Federal Budget 2014-15: The Government delivers on austerity but not genuine tax reform

13 May 2014

Tonight Treasurer Joe Hockey delivered his keenly anticipated first budget. As expected, Mr Hockey announced various revenue and welfare savings measures likely to be unpopular with the electorate but designed to restore the Budget to surplus in the medium term. The Government has forecast an underlying cash deficit of $29.8 billion in 2014/15, falling to $2.8 billion by 2017/18 and building to surpluses of well over 1% of GDP by 2024/25.

Topping the list of revenue measures is the temporary Budget deficit tax known as the “Temporary Budget Repair Levy”.  This tax is expected to generate additional revenue of $3.1 billion over the forward estimates period.  In addition, the Government has reintroduced the indexation of fuel excise previously removed by the Howard Government. 

As anticipated, the Budget does not attempt to address in any meaningful way genuine tax reform. For that we await the Government’s Tax Reform White Paper due for release prior to the next Federal election.

So what are the most significant measures in this year’s Budget that will impact on the business bottom line?

Company tax rate cut and the new Paid Parental Leave scheme

A ray of sunshine for business is the Government’s confirmation of its commitment to cutting the company tax rate by 1.5% to 28.5% by 1 July 2015.  This change satisfies an election commitment of the Abbott Government. However, as has been widely discussed, the Government will push ahead with its 1.5% tax from 1 July 2015 on large companies to fund its Paid Parental Leave scheme. The scheme will have an income cap of $100,000 including superannuation and will provide up to 26 weeks wage replacement at no less than the minimum wage.

Temporary Budget Repair Levy and other related measures

The highly anticipated Temporary Budget Repair Levy will consist of a 2% charge on taxable income in excess of $180,000 for three years commencing on 1 July 2014. To prevent high income earners from utilising non-cash benefits to avoid the levy, the fringe benefits tax rate will be increased by 2% from 47% to 49% from 1 April 2015 until 31 March 2017.

Changes to tax administration

The Government has confirmed that it will bring forward staff cuts at the ATO which were planned under the previous Government.  4,700 ATO jobs will go over the forward estimates period, saving an expected $142.8 million. 

The cuts may put further pressure on the ATO to resolve disputes with taxpayers quickly and efficiently.  Taxpayers could find the ATO more willing to explore alternative dispute resolution in order to settle tax disputes.

Additionally, the Commonwealth Ombudsman’s tax complaints handling function will be transferred to the Inspector-General of Taxation (IGOT).  The IGOT’s role is to review systemic tax administration issues and report these back to Government. The complaints handling function will sit neatly within this role.

Changes to mining taxes

The Government will clarify the treatment of realignments of interests between joint venture partners in the minerals and petroleum industry for changes to ownership within a common project.  This measure is intended to address uncertainty for realignments, which are potentially affected by the decision to limit the immediate deduction for mining rights first used for exploration.

In addition, the Government will introduce an Exploration Development Incentive (EDI) to allow small exploration companies with no taxable income to provide exploration credits, paid as a refundable tax offset, to their Australian shareholders for greenfields mineral exploration. 

Announced but unenacted measures – further decisions

The Budget sheds further light on some previously announced but unenacted changes to taxation and superannuation measures.  In particular, the Government has decided to:

  • not proceed with a proposal to remove inconsistencies in the tax treatment of multiple entry consolidated groups that was originally announced by the previous Government in the 2013-14 Budget;
  • further refine measures that amend the principal asset test under the foreign resident capital gains tax regime;
  • refine the consolidation integrity package announced by the previous Government in the 2013-14 Budget;
  • defer the start date of the new managed investment trusts regime (previously announced by the Government in November 2013) to 1 July 2015.  Exposure draft legislation is expected to be released for comment in June 2014;
  • reform the offshore banking unit regime as previously announced; and 
  • defer the start date for measures to improve tax compliance through third party reporting and data matching from 1 July 2014 to 1 July 2016.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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