Browsing articles in "Tax"
Monday 31st March 2008 - 8:49 am

Swan sells tax cuts

by Alan Thornhill

The families hit hardest by recent rate rises can expect relief, on the tax front, from July 1.

 

That’s the message the Treasurer, Wayne Swan, is trying to sell to the Australian public.

He says Treasury modelling shows that the government’s tax cuts “are focused fairly and squarely on low and middle income earners.”

“That is the people on modest incomes who havee been left behind in recent years by previous governments,” Mr Swam said.

(It’s never too late to blame your predecessors).

Mr Swan also told the public, in his home state of Queensland, that this includes shop assistants, mechanics, people who are working in clerical occupations, childcare workers

.

“They will be the significant beneficiaries of these tax cuts,” Mr Swan said.

But he broadened his message to include all Australians.

” There are something like 1.8 million women who work part time and earn less than $20,000 a year,” Mr Swan said.

“They will receive significant tax cuts as a percentage of their income.”

Mr Swan said, too, that the tax cuts are “affordable.”

“We will only deliver tax cuts that are affordable,” he said.

Expect much more of this kind of talk, in the months ahead.

Mr Swan did not explain, though, just how some $30 billion worth of staged tax cuts, directed largely, as he said, to hard pressed low to middle income earners, will help to curb Australia’s now  troublesome inflationary pressures.

These people, after all, are also the most likely to spend any extra money that might come their way.

They have little choice, on that front.

But that must add to aggregate demand.

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Thursday 27th March 2008 - 8:09 pm
Comments Off on What the RBA – still – doesn’t understand

What the RBA – still – doesn’t understand

by Alan Thornhill

The Reserve Bank chief, Glenn Stevens, is sanguine about the prospect of further rate rises.

Speaking at a seminar yesterday, Mr Stevens noted that Australia’s banks might raise their home loan interest rates even further, to recoup the higher borrowing costs they now face, as a result of the US credit crunch.

But he appeared comfortable and relaxed about this, saying simply “that’s life.”

That comment, coming immediately after 12 official rate rises – and some stiff unofficial ones as well – won’t endear Mr Stevens to young families, with big mortgages, in Australia’s outer suburbs.

Many, indeed, might regard his remark as callous.

Especially as the Reserve Bank also admitted, in assessment it made of the stability of Australia’s financial system yesterday, that it expects more foreclosures in future, as some, now overcomitted, homebuyers find that they cannot meet their monthly payments.

The bank did say that, statistically, the number of sub-prime mortgages in Australia is not large enough to threaten Australia’s financial system.

Australia’s politicians, undoubtedly, are now delighted with their decision to flick pass the decision to raise or lower the nation’s official interest rates to to the Reserve Bank.

It means that barely visible officials, like the Reserve Bank board members now cop much of the blame for raising rates.

Not the highly visible politicians.

This has genuine advantages, though,  in terms of risk management.

It means, for example, that rates will be raised, when necessary, even if an election is imminent.

Politicians, on any side, could never be trusted to do that.

But political – and economic – policies often have unintended consequences.

And that has, certainly, happened in this case.

At 3.6 per cent – and heading north – Australia’s inflation is higher than it has been for 16 years. Dangerously high, in fact.

For the good of the entire community, it has to be vigorously attacked.

That usually involves raising interest rates.  And that is quite right, when the circumstances demand it, as they do now.

What is clearly not right, though, is that the burden of steps taken for the common good should fall, quite disproportionately, on one section of the community.

That is the one third of the mostly young Australian families who are paying off their homes.

Other policies, too, can be used to fight inflation.  Tax rises, for example, also reduce demand.

Cuts in government spending, too, can be deflationary.

It would, of course, also be unfair to place too much of the blame, for all this, on the shoulders of Glenn Stevens and his board.

It was, after all,  the politicians who set up this system, not the Reserve Bank, which simply administers it.

Even good policies, though, can ultimately prove counterproductive, if they are applied callously.

And that is a point which sometimes seems to escape Mr Stevens.

Tuesday 25th March 2008 - 8:31 am

Gift deductibility extended

by Alan Thornhill

Donations to the World Youth Day Trust will be tax deductible in future.

The trust is one of several organisations that the government is adding to its deductibility list.

This is being done under the Tax Laws Amendment (2008 MeasuresNo. 2) Bill 2008, which was introduced into parliament, just before the Easter break.

