This year’s budget will be eagerly anticipated for the tax changes that are undoubtedly coming.
Modern budgets create an air of expectation just like those of past decades. These days, it’s not so much about finding out how much the beer and baccy is going up; it’s more about how the Government plans to raise and spend our money in a way that will help grow the economy.
The Tax Working Group (TWG) reported to the Government earlier this year and its findings provide an insight into what we can expect to see in the budget.
The TWG was guided by what they saw as the principles of a good tax system, being:
The TWG was charged with ensuring that any changes are “fiscally neutral”. The Government does not intend to increase the overall tax take through any proposed changes; nor does it intend to reduce it.
The current tax system was described by the TWG as “broken”. Too much emphasis is currently placed on taxes that inhibit growth (personal taxes and company tax). The system is unfair, skews investment decisions and discourages work participation. Their view is that a “broad base, low rate” system will address those issues.
Specific recommendations include:
Reducing the top personal tax rates and aligning them with the rates applying to companies and trusts. The current top rate of 38% applies to income earned over $70,000. Alignment with the company tax rate would see this reduced to 30%. However, the Minister of Revenue has indicated that tax changes would be “across the board”, so there is likely to be some movement at all levels of the tax spectrum.
This was recently reduced to 30%, the same as Australia’s headline rate. The TWG considered lowering this to 27% to provide a competitive edge.
Announcements made by the Government since the release of the TWG’s report lend an air of inevitability to the prospect of GST being increased to 15%, although the TWG also considered 17.5% as an alternative. Also made clear by the TWG was the continuation of the broad application of GST, with no exceptions for food or other basics.
Much has been made of the apparent “tax loopholes” available to property investors. In reality, the rules applying to property are no different to those applying to other investments - other than a question over the true intention of investors in buying their capital asset. The effects are distorted by the economics of the property market. Some of the TWG’s recommendations have already been ruled out by the Government, including a comprehensive capital gains tax, a land tax and a notional “risk free rate of return” based on equity. That leaves curtailing depreciation claims, ring-fencing of property losses and/or some form of “bright line” test (regarding how many properties are bought and sold) as potential solutions to the problem of taxing property investment.
The TWG pointed out the entwined nature of tax and welfare, particularly Working for Families. Such initiatives create high effective marginal tax rates. Little has been said on this aspect, other than welfare being used as a conduit for compensating the less well off for any GST changes.
Given the TWG’s report and the Government’s subsequent announcements, anticipating this year’s budget is less about “what” as opposed to “when”. There is nothing overly special about 1 April and most tax changes could be introduced as early as 1 October this year. The main considerations will be providing sufficient time for implementation and the influence of the electoral cycle, with an election due next year. How much can the Government implement this year and be forgiven for by then, and how much does it want to keep up its sleeve? All will be revealed on 20 May.