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Further Tax Reforms In Australian Budget

by Mary Swire,, Hong Kong

13 May 2010

While the large reforms already announced following release of the Henry tax review – including the proposed 40% resource super profits and reduced company tax rate – are due to be effective, at the earliest, in the 2012-13 fiscal year, the Australian Treasurer, Wayne Swan, has included further tax changes in his 2010-11 budget.

Overall, he disclosed, the budget is projected to return to surplus in 2012-13, “three years ahead of schedule and ahead of every major advanced economy”. The budget deficit of AUD40.8bn (USD36.8bn) for 2010-11 would only be 2.9% of gross domestic product (GDP) and more than AUD16bn less than expected one year ago. Strict fiscal rules are now to hold expenditure growth at a cap of 2%, until the budgetary surplus reaches 1% of GDP.

In this budget, the government is delivering its third round of personal income tax cuts, which it had promised in its 2007 election manifesto. The personal tax cuts starting from July 1 this year mean the government will have delivered AUD47bn in tax relief over four years, targeted particularly at low and middle income Australians.

From July 1 2010, individuals will be able to earn up to AUD16,000 and not have to pay income tax (up from AUD11,000 in 2007-08) due to a further increase to the Low Income Tax Offset. From the same date, the 30% tax threshold will increase from AUD35,000 to AUD37,000, and the current 38% marginal tax rate will decrease to 37%.

The government is also to make it easier for Australians to fill out their tax returns by offering a standard tax deduction. Swan said: “This is an important step towards a 'tick and flick' system of pre-filled tax returns that will make life easier for working families at tax time and provide a bit of extra assistance to household budgets, particularly for low and middle income families.”

From July 1, 2012, the government will provide individual taxpayers with an optional standard deduction of AUD500 in lieu of claiming work-related expenses and the cost of managing their tax affairs. The standard deduction will be increased to AUD1,000 from July 1, 2013. In 2013-14, an estimated 6.4m taxpayers are expected to be better off from choosing the standard deduction.

Under the current system, taxpayers face costly complexity as they try to work out what is deductible, correctly quantify work-related costs and apportion expenses between income-earning purposes and private purposes. It is believed that providing a standard deduction will remove this burden for many taxpayers.

In addition, the government will boost national savings by gradually increasing the superannuation guarantee from 9% now to reach 12% by 2019-20, and will also include steps to boost private savings outside of the superannuation system with new tax incentives.

To encourage savings, from July 1 2011, the government will provide individuals with a tax discount equal to 50% on up to AUD1,000 of interest earned, including on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products. For a person earning an average pre-tax interest rate of 6%, the discount would apply up to a savings balance of just over AUD16,500.

This reform is expected to benefit around 5.7m Australian depositors in 2011-12. It should help promote deposits as a savings vehicle, by closing the gap between the tax paid on interest income and other non-interest earning investments. There presently is a large variation in the taxation treatment of alternative savings vehicles. For example, most interest income is taxed at the individual's marginal rate, while capital gains can receive a 50% discount.

Wayne Swan also announced reforms to make it easier for companies to borrow directly from retail investors and reduce their reliance on borrowing from banks. The Australian Securities and Investments Commission will allow listed companies meeting appropriate criteria to issue bonds to retail investors using a simplified process, while maintaining a strong level of investor protection.

Businesses will only be able to use the new streamlined process on the following strict conditions: the companies are listed and have a good continuous disclosure history; the bonds offered are simple, so-called 'vanilla' bonds offered to retail and wholesale investors at the same price; and the size of the bond offer is at least AUD50m.

The government will phase down the interest withholding tax (IWT) incurred by local bank subsidiaries and branches when they pay interest on borrowings from their overseas parents. This reform also extends to Australian-owned financial institutions borrowing from related parties overseas, and any financial institution borrowing offshore retail deposits which they lend on in Australia.

For local subsidiaries of overseas parents, the IWT rate will be reduced on such borrowings from 10% to 7.5% in 2013-14 and to 5% in 2014-15. The government has said that it is favourably disposed to reducing this rate to zero, subject to its medium-term fiscal objectives. Additionally, the IWT rate applying to borrowings by any bank branch from its overseas head office will be reduced from 5% to 2.5% in 2013-14 and to zero in 2014-15.

This announcement implements an important recommendation of the Henry tax review, as well as the Johnson report, and furthers the government's objective of developing Australia as a leading regional financial centre. The measure will remove existing distortions to how financial institutions borrow from overseas – so that funding choices are based on commercial considerations rather than taxation.

TAGS: individuals | tax | investment | economics | pensions | tax incentives | fiscal policy | banking | capital markets | retirement | budget | Australia | withholding tax | tax breaks | individual income tax

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