Federal Budget
2014-15
Building a healthy economy
1
Executive summary
Structural savings and a $50 billion
Federal infrastructure spend between
now and 2020 make up the centre pieces
of Treasurer Joe Hockey’s first Budget.
While there will always be winners and
losers, Pitcher Partners welcomes this
Budget as being fiscally responsible.
John Brazzale // Victorian Managing Partner
Contents
Building a healthy economy
Executive summary
1
Providing certainty for business around tax reform
3
Personal tax
4
Company tax
5
Re-introduction of fuel excise indexation
6
Employment tax
7
Research and development
8
Exploration development incentive
8
Tax compliance
9
Superannuation and retirement
10
2
Strengthening Australia’s balance sheet
Since the GFC, our clients in the middle market have been working
tirelessly paying down debt, managing costs, improving productivity and
growing their businesses. It is pleasing to see the Government is following
this lead, dealing with their own budget deficits and mounting debt.
The rate of growth in Government spending was unsustainable and with
an ageing population, the country was facing revenue risks had nothing
been done. Tonight’s Budget reduces the forecast deficit from $49.9 billion
to $2.8 billion over the three year forecast period.
Addressing the structural
imbalance
Net Debt had risen to $0.67 trillion
as a result of measures taken to
defend Australia from the impacts
of the GFC, together with underlying
structural issues in the Budget. It was
important that the Government took
the necessary measures to rebuild the
country’s financial buffers to protect us
from any future shocks.
The Government has chosen to focus
the bulk of its fiscal restraint on
health and welfare spending and at
the same time is seeking to grow the
economy by focussing on infrastructure
spending. This at a time when the
capital investment in the mining
sector is scaling back. The combined
infrastructure budgets of the various
levels of Government and private
interests will be in excess of $125 billion
and will generate thousands of jobs,
starting immediately.
A focus on smaller Government
and red tape reduction
We welcome the comments by the
Treasurer that businesses will enjoy the
benefits of a “smaller less interfering
Government” that focuses on cutting
red tape.
There is no doubt that the myriad
layers of complexity and bureaucracy
in dealing with Government agencies
has stifled and inhibited the growth of
Australian businesses for many years.
We await the positive outcomes from
these initiatives.
Finally some business tax relief
Middle market business in Australia
has continued to punch above its
weight and do the heavy lifting
throughout the GFC. The change in the
corporate tax rate from 30% to 28.5%
for all but the biggest businesses finally
provides some reward for their effort.
The reduced corporate tax rate will
be well received by businesses who
are looking to reinvest their after tax
profits back into their businesses to
fund growth.
Confidence?
Businesses are likely to remain wary
about the impacts on consumer
confidence as a result of this Budget’s
changes to pensions, fuel taxes and
family tax benefits which impact
directly on consumers’ hip-pockets
and their propensity to save rather
than spend. Those most affected are
likely to include: Retail, Hospitality,
Travel and Tourism and those reliant
on discretionary spending.
More still to come
For the last two weeks the media
have been speculating how the
Government would react to the 86
recommendations of the Commission
of Audit. Whilst a number have been
touched on within the Budget papers,
many more have been deferred
for further analysis and debate.
The Government has flagged the
production of a White Paper which
will provide Pitcher Partners the
opportunity to further advocate on
behalf of our clients.
Key Budget items
$50 billion in
infrastructure spending
$20 billion investment
in Medical Research
Future Fund
Change in corporate tax
rate to 28.5%
2% debt levy on
$180,000 plus income
earners
Re-introduction of fuel
excise indexation
Prescriptions to cost
$5 more
$7 co-contribution for
doctors visits
1
2
3
4
5
6
7
3
Providing certainty for business
around tax reform
As compared to previous years, the level of tax
reform measures announced in this Budget is
likely to be considered unremarkable.
The Government has maintained the commitment made prior to
being elected to seek a second term mandate at the next election
for a further, more broad, tax reform agenda. A number of carry
over measures from the last Budget have now been rejected and
the Government has gone with an approach of seeking business
certainty rather than seeking to change the tax laws during this
intermediary period.
