Australia’s future tax system review - Business...

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Australia’s future tax system review

Invigorating Business Representation

02 May 2010

Invigorating Business Representationnswbusinesschamber.com.au

Business has long known that the tax system can operate better. NSW Business Chamber Red Tape surveys consistently rank tax as the area where business is frustrated at the costs of compliance.

The Henry Review acknowledged this today by re-iterating studies estimating that the cost of taxpayers complying with their tax obligations is in the order of 1 to 2 per cent of GDP. Even using the most conservative models, if these on-going compliance costs could be reduced by one-third, this would result in a national saving of $4 billion each year” (Tax Policy Statement, Page 19).

This document details the decisions announced by the Government today and covers issues relating to:

a new resource tax; >

changes to company tax rates; >

rebates and write offs for small business; >

state infrastructure funding; and >

changes to superannuation. >

The Government’s announcements in relation to small business tax rates and changes to depreciation and write-offs are welcome by small business.

Other decisions regarding superannuation are designed to address the gap between Australia’s superannuation pool and the growing needs of our ageing population. Central to the Government’s superannuation reforms is a three percent increase in the Superannuation Guarantee Levy, from 9 percent to 12 percent over ten years.

One area where NSW Business Chamber will be seeking advice from members in coming weeks is in relation to the proposed Resource Super Profits Tax (RSPT). This new tax is designed to raise in excess of $12 billion from the resources sector by 2013-14.

This additional tax revenue will fund cuts to company tax (from 30 percent to 28 percent), changes to small business writes-offs and depreciation rates; the funding of a State Infrastructure Fund; and a $1.1 billion Resource Exploration Rebate. The Government has also flagged possible future cuts to the company tax rate (cut to 25 percent) depending on the revenue flow from the Resource Super Profits Tax.

Treasury has argued these decisions will provide a real increase in GDP in the long term of 0.7 percent and real wages by 1.1 percent. This will provide a reform dividend of $450 per year to a full-time worker on average weekly earnings.

In the coming weeks, NSW Business Chamber will examine which reforms should be encouraged and supported. This analysis focuses on the major decisions announced by the Government today.

Today’s announcements are the beginning of a real opportunity to improve our tax system. Through our 10 Big Ideas to Grow NSW many opportunities for reform of State Taxation have been identified. On your behalf, NSW Business Chamber will continue to be an active participant in this debate.

Yours sincerely

Stephen Cartwright

CEO, NSW Business Chamber

A message from the CEO

Earlier today, the Government released the long-awaited review into Australia’s Future Tax System.

The Henry Review contains 138 recommendations for tax reform and represents the first step in a major debate about tax reform in Australia.


Government DecisionA new Resource Super Profits Tax (RSPT) will be introduced from 1 July 2012. The tax will be payable at a rate of 40 percent on the realised value of resource deposits.

Resource royalties paid to State and Territory Governments under existing arrangements will be offset by a refundable tax credit, avoiding double taxation of resource profits.

This decision is expected to raise $3 billion in 2012-13 and a further $9 billion in 2013-14.

Rationale for DecisionThe measure will:

“Provide a more appropriate return to the Australian >community from the exploitation of its non-renewable resources;” and

“Provide a more efficient mechanism for collecting >a share of the returns to the community.”

The measure will also:

“Remove impediments to mining investment and >production;” and

“Encourage greater investment and employment in the >resource sector.” (Future Tax System Fact Sheet p 19)

NSW Business Chamber ReactionThis decision represents a significant additional tax for resource companies, raising an additional $9 billion in 2013-14 alone. However, this measure is necessary to finance the other tax changes announced by the Government.

Some of these additional changes will benefit the resources sector, including the reduction in the company tax rate, the introduction of a resource exploration rebate (RER) and the establishment of a new infrastructure fund.

While we are all aware that Australia’s recent prosperity has been, in part, a direct resource of the commodities boom – on the other hand, this same boom has pushed up interest rates and pushed up the value of the dollar.

Much of the money raised through the introduction of the RSPT will be used to promote business growth, reducing the risk of a two-speed economy re-emerging.

Consultation in the coming weeks on the detail of the proposed Resource Super Profits Tax will provide the NSW Business Chamber and its members with an opportunity to confirm a final view.

Resource Super Profits Tax


Government DecisionThe company income tax rate will be reduced to 29 percent for the 2013-14 income year and to 28 percent from the 2014-15 income year, in conjunction with the introduction of the Resource Super Profits Tax (RSPT).

Rationale for Decision“Recognising the benefits to investment and growth, company income tax rates have been reduced across the OECD over the past 30 years. The fall in the average statutory corporate tax rate across the OECD has been continuous.

“Australia’s company income tax rate has also been cut from 49 percent in the mid 1980s to its current rate of 30 percent in 2000-01.

“Company income tax lowers domestic productivity by reducing the incentives to invest, and the overall level of investment. Reducing the company income tax rate increases domestic investment. More capital means higher productivity and economic growth and leads to more jobs and higher wages” (Government Fact Sheet Page 1)

NSW Business Chamber ReactionNSW Business Chamber supports the reduction of the company tax rate to 28 percent by 2014-15. This will equate to a saving to business of $2 billion in 2013-14 and will increase improve levels of economic prosperity in the long run.