The bill also proposes several other small, but significant changes.
The government said it had two objectives.

It said the proposed changes are meant to:-

  • improve Australia’s taxation system and
  • extend deductible gift recipient (DGR) status to a number of community organisations.

The government  said bill would also amend the tax law to account for amounts misappropriated by an employee or agent.

“This recognises the loss taxpayers suffer when they dispose of a depreciating asset or capital gains tax (CGT) asset and an agent or an employee steals the proceeds,” the government’s explanatory statement said.

It said this would also ensure that the market value substitution rule does not apply
where CGT event C2 occurs in relation to a share in a widely held company or a unit in a widely held unit trust.

It would ensure that taxpayers are treated fairly by paying CGT on an amount they actually receive.

The Bill exempts from income tax the Endeavour Executive Award and
research fellowships under the Endeavour Awards. The measure ensures
consistency in taxation treatment of research fellowships.

It also establishes the means for State and Territory governments to
seek to exempt from income tax the first $1,000 of early completion
bonuses paid to eligible apprentices.

The Bill updates the list of deductible gift recipients (DGRs) to
include nine new entities and to extend the time period of DGR status of
four entities.

The following organisations are provided DGR status for the first time:

• World Youth Day 2008 Trust

• The Council for Jewish Community Security

• Wheelchairs For Kids Incorporated

• Memorials Development Committee Ltd

• AE 2 Commemorative Foundation Ltd

• Ian Thorpe’s Fountain for youth Limited

• Amy Gillett Foundation

• The Spirit of Australia Foundation

• Playgroup Australia Incorporated

Sunday 9th March 2008 - 11:04 pm

Pre-budget scare stories – what to make of them

by Alan Thornhill

Scare stories about possible budget cuts are a staple part of the media’s diet at this time of year.

And there will be many more, before the new Rudd Labor government brings its first budget into parliament in May.

So pensioners and carers probably won’t be the only frightened people ringing their financial advisers over the weeks ahead, to seek reassurance.

Mr Rudd, himself, has already attempted that, saying that while everything is on the table, as the government seeks more spending cuts, there is no way “on God’s earth” that his government would leave either pensioners or carers “in the lurch.”

But there will be more than $10 billion worth of spending cuts. The government, itself, has told us that. So there will be pain.

Because of that, it is worth looking both at how these scare stories are written and the background against which these cuts are being made.

First the stories. Every editor in the country is now demanding stories about what the government will do. Their unspoken expectation is that the scarier these stories are, the better.

And, as everyone knows, reporters are a very obliging lot. Those stories will be written.

Some of these stories will be based on leaks, either from government or opposition sources.Others will be based on hearsay.

Some, too, will be be pure speculation.

A little caution about all of them would be wise.

But this will probably be Labor’s toughest budget. It may well be the one Labor hopes the public will forget, before the next Federal elections in 2010.

Big spending cuts will be necessary. But there was plenty of fat in the Howard government’s spending programs. Despite its boasting of economic responsibility, the previous government was, in fact, the biggest spender and the biggest taxer ever in Australia.

The Whitlam government was certainly no slouch, in either department. But John Howard both outspent and out-taxed even Whitlam.

The Howard government took – and spent – bigger slices of Australia’s gross domestic product than the Whitlam government ever did. Especially when the GST, which is now worth some $42 billion a year, is counted properly. That is as a Commonwealth, not a State tax.

As both the Statistician and the Auditor General  insisted, the GST was always a Federal tax, because the Federal government collected it, even if it passed the money straight onto the States.

This point is important, because John Howard and Peter Costello consistently disowned their child, leaving GST revenue out of their Federal budget accounts.

Anyone who tried the same trick, when declaring their own income, could expect a rocket from the Tax Office.

Wednesday 27th February 2008 - 7:28 am

Tax:the Treasurer explains

by Alan Thornhill

The Federal Treasurer, Wayne Swan, says the government’s tax cuts are part of its plan to encourage people to take bigger roles in the nation’s workforce.

Mr Swan has said that before.

But he made the point strongly, once again, last night while addressing the Business Council of Australia in Melbourne.

Business leaders have been complaining that they are finding it hard to get the workers they need, to fill critical jobs in their operations.

“There has been much comment on our tax plan,” Mr Swan said.

“I understand that.

“But what this commentary often misses is the debate we have championed for many years now to re-inject participation incentives into the tax system.”

Those words would have been music to the assembled business leaders’ ears.

