By Uday Mitra
We are in the middle of a Federal election campaign. The 2016 Federal Budget was handed down by the Treasurer, The Hon Scott Morrison M.P. in the background that the Government had already declared its intention to call a double-dissolution election immediately after the Budget.
Much has been written and spoken about the Budget. This article seeks to provide information on an important measure and its possible effects on the Australian economy and people.
In recent times, significant changes have occurred on Australia’s economic position. Prior to the election of the Rudd Government in 2007, Australia’s mining industry enjoyed significant increase in activities and profits. However, the ‘global financial crisis’ (“GFC”) that erupted in late 2008/09 slowed down these activity levels considerably This forced the Rudd Government to take immediate and extensive steps to stimulate the economy and prevent Australia from falling into recession. These steps helped the economy considerably and we did not suffer from the effects of GFC, as much as some other large Western economies did, but had the undesirable effects of increasing the budget deficits since then.
Unfortunately, the cry for ‘balanced budgets’ frequently demanded by sections of the population conveniently ignores the significant economic benefits the country enjoyed during the GFC periods.
It is necessary to appreciate the current state of the Federal budget in light of this background, and that the task of ‘budget repair’ is considerably difficult at a time of significantly low levels of economic activity and growth in Australia. Any significant reduction in budget expenditure would create both economic and social difficulties, and hardships to the poor and disadvantaged.
Estimated budget position
The 2016 Budget estimates that net revenue and expenses for the 2016/17 year would be $416.9 billion and $431.5 billion, respectively. After taking into account the net capital investment proposed of $3.4 billion, a net budget deficit of $37.1 billion is being estimated.
Revenue and expenses
In order to fully appreciate the possible effects of the Budget measures, it is useful to understand how the various measures might inter-relate.
The Government revenue generally arises from income tax payable by corporations and individuals, goods and services tax, customs duty, and other fees and charges (non-tax revenue). Government expenditure is incurred primarily in social security and welfare, health, education, defence and other purposes.
So, in assessing the impact of any particular government initiative, it is necessary to consider its impact on both the revenue side and the expense side.
For example, if the Government wishes to reduce income tax on certain companies, it has the effect of reducing the revenue available to the Government. This reduction in revenue would increase the budget deficit in the same way as another policy initiative that would increase funding for health or school.
Where the budget is generally in a deficit position, Governments have to make choices between competing policy initiatives. This is where clashes occur between competing ideologies and priorities.
In this article, we focus on the principal budget initiative by the Government. In subsequent articles, we would comment on other budget initiatives.
Jobs and Growth
The Government’s significant initiative in achieving economic growth in Australia is a 10-year plan to reduce the tax rate applicable to companies. The argument is that a reduced tax rate would encourage further investment into business activities in Australia, and thereby boost employment opportunities and tax revenue in future.
The corporate tax rate reduction, proposed by the Government, has two limbs: (a) Small companies; and (b) all companies (including small companies).
Currently, a ‘small’ company is defined as one which has an aggregate annual turnover (sales) of less than $2 million. The tax rate applicable to such companies on their profits is 28.5%. The Budget proposes that as from 1 July 2016, this tax rate will be reduced to 27.5%. However, more importantly, the definition of a ‘small’ company will be relaxed progressively from 1 July 2016. The annual turnover threshold at which the small company tax rate of 27.5% will apply will be increased as follows:
|Income year||Annual Aggregate Turnover threshold|
|1 July 2016 – 30 June 2017||10 million|
|1 July 2017 – 30 June 2018||25 million|
|1 July 2018 – 30 July 2019||50 million|
|1 July 2019 – 30 June 2020||100 million|
|1 July 2020 – 30 June 2021||250 million|
|1 July 2021 – 30 June 2022||500 million|
|1 July 2022 – 30 June 2023||1,000 million|
So, for example, a company with an annual turnover of less than $100 million will pay tax at 27.5% from the 2020/21 income year.
From 1 July 2023, all companies (including small companies) will be liable to pay tax at 27.5% on their profits. Further, the tax rate will be further reduced progressively to 25% by 1 July 2026.
The Budget papers contain an estimate of the value of these reductions in tax rates four years to 30 June 2019 at $2,650 million. In other words, the Government estimates to collect lesser revenue by this amount over the next four years.
The Budget papers do not contain an estimate for the total cost of these tax rate reductions over the ten-year period. Press reports suggest that this total cost could go up to $50,000 million ($50 billion).
So, an important issue is whether these tax rate reductions would increase the levels of business activities, employment opportunities and the consequential tax revenue to such an extent that offset the potential cost to the budget of $50 billion; or whether this would simply result in increased after-tax profits for domestic and foreign shareholders, and big corporations.
Given that significant foreign capital is invested in Australian corporations and businesses, there is no doubt that the tax rate reduction would provide more after-tax profits to these investors, but whether it would result in a larger foreign capital investment in Australia remains a debatable issue.
Opinions differ on this issue; either way, it seems there is a high level of “blue sky” or “uncertainty” surrounding the outcome of this initiative.
Uday Mitra is a practising chartered accountant and tax adviser.