However, this reduction in the company tax rate has not been matched by a reduction in personal income taxes. Greater equalization between personal income tax and company tax levels will reduce the need for complex anti-avoidance rules aimed at preventing redefinition of personal income as company income.

Company Tax Rate


Government DecisionTo commence on 1 July 2012 the Government will expand existing capital allowance concessions for small businesses by:

allowing small businesses to immediately write-off assets >valued at under $5,000 (this is up from $1,000 allowed presently); and

allowing small business to write-off other assets (except >buildings) in a single depreciation pool at a rate of 30 percent. Currently, small businesses allocate assets to two different depreciation pools.

Rationale for Decision“Enhancing the existing depreciation concessions is a relatively simple and tax effective mechanism for assisting small businesses.

“This will:

increase their cash-flow by deferring their tax liabilities; >

reduce compliance costs by removing the requirement to >calculate depreciation allowances and track assets for depreciation; and

make asset ownership more attractive than leasing or >debt financing.” (Source: Fact Sheet Pg 5)

NSW Business Chamber ReactionThe decision to increase the immediate write-off threshold to $5,000 will enable small businesses to immediately deduct the costs of a significant proportion of the assets that they purchase. Whilst the $5,000 limit is below the Henry Committee’s recommendation of a $10,000 threshold, the increase is welcome.

The changes to the instant asset write off and the simplification of depreciation will save small business $1,030 million in 2013-14.

Small Business Instant Asset Write-Off


Government DecisionThe Government will provide the States and Territories with a new infrastructure fund. The fund will be a permanent structural feature of State and Commonwealth budgets.

The infrastructure fund will be paid to the States each year, with an initial amount of $700 million in 2012-13.

Funding will be distributed in a manner that recognises that resource rich States face large associated infrastructure demands.

The final details for the infrastructure fund will be negotiated with the States. The infrastructure fund will be paid to the States each year from 2012-13 to coincide with the introduction of the Resource Super Profits Tax (RSPT).

Rationale for Decision“World class infrastructure is essential to ensure that Australia continues to be an attractive place to set up a business, creating new jobs for now and the future.

“Investing in infrastructure will help improve our potential to grow the economy into the future. Key capacity-building infrastructure, like ports and roads, are vital for all Australian industries, and for Australian workers”. (Source: Fact Sheet Pg 7)

NSW Business Chamber ReactionAdditional funding to remove capacity blockages in relation to infrastructure is welcome. However, it should be recognised that the infrastructure fund is a deliberate attempt to placate anger in resource rich states over the introduction of the Resource Super Profits Tax.

Given the parameters expected to be set for the fund, there should be significant opportunities for a region such as the Hunter and /or the Illawarra to benefit from the fund. Business will need to work with Government to identify the best economic opportunities for funding within the Hunter and/or the Illawarra and throughout the remainder of NSW.

The negotiations with the States and Territories will be critical in ensuring the fund is allocated in way that best addresses the ongoing infrastructure capacity constraints experienced throughout the economy.

State Infrastructure Funding


Government DecisionThe Government will provide a refundable tax offset at the company level, set at the prevailing tax rate, for exploration expenditure carried out in Australia.

The Resource Exploration Rebate will apply to expenditure incurred on or after 1 July 2011. As part of the measure, the definition of ‘exploration expenditure’ will be expanded to include expenditure incurred in exploring for geothermal energy.

Expenditure incurred in exploring or prospecting for minerals, petroleum or quarry minerals can be immediately deducted (subject to passing certain tests). Expenditure on depreciating assets can be deducted immediately.

All companies will be able to access the Resource Exploration Rebate.

Rationale for Decision“The Rebate provides a stronger incentive to carry out exploration.

“The Rebate will deliver on the Government’s election commitment to implement better support for resource exploration companies. It is a simpler and more effective means…to support the development of Australia’s resource sector than a traditional flow-through shares scheme”. (Source: Fact Sheet Pg 9)

NSW Business Chamber ReactionAround 4,300 companies in the resources sector will benefit from the new refundable tax offset. The Rebate will save businesses $1,120 million by 2013-14.

As a stand alone rebate this decision is welcome. However, this rebate is funded by the new Resource Super Profits Tax which will generate a total of $12 billion in taxes by 2013-14.

Resource Exploration Rebate


Government DecisionThe Government will increase the Superannuation Guarantee rate to 12 percent by 2019-20.

The Superannuation Guarantee rate will be increased gradually with initial increments of 0.25 of a percent on 1 July 2013 and on 1 July 2014. Further increments of 0.5 of a percent will apply annually up until 2019-20, when the Superannuation Guarantee rate will be set at 12 percent.

Year Rate (%)

2013-14 9.25

2014-15 9.5

2015-16 10

2016-17 10.5

2017-18 11

2018-19 11.5

2019-20 12

Rationale for Decision“The Government’s approach to superannuation will achieve two main outcomes – greater adequacy and greater equity.

