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Australian Budget Scraps Planned Business Tax Cuts

Thursday, May 10, 2012

A planned cut to business tax rates will not go ahead in Australia, as the government seeks to redirect projected mining tax revenue to help families and small businesses in the face of ongoing disputes with opposition parties.

The announcement was made by Treasurer Wayne Swan in his May 8 Budget. According to Swan, the Budget “is about discipline and restraint but also about priorities; ensuring precious funds are re-directed to the purposes and people that need them most.”

The Budget will redirect AUD33.6bn (USD33.9bn) across the economy, with AUD5bn earmarked for new payments to households, AUD714m to help companies compete, and AUD3.7bn for small business tax breaks. In addition, a new AUD3.6bn “Spreading the Boom” package will use proceeds from the controversial Minerals Resource Rent Tax (MRRT), which had been intended for a company tax cut, announced earlier this year.

Swan described in his speech how surplus remains the best defence against challenges in the global economy, pointing to moderate recovery in the US and ongoing issues in the eurozone. A high dollar is also causing problems, with billions “ripped” from the Australian tax base, and tax receipts as a share of gross domestic product (GDP) not expected to recover to pre-crisis levels for some years. Swan explained that tax as a proportion of the economy will be 22.1% this year, in comparison to the 23.7% the government inherited from its predecessors, a difference of AUD24bn. Taxes are a further AUD12bn down since Swan’s last update, meaning that the total write down figure since the economic crisis began has now reached AUD150bn. As a result, the 2011-12 deficit was AUD44bn, with debt expected to peak at 9.6% of GDP. The economy is projected to grow by 3.25% in 2012-13 and 3% in 2013-14, while unemployment will remain at 5.5% over the next two years. The intention is to return to an AUD1.5bn surplus in 2012-13.

Swan went on to state that, “from the firm foundations of a surplus budget, we announce new policies to spread the benefits” of the mining boom. The government had intended to reduce company tax rates, using funds generated from the MRRT. In March, Swan announced that projected MRRT revenue would place the government in a position to lower the rate from 30% to 29% for small businesses from 2012-13, with the headline rate to drop the following year. However, blaming parliamentary “gridlock” over the measure on the actions of opposition coalition forces, Swan said that funds intended for this initiative will now be redirected to families and other small business-related measures. He added that he would not allow such opposition to prevent the benefits of the mining boom from reaching the wider Australian public.

As a result, a series of less headline-grabbing tax measures will now be introduced. Rather than receiving tax cuts, small businesses are now being targeted with tax breaks. The Budget confirms the introduction of a “loss carry back” scheme announced earlier in the week, which is set to enter into force from this July. At a cost of AUD714m, it will allow small businesses to offset current year tax losses of up to AUD1m against tax paid in previous years and receive a refund of up to AUD300,000. From July 1, 2013, companies will be able to carry back up to AUD1m worth of losses against tax paid up to two years earlier. Swan said of the initiative that it “will support businesses facing challenges in our patchwork economy. It will encourage businesses to invest and adapt, boosting productivity and strengthening our economy as it goes through a period of major transition.”

Also confirmed in the Budget is a write-off scheme originally announced alongside planned rate cuts in March. From July 1, all small businesses will be able to write-off any new business asset costing less than AUD6,500, for as many assets as they purchase. Swan anticipates this tax break to be worth around AUD1bn in its first year alone. Small businesses will also be able to instantly write-off the first AUD5,000 of the cost of a new motor vehicle, from July 1. Swan explained: “These reforms will help small businesses - whether they operate as sole traders, partnerships, companies or trusts - to invest to compete.”

Among the other key measures in a Budget peppered with detail-heavy tax policies are the following:

  • The superannuation guarantee rate is to be increased to 12%, intended to boost retirement savings. A higher concessional contribution cap for older Australians with a balance of AUD500,000 will be introduced, with a revised start date of July, 2014. The tax break concessional contribution for the top 1% of earners will be reduced, bringing it into line with concessions for the average wage earner.
  • The tax concession for living-away-from-home allowances and benefits is to be amended, with a 12 month time limit to be placed on how long an employee can receive the tax concession at a particular work location.
  • The tax treatment of employment termination payments (ETPs) is to be reformed, to improve the fairness of such “golden handshakes”. ETPS are currently taxed at a maximum 15% for those over preservation age (the age at which they are entitled to access their pension benefits) and 30% for those under, up to an indexed cap of AUD165,000. The reform will retain the existing concession for payments related to hardship, and will save an estimated AUD196.4m.
  • The personal income tax rate and thresholds applicable to non-residents’ Australian income will be adjusted to better align with those of residents. This will apply from July 1.
  • The government will remove eligibility for the 50% discount on capital gains earned May 8 by non-residents on taxable Australian property, such as real estate and mining assets. Non-residents will still be entitled to a discount on capital gains accrued prior to May 8 (after offsetting any capital losses), provided they choose to value the asset as at that time.
  • A “Schoolkids Bonus” will replace the Education Tax Refund, making the scheme automatic, with those eligible receiving AUD820 per year for secondary school children and AUD410 for children at primary school, in a lump sum form.
  • From July 1, eight existing dependency offsets will be consolidated into a single offset available to taxpayers maintaining a dependant who is unable to work due to disability or carer responsibilities.
  • From July 1, the government will phase out the mature age worker tax offset (MAWTO) for taxpayers born on or after July 1, 1957.
  • From September 1, 2012, the inbound duty free allowance for international travellers will be reduced to 50 cigarettes or 50 grams of tobacco.
  • The government will update the method of determining the taxable value of airline transport fringe benefits from stand-by value to market value, applicable to benefits provided after 7.30pm (AEST) on May 8.

Stressing the importance of these measures, Swan said, “it is these responsible decisions which return the Budget to a UAD1.5bn surplus in 2012/13, and growing every year after that...Making the tax system more sustainable not only achieves savings now, but benefits the budget bottom line for decades to come.”

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