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TAX TAX TAX

TAX HAS DOMINATED THE POST-BUDGET HEADLINES, AS TREASURER SCOTT MORRISON PROMISED LAST NIGHT TO SLASH TAXES ACROSS THE BOARD. THE FIRST SENTENCE ON THE FRONT PAGE OF THIS MORNING’S AUSTRALIAN FINANCIAL REVIEW SAID THE GOVERNMENT HAD “LAUNCHED ITS RE-ELECTION BID” LAST NIGHT, AND WITH $140 BILLION OF INCOME TAX CUTS AND $80 BILLION OF CORPORATE TAX CUTS, THE TURNBULL GOVERNMENT IS LAYING THE FOUNDATION FOR A RE-ELECTION CAMPAIGN BASED UPON ITS TRIED AND TESTED ECONOMIC CREDENTIALS.

The income tax cuts are phased over seven years through three distinct phases, with low and middle-income earners set to receive the most immediate tax relief in the form of a “Low and Middle Income Tax Offset”, worth up to $530 a year for those earning less than $125,000. Shadow Treasurer Chris Bowen indicated last night that Labor would support this initial phase of cuts, however the Treasurer has indicated the entire tax reform platform will be rolled into a single package, setting up a political fight over the remainder of the measures likely to run into the next election.

Particularly contentious are the second and third phases of the income tax cuts, which propose Australia shifts towards a US-style flat tax bracket structure. From 2022-23, two higher income thresholds are slated to rise in order to address bracket creep, while from 2024-25, the 37¢ tax bracket would be abolished. The end result is that workers on incomes between $41,000 and $200,000 would be taxed at the same marginal rate – with those earning $200,000 receiving the biggest saving – $11,815. It is not surprising that these more controversial reforms are not slated to come into effect for another two or three federal elections.

Other politically expedient tax measures announced in the budget included reaffirming that the Medicare Levy will remain unchanged, while the Treasurer also used his speech to criticise the ALP’s plan to end tax refunds for franked dividends in a nod to the Coalition’s older voter base.

The Coalition has promised to stick with its unpopular plan to extend company tax cuts to large corporations, despite only securing 37 of the 39 Senate votes it requires to pass the measure. The big bank levy, also maintained in last night’s budget, is being positioned as paying for a significant portion of the cuts. However, the misdeeds exposed by the Royal Commission into the financial services sector have made the reforms even more unsavory for the public, with the Australian Institute of Company Directors now calling them a “distraction…probably unlikely to succeed”. While company tax relief was not a major part of the Treasurer’s speech last night, he did flag another extension of the small business instant tax write-off on spending under $20,000 for another year, at a cost of $350 million over the forward estimates.

In a step away from Turnbull’s oft-derided innovation agenda, the government is also paring back its R&D investment tax incentive by $2 billion over the next four years. Minister for Jobs and Innovation, Michaelia Cash, said the aim is to reduce assistance for research spending that would have occurred without any public assistance.

The Treasurer’s budget speech ended by highlighting the government’s efforts towards improving the integrity of the taxation system, saying its “next big challenge is to ensure big multinational digital and tech companies pay their fair share of tax.” The Treasurer revealed he will be releasing a discussion paper on taxing digital businesses in the coming weeks, while there was also the usual nod towards the black economy taskforce and the importance of catching tax cheats, including a new $10,000 limit for cash payments from 1 July 2019.

The Treasurer also warned that higher taxes to chase higher spending “never ends well”. Nevertheless, this budget promises reduced taxes across the board (with a new 23.9% cap on tax revenue as a proportion of GDP), without impacting spending on essential services, while also delivering a surplus by 2019-20. These promises are largely dependent on a prediction that the weak wage growth which has troubled Australia (and much of the OECD) in recent years is coming to an end, however this is far from a certainty. By rolling the widely-supported low and middle-income tax offset, and highly contentious higher income reform measures into a single legislative package, the tax debate is likely to dominate the political debate for the foreseeable future.

 

Infrastructure

Investment in infrastructure formed a major pillar of this year’s federal budget, with every dollar the federal government invests on infrastructure returning $4 to the economy, according to the budget papers. The Turnbull Government has recommitted to last year’s declaration of a $75 billion investment on a 10-year infrastructure program, which includes $25.4 billion in new projects.

