Imminent election sobers government’s tax reforms

Facing an election later this year, the Rudd government has decided that it cannot afford to be as bold as the Henry Committee, when it comes to tax reform.

But Kevin Rudd, himself, insists that it has made a good start.

And Heather Ridout, who heads the Australian Industry group agrees, admitting that she sees getting the tax reform Australia needs as a decade long project.

That’s an insider’s view, as Ms Ridout was also a member of the committee, headed by the Treasury Secretary Ken Henry, which also recommended a similar approach..

Mitch Hooke, who heads the Mining Industry council, has emerged as the  toughest critic of the government’s reforms, so far.

He insists that the super profits tax, that the government is planning to impose on Australia’s miners, will stop valuable projects going ahead,  with consequent job losses in the industry.

The Henry Committee made 138 recommendations, urging the government, in particular, to: abolish several existing taxes over time.

These included:-

• insurance taxes
• payroll taxes
• property transfer taxes
• resource royalties, saying these should be replaced by the rent tax
• the luxury car tax
• the tax on superannuation contributions, while they are in the fund
• income taxes on all government pensions and benefits and
• fuel and registration taxes.

So far, the government has not made a start on any of these areas.

But it will:-

• gradually raise the compulsory superannuation  contributions rate from 9 to 12 per cent.
• lower the company tax rate, first to 29 per cent and then to 28 per cent and
• introduce a super profits tax for miners

The Prime Minister said a typical 30 year old Australian worker should retire with an extra $108,000 in superannuation as a result of the latest changes.

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Tax reform:What it all means

Even the Federal Treasurer, Wayne Swan, admits that the tax reforms, just announced,  are just the first steps in the Rudd government’s tax reform programs.

But it’s a safe bet that they are also the only ones we will see this side of the election, that is due later this year.

Voters, who see the changes as merely a clever, election year response, to the long overdue need for a  better tax system, will have solid grounds for argument, too.

Essentially, the government is asking Australia’s miners, who are currently enjoying a boom, to largely fund the first round of those reforms.

So what, exactly, is the government doing?

Well, there are no broad cuts to personal income tax rates.

That will disappoint many.

However, it has set Australia on a  gradual path to a compulsory 12 per cent superannuation levy.

That, combined with reforms to make super simpler and cheaper for most Australians, should leave younger workers much better off in retirement.

Staged reductions in Australia’s company tax rates should help offset the extra costs that will impose on business.

Australia’s major resource States, Western Australia and Queensland, will probably be upset at the new arrangements.

They are likely to see it as a Federal intrusion into their taxation territory.

Tony Abbott has also been quick to respond, dismissing the government’s announcement as “more spin than subtance.”

He says the government has responded to only two of the 138 recommendations made by the taxation review committee, that the Treasury Secretary, Ken Henry, chaired, although he concedes that it “partly” responded to a third.

The Treasurer, Wayne Swan, has no doubts.

“This is a really big day for the country, the economy and for families and small business,” he says.

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“Tax relief and less red tape” for small business

The Federal government is promising tax relief and less red tape for Australia’s small businesses, as part of its tax reforms.

It describes ssmall businesses as “the backbone of the Australian economy.”

“While all businesses face compliance costs in meeting their tax obligations, complexity has a proportionately greater impact on Australia’s estimated 2.4 million small businesses,” the government said in a statement.

“Smaller businesses may also experience greater cash flow difficulties than their larger counterparts,” it added.

“In some cases, these can be an impediment to growth and expansion.

“Our small business package addresses these issues and provides a practical benefit to a large number of small businesses,” the government said.

“Small businesses currently have to keep a range of records and classify the assets they buy into a number of depreciation ‘pools’.

“Small items worth less than $1,000 can be immediately written off and others allocated to one of two depreciation ‘pools’ which are depreciated at either a 30 or 5 per cent rate depending on the life of the asset (half these rates in the year of purchase).

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Company tax rates to fall

The Federal government is to reduce Australia’s company tax rate in two stages, as part of its tax reforms.

It says this is part of its plan to spread the benefits of the present resources boom more evently

“This is why we will reduce the company tax rate to 29 per cent for the 2013/14 income year and to 28 per cent from the 2014/15 income year, in conjunction with the introduction of the new Resource Super Profits Tax. This will have a number of benefits.” it said.

