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Forward Tax Agenda: Reform to Perform

The Prime Minister is expected to ask the Governor-General to dissolve both Houses of Parliament within the next week or so, with a double dissolution election likely to be held on 2 July 2016. Whilst the practicality of implementing any measure originating from a budget handed down in an election year is complicated, this year it is even more so due to the fact that the election will be held so soon after the Budget. In particular, many of the key tax measures announced in this year’s Federal Budget will not be legislated before Parliament is dissolved meaning this year’s Budget is for all intents, the current Government’s election policy platform.

Given that the forward tax agenda will largely hinge on the outcome of the next election, below is a comparison of the tax and superannuation policies of the two major political parties that have been announced to date. Of course, with a long election campaign ahead, there is surely more to come from both major political parties on tax reform, commencing with the Opposition’s Budget Reply on Thursday 5 May 2016.

Policy area

Coalition Government policy

Labor Party policy

Company income tax rate

  • Progressive reduction of the corporate tax rate to 25 per cent over 10 years for all companies.
  • Small business companies (those with annual aggregated turnover of less than $10 million) will benefit from lower rates sooner.
  • No formally announced policy. Whilst the Labor Party has previously stated that it supports a lower corporate income tax rate, it has more recently indicated that it does not support corporate income tax rate cuts for large businesses at this time.

Personal income tax rates

  • Increase in the threshold at which the 37 per cent marginal tax rate cuts in from $80,001 to $87,001 to address bracket creep.
  • Increase in the unincorporated small business tax discount phased in over 10 years.
  • No announced policy, however the Labor Party has criticised the Government’s intention to allow the Temporary Budget Repair levy to lapse.

Goods and services tax (GST)

  • No change to GST rate or base.
  • GST to be extended to low value imported goods.
  • No announced policy, however the Labor Party has indicated it will make no changes to the GST rate or base.

Multinational tax avoidance / transparency / transfer pricing

  • Introduction of a Diverted Profits Tax, a 40 per cent tax on profits that are artificially diverted from Australia.
  • Amendments to the transfer pricing rules to give effect to OECD BEPS recommendations.
  • Implementation of the OECD BEPS recommendations to eliminate hybrid mismatch arrangements with minor amendments as recommended by the Board of Taxation.
  • Increased penalties for ‘significant global entities’ that fail to disclose information to the ATO (100 times current penalty amounts).
  • More funding to the ATO to establish of new a Tax Avoidance Taskforce (also targeting tax avoidance by high wealth individuals).
  • Amend the thin capitalisation rules to limit the amount of debt deductions multinational companies can claim in Australia to the debt-to-equity ratio of a company’s entire global operations.
  • Better align Australia’s tax treatment of hybrid entities and instruments with those of foreign countries to reduce the opportunity for companies to claim tax exemptions and deductions in more than one country.
  • Provide additional funding to the ATO to properly investigate and pursue multinational profit shifting.
  • Increase penalties for ‘significant global entities’ that fail to lodge a Country-By-Country report (50 times current penalty amount)
  • Restore the $100 million threshold for public reporting of tax information of large private companies by the ATO.
  • Establish a publicly accessible central register of beneficial ownership of Australian companies, trusts and other corporate structures.

Superannuation

  • Reduce the threshold for the additional 15 per cent contribution tax for high income earners from $300,000 to $250,000.
  • $1.6 million cap on balances in pension phase.
  • Reduce concessional contributions caps to $25,000.
  • Removal of 10 per cent rule for deductible personal contributions.
  • Introduce a $500,000 lifetime non-concessional contributions cap.
  • Changes to the work-test age requirements.
  • Increased income threshold for low income spouse contributions.
  • Introduce a Low Income Superannuation Tax Offset.
  • Changes to transition to retirement income streams.
  • Remove ability for certain income stream payments to be taxed as lump sums.
  • Anti-detriment payments to be abolished.
  • Reduce the threshold for the additional 15 per cent contribution tax for high income earners from $300,000 to $250,000.
  • Introduce a 15 per cent tax on superannuation fund income exceeding $75,000 in the pension phase.

Tobacco excise

  • Four annual 12.5 per cent increases in excise commencing on 1 September 2017.
  • Four annual 12.5 per cent increases in excise commencing on 1 September 2017.

Capital gains tax (CGT)

  • No changes to CGT.
  • Reduce the CGT discount for individuals to 25 per cent for all assets purchased on or after 1 July 2017. Investments made before this date will not be affected by this change.

Negative gearing

  • No changes to negative gearing.
  • From 1 July 2017, negative gearing will be limited to new housing. Investments made before this date will not be affected by this change.

Innovation

  • The National Innovation & Science Agenda contains the following tax-related measures:
    • new tax incentives for investors who support innovative start-ups including a 20 per cent non-refundable tax offset based on the amount of the investment (capped at $200,000) and a CGT exemption for investments held for between one and ten years*
    • increasing access to company losses by replacing the same business test with a more flexible "predominantly similar business test"
    • changes to Venture Capital Limited Partnerships, including a new 10 per cent non-refundable tax offset for partners in Early Stage Venture Capital Limited Partnerships*
    • providing a new option to self-assess the effective life of acquired intangible assets for depreciation purposes.
  • Introduce an ‘Australian Angel Investment Scheme’ will provide:
    • an upfront 50 per cent tax deduction for an investment up to a maximum of $200,000 per year
    • investors can ‘carry back’ tax relief if they do not reach the maximum $200,000 cap in any particular year
    • full CGT exemption for equity held in the startup venture for more than three years
    • allow realised losses following investment in the scheme to be deducted against wage and salary income, and
    • defer CGT on investments if the investor directs a prior capital gain into a new startup venture.

*Note: This measure is already before Parliament.

In addition to the measures announced in the Budget and noted above, there are a number of other tax measures that the Government has been pursuing which have not yet been enacted. These include:

  • Introduction of a statutory remedial power for the Commissioner of Taxation. This was previously included in a Bill that lapsed on proroguing of Parliament on 15 April 2016
  • Implementation of the new double tax agreement between Australia and Germany that was signed on 12 November 2015
  • Reform the GST law to address the ‘double GST treatment’ of digital currencies such as Bitcoin (a Treasury discussion paper was released on Budget night to commence consultation on this measure).

Whilst this year’s Federal Budget has contained a range of substantial reforms focusing on growth and fairness, it is disappointing that the Government has not delivered comprehensive tax reform. It is hoped that onced the “fairness” debate has subsided, both sides of the political divide can refocus their efforts on real tax reform, which will include a close look at the way in which consumption and investment are taxed in Australia and the interaction of State and Federal taxes.

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