On the eve of a double-dissolution election campaign, the Turnbull government released a restrained Budget with few surprises, not least because much of the detail had already been leaked.
But drilling down into the implications of changes to company, personal tax and superannuation provoked a lively discussion among the expert panel at the annual UNSW Business School Budget Roundtable, hosted by BusinessThink and streamed live from the Museum of Sydney. A podcast of the event is available at the bottom of this article.
The panel from UNSW Business School comprised economics professor Richard Holden; scientia professor and director of the ARC Centre of Excellence in Population Ageing Research, John Piggott; professor Neil Warren and associate professor Fiona Martin, both from the school of taxation and business law.
At the outset, Holden expressed concern at the optimistic assumptions underlying projections for future growth on which the Budget’s plan to reduce the deficit to surplus by 2021 are based.
“One of the key figures is nominal GDP growth [which has been] 1.6%. It’s looking like being maybe 2% this year and [yet] it’s forecast to be 4.25% in the first year of the estimates of the Budget, and then 5% thereafter,” Holden says.
“A lot of people, particularly former US Treasury secretary Larry Summers, think we’ve entered a long run of what he calls secular stagnation, a period where we’re going to have GDP growth with a 2 in front of it in advanced economies around the world for an extended period, perhaps an almost indefinite period. And that’s not reflected in the forecasts.”
Warren also considered 5% growth unlikely:
“I think when you look at this Budget, you actually have to look at all of the things that are not in [it] that will probably be in the next mini-budget when somebody does an audit after the election. Something’s going to have to give because the money is simply not going to be there. And all they are doing with those figures is just buying themselves time.”
The panel was generally positive about the government’s 10-year plan to gradually reduce the corporate tax rate to 25%. But Martin pointed out that “we’re not really doing a lot in this area”.
“[It’s] nowhere near the OECD average, which is around 20%, or even the ASEAN average, which is 23% – and Ireland [has been] 12.5% for a very long time. The UK is currently at 20% moving down to 17%,” Martin says.
The reduction plan begins with the small business tax rate being lowered by 1% to 27.5%, and with the threshold for eligible firms increased from an annual turnover of less than $2 million, to less than $10 million.
‘Something’s going to have to give because the money is simply not going to be there. And all they are doing with those figures is just buying themselves time’
– NEIL WARREN
Says Martin: “Whether it will stimulate these small businesses to actually start employing more people is another issue, because that’s what they’re saying is the rationale. But is 1% of tax really going to make that much difference? Is that going to make a small business put on an extra employee or add to that employee’s days? Pretty unlikely I would think.
“[And] it’s important to remember when we talk about the corporate tax rate, and when we start thinking about investing in corporations and being shareholders and getting dividends, that in Australia we have the benefit of the dividend imputation system. So at the moment, if you invest in a large corporation that’s on the stock exchange and you get a fully franked dividend, you get a 30% tax credit.
“If that starts to get eroded then it’s the Australian investors who are losing out because they’re no longer getting that tax credit; they’re getting 27.5% down to 25% tax credit. So we’ve got some winners here but some losers as well, and Australian investors, particularly, say, self-funded retirees, may be the losers in that one.”
Late to the table
In other changes, GST will soon be payable on imports under $1000, something that Warren says has taken “us an incredibly long time to get our act together”.
“At the heart of the issue is how do you administer something like this? And the answer is, don’t get hung up on how you administer it. The whole point of it is that you know there’s going to be non-compliance, and frankly you don’t give a hoot about that because you’re after Amazon, all the big players. You’re after the Sonys and the Adobes, Microsofts, Netflix. This is the Netflix tax.”
Martin noted that a new diverted profits tax targeting the avoidance strategies of multi-nationals was also “quite late to the tax reform table”.
“This has been a very important topic internationally for many years,” she says. “We’ve now got a suite of what you might call reforms or changes that will have a potentially significant impact on these areas, but at the same time are incredibly complicated.
“So I think there’s going to be lots of work for accountants and lawyers out of this but I’m not so confident that it’s going to do a lot of good.”
Tinkering with super
The Budget’s changes to superannuation, such as the new $1.6 million cap on super balances eligible for tax-free earnings in retirement, were seen as quite dramatic. But Piggott noted that “it’s very difficult to make out what the changes that have been announced actually mean for retirees, for people approaching retirement, in different bands”.
“Some things are fairly clear – the low income offset, for example – but at the upper end it’s unclear what the rules will be, and it’s unclear how some of the promised changes will in fact be implemented. I think it’s going to be lobby-land in the superannuation industry for some time to come,” Piggott says.
But the lowering of the annual cap on concessional contributions from $30,000 to $25,000 is more obviously problematic.
Piggott says a limit of $25,000 is all very well if you’re young, “but once you have some discretionary income – your kids have left home, your salary has gone up, both spouses are now working full-time again – there is the opportunity to top up your superannuation and this is the time when you might make some up.
‘I think there’s going to be lots of work for accountants and lawyers out of this but I’m not so confident that it’s going to do a lot of good’
– FIONA MARTIN
“Now, there is a five-year averaging provision, which might help some. But $25,000 – it’s actually come down from $35,000 for the 50-pluses – that’s going to impact a number of people and I don’t see it as actually supportive of income replacement in retirement for the middle classes. I think that’s going to be an issue in the time to come.”
And Martin pointed out that it would exacerbate the problem of the gender gap in superannuation.
“So women, who have messy lives – who come in and out of the workforce, who look after various members of their family – therefore don’t accumulate a lot of superannuation throughout their younger years. Once they get to around their middle age, that’s when they’re starting to think about, ‘Well, how can I make this up? What can I do?’ And having a concessional contribution cap of $25,000 is very limiting to those women,” Martin says.
“And also, the other issue is that we live longer. We live on average five years longer. Sorry guys, but we actually need more superannuation than males. So it’s a double whammy against women."