Australia’s Federal Budget 2019 heralds a return to surplus after more than a decade, the chance of higher wages and more focus on governance in deterring tax avoidance. Tax cuts have also been fast-tracked and smaller companies with annual turnover below $50 million now face a tax rate of 25 per cent in 2021-22, five years earlier than planned. BDO tax partner Mark Molesworth guides you through the main points of the Budget and the alternative scenario that may result if a Labor government is elected.
What does the return to surplus in the Budget mean for the economy and for business?
The thing that businesses need to understand behind the return to the much-vaunted return to surplus, is that it is based on assumptions in the budget papers that there will be a significant uptick in wages growth. In fact, wages growth has been forecast in each of the four forecast years from 2020-21 onwards. In the forward estimates, wages growth is estimated to be greater than the increase in real GDP. Treasury, in doing this modelling, is saying that wages are going to grow faster than the economy is.
Now, clearly that's not sustainable long term. So if that goes wrong then that surplus and all those future surpluses may not be there. Secondly, if it's right, if it comes true, businesses should be preparing for an increase in wages.
Are there any changes in reporting requirements in the Budget that will affect boards?
There is nothing in the government's budget which imposes further reporting requirements on boards. However, if Labor is elected, they actually have a number of policies that will increase board reporting requirements. Everything from a requirement to disclose in annual reports dealings with tax havens, through to changing the voluntary tax transparency code.
Labor's policy is to make that voluntary tax transparency code mandatory. That would affect all businesses or companies with turnover of more than $250 million. But the biggest effect is on large businesses with over half a billion dollars in turnover. They would be required to make a number of other statements, including a requirement to outline their principles of tax governance and a summary report of taxes paid to authorities in various by jurisdictions. So there's a lot more narrative detail required by Labor for those large businesses.
The ATO has increased funding by $1 billion to expand and extend its Tax Avoidance Taskforce on large corporates, multinationals and high wealth individuals. What will this mean for boards?
This funding will continue the tax avoidance taskforce and the task office's program of work around large companies and high net wealth individuals. Boards need to be aware that the program of work currently includes a program around tax governance.
One of the first questions the Australian Tax Office (ATO) now asks in relation to a review is for companies to tell them about the systems of governance and control relating to tax that the company has. The ATO rates company systems of governance and control in relation to tax and assesses them as providing high assurance, medium assurance or low assurance. That’s taken into account in how the tax office then treats the company as a taxpayer. So boards need to be very much aware that their systems of governance and control, as they relate to tax, are a matter of great interest to the tax office. And that under the justified trust program, it’s now a higher level of assurance that the tax office is looking for. They want to be able to come in and say positively, "We believe, we trust that this organisation is meeting its tax obligations.” If they can see a well-developed and well-operating system of governance and control, then they feel far more confident.
The Budget increases the instant asset write-off threshold and expands access to medium-sized businesses with an annual turnover of less than $50 million. What benefits are there for business?
The Budget increased the instant asset write-off threshold from $25,000 to $30,000. The write-off also previously applied to only firms with a turnover of less than $10 million but the Budget increased this to $50 million.
This is a good thing which essentially brings forward tax deductions. The new legislation was passed last week, so it’s not just a proposal. So now, if you are a small or medium business, with less than $50 million in turnover and you acquire an asset between budget night, 2 April and 30 June 2020 and that asset costs you less than $30,000, you get an immediate tax deduction for the cost of the asset. That's quite attractive because it brings forward the tax benefits for companies which are buying those assets. It makes it easier to say, "Yes, I will buy that asset because I get the immediate tax benefit for it."
If a Labor government is elected, what will the change of direction be?
The Labor Party seems to agree that if they form government after the next election, they will effectively hand down a new budget. They're calling it a major economic statement, but it will in effect be a new budget. And they're saying they'll do that in the third quarter of the year.
There are a large number of Labor policies that business will need to get its head around if Labor forms the next government.
Labor has a very large number of tax policies already in the public domain - not just those that are taking the headlines about franking credit refunds or capital gains tax discounts or negative gearing.
They have proposed a series of measures in relation to business taxation, including what they're calling the Australian Investment Guarantee, which is a little bit like the instant asset write-off, except it doesn't give a deduction for the full value of the asset that's acquired. It gives a deduction for 20 per cent of the value of the asset acquired. But it's uncapped – so it's 20 per cent of whatever asset you acquire. So that would be an incentive to large organisations which are looking at large capital expenditure programs. If they do form government, the ALP also has some other tax policies that will affect multinational enterprises which are not necessarily positive for those organisations, such as changes to the thin capitalisation regime, which restricts the interest deductions available to multinational enterprises. Labor is proposing amendments to that.
For more in depth analysis, BDO’s budget report gives you the insights you need to help set a clear path through what could be choppy waters ahead for some market segments.
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