A White Paper on the Reform of Australia’s Tax System is to
be developed in consultation with various stakeholders. The
Government has committed to finalising its preferred policy
positions in this White Paper which is anticipated to be released in
2015, and which the Government will take to the next election.
It is expected that the White Paper will examine many of the
structural issues with our tax system and will consider significant
reform approaches to broaden the tax system. Pitcher Partners
will be actively involved in the consultation process.
We have outlined the impact of the few tax changes announced
in the Budget over the following pages.
4
Personal tax
Income tax rates
As anticipated, the Government announced that a
temporary budget repair levy will apply to individuals at
a rate of 2% on taxable incomes in excess of $180,000.
This measure has been announced as being temporary,
whereby it will apply for three years only from 1 July 2014
to 30 June 2017.
2014-15
The Medicare Levy is also to be increased from 1.5% to
2% from 1 July 2014 to fund DisabilityCare Australia.
Individuals with taxable incomes over $180,000 will
therefore pay tax at a rate of up to 49% from 1 July 2014.
For the years ending 30 June 2015, 2016 and 2017, tax
(excluding the Medicare Levy) will be as follows.
2015-16 and 2016-17
Taxable Income
Tax Payable
2014-15
Taxable Income
Tax Payable
2015-16 and 2016-17
0 - $18,200
Nil
0 - $19,400
Nil
$18,201 - $37,000
19% of excess over $18,200
$19,401 - $37,000
19% of excess over $19,400
$37,001 - $80,000
$3,572 + 32.5%
of excess over $37,000
$37,001 - $80,000
$3,344 + 33%
of excess over $37,000
$80,001 - $180,000
$17,547 + 37%
of excess over $80,000
$80,001 - $180,000
$17,534 + 37%
of excess over $80,000
$180,000+
$54,547 + 47%
of excess over $180,000
$180,000+
$54,534 + 47%
of excess over $180,000
Top-up tax on franked dividends
Tax receipts and simpler income tax returns
For taxpayers who rely on dividend income, the tax cost will
increase significantly under the changes. The personal “topup” tax payable on a franked dividend will increase from a
maximum rate of approximately 24% to 29% of the cash
component of the dividend received. The full impact of these
changes could apply to dividends paid from 1 July 2015.
From 1 July 2014, up to 1.4 million taxpayers with simple
tax affairs will have the option of no longer lodging tax
returns. Instead their tax return will already be filled in by
ATO systems and they can simply “accept” that return online
from a computer or mobile device.
Building a healthy economy
Simple tax returns only contain income from salary,
wages, allowances, interest, dividend and/or assessable
Government payments. Deductions need to be added but
will be limited to work expenses, tax related expenses and
donations. Offsets will be also limited to senior, pensioner,
zone and overseas forces tax offsets. More complex personal
tax returns will still have to be completed as usual.
5
Company tax
Reduction in company tax rate
Minor integrity announcements
The Government has confirmed that it
will reduce the company tax rate from
30% to 28.5% from 1 July 2015. For
large companies with taxable income
exceeding $5 million, the savings
from this measure will be offset by a
1.5% paid parental leave scheme levy.
Accordingly, these companies will
remain on a 30% tax rate, with franking
credits likely to be recorded at 28.5%.
The Government has announced
additional minor changes that will
apply to corporate taxpayers. The fact
that these changes are only minor
technical amendments are a positive
indication from the Government that
they are committed to increasing
certainty for business taxpayers
and that they will not be making
significant changes during this term
of Government unless appropriately
justified.
Overall, this is a positive measure for
companies that will be able to invest
the savings into growing their own
businesses. The measure is expected
to benefit up to 800,000 companies.
If the current Board of Taxation
proposal relating to the use of trusts
with companies is implemented, this
will also benefit trusts that operate
businesses that distribute to corporate
entities.
However, it is noted that the benefit
will be lost once the company pays
the after tax profits as a dividend.
That is, once dividends are paid to
shareholders, the reduced franking
credits (provided at 28.5%) will result in
an increased amount of top-up tax at
the shareholder level.