A key project that the federal government may make an equity contribution to is the $5 billion commitment to the Melbourne airport rail link. However, with other major infrastructure projects like the National Broadband Network, the $10 billion Melbourne to Brisbane inland rail, and possibly Snowy 2.0, it could be a potential budget time-bomb for future treasures if the government does not receive an appropriate commercial return on its investments.

The $5 billion for the Melbourne airport rail link is the big-ticket item for Victoria, which faces a state-election in six months’ time. Another $1 billion in federal government money has already gone to work easing Melbourne’s congestion woes, with construction under way on both the M80 Ring Road and the Monash Freeway upgrade.

Although Victoria is a big winner for infrastructure in this budget, the Turnbull Government has also opened its wallet to fund other key infrastructure projects around the country. This includes a $400 billion Port Botany rail duplication and a $1 billion bypass at Coffs Harbour in New South Wales, and a $1 billion upgrade to add extra lanes to the M1 between Brisbane and the Gold Coast in Queensland, in addition with a further $3.3 billion for upgrades to the Bruce Highway from Pine River to Caloundra and Section D from Cooroy to Curra.

In Western Australia, the federal government has committed $1 billion for the Metronet rail project in Perth, including a further $944 million towards tackling road congestion, including on the Tonkin Highway, while $560 million has been slated for the Bunbury Outer Ring Road. While in South Australia, the federal government declared $1.2 billion for the north-south corridor, in addition with $220 million to go towards electrifying the Gawler rail line and $160 million which has been allocated for the duplication of the Joy Baluch Bridge in Port Augusta.

Tasmania has also welcomed a new infrastructure project, with the long-awaited replacement bridge linking the Brooker and Midland highways being committed to as a part of a $920 million package for the state. While the Northern Territory received $180 million to seal a yet-to-be announced length of the Central Arnhem Rd and $100 million to seal part of the Buntine Highway.

Treasurer Morrison also announced a $1 billion Urban Congestion Fund to support the states in fixing pinch points and improving traffic flow in the major cities. For regional Australia, we have also seen a declaration for $3.5 billion on a Roads of Strategic Importance initiative, upgrading key freight routes in regional areas.

 

Financial Services

There were no surprises in last night’s 2018-2019 Federal Budget announcement with the government launching its pre-election bid designed to deliver wins for middle-Australia. Tax cuts have formed the centrepiece of Scott Morrison’s third budget which will be rolled out in three distinct phases over the next seven years, and are forecast to deliver a significant debt reduction before 2030.

Superannuation

From July 1 2019 exit fees on all superannuation accounts will be banned to enable Australians to exercise greater choice when it comes to choice of fund. Additionally a 3 per cent annual cap on passive fees will be put into place for accounts with less than $6,000.

Australia’s lost super also ranked high on the Treasurer’s hit-list, with an announcement that all inactive super accounts with balances less than $6,000 will be transferred to the Australian Taxation Office, to “proactively” reunite inactive accounts with their rightful active accounts. This measure is designed to reduce potential loss of income from ongoing fees, and will see the government reap $166 million over the next four years.

Measures have been put in place to prevent high-income earners from inadvertently breaching the annual super contributions limits. Individuals who earn more than $263,157 a year from multiple employers will be allowed to choose which wages from which companies are made exempt from the super guarantee.

For self-managed super funds, the maximum number of trustees will be raised from four to six and from 01 July 2019, funds with “a good history of record-keeping and compliance” will only need to obtain an audit once every three years instead of annually.

Life insurance

Life insurers seemingly lost out in this year’s budget, with Treasurer Scott Morrison announcing that from July 1 2019, insurance linked to superannuation will move from an opt-out model to opt-in. The measure will be put in place for members with balances of less than $6000, members who are under the age of 25, and members who have not made a contribution over the last 13 months. This change will see the government gain $700 million over the next four years – this is because fund members do not pay tax on the portion of their savings used to pay insurance premiums, whereas contributions invested for the purpose of retirement savings are taxed at 15 per cent.

Pensioners & retirees

The Pension Loans Scheme is set to be opened to all older Australians, including full rate pensioners and self-funded retirees. These changes mean that effectively all Australians over pension age will be able to mortgage their home to the government to receive higher fortnightly payments. According to the Treasurer this measure could see pensioners boosting their retirement income by up to $17,800 for a couple, or over $300 per fortnight, without impacting on their eligibility for the pension or other benefits.