The government explained;”The success of our resources industry can make it harder for other industries to attract workers and investment.

“A strong Australian dollar can make it harder for other export industries to compete overseas.

It said this would improve the international competitiveness of Australia’s company tax rate, moving Australia from 22nd to 17th amongst similar sized OECD countries.

“Currently, Australia’s company tax rate is high relative to other similar sized OECD countries,” the government said.

“By reducing it we can reinforce that Australia is a good place to invest.” it added.

“Over time, this will lead to an increase in investment, particularly from overseas.

“Increased investment means a larger capital stock, higher productivity and higher wages.

“More investment will also mean more innovation and entrepreneurial activity.

“By making sure our corporate sector continues to be productive and competitive, we can remain at the forefront of technological change and knowledge generation. The combination of the new RSPT and reduced company tax rate will make Australia a more attractive place to invest across all sectors.

“The reduction in the company tax rate is expected to increase GDP by 0.4 per cent in the long run.

“Together with the resource tax reforms, this will lead to a long run increase in GDP of around 0.7 per cent.

“Independent modelling indicates these changes are expected to increase average real after tax wages by 1.1 per cent (equivalent to an extra $450 per year in the pocket of a full-time worker on around average weekly earnings.

The government also released a table, showing  how Australia’s company tax rate compares with that in other countries.

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A 40 per cent super profits tax

The Federal government’s tax reforms will feature a 40 per cent resource super profits tax, that will be introduced from July 1 2012.

Resources Minister Martin Ferguson said that under the plan the Rudd government would provide a refundable credit to resource entities for state royalties and will guarantee to contribute 40 per cent of the investment cost of a resource project.

“In effect, the Australian community will share in the costs of, and returns from, realising the value of resource deposits.,” Mr Ferguson said.

He said there would be a staged consultation process over the course of this year to work through detailed design issues.

This would look, particularly, at  the transition for existing projects.

“This is a major reform and the Australian Government is committed to a genuine and open consultation process to make sure we get it right,” he said.
“A significant proportion of funds raised from the RSPT will be returned to the resources industry through a new resource exploration rebate and investments in infrastructure,” Mr Ferguson said.

“The resources sector will also benefit from a lower company tax rate.” he added.
The government said the new resource exploration rebate would boost investment.
“Exploration is vital to build a pipeline of resource projects for future generations,”Mr Ferguson said.

“The Australian Government will introduce a new resource exploration rebate (RER), within the company income tax system, from 1 July 2011,” he said.

Mr Ferguson said this would deliver  on the government’s 2007 election commitment to promote resources exploration.

This measure is estimated to cost $1.1 billion in the two years commencing 2012-13.
Under it,  companies could receive a refundable tax offset at the company tax rate for their exploration expenditure.

“The RER will apply to the same range of exploration expenses currently deductible under the tax law, provided the exploration is undertaken in Australia.

“The RER is a simpler and more effective way to promote investment in exploration than a flow- through shares scheme. For a company in a tax loss position that spends $1 million on exploration, the RER will provide an immediate cash benefit of $300,000.

“In a huge boost for geothermal energy explorers, their exploration expenditure will also be eligible for the RER.

“The RER will significantly benefit small, pre-profit exploration companies. Small exploration companies currently do not get a tax benefit from their deductible exploration expenses until they become profitable. Compared to larger, more diversified companies, these smaller companies face a competitive disadvantage because losses they generate from exploration often cannot be used to offset other taxable income.

New investment in infrastructure

One of the nation’s top priorities must be the elimination of infrastructure bottlenecks so that we can get our resources to market. The Australian Government is already making a substantial investment in the nation’s infrastructure, including the $22 billion Nation Building for the Future package announced in the 2009-10 Budget. We will build on this commitment by establishing a new ongoing infrastructure fund, and make annual contributions starting at $700 million from 2012-13.
The infrastructure fund will help build the roads, rail, ports, electricity and water supply, and other facilities needed to unlock Australia’s resource wealth.

The Government will consult closely with the states on both the establishment of the infrastructure fund and the arrangements for rebating state royalties, Mr Ferguson said.