The rate will increase from
approximately 24% to 29% at the top
marginal rates. This will mean that
companies and shareholders will
need to consider the tax effect of the
payment of dividends closely over the
next 12 months.
These minor amendments relate to the
application of the tax consolidation
measures to accounting liabilities
for securitised assets, amending the
application date of measures applying
to certain deductible liabilities and
related items under tax consolidation,
and minor technical changes relating
to capital gains tax on the disposal of
shares held by non-residents.
The Government also announced that
it will continue to consult on a new
measure to prevent certain deductions
claimed in relation to the financing
of offshore investment by Australian
businesses.
In addition, the Government will
not be proceeding with the measure
to address inconsistencies in the
tax treatment of Multiple Entry
Consolidated (“MEC”) Groups. Instead,
Treasury will begin consultation
to extend the application of the
unrealised loss rules to MEC Groups
and on other minor technical
measures.
Reduction in
the company
tax rate from
30% to 28.5%
from 1 July
2015
Deferred reforms
The commencement of some
previously announced reforms were
deferred in this Budget. These include
the deferral of the new tax system
for Managed Investment Trusts to
1 July 2015 (previously 1 July 2014),
legislative elements of the measure to
improve tax compliance through third
party reporting and data matching to
1 July 2016 and reforms to the offshore
banking unit regime to income years
commencing on or after 1 July 2015.
The Government has announced that
it will secure funding for additional
road infrastructure by re-introducing
indexation of excise and exciseequivalent customs duty for all
fuels except aviation fuels. Biannual
indexation will commence from
1 August 2014 and will be based
on the consumer price index (CPI).
The increase in fuel excise as a result of indexation is
projected to generate additional revenue of $2.2 billion over
the forward estimates period. This includes allowance for a
$1.8 million increase in Ethanol Production Grants in 2014-15
and a $0.7 million increase in the Cleaner Fuel Grants Scheme.
The Government has stated that it will amend the legislation
to ensure that the amount spent on road infrastructure
funding is greater than the net revenue from the reintroduction of indexation on fuel excise.
The fuel excise rate has been frozen at 38.143 cents per
litre since March 2001 when former Prime Minister John
Howard abolished fuel excise indexation in the wake of the
introduction of the GST.
Based on historical CPI figures, we estimate that if the fuel
excise rate had been indexed to CPI over the last five years for
example, it would have resulted in a five cent per litre increase
in the price of fuel over that period. This increase over the
next five years will have an impact on businesses across a
wide range of industries to the extent that they cannot claim
a credit for the fuel excise under the Fuel Tax Credits system.
The critical issue is likely to be whether businesses impacted
by the increase in the fuel excise will have to absorb some or
all of the increased cost of fuel, or whether they can pass it on
to their customers. Businesses that operate in price sensitive
markets or on low margins may not be able to simply increase
the prices of their goods or services to cover the additional
fuel cost. We expect that the decision of whether to pass on
the cost increase will be made on an industry by industry and
sector by sector basis. If businesses cannot pass on the excise
increase, the cost will have a direct and ongoing impact on
their bottom line.
Building a healthy economy
6
Re-introduction of
fuel excise indexation
7
Employment tax
Increase in the FBT from 1 April 2015
In line with the increase in the top
marginal tax rate for the temporary
Budget Repair Levy, the FBT rate will
increase to 49% from 1 April 2015 to
31 March 2017. This change will have a
flow on effect to the Type 1 and Type 2
FBT gross up rates, which will change to
2.1463 and 1.9608 respectively.
The increase in FBT rates will be in force for a period of two
years, in contrast to the three year increase in the individual
top marginal personal tax rate. Accordingly, for the nine
months to 1 April 2015, taxpayers on the top marginal rate
may be able to access a reduced FBT rate where benefits are
salary packaged.
In addition, however, the increase in the FBT rates will have
the unintended effect of increasing the effective tax paid by
many individuals earning less than $180,000 that engage
in salary sacrifice arrangements (e.g. a novated lease).
Taxpayers in this category may therefore wish to review their
salary packaging arrangements.
