#Budget2016: A curate’s egg, good in parts
From a corporate tax perspective, the Budget was a curate’s egg – good in parts.
We welcome the proposed reduction in the corporate tax rate to 25 percent – this is a clear intent to reinvigorate investment by the business sector, most likely foreign investment, lifting productivity and real wages, and reducing unemployment as flow-on consequences.
This is much-needed – in the absence of stimulus like this, we expect Australia’s economy only to achieve sanguine growth over the next few years, predominately as a consequence of declining net investment activity following the boom years of the commodity super cycle. Non-mining investment has not picked up, which has meant the declining mining investment has in fact been a drag on economic growth. These concerns are obviously also worrying the Reserve Bank of Australia, which yesterday cut the official cash rate down to 1.75 percent – the lowest on record.
But the no so encouraging side is that transitioning the corporate tax cut over an eleven-year period is likely to result in Australia falling further behind the tax rates of other capital-importing countries.
The new batch of anti-avoidance measures – anti-hybrid rules, a new transparency regime and whistle-blower rules, and additional ATO cash to scrutinise multinationals is inevitable in the current politics of multinational business taxation, both in Australia and abroad.
But the new Multinational Anti-Avoidance Law – dubbed MAAL 2 is important and worthy of attention. It is fundamentally about the balance of power in a negotiation. We already have the laws in place to deal with artificial and contrived structures, but if a taxpayer wants to play hard-ball, then this would make them think twice. Penalties at 40 percent, but most importantly, paying the purported tax upfront. And that tax amount is based on information made available to the Commissioner.
So delays in providing the Commissioner with material will not be a good strategy.
Our anti-avoidance provisions now have four different hurdles for looking at whether there is an inappropriate tax purpose. They are the “sole or dominant purpose” for general anti-avoidance; “more than an incidental purpose” for franking credit schemes; “one of the principal purposes” for avoiding a permanent establishment and now “designed to secure” for structures designed to shift income.
Whether we need four tests or could do with one is an interesting question. But this is certainly not simplification.
In addition the ATO is being funded with an additional amount of $680 million for compliance work on multinationals and high net worth individuals. This is expected to raise about $3.7 billion over 4 years. This is a return of 5.4 times the amount of the investment.
On personal tax, the news is slightly more encouraging. On bracket creep, the government has gone with an adjustment to one bracket so that someone on average full time earnings does not creep into the second highest bracket. While this is welcome, more fundamental reform to the personal tax and transfer system needs to be undertaken
All-in-all, what has been lost in the Federal Government’s economic plan is the opportunity for grand tax reform including a review of consumption taxation. One cannot see this happening for at least five years and possibly a decade.
But this is what we truly need.
Read our full analysis.