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Rudd and Swan explain their changes

The Federal government says its new  tax reforms are part of a ten year plan to overhaul the Australian economy.

The Prime Minister Kevin Rudd and his Treasurer Wayne Swan spelt out their aims in a joint statement, which explained how they would introduce a super profits tax for the mining industry, as expected, and overhaul Australia’s superannuation system.

They said:-

“The long term tax plan we announce today will strengthen the economy and make the tax system fairer and simpler for Australian working families and businesses.

These are the first steps in a 10 year agenda that will help ensure we share prosperity fairly, maximise our opportunities, and keep Australia in the box seat as the global recovery gathers pace.

Australia faces important decisions about how we structure our tax system.

This package is carefully calibrated to make the most of the opportunities presented by commodity boom mark II, but also to address the challenges that it presents.

This is a long term plan to apply a Resource Super Profits tax to the profits earned from resources that are owned by all Australians, and use it to:

•                generate more superannuation savings for working families;
•                lower tax for all companies, especially small businesses; and
•                invest in our future infrastructure needs, particularly for mining states.

A Resource Super Profits Tax will ensure Australians get a fair share from our valuable non-renewable resources.

It will be a better way to tax resources because it only taxes profits and fully recognises the large investments made in resource projects.

It will also rebate State royalties paid by resource companies, and the Government will consult with the States on the implementation of this. The revenues will be used to deliver a stronger economy for Australian families.

Approximately one third of the package will directly assist the resources sector. A Resource State Infrastructure Fund will make infrastructure spending a permanent feature of Commonwealth and State budgets.

It will deliver $700 million in 2012-13 and more than $5.6 billion over the next decade, particularly for mining states.

Without infrastructure funding, capacity constraints will stand in the way of resource sector expansion. A Resource Exploration Rebate will help small exploration companies search for new deposits.

Roughly a third of the package will promote growth across the economy, addressing the risk of a “two-speed economy” by taking the brakes off the slower lane.

A phased cut in the company tax rate to 28 per cent will assist the competitiveness of all Australian industries. The Government will also seek to cut the company tax rate further, as revenue allows.

Small businesses will get a head start on the company tax cut, with the 28 per cent rate applying from 2012-13.

Small businesses will benefit from a new instant write-off for assets worth up to $5,000. Depreciation for other assets will be simplified, reducing complexity, cutting red tape and providing up front tax relief.

Roughly a third of the package will be used to ensure that we save rather than squander the benefits of the current boom, and translate higher economic growth and wages into long term benefits and more secure retirements.

The superannuation guarantee will be gradually increased to 12 per cent. Around 3.5 million lower paid Australians will receive a concession on their superannuation guarantee contributions, for the first time.

Over 50s with lower super balances will be given more generous contributions caps to allow them to make catch up contributions.
These superannuation measures will cost the Government $2.4 billion over the next four years.

These significant reforms will build sustainable growth with low inflation. They will attack potential capacity constraints in our economy and ensure that the proceeds from our mineral resources are dedicated to the best possible outcomes for our economy and our people.

A stronger economy benefits all Australians through more jobs and higher wages. The changes announced today are expected to increase Australian GDP by 0.7 per cent and real wages by 1.1 per cent in the long run. In current terms, this reform dividend is equivalent to an extra $450 per year in the pocket of a full-time worker on average weekly earnings.

These reforms will make our tax system fairer, by providing more Australians with a fair return for our natural resource wealth and by providing better superannuation concessions for over two million lower income earners.

The system will be simpler, especially for small businesses through simpler tax arrangements.

These changes will be consistent with our fiscal rules and will not detract from our ability to return the Budget to surplus and repay debt. This means that the package is dependent on the successful implementation of the Resource Super Profits Tax.

These reforms will not be welcomed by every business or every interest group, but they are the considered, responsible changes we need if we are to turn our success during the global recession into enduring gains for our economy, our people and our nation.

The Government’s agenda for tax reform has been informed by the independent tax review, our discussions with the community and our own values and beliefs.

We will consult broadly on the changes, including with businesses, the states and the broader community.

Today we have announced that the first wave of our agenda is to reform resource, company and small business taxes and superannuation.

In the coming months we will have more to say on a number of other areas considered by the review, especially making tax time simpler for everyday Australians, improving incentives to save and improving the governance and transparency of the tax system.  This would represent a full second term agenda.