FBT exempt and rebatable employers
The Government has announced the cash value of
concessions received by FBT exempt and rebatable
employers (e.g. certain schools, public hospitals, public
benevolent institutions etc.) will be protected by increasing
the annual FBT caps. The FBT rebate will also be changed to
align with the FBT rate from 1 April 2015.
Employee Share Scheme rules
The Budget was silent with respect to anticipated reforms
to the Employee Share Scheme (“ESS”) taxation rules.
Although the existing rules have only operated since 1 July
2009, they have been criticised for their complexity and
failure to encourage equity participation by employees. This
is particularly an issue for start-up companies, who need to
attract and retain talented employees through incentives like
employee share schemes.
Whilst we understand that Government support exists for
reform to the ESS taxation rules, we have yet to see any
positive developments in this area.
Building a healthy economy
Reduction in R&D tax incentive rates
Both the refundable research and
development (“R&D”) tax offset (for
companies with aggregated turnover
of less than $20 million) and the
non-refundable R&D tax offset (for
companies with aggregated turnover of
greater than $20 million) will be reduced
by 1.5% with effect from 1 July 2014.
This means that the refundable tax
offset of 45% will reduce to 43.5%, and
the non-refundable tax offset of 40%
will decrease to 38.5%.
The rationale behind the change is to reduce the benefit
obtained from the R&D tax incentive in line with the
proposed reduction in the company tax rate of 1.5% from
1 July 2015. This will mean that companies undertaking
R&D activities should be no worse off after the change.
Interestingly though, the changes to the R&D offsets will
occur one year earlier than the proposed reduction to the
company tax rate.
It is also worth noting that there is currently a Bill before
Parliament to deny the R&D offset for companies with
turnover of greater than $20 billion.
For clients undertaking eligible R&D activities, the benefit
of the R&D tax offset will effectively be reduced for the
2014/15 financial year before the reduction in the company
tax rate occurs. This may lead to a reduction in R&D activities
at a time when the Government should be encouraging
R&D to assist in stimulating the economy. Clients should
therefore start considering whether to bring forward eligible
R&D expenditure to the 2013/14 financial year, where
possible, prior to the change in rate.
Exploration development incentive
The Government plans to introduce
an Exploration Development Incentive
(“EDI”) to encourage increased
investment into mining exploration.
Under the EDI, small mineral exploration companies with no
taxable income undertaking greenfields exploration will be
able to provide exploration credits in the form of refundable
tax offsets to Australian tax resident shareholders.
Whilst the mechanism to facilitate the offset has yet to
be developed, and the Government plans to limit the
EDI refundable offset to $100 million over three years
beginning 1 July 2014, we welcome this development as
Australian junior explorers have lobbied for such a measure
for some time and the global competition for capital
remains fierce.
The aim of the EDI is to turn non-usable capital losses
into refundable tax offsets for investors in unsuccessful
mineral exploration companies. Such a measure has been
successfully implemented in Canada with positive results
on investment levels into Canadian explorers.
8
Research and development
9
Tax compliance
ATO review
For taxpayers seeking a review of ATO decisions on their affairs in the future, the
Government has announced several changes to the tax system’s review structures.
The tax complaints function will move from the Office of the Ombudsman to the
Inspector General of Taxation. In addition, the Government will be amalgamating
most of the existing review tribunals into a single tribunal from 1 July 2015.
Reduction in ATO funding
The planned reduction of 1,600 staff at the Australian Taxation Office, which
was due to occur in 2015/16, will now be brought forward by one year and
represents the largest single reduction in the public sector announced in the
Budget. This can be compared to prior years, where the ATO have been given
extra funding for audit activities. This may have a direct impact on ATO
activity and resource allocation in the short to medium term.
Data matching initiatives deferred
Taxpayers concerns in respect to increased ATO access to third party
reporting and data matching have been alleviated to some extent by the
Government’s announcement that it will defer the start date from
1 July 2014 to 1 July 2016. The Government states it needs time to analyse
stakeholder concerns raised in submissions responding to the Treasury
Discussion Paper on this previously announced Budget measure.
