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Australian Budget's High Earner Levy To Prop Up Finances

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

15 May 2014


Joe Hockey has announced a company tax cut and the introduction of a temporary Budget Repair Levy as part of his first Budget as Australian Treasurer.

Hockey delivered the Coalition's maiden Budget on May 13. One of the main themes of his speech was the country's rising deficit. Blaming the former Labor administration for presiding over five deficits in a row, he said that "the days of borrow and spend must come to an end." He admitted that the Budget would not be an easy one, but stressed that its measures are in the nation's interest.

The underlying cash deficit is projected to be AUD60bn (USD56.1bn) over the four years to 2017-18. It will stand at AUD29.8bn in 2014-15, or 1.8 percent of gross domestic product (GDP), before falling to AUD2.8bn in 2017-18. The Government's aim is to establish a clear path to a credible surplus, and return the underlying cash balance to surplus by the end of the decade. Its medium term estimates project a surplus of more than one percent of GDP by AUD2024-25.

Since coming to office, the Government has committed to clearing a backlog of unlegislated tax measures, and remains determined to repeal the minerals resource rent tax (MRRT) and carbon tax. However, its revenue decisions have resulted in a AUD5.7bn reduction in revenue in accrual terms compared with the choices made by the previous Government.

It was on this basis that Hockey proposed the introduction of a temporary Budget Repair Levy. Billed as a measure intended to ensure that high income Australians contribute to the country's finances, he expects it to raise AUD3.1bn over the forward estimates period. From July 1, 2014, until June 30, 2017, the levy will be payable by the approximately 400,000 individuals whose taxable income exceeds AUD180,000 (USD168,386). It will be charged at a rate of 2 percent.

Individuals with taxable income of AUD200,000 will pay AUD400 a year, while those with an income of AUD300,000 face a bill of AUD2,400. The levy will also be reflected in a number of other tax rates that are currently based on calculations that include the top personal income tax rate, including the fringe benefits tax (FBT).

Another of the headline tax reforms announced by Hockey is a 1.5 percent cut in the company tax rate from July 1, 2015. Around 800,000 small- and medium-sized companies are expected to benefit from an associated net boost to their profitability. In the case of large companies, the reduction will offset the cost of a new Paid Parental Leave (PPL) levy.

The levy will be charged at 1.5 percent and will affect just over 3,000 companies. It will enter into force from July 2015 and fund a scheme that will provide recipients with up to 26 weeks' replacement wage at no less than the minimum wage.

According to Hockey, the PPL will complement his changes to the Family Tax Benefits (FTB-B) system. The rationale behind the revamp is that "staying at home should be a parent's choice, but there are limits on how much support the taxpayer can give." The FTB program comprises two parts. Part A is paid on a "per child basis" and is means tested on the combined adjusted income of a family. Part B provides extra assistance to single parent families and to families with one main income, and is paid on a "per family basis." It varies according to the age of the youngest child.

From July 1 2015, families with one parent earnings of more than AUD100,000 will not be eligible for FTB-B. FTB-B payments will be paid until the child turns six. Those families already receiving FTB-B for children over six at this time will continue to receive the payment until June 30, 2017. Single parents who receive the maximum rate of FTB-A will receive additional assistance of AUD750 per year, per child aged between six and twelve, once their youngest child turns six. The income threshold for the maximum FTB-A rate will remain at AUD48,837, and the lower income earner threshold for FTB-B at AUD5,183 until June 30, 2017.

These efforts are part of a broader agenda to establish a more sustainable welfare system, building on a move by the former Government to raise the pension age eligibility to 67 by 2023. Hockey will gradually increase this until it reaches 70 by 2035.

To ensure more consistent treatment of Australians with similar incomes, untaxed superannuation will be included in the income test for new recipients of the Commonwealth Health Card. The indexation of payments and programs, including thresholds for the Medicare Levy Surcharge, will be temporarily paused.

Government spending will be substantially overhauled. More than 70 government bodies, boards, committees, and councils are being abolished, and 16,500 public servants will lose their jobs over the next three years. Over the next 18 months, the Coalition will work with State and Territory Governments to reduce or remove "overlaps" between the layers of Government that make up the Federation as a whole.

Concluding his Budget speech, Hockey said that Australians must "fix the Budget together."

The reaction from the business community has been broadly positive. The Australian Chamber and Commerce Industry described Hockey's package of reforms as "the Budget that we had to have as a nation."

ACCI Chief Executive Office Kate Carnell said: "The Budget offers genuine structural reform that will help address the underlying structural deficits in recent Budgets and begin to reduce the size and scope of government. The Budget provides short term pain for long term gain, which attempts to share the burden for repairing Australia's finances across business and the community."

She welcomed the company tax cut but reiterated ACCI's opposition to the "debt tax" and the PPL scheme. Her comments were echoed by ACCI's Chief Operating Officer, John Osborn, who warned that "an increase in tax on higher income earners at this point of time could have a detrimental impact on growth and jobs."

The Business Council of Australia has likewise expressed its concerns. Chief Executive Jennifer Westacott described the Budget as "a solid start to putting the fiscal strategy back on track," but said that it was disappointing to see ad hoc measures like the "deficit levy" included.

"While the deficit levy has been introduced for equity reasons, it does not substitute for the hard work of reform. Any changes to tax arrangements should be considered as part of a broader strategic review of the tax system. The Budget highlights the importance of considering major revenue reforms as part of the tax White Paper, complemented by streamlining the roles and responsibilities of government through the federation White Paper process. It is critical that new revenue measures better support growth, investment and job creation while strengthening the revenue base over the long term," she said.

The Green party has already said that it will not support the levy and the Palmer United Party has denied that there exists a crisis that necessitates the imposition of a new tax in this manner.

Hockey defended his reforms during a post-Budget doorstop interview in Canberra. He told reporters that "there's two ways we can go from here, we can either pretend there is no mess and Australia heads towards an eventual train crash on the Budget, or else we can do what's right in the national interest."

He added that "the Budget needs to be fixed; we didn't create the mess but we are stepping up to the plate to fix it and will take responsibility to fix it."

TAGS: individuals | Budgets | tax | investment | business | tax incentives | revenue guidance | fringe benefits | gross domestic product (GDP) | corporation tax | Australia | ministry of finance | tax rates | carbon tax | revenue statistics | tax reform

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