“The measure directly addresses issues raised by our ageing population and boosts private and national savings, bringing broader benefits to the community and the nation.

“It will significantly increase the future retirement incomes for many Australian workers. For example, a 30 year old earning average full time wages will have an additional $108,000 in retirement savings”. (Source: Fact Sheet pg 11)

NSW Business Chamber ReactionThe ageing of the population will place great strain on the future Federal and State budgets. Currently 3.1 million Australians are over the age of 65 and this number is expected to grow to 8.1 million by 2050. As significantly, the ratio of working age Australians to those over 65 will decrease from 5-to-1 to just 2.7-to-1.

If Australians do not save sufficiently for their retirement, there will be significant pressure on future Governments to fill the gap.

Business supports the existing Superannuation Guarantee which to date has created a $1 trillion retirement savings pool. However, a significant gap exists between the current savings pool and the growth required to provide for the ageing population in the long term.

Business accepts that a decade long timeframe to increase the rate to 12 percent is significant but also note that cost pressures due to the new Fair Work System are also adding to employment costs for some businesses.

Increasing The Superannuation Guarantee Rate To 12 percent


Government DecisionThe Government will increase the Superannuation Guarantee age limit from 70 to 75, meaning workers aged 70 to 74 will be eligible to have Super Guarantee contributions on their behalf for the first time matching the age limit for voluntary and self-employed contributions. The measure will commence from 1 July 2013.

Rationale for Decision“Currently, the Superannuation Guarantee Levy only applies to people aged up to 70. In contrast, employers can make voluntary deductible superannuation contributions for employees under 75, and self-employed people can make deductible contributions until they turn 75.

“Increasing the Superannuation Guarantee age limit will provide an incentive for mature workers to remain in the workforce”. (Source: Fact Sheet Pg 13)

NSW Business Chamber reactionThe decision to increase the Superannuation Guarantee age limit will impact less than 0.3 percent of the workforce when it commences in 2013.

Business recognises the need to retain or employ older workers and for there to be appropriate incentives for older workers who can work, to do so. This will become even more important as the population ages.

Superannuation – Raising the Superannuation Guarantee Age Limit from 70 To 75


Government DecisionThe Government will provide a superannuation contribution of up to $500 annually for individuals on adjusted taxable incomes of up to $37,000 to improve the equity of superannuation taxation arrangements.

The amount payable under this measure will be calculated by applying a 15 percent matching rate to the concessional contributions made by or for individuals on adjusted taxable incomes of up to $37,000, with an annual maximum amount payable of $500 (not indexed). The amount will be paid into a superannuation account of an individual to directly boost their retirement savings.

Concessional superannuation contributions made from 2012-13 will be eligible for the Government contribution. This will be paid in 2013-14.

Rationale for Decision“Currently, as a result of the flat rate for all superannuation concessional contributions, low-income earners receive little or no concession.

This measure will improve the equity of superannuation taxation arrangements by effectively returning the tax payable on superannuation guarantee contributions made for low-income earners.” (Source: Fact Sheet pg 15)

NSW Business Chamber ReactionThis is a welcome decision to improve the adequacy of superannuation for low-income earners. This group is more likely than any other to draw upon Government benefits after retirement.

Removing tax disincentives in the short term will be cost effective in the longer term.

This decision will mean that individuals with a 15 percent marginal tax rate will receive a 15 percent tax concession. It will also remove the 15 percent tax penalty paid by individuals (who contribute to super) who have a zero percent marginal tax rate.

Superannuation – Low Income Earners Government Contribution


Government DecisionThere are a number of tax reform issues within the Henry Review that the Government has ruled out. NSW Business Chamber welcomes this decision with respect to the following:

Not removing the benefits of dividend imputation; >

Not indexing fuel taxes to CPI; and >

Not changing wine-specific tax arrangements, given that >Australia is in the middle of a wine glut and an industry restructure is currently underway.

For further Information, refer to:

The Henry Review: http://taxreview.treasury.gov.au >

Future Tax Website: http://www.futuretax.gov.au >

What the Government is not considering

Invigorating Business Representation

NSW Business Chamber140 Arthur Street North Sydney NSW 2060

t > 9350 8112 f > 9279 1961 e > [email protected]

REP

2436nswbusinesschamber.com.au

1 Ensure taxpayers get better value for money by auditing government services and performance.

2 Create jobs by cutting employment taxes and red tape.

3 Protect the NSW Budget by fighting for a fairer share of the GST.

4 End the blame game in hospitals by handing funding to the Federal Government.

5 Move economic growth to the centre of State Government decision making by establishing the Department of Business Growth.

6 Encourage growth in regional NSW through funding government and business relocations to regional areas.

7 Get the politics out of infrastructure by establishing Infrastructure NSW.

8 Take charge of Sydney traffic by appointing a Transport Tsar.

9 Help Sydney prepare for the future by creating 10 super councils.

10 Better prepare young people for the workforce by improving the HSC for students not attending university.

Visit 10bigideas.com.au to find out more

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