Building a healthy economy
There were no real surprises in the Budget with the Government
announcing no significant changes to superannuation rules and the
majority of age pension changes already out in the media.
Indirectly, however, we note that the proposed corporate tax rate cuts may
have an impact on super funds investing in Australian equities, whereby
the reduction in the corporate tax rate will decrease franking credits and
investment returns. While this may have an impact on overall returns, we
do not expect to see the reduction in the corporate tax rate leading to a
change in investment behaviour in the superannuation market.
Age pension
As confirmed before the Budget the age pension qualifying
age will increase by six months every two years so the
qualifying age will be age 70 by 1 July 2035. Practically the
change will increase the age pension eligibility age for those
born after 1 July 1958 in accordance with the table below:
Date of birth
Age pension
eligibility
1 July 1952 and 31 December 1953
65½
1 January 1954 and 30 June 1955
66
1 July 1955 and 31 December 1956
66½
1 January 1957 and 30 June 1958
67
1 July 1958 and 31 December 1959
67½
1 January 1960 and 30 June 1961
68
1 July 1961 and 31 December 1962
68½
1 January 1963 and 30 June 1964
69
1 July 1964 and 31 December 1965
69½
1 January 1966 and later
70
From a personal perspective, however, we still see
superannuation as a tax effective savings structure that
clients should be seeking to use to generate wealth for
retirement even if the Government limits access to age 65
as anticipated.
Commonwealth seniors health card
Eligibility for the Commonwealth Seniors Health Card,
which broadly provides access to the Pharmaceutical
Benefits Scheme for self-funded retirees who do not qualify
for the age pension, will be indexed annually to CPI from
20 September 2014. The current income thresholds of
$50,000 per annum for singles and $80,000 per annum for
couples have not changed since 2001.
Income for the purposes of the thresholds will now include
superannuation payments to individuals over age 60 even
though they are exempt for income tax purposes.
Superannuation guarantee rate
The Government confirmed the superannuation guarantee
Rate will rise to 9.5% from 1 July 2014 as currently legislated.
The rate will remain at 9.5% until 30 June 2018. From 1 July
2018 the rate will increase by 0.5% each year until it reaches
12% on 1 July 2022.
There will be some claw back of age pension entitlements
by pausing income and asset test indexation for three
years from 1 July 2017 and permanently linking age
pension increases to the Consumer Price Index (CPI) from 1
September 2017, instead of the more generous indexation
that may apply under exiting arrangements.
Excess contributions tax
While not announced in the Budget, we expect there will
probably be an increase in the age where individuals can
access their super, probably to age 65, to align the super
system with the increase in pension eligibility age. This is
likely to be addressed as part of the Government’s Financial
System Inquiry and apply to individuals born after 30 June
1969.
If the individual chooses to withdraw, no excess
contributions tax will be payable and any related earnings
will be taxed at the individual’s marginal tax rate.
The Government will allow excess non-concessional
contributions, and any associated earnings, made on or
after 1 July 2013 to be withdrawn by the individual as an
alternative to excess contributions tax applying.
If the individual leaves their excess contributions in the fund,
top marginal rate will continue to be applied on the excess.
10
Superannuation and retirement
Get in touch...
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Perth
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partners@pitcher.com.au
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MELBOURNE
John Brazzale
Managing Partner
Adelaide
Tom Verco
Managing Partner
+61 3 8610 5110
+61 8 8179 2800
john.brazzale@pitcher.com.au
tom.verco@pitcher-sa.com.au
SYDNEY
BRISBANE
Scott Treatt
Nigel Fischer
Partner, Tax Consulting
Managing Partner
+61 2 9228 2284
+61 7 3222 8444
streatt@pitcher-nsw.com.au
nfischer@pitcherpartners.com.au
PERTH
NEWCASTLE
Bryan Hughes
Greg Farrow
Managing Director
Managing Partner
+61 8 9322 2022
+61 2 4931 6000
hughesb@pitcher-wa.com.au
greg.farrow@pitcher.com.au