8 October 2020
In this episode we discuss what the federal government’s 2020 Budget announcements in tax tell us about the blueprint to create a thriving domestic economy.
Peter Van Onselen: The economic impact of COVID-19 and the support given to businesses and individuals through the pandemic have resulted in ballooning government spending and shrinking revenue. The tax reform could be pivotal to supporting a long term economic recovery in a post-covid world.
In this episode of the PwC Federal Budget podcast we discuss what the Federal Government's 2020 budget announcements in tax tell us about the blueprint to create a thriving domestic economy. My name is Peter van Onselen and you're listening to the PwC Federal Budget Podcast.
I'm joined now by Paul Abbey partner Corporate Tax at PwC. Paul obviously tax and changes in that respect particularly in this year's budget really are at the center of what we've seen announced by Josh Frydenberg. Let's start with what is in this budget I suppose for corporate Australia when it comes to tax. What piques your interest?
Paul Abbey: Well thanks Peter. The interesting thing for corporates is that the government's really looking for the corporates to drive the growth in demand. If you look at the Budget the Government's brought out, really they divided the budget into two parts. They've set out a COVID-19 recovery plan and then what they want after that is a medium term fiscal strategy.
But when you look at the budget papers there actually is no detail on the medium term fiscal strategy and that's because in the short term what the government wants to do is to drive demand. And it's really turning to the corporate sector to create a lot of that activity and it's putting stimulus into the corporate sector and it wants that stimulus to fire up fast.
And so you're seeing two particular things in the corporate sector. The first thing is expensing instant asset write off. So what the Government is proposing is provided you've spent the money and installed the assets before 30 June 2022 then corporate asset costs, investing in hard equipment, plant and equipment, different types of expansion to your productive capacity through buildings etc. All of that is going to get an immediate deduction. You'll deduct it straight away and you won't depreciate it.
And then the other thing the government's doing is it's introducing tax loss carry backs. In effect, what this involves is turning your franking credits into cash. For taxpayers who in the years ended in 18/19 or 19/20 have paid tax, but in the year ended 20/21 are going to be in losses they'll be able to carry that loss back and effectively reduce the tax that they've already paid.
And so long as that tax is sitting in their franking account as available franking credits that will give rise to a tax offset, which they'll be able to, in effect, monetize straight away. And so again that's the government wanting to create demand, wanting to stimulate activity, wanting companies to spend. And so you've got this COVID recovery plan focused on corporates, focused on corporate spending money, and creating demand in the economy as soon as possible.
Peter Van Onselen: So lots there when it comes to trying to incentivise business to invest. I guess the obvious follow up question is how successful do you think it's likely to be in the context of the recession, in the context of the pandemic?
Paul Abbey: Look, asset expensing could be really effective in the middle of watching the budget I was already receiving phone calls from taxpayers and corporate saying ‘so if we go and accelerate our investment and get that done before 30 June 2022, are we going to get a full deduction for that?’. And the answer to that is yes.
And what's more if that full deduction puts them in losses and they've paid tax in earlier years then in effect they'll be able to carry that full deduction back into the earlier years and get the tax in the earlier years refunded. And so essentially get the cash back straight away.
So a corporate could do an investment of say $100 million and be in a circumstance where the government is giving them a $30 million cheque to contribute to that investment virtually straight away.
So you would hope and I'm sure the government hopes that that will create a lot of investment activity and especially accelerated investment activity. And one of the nice tricks in what the Government's done is that they've said that if you do this immediate investment for which you'll get the immediate deduction it has to be installed by 30 June 2022. It's got to be installed and operative.
Now the thing about that is that means you've got to move fast. And the government wants people to spend fast. It wants all this activity to happen really soon. And so the way they've structured this piece of relief is to try and encourage people to look at the projects they had in the pipeline and basically say we're going to accelerate those projects, we're going to do them as soon as possible.
Because what the government wants is they want that demand to come into the economy. They want people to spend, they want businesses to spend. They want that to lead into activity and to flow down into job activity. And so it's all targeted at getting that immediate piece of relief and that immediate piece of activity.
Peter Van Onselen: The Government's very keen to try and make sure that it can bring down the unemployment rate and move people off JobSeeker and into work. And they really have targeted this idea of a youth wage subsidy. Now strictly speaking, it's not a tax change but what it is trying to do is incentivise businesses to hire people under the age of 30 even up to 35 with that subsidy to business. Do you see that as something that is likely to be effective to try and drive employment growth from a business perspective?
Paul Abbey: Look Peter it should. The government anticipates that it's going to create 100,000 new jobs. But what's interesting is that when they estimate the cost for that particular piece of relief the cost of that is $1.2 billion over the forward estimates. But the instant asset write off that I just spoke about is the cost of that is $26.7 billion and the cost of the tax loss carryback to getting cash for your imputation credits, that's $5 billion. So you can see by the order of magnitude in terms of what the cost is going to be for the government the amount of stimulus coming into the economy from the wage subsidy it's very targeted on youth employment. Correct. But the amount of stimulus in the economy is nowhere near as large as some of those other changes.
