Federal Treasurer Josh Frydenberg’s maiden Federal Budget, released on 2 April (with an election only a matter of weeks away) is laser-focussed on those issues that hold the key to re-election of the Government.
That focus is on a modest surplus, no increases in taxes and tax cuts and incentives for individuals and small to medium business. That surplus is underlined by a stronger-than-expected resources sector (including higher coal and iron ore prices) and increased corporate profits, but this sort of windfall should not be taken for granted.
The Australian economy is expected to face slower growth, estimated at 2.75% in 2019-20 and 2020-21, amid challenges in the international economy – think Brexit and the China-US trade war – as well as the local economy – think softening domestic property markets and the associated risks to household consumption.
The focus of the Budget being what it is, there is little by way of major tax-related announcements for business generally.
Some highlights from the good news budget included:
- The Treasurer announced the first surplus in 12 years at $7.1 billion for 2019-20. However, it should be remembered that previous governments have announced a surplus but that surplus has not come to fruition.
- Personal tax cuts of $158 billion, surpassing the Federal Opposition’s previously-announced tax cuts for the lower paid over the next four years.
- $100 billion in infrastructure spending to ease congestion, support rail and airport upgrades, road safety and access to ports.
- A widening of the instant asset write-off for small business by extending it to medium-sized businesses, and increasing the asset write-off threshold for each asset.
- Matching the Federal Opposition’s previously-announced measures to end the freeze on the Medicare rebate a year early on 1 July and spending $525 million on a skills package to create up to 80,000 new apprenticeships in industries with skills shortages. The latter is a more fully-realised incarnation of the Government’s current under-funded skilled workers fund.
Some of the more significant tax-related measures announced that will impact on business and investment are set out below:
Considering the electoral context and the focus of the Budget, it is not surprising that the Government has eschewed continuing its well-publicised agenda of reducing the corporate tax rate or other major corporate tax measures.
Instead, the Government has allocated an extra $1 billion to Australian Taxation Office’s Tax Avoidance Taskforce over four years for the purposes of ensuring the integrity of the tax system. The Government has also provided $24.2m in 2018-19 to Treasury to conduct a communications campaign focused on improving the integrity of the Australian tax system.
Of interest to multinational businesses, two measures relating to tax treaties were announced:
- Refinements to the International Tax Agreements Act 1953 to provide that certain income covered by a tax treaty is deemed to have an Australian source. No start date was announced for the proposed amendments.
- A double taxation agreement (DTA) between Australia and Israel signed on 28 March 2019 will be given force of law. The DTA features reduced withholding tax rates for dividends (0% to 15%), interest (0% to 10%) and royalties (5%).
The big sweetener for business in this Budget is directed towards small to medium businesses, with an expansion of the instant asset write-off being extended to medium-sized businesses (annual turnover up to $50 million) and an increase in the asset write-off threshold from $25,000 to $30,000 on a per asset basis applying from 2 April 2019 to 30 June 2020. An existing Bill before Parliament is proposed to increase the threshold for the asset write-off for small business from $20,000 to $25,000 effective 29 January 2019 until 30 June 2020.
Medium-sized businesses with an aggregated annual turnover of $10 million to $50 million, which previously did not have access to the instant asset write-off, will also be able to immediately deduct purchases of eligible assets costing less than $30,000 that are first used, or installed ready for use, from Budget night (2 April 2019) to 30 June 2020. Assets purchased on or before 2 April 2019 or after 30 June 2020 will not qualify.
Following 1 July 2020, the threshold will revert to $1,000 and the asset write-off will presumably revert to only being available to small business entities.
The major electoral sugar hit comes by way of changes to personal taxation, which should contribute to a boost in household consumption, namely:
- More than doubling the low and middle income tax offset up to $1,080 from 2018-19. This offset will be available to the more than 10 million taxpayers earning up to $126,000 a year.
- The 32.5% tax rate will be reduced to 30% by 1 July 2024, resulting in 94% of taxpayers paying no more than the full corporate tax rate of 30%. Recall that the 37% tax bracket is already legislated to be abolished from 2024-2025.
Following these changes, there will only be three personal income tax rates (19%, 30% and 45% kicking in at taxable income above $200,000).
With an election only weeks away, this Budget is directed at infrastructure projects, personal tax cuts and incentives for small to medium businesses.
Accordingly, there is not much space for the Government to pursue structural tax reform which may otherwise distract from the key messages for an imminent election campaign. For business generally, the apparent confidence in revenue forecasts and a focus on voters ahead of the election means that the Budget might be best assessed by reference to measures that are conspicuous in their absence.
Measures such as a reduction of the corporate tax rate to increase the global competitiveness of Australian businesses and changes to the thin capitalisation regime to further limit debt deductions, amongst others, seem to have been left for another day.
With respect to the revenue side of the Budget, notwithstanding the consistent rhetoric from both sides of Parliament regarding big business – multinationals in particular – paying their fair share of tax, the Government must currently be confident that it has the right tools and settings at its disposal. Those tools include the Multinational Anti-Avoidance Law, the Diverted Profits Tax, the thin capitalisation regime and the recent interpretation of the transfer pricing regime. The increased funding provided to the ATO in this area suggests a focus on the use of the tools already at its disposal rather than requiring further reform.
In addition to the measures identified above, the Government’s structural tax reform agenda can be measured by the previously announced but unenacted measures such as:
- thin capitalisation changes including the removal of the ability to revalue assets off balance sheet and treat foreign controlled Australian tax consolidated groups with foreign investments or operations as both outward and inward investing entities;
- broadening the definition of significant global entity (SGE), which impacts a number of measures;
- reforming the integrity provisions in the debt and equity rules;
- better targeting the research and development (R&D) tax incentive;
- reforms to the taxation of financial arrangements (TOFA);
- reforms to the Petroleum Resource Rent Tax (PRRT);
- the introduction of integrity measures relating to stapled structures and limiting access to tax concessions for foreign investors;
- the removal of the CGT discount at trust level for MITs and Attribution MITs; and
- the introduction of corporate and limited partnership collective investment vehicles (CIVs).
The structural tax reform agenda will need to be picked up in future Budgets. However, with the election imminent, it remains to be seen whether that agenda will remain the same under a re-elected Government or there will be a new set of priorities under a new Government.
In either case, the next Federal Budget (2020-21) should be more fertile ground for an articulation of a much-needed tax reform agenda.
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