stagnating economies of Europe where governments are taking much harsher fiscal measures as they attempt to close much bigger budget deficits. However, with the government going out on a limb as one of the only countries in the world to commit to a carbon tax, only time will tell whether Australia is better equipped to weather the current economic storm. What can be said with certainty is that Swan will not be the last politician to perform a u-turn!

The following list outlines some of the other key measures announced by Swan in the 2012-13 Budget:

  • The superannuation guarantee rate is to be increased to 12%, intended to boost retirement savings. A higher concessional contribution cap for older Australians with a balance of AUD500,000 will be introduced, with a revised start date of July, 2014. The tax break concessional contribution for the top 1% of earners will be reduced, bringing it into line with concessions for the average wage earner.
  • The tax concession for living-away-from-home allowances and benefits is to be amended, with a 12 month time limit to be placed on how long an employee can receive the tax concession at a particular work location.
  • The tax treatment of employment termination payments (ETPs) is to be reformed, to improve the fairness of such “golden handshakes”. ETPS are currently taxed at a maximum 15% for those over preservation age (the age at which they are entitled to access their pension benefits) and 30% for those under, up to an indexed cap of AUD165,000. The reform will retain the existing concession for payments related to hardship, and will save an estimated AUD196.4m.
  • The personal income tax rate and thresholds applicable to non-residents’ Australian income will be adjusted to better align with those of residents. This will apply from July 1.
  • The government will remove eligibility for the 50% discount on capital gains earned May 8 by non-residents on taxable Australian property, such as real estate and mining assets. Non-residents will still be entitled to a discount on capital gains accrued prior to May 8 (after offsetting any capital losses), provided they choose to value the asset as at that time.
  • A “Schoolkids Bonus” will replace the Education Tax Refund, making the scheme automatic, with those eligible receiving AUD820 per year for secondary school children and AUD410 for children at primary school, in a lump sum form.
  • From July 1, eight existing dependency offsets will be consolidated into a single offset available to taxpayers maintaining a dependant who is unable to work due to disability or carer responsibilities.
  • From July 1, the government will phase out the mature age worker tax offset (MAWTO) for taxpayers born on or after July 1, 1957.
  • From September 1, 2012, the inbound duty free allowance for international travellers will be reduced to 50 cigarettes or 50 grams of tobacco.
  • The government will update the method of determining the taxable value of airline transport fringe benefits from stand-by value to market value, applicable to benefits provided after 7.30pm (AEST) on May 8.


Tags: individual income tax | corporation tax | legislation | Australia | economics | budget | business | employees | mining | small business | small and medium-sized enterprises (SME) | individuals in business



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