They, too, have been arguing for years that there is little incentive for them, in Australia’s ramshackle tax system.

However, it was not the big end of town, primarily, that Mr Swan was talking about.

Only last week, the Statistician confirmed that Australia has a big pool of “underemployed” workers.

That is people who want to work longer, each week.

Mr Swan is convinced that an unsympathetic tax system is one of the reasons they are not participating fully in Australia’s work force.

He argues that educational barriers are playing their part, as well.

Mr Swan told his business audience that was why the Labor government is making education its top priority.

None of this will stop either the Treasury or the Reserve Bank worrying about the government’s plan to offer $31 billion worth of staged tax cuts, while inflationary pressures are as high as they are now.

But Mr Swan is adamant. Tax reform is necessary. But it is still only part of what is needed.

“Putting incentive in the personal tax system is part of the equation,” he says.

Tuesday 26th February 2008 - 12:33 pm

Tax Office cleared of bias

by Alan Thornhill

The Australian Tax Office has a well-earned reputation for toughness.

But is it biased, towards producing extra revenue, when it issues private binding rulings?  That is, does it indulge in a little gouging, when it is asked for such rulings.
There is a perception, at the big end of town, that it is.

Australia’s big companies are the main users of these rulings.

And many are unhappy with the rulings they receive.

They suspect that the Tax Office sometimes seeks more than its fair share.

However the Inspector General of Taxation, David Vos, has scotched that one.

He has examined the matter and says that he found no evidence of “undue bias.”

But Mr Vos said the ATO could do more to prevent such beliefs spreading.

He says there has not been enough transparency in these matters in the past.

Mr Vos admits that the Tax Office has tried to overcome this problem.

“However strong perceptions of undue revenue bias remain,” the Inspector General said.

But the Tax Office genuinely strives to interpret the law to support the ‘policy intent,'” he added.

Some might conclude that this is just another case of the big bureaucrats sticking together.

But that would be unkind.

The Tax Office has said that it agrees with most of Mr Vos’s report.

It has promised that it will try to do better by:-

  • increasing transparency
  • clarifying its protocols and
  • further reducing delays.
Tuesday 26th February 2008 - 7:54 am

A horror budget

by Alan Thornhill

Australians can expect a horror budget in May.

That’s because the new Rudd Labor government has a doubly difficult task before it.

It must reduce the high inflationary pressures, which now threaten the economy.

And it has to make room for the staged tax cuts that it promised before the election last November.

The first instalment of those tax cuts, which will ultimately cost $31 billion, is due to be paid from July 1, this year.

The government will probably get a little help from the present downturn in the US economy.

That should help reduce those inflationary pressures, by slowing the Australian economy, too.

The interest rate rises, that the Reserve Bank has already announced, and those it is likely to announce, in the months ahead, are starting to bite, too.

The government will also get some extra tax, from Australia’s iron ore and coal companies, which have just extracted big price rises from their customers.

The trouble with all this, though, is that the timing is far from predictable.

It is all too possible that those nasty inflationary pressures will cause real damage, that will be hard to reverse, before the economy slows.

So the government’s spending cuts will be deep. Especially as Mr Rudd is ruling out slashing middle class welfare. He has declared, for example, that the private health fund rebate will not be touched.

The government says there are two reasons why the tax cuts should be paid, as promised. Firstly, they will offset the pain working families are now experiencing, as a result of those rate rises.  And secondly,  they will counter inflation by encouraging people to re-enter the workforce.  But these are just pretexts.

What the government is actually concerned about here is its own survival. It knows that the public would never forgive it, if it didn’t keep its promise to cut taxes. The results of Paul Keating’s politically disastrous attempt to defer part of his “L.A.W. law” tax cuts, by paying the second tranche into superannuation accounts, is still well remembered in Canberra.

Besides, the government is also facing the grim prospect of increased spending in particular areas, such as hospitals.

There is room, of course, for savings, in this area, too. Building good hospitals is generally cheaper, in the long run, than building bad ones, that don’t work, as the Iemma government has done, in Bathurst.

In the end, though, those tax cuts will have to be paid for somehow.

And even the people in Canberra, who reliably vote Labor in Federal elections, will suffer.

Urgent roadworks, in the National capital, are being deferred, as part of the Federal government’s economy campaign. And, as a result, the bush capital will soon start to see some real traffic jams.

Don’t laugh. You will be next. No matter where you live in Australia.