Peter Van Onselen: That's so interesting to hear because obviously politically the focus in the Treasurer's speech was in that youth wage subsidy. But the numbers as you point out is very much more around the ways to incentivise businesses to truly invest with their tax structuring.
The other big spending development in terms of tax changes is the personal income tax changes. Now we knew the states two would be brought forward. There was speculation that so would stage three for higher income earners, but that was held back by the government. What is your take on those changes to tax when it comes to personal income tax cuts?
Paul Abbey: The first thing is to say that the Government's actually been really quite clever I think. The first thing to point out and a real insight is that if you're on taxable income of $60,000 the change in your tax is going to be $2,160. If you're on taxable income of $200,000 the change in your tax is going to be $2,560. So with $140,000 of income difference the additional benefit for the higher income earner is only going to be $400.
That's pretty clever targeting. So what the government has done is that in the range from $60,000 up to $200,0000 they're basically giving everybody $2,000 and a bit. And so it's nicely spread across a huge portion of the population. Everybody is essentially getting money. Everybody is more or less getting the same amount.
The timing is a little bit different because some people will get that money through changes in their rates and some people will get it through the LMITO so the low and middle income tax offset which you do once you lodge a tax return. So there will be a little bit of difference in timing but it's going to be a benefit spread across a huge proportion of the taxable income basis as the Treasurer emphasized last night. Because it's been targeted to expand all across that base and to be more or less at the same level.
And that's pretty clever because it means that a lot of people are going to get that additional funds. And again if you read the budget papers the government desperately wants you to spend. They recognize that you're probably going to save and they know that over the past six months people have saved a lot more than they've spent.
And in fact incomes over the last six months have been up compared to last year. And notwithstanding that people have saved a lot more. But what the government desperately wants all of those people who are getting that benefit to do is to spend that money because what they want is again as we said before for that to pass through into immediate demand.
And again the whole COVID recovery plan for these personal tax measures comes back to this principle which the government has recognized which is that to get the economy up and firing what we need is to boost demand. We need people to spend. We need the demand side of the economy to drive the recovery of the supply side of the economy.
Peter Van Onselen: The government's clearly trying to boost spending because it sees on the numbers as well the amount of GST revenue is in significant decline. How concerned are you about that in terms of the revenue flow to the states and territories?
Paul Abbey: Look it's true that the GST revenue is in decline and we're going to see GST revenue over the forward estimates drop off compared to where it's been over the last three or four years. And remember over the last three or four years and in fact since the inception of the GST we've seen the GST as a proportion of spending decline. And that's because spending choices and tastes have changed and people are spending more money on GST free items now as a portion of their consumption pool compared to what they were when the GST was introduced.
And now that we've got people saving more we're going to see the GST drop off even more because we don't have that consumption passing through into the economy. And it throws up an interesting question for the government, which is in the budget papers they've said once we get down below 6% unemployment then we will stop the COVID recovery plan and we will switch to medium term fiscal strategy.
And in the budget papers they don't say what medium term fiscal strategy is, except to say that they're not going to be focused on paying down the debt. They're going to be focused on growing GDP so that the debt as a proportion of the size of our economy, as a proportion of our GDP is reduced. And that they're going to be looking for structural change and doing that which the budget papers highlight. But without saying what it is.
So you've got this really interesting question which is, in the future are we going to face up to some of the tax changes that we constantly talk about and never do? Are we going to face up to consumption tax? Are we going to face up at a state level to the stamp duty land tax switch? Are we going to face up to doing payroll tax more efficiently? Are we going to face up to the balance of our taxes between consumption and income and the fact that we overtax income compared to consumption?
Are we going to do that in the medium term when we'll need structural change? When we'll still be looking to drive growth in the economy and still be looking to generate those jobs, improve real incomes, get tax revenues back. Because remember at the end of the forward estimates we've still got a budget deficit which is 3% of GDP.
So over the medium term we're going to need that come back and you look in the budget papers up until 2031 the budget is not looking good. It's terrible this year we know but it's still not good in 2031. So we're going to need that growth to come through to drive tax revenues. And there's a really interesting question about what happens about consumption taxes? What happens about the structural nature of our tax system? Which whatever the flavour of the government is is going to have to face up to over the medium term.
Peter Van Onselen: So Paul looking at the budget as a whole from a tax perspective what's your biggest take out?
Paul Abbey: Peter if you look at the budget papers right from the start there's this message which comes through which is essentially to the Australian public: get healthy, stay healthy and spend. That's what the government wants you to do because they want that spending which they're trying to initiate through personal tax cuts and through business tax measures. They want that spending to drive the economy, drive growth, drive jobs, get unemployment down and get us to a position where we can start to rebuild back to a pre-COVID situation.
Peter Van Onselen: Paul Abbey partner Corporate Tax at PwC thanks so much for your time.
Paul Abbey: Thanks Peter.
Peter Van Onselen: Thank you for listening to the PwC 2020 Federal Budget Podcast. We hope you enjoyed our commentary for additional in-depth analysis visit pwc.com.au/federalbudget where you will find articles and information about the 2020 Federal Budget and what it means for the economy, our society and you.
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