The 2015 Federal Budget came with very few surprises or significant developments. BDO's analysis of the second Abbott Government Federal Budget concluded that the policies set forth did little to advance tax reform, essentially leaving that 'train' stuck at the station.
Nonetheless, the country's financial plan does include a number of changes that will impact the way enterprises make investment decisions and carry out their accounting. For instance, small businesses will enjoy some new incentives, while multinationals need to be even more cautious about their international dealings.
We sat down with BDO National Tax Director Lance Cunningham for additional insight into the tax implications of the 2015 Federal Budget, as well as a peak into what the forthcoming Tax White Paper might hold.
1. Last year's budget caused quite a stir, whereas this one is decidedly 'bland'. What are some of the biggest differences?
Last year, the government appeared to be still thinking like it was in opposition not in Government, so their negative stance they had regarding the economy that they had through the election carried through that first year in power. Unfortunately, they had a budget emergency focus, which drove them to reduce spending at all costs in an effort to lower government debt as soon as possible.
There were also some fairness issues. The budget seemed to be picking on the less-advantaged parts of the community: the unemployed, pensioners and the like. It definitely didn't go across very well.
This year, it seems to be a bit different. Perhaps because they see an election looming, they realised they have to talk up the economy a bit more. So, we end up with this ‘have a go’ mentality, as Joe Hockey put it.
As a whole, it's much less focussed on spending cuts, though there's still a bit in there. They've replaced the paid parental leave scheme with child care instead, which has actually been a lot more popular than the previous plan.
2. Small businesses were one of the 'winners' this year. Why does the budget focus on these enterprises? What are the main changes and will they be enough to support growth?
I can see two things: If it supports small business, it's generally good for the economy and probably helps the government electorally.
It goes back to my comments about this being an election budget. The government wants to shore up its support base, and one of the groups that can easily swing either way is small business. That's the purely political perspective.
Beyond that, it's also good for the general economy, particularly in relation to the depreciation incentive - the immediate write-off for small business assets under $20,000. Interestingly the previous Government had a $6,500 small business instant asset right off but one of the first things the current Government did when it came to power in 2013 was to reduce the $6,500 instant asset write-off back to $1,000. This was on the basis that the economy could not afford such a large instant write-off. The increase of threshold to $20,000 by the current Government highlights the change of focus from surplus cutting at all costs in the 2014 budget to a more expansionary focus in the 2015 budget. The economy is not looking all that flash at the moment and the Reserve Bank is concerned, so I think it's appropriate the government puts in some incentives.
As far as supporting the economy, it probably would have been just as good, if not better, to provide a similar depreciation to medium and large businesses. They're better able to spend and probably would have a bigger effect on the economy.
3. Why were mid-sized enterprises largely left out, in your opinion?
Back to the electoral motivation, there aren't as many medium businesses as small companies. That's the political side.
But why not both? I think it's mainly a matter of cost - the government could see it would cost a lot more to bring in the medium-sized business because they have a lot more capacity to take advantage of the incentives. If they were given a $20,000 immediate write-off, it could be quite expensive for the government.
In the economy we're in - we're getting close to a retracting economy - small businesses are the most vulnerable. Medium and large enterprises are more resilient, so it's probably the appropriate choice to concentrate on small businesses.
4. What kind of changes would be welcome for medium enterprises?
A company tax cut across the board would be a better approach than the 1.5 per cent that applies just to small businesses.
There is good argument to reduce the rate more than that, down to 25 per cent. A reduction could actually increase government revenue, because it provides enterprises with more funds to reinvest in their businesses, so they employ more people, the employees pay more tax on their wages and the company makes more profit so it pays more tax.
That's being put to government quite regularly, and it's happened in other countries. It gives businesses the incentive to go out and do more, and to get the funds to fuel growth.
Allowing foreign tax paid by the company to flow through to the shareholder would be another good change. At the moment, many Australian companies pay a large amount of tax overseas, but when profits are paid out to the shareholders in Australia, these individuals still pay full rates of tax. So they get no credit for the tax that the company paid abroad.
5. BDO's analysis of the budget highlights several cases where the changes are adding to the complexity of the tax system. This was one of the major pain points identified in the latest Tax Reform Survey. How is the budget making things more complicated and how will this impact enterprises?
Creating some policies that apply only to small businesses means small enterprises need to pay more attention to their turnover throughout the year.
We've got a threshold for small businesses - $2 million turnover. While companies have always needed to know whether they're under or over this limit, the incentives haven't always been as important as they are now.
In the past, it was about claiming capital gains tax concessions on the sale of certain assets or some other minor benefits. But now accountants have to take more care to reassess annually for every organisation that might be a small business to see whether they're under or over that $2 million mark. It affects what rate you're going to use, or if it's not a company, whether you're going to get the 5 per cent rebate up to $1000.