Other recommendations in the review are not government policy. We have called for a mature tax debate and expect the other recommendations to be the subject of much discussion in the coming years.

We thank the five eminent members of the independent review panel; Ken Henry, Jeff Harmer, John Piggott, Heather Ridout and Greg Smith, as well as the dedicated review secretariat who supported them.

We also thank the community for their extensive contribution to the development of the report we are releasing today.

Information about the Government’s future tax plan is available on the Stronger, Fairer, Simpler website at www.futuretax.gov.au. People can subscribe to the site and receive regular updates and advice, or call 1800 614 133 for further information and to obtain hard copies.

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Retirement benefits boosted under new tax plan

The Federal government has delivered a big surprise, in its tax reforms, promising to gradually take compulsory contributions to superannuation from 9 to 12 per cent.

This will mean much bigger retirement benefits for Australian workers, especially as the cost of maintaining most superannuation accounts will also be slashed.

In an announcement they described as historic, the Treasuer Wayne Swan and Superannuation Minister Chris Bowen spelt out the details.

The two ministers said:-

“The Rudd Government will deliver an historic boost to retirement savings to help prepare for an ageing population and ensure the Australian people get a fairer share of our mineral wealth.

“Today’s announcements are the biggest reforms to superannuation since the introduction of compulsory superannuation in 1992 as part of our Stronger, Fairer Simpler: Tax Plan for our Future.

“The Government’s reforms will deliver substantial improvements in retirement savings and a fairer distribution of superannuation tax concessions, ensuring more Australians can enjoy a comfortable retirement.

“The Stronger, Fairer, Simpler: Tax Plan for our Future superannuation reforms are:-

•   A  12 per cent Superannuation Guarantee (SG) – commencing with a 0.25 increase in 2013-14 and 2014-15, followed by 0.5 increments until the SG reaches 12 per cent by 2019-20. The three year lead time recognises that employers and employees need to factor this into future wage negotiations.

•    A low income earners Government contribution – from 1 July 2012. The Government will provide a contribution of up to $500 annually into the superannuation account of workers on adjusted taxable incomes of up to $37,000. This will provide a reward for savings for low income earners by ensuring no tax is paid on SG contributions.  The Government will also retain the co-contribution scheme.

•     Concessional superannuation contribution caps for those nearing retirement – from 1 July 2012. Workers aged 50 and over with superannuation balances below $500,000 will be able to make up to $50,000 in annual, concessional superannuation contributions. This measure is expected to benefit 275,000 people.

•    Raising the Superannuation Guarantee age limit from 70 to 75 – from 1 July 2013. The SG age limit will be raised to 75, which for the first time means workers aged 70 to 74 to be eligible to have SG contributions made on their behalf. Around 33,000 employees are expected to benefit from this measure.

These superannuation measures will cost around $2.4 billion over the next four years.

As a result of these reforms 8.4 million Australians will receive an increase in their retirement incomes, including 3.5 million Australians on lower incomes who do not receive tax incentives for saving through superannuation and older workers catching-up on their retirement savings.

•                An employee aged 30 today on average weekly earnings, will retire with an additional $108,000 in superannuation.

•                A female aged 30 today on average weekly earnings, with an interrupted work pattern, will retire with an additional $78,000 in superannuation.

•                The superannuation savings of 3.5 million Australians on lower incomes will be boosted by $830 million over the forward estimates.

Over the next 10 years, $85 billion will be added to Australia’s pool of superannuation savings. A proportion of these savings will be channelled back into the Australian economy to fund jobs and nation-building infrastructure, ensuring our reliance on foreign funds is lower than it otherwise would be.

The measures the Government has outlined help address the challenges of an ageing population set out in the Intergenerational Report 2010 and also complement the Secure and Sustainable Pension changes made in the 2009-10 Budget.

The Government is determined to boost Australians’ retirement savings so that whenever the mining boom ends, Australians have got something real and enduring to show for it.   Our natural resources are finite, so we need to take action now to ensure we save some of the proceeds.

The Government will consult with industry on the implementation of these measures.

More information on the Stronger, Fairer, Simpler: Tax Plan for our Future is available at www.futuretax.gov.au.

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