Federal Budget and Turnbull Government tax package: What should you expect?

The Government has brought forward the announcement of the Federal Budget this year to 3 May 2016.  With a double dissolution election almost certain to take place on 2 July this year, it is unlikely that the Government will release its entire taxation and superannuation reform package on budget night. Instead, we may see a more comprehensive policy discussion being rolled out over the months leading up to an election.

The following tables provide a summary of the tax reforms proposed by the government to date, and those that have been abandoned.

Table 1 – Possible Tax Reforms

Reform item

Summary

Corporate tax cuts

The Government has suggested a cut to the company tax rate, which may produce greater economic growth than personal income tax cuts.

However, in our view, any company tax cut will likely be a modest one, given the lack of options to create savings elsewhere.

Superannuation contributions

 

The Government has considered the introduction of some minor reforms to the superannuation system, which have included:

  • lowering the personal income threshold at which a 30%, rather than 15%, tax rate is applied to superannuation contributions (eg from $300,000 to $180,000; Labor has proposed a reduction to $250,000);
  • reducing the cap on concessional contributions (eg from $30,000/$35,000 to $20,000); and
  • reducing the cap on non-concessional contributions (eg eliminating the ability to trigger the bring forward provisions).
Taxation of superannuation The Government may consider a variation of the Opposition’s proposal to introduce a tax on earnings exceeding $75,000 in the retirement phase.
Thin Capitalisation Rules

It is likely that the thin capitalisation rules will be tightened in the Federal Budget.  A leaked advertising campaign suggests that the tax-deductible debt-to-assets ratio will be reduced from 60% to 50%, meaning that multinational corporations will no longer be able to claim a deduction on debt holdings exceeding the 50% ratio.

This can be contrasted to the Opposition’s proposal, which is to assess a company’s debt allowance for tax deduction purposes based on its worldwide debt-to-assets ratio.

Deductions for work-related expenses The Government is likely to tighten the availability of deductions for work-related tax expenses.  This may be in the form of broad category-based caps, designed to create revenue savings for Government and simplify income tax returns for taxpayers.
Tobacco excise The Government is likely to increase tobacco excise tax as proposed by the Opposition.  It has been suggested that this increase is more likely to be 10% rather than the 12.5% increase proposed by the Opposition.

 Table 2 – Unlikely Tax Reforms

Issue

Summary

Income tax cuts

The Treasurer, Hon Scott Morrison, has identified issues with bracket keep which, in his view, must be addressed.

However, the Government has given a strong indication that there will not be cuts to personal income tax rates in this budget.

Superannuation contributions The Government has ruled out taxing superannuation contributions at a person’s marginal tax rate minus a discount factor (eg 15%) as it is considered too complex to administer.
Negative gearing

The Government has criticised the Opposition’s proposal to limit negative gearing to new housing from 1 July 2017, arguing that it would distort the housing market, increase rents, inhibit growth and increase unemployment.

While changes to negative gearing have not been explicitly ruled out, it appears they are very unlikely.  If the Government were to reform negative gearing, this would likely be in the form of a cap on the dollar amount claimable as a deduction (eg $50,000).

Capital Gains Tax (CGT)

The Government has rejected the option of reducing the CGT discount from 50% to 25%, as proposed by the Opposition.

The Government appears to still be considering reducing the CGT discount available to superannuation funds from 33% to 0%, although this appears unlikely.

State income tax The Government proposed to lower federal income tax and allow the states collect a portion of the income tax funds directly, combined with a reduction in Commonwealth grants to the states.  This proposal was rejected by state leaders and withdrawn only days after it was released.
GST The Government has ruled out a GST increase for lack of GDP growth potential.
Temporary budget repair levy The Government has indicated that the temporary budget repair levy will not be extended beyond the original termination date of 30 June 2017.
Other A report released by the Committee for Economic Development of Australia suggested that other tax reforms to consider include halving the fuel credit scheme, increasing taxes on luxury cars, alcohol and tobacco and removing private health insurance rebate exemptions.  These options have not received much, if any, attention from the Government.

If you’d like to discuss how tax reform in the Federal Budget may affect you or your clients, please feel free to give us a call.

Disclaimer

Please be advised that the above information is strictly the opinion of the author and should not be relied upon as legal advice.

This article was written with the assistance of Tim Hutton, Law Graduate.


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