This also applies to the $20,000 asset write-off. If businesses are close to the $2 million turnover threshold, it's something you have to monitor very carefully. At the beginning of the year, they might buy an asset thinking they can write it off, and then by the end of the year they find the business has done better than expected and gone over the $2 million turnover threshold and therefore won't be able to claim it and will have to write it off under the normal rules.
With these added complications, many businesses will need more assistance with their accounting. Most enterprises use a tax agent, and he or she will have to be aware of these changes.
6. In many cases, it sounds like additional clarification is in order, such as whether the $2 million threshold applies to incentives for start-ups. When can we expect to hear more?
I expect some of the answers will come out fairly soon, but the track record of the Treasury preparing legislation is not all that great. That said, we've already seen some of the measures in exposure draft format, including for the multinational avoidance law and the GST changes.
We're still waiting on the full details of the small business package. We need more details on how franking is going to work for small businesses paying out dividends. Small companies will be paying tax at 28.5 per cent, but the franking credits they pay out on dividends will be at 30 per cent. It appears that will mean the company won't be able to distribute all their profits as frank dividends.
For the start-ups advice concessions, is still not clear what threshold will be used. The small business concessions has a 42 million turnover threshold but the start-up incentive for employee share schemes has a different threshold, requiring companies to be established within the last 10 years and have turnover under $50 million - much higher than the small business threshold. It's not clear which one they Government is going to use in this case, but my understanding so far is that they'll be using the higher threshold for start-ups. Again, we'll have to wait and see.
7. There are now larger penalties for tax avoidance for large companies and funding allocated to the ATO for compliance activities. What can organisations do to make sure they're in the clear?
It's very important for organisations to take professional tax advice before entering into any international arrangements or conducting other large transactions that have possible large tax consequences.
Far too often, clients come to see us and explain they've done a certain transaction and then we have to tell them what the tax results are, which may unpleasantly surprise them.
If they'd come to talk to us beforehand, we might have been able to structure the arrangement more advantageously. It helps to be proactive, because often there are certain ways of doing a transaction that may have detrimental, unexpected tax outcomes.
Additionally, if they do find the tax offices talking to them about things they've already done, they definitely need to speak to some professionals.
As far as what can they do to avoid penalties - be very careful in any international transactions.
8. Which industries will be affected most positively by the tax implications of the budget? Most negatively?
Agribusiness, construction contractors, small professional services firms, small retail firms, childcare - all those are the winners.
The ones that could be more negatively affected are large multinational firms. They may be subject to higher penalties and greater scrutiny by the tax office, as well as the anti-avoidance legislation - so situations where they're trying to shift profit out of Australia.
The proposed additions to the general anti-tax avoidance provisions for international transactions is quite broadly worded and could apply to a lot more organisations than it appears to be aimed at. The announcement spoke of targeting just 30 companies, but from our reading of it, it has the potential to apply to a lot more enterprises. There is a lot more than 30 companies with over $1 billion turnover. Although the Government may be specifically looking at these 30 companies, anyone with a $1 billion turnover with international transactions has to look very closely at these new rules.
Foreign companies that are providing either download services or other professional services into Australia will now be subject to the GST, so those industries will also be affected negatively by the extension of GST to these services.
Between the positives and the negatives, there's a big gap, with the mid-sized enterprises sitting in between. They didn't really get much at all either way. We'll wait for the Tax White Paper, which will be coming out towards the end of next year, apparently.
9. What do you anticipate in the government's upcoming White Paper on tax reform?
The Tax White Paper is a bit of an open page at the moment. We've got the tax discussion paper, which is basically just a description of Australia's current tax system and the perceived problems we have with it. They don't go into any detail of what they may or may not do about it, and so the Government has asked for submissions. BDO will be putting one in.
Then, the government will put out an options paper listing out a number of possibilities. That's when we'll have a better idea of what's going to end up in the Tax White Paper.
10. What kind of policies would we need to see to have a stronger impact than the budget?
As I noted before, I'd like to see shareholders get credit for foreign tax paid by the business as well as a lower company tax rate, perhaps down to 25 per cent. The rationale behind that is that it can actually be good for the economy.
There needs to be a reduction in complexity. That's probably one of the biggest issues of our tax system - people arrive at quite different tax outcomes depending on which type of structure they use. R&D incentives is another area in need of simplification.
The GST also needs to be looked at. There's probably room to increase the GST rate and broaden the base. We've got a fairly narrow base, with fresh food, education and health excluded - there's some rationale for fresh food, but I'm not sure there is so much for health and education.
The tax discussion paper talks about whether we should retain imputation, but I think this system works well for us, so I'd keep changes here restricted to whether people should continue to get a refund for excess franking credits.
If we're going to have a sensible approach to tax in Australia, we're going to have to look at both the federal and the state taxes. Stamp duty, for instance, is one of the least efficient taxes and could be replaced by a lower land tax that applies to all. We'll have to wait and see what happens in the year ahead.