You may have to wait for the budget, itself, in May, to find out how you will be hit. But don’t think you will escape the Treasurer’s axe. You won’t.

Friday 15th February 2008 - 8:07 am

The staged tax cuts:round one

by Alan Thornhill

A bill the Federal Treasurer, Wayne Swan, yesterday brought into Federal parliament yesterday is meant to give effect to the first stage of the $31 billion worth of tax cuts, that Labor promised before the Federal elections in November.

The government had to act quickly on this, because the first tranche of the cuts is to be paid from July 1.

Its aim, ultimately, is to flatten Australia’s personal income tax system.

The government plans to do this by reducing the number of income tax rates from four to three.

That would mean a personal income tax scale of 15 per cent, 30 per cent and 40 per cent.

It would also include what Mr Swan called “a more generous low-income tax offset delivering an effective tax free threshold of $20,000 to low-income earners.”

“These further reforms will be implemented in due course as economic circumstances allow,” Mr Swan said.

Those words are worth marking.

His advisors are less than enthusiastic about the idea of pumping all that extra money into an already overheated economy.

Terror in the Treasury -and reserve in the Reserve bank – just about sums up the attitudes of the best and the brightest on the government’s panel of experts.

But a promise is a promise. And the government saw what happened to Paul Keating, when he tried to divert the second tranche of his famous L-A-W tax cuts, back in the early 1990s.

The tories well remember, too, the fuss they made about all that, in those dim, dark days. That matters now, too. The conservatives would expose themselves to ridicule, if they tried to delay the first stage of Labor’s promised tax cuts now, by arguing that they would be inflationary. That would not be practical, politically.

But the tax cuts could well prove to be inflationary, unless they are offset by very substantial cuts in government spending.

And Mr Swan appeared to have few doubts yesterday, as he introduced his bill.

He argued, forceably, that the tax cuts would counter inflation, by attracting more people, particularly women, back into the workforce.

Mr Swan has a point.

Labour shortages, in key areas, are indeed one of the prime drivers of inflation in Australia right now.

No -one doubts that.

Mr Swan said that from 1 July this year, the that the 15 per cent marginal tax rate will apply up to $34,000 of income.

That is an increase in the threshold of $4,000.

The low income tax offset would also be increased from $750 to $1,200.

“It will continue to phase out at 4c for every dollar of income above $30,000,” the Treasurer said.

“This means that those eligible for the full low-income tax offset will not incur a net income tax liability until their annual income exceeds $14,000.

“Importantly and also for the first time, from 1 July 2008, low-income earners will receive half the benefit of this offset through their regular pay, rather than receiving the total as a lump sum when their income tax returns are assessed,” Mr Swan said.

“This will ensure that they receive more timely tax relief in their take-home pay and will sharpen incentives to participate in the workforce.

“Further tax cuts will apply from 1 July 2009, including an increase in the 30 per cent marginal tax rate threshold, so that the 15 per cent marginal tax rate will apply up to $35,000 of income.

“In addition, the 40 per cent marginal tax rate will be reduced to 38 per cent.

“The low-income tax offset will be increased from $1,200 to $1,350 from 1 July 2009.

“This means that those eligible for the full low-income tax offset will not incur a net income tax liability until their annual income exceeds $15,000.

“From 1 July 2010, the threshold for the 30 per cent marginal tax rate will increase so that the 15 per cent marginal tax rate will apply up to $37,000 of income.

“In addition, the 38 per cent marginal tax rate will be reduced to 37 per cent.

“The low-income tax offset will also be increased from $1,350 to $1,500 from 1 July 2010.

“This means that those eligible for the full low-income tax offset will not incur a net tax liability until their annual income exceeds $16,000.”

Mr Swan said, too, that the changes would help many older Australians.
As a result of the increases in the low-income tax offset and the threshold for the 30 per cent tax rate, the income up to which senior Australians eligible for the senior Australians tax offset do not pay income tax will also increase.

“From 1 July 2008, senior Australians who are eligible for the senior Australians tax offset will not pay income tax until they reach an annual income of $28,867 for singles and $24,680 for each member of a couple.

“From 1 July 2009, these income levels will increase to $29,867 for singles and $25,680 for each member of a couple. From 1 July 2010, these income levels will increase further to $30,685 for singles and $26,680 for each member of a couple.”

Debate on the bill was adjourned.

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Alan Thornhill

Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.

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