Additionally, pensioners will be able to earn more money without impacting their pension. The expanded Pension Work Bonus will enable pensioners to earn up to an extra $1,300 a year without reducing their pension payments. The program has also been extended to self-employed pensioners who will be able to earn up to $7800 per year without their pension payments.

Investments

The government reiterated its stance on franking credits with the Treasurer stating the party will “oppose unfair tax grabs on retirees and pensioners by enabling everyone who has invested in Australian companies that issue franked dividends, to keep their tax refunds”.

Banking and finance

After taking a hit in the 2017-2018 Federal Budget, Australia’s five biggest banks did not escape further scrutiny in 2018-2019. The Treasurer stated that the government will “continue to roll out stronger penalties, powers and enforcements to take action on misconduct on the sector”. The legislated major bank levy will continue, the Australian Financial Complaints Authority will come into effect on 1 November 2018 and the Banking Executive Accountability Regime kicks into gear from 01 July 2018.

The Treasurer also stated that the government will “move forward” with its Open Banking Regime and consumer data right, a measure designed to give Australians more control, choice and “better deals”.

Education

Despite education being a central concern for many Australian families, the sector failed to feature as a significant beneficiary of major funding. Nonetheless, there were some funding allocations of note in last night’s budget announcement.

The government’s legislated needs‑based funding for schools, set out by the second Gonski review, will deliver an additional $24.5 billion for Australian schools over the next 10 years.

The National Schools Chaplaincy Programme has now been made ‘permanent.’ With a new focus on bullying prevention; the government committed to provide an additional $247 million over four years from 2018‑19.

Following recommendations by Gonski 2.0, the government will also support access to preschool education through a $440 million investment to extend the National Partnership Agreement on Universal Access to Early Childhood Education until the end of 2019.

The Child Care Package will come into effect on 2 July, with the aim of providing more affordable access to childcare. This will include the Child Care Safety Net, providing early childhood education for children from rural and regional areas. Additionally, the Child Care Subsidy withholding rate has been reduced to 5 per cent for all families.

Regarding tertiary education, the budget announced a commitment to spend $1.9 billion over the next 12 years on research infrastructure, focusing on medical research and genomics. In response to the recent independent review into regional, rural and remote education, regional universities will receive $123.6 million over five years for additional Commonwealth Supported Places from 2017-18.

 

Healthcare

The winners of this year’s health budget are undoubtedly aged care, rural health and medical research.

Healthcare is now at the centre of Scott Morrison’s investment into “essential services” that Australians rely on. The timely Pharmaceutical Benefits Scheme listing of Spinraza on Sunday was part of a $2.4 billion commitment to subsidising life-saving medicines for cancer types, HIV and multiple sclerosis.

As Australia’s population ages, the issue of aged care and how we as a society support our elderly is increasingly taking centre-stage. For older Australians living in nursing homes, the government is promising $83 million to address the drastic shortage of mental health services in residential aged care facilities.

Furthermore, doctors and nurses will be trained in regional Australia via a network of medical schools under the $83.3 million Stronger Rural Health Strategy. The government has also given the Royal Flying Doctor Service an extra $84.1 million over four years to increase dental, mental health and emergency service to rural and remote Australia.

The Coalition plans to make Australia a medical technology leader, announcing a $1.3 billion health and medical research growth plan including $500 million to prioritise emerging studies of genes and their functions. Funded through the government’s Medical Research Future Fund, the genomics plan is designed to help doctors tailor treatment for each patient and assess risk in a wide range of diseases. In an effort to eliminate rare and debilitating birth disorders, the first initiative of the Medical Research Future Fund will see a $20 million investment in a pre-conception screening program.

Other noteworthy elements include a scrapping of the proposed increase in the Medicare levy which would have been used to fully fund the National Disability Insurance Scheme, multi-million-dollar investments in support services like Lifeline and SANE Australia, and a tightening of research and development tax breaks for companies with turnover of less than $20 million.

 

Technology and Innovation

The Turnbull Government has tweaked its research and development (R&D) tax incentive program, while allocating over $40m for a National Space Agency and $30m into developing Australia’s capabilities in artificial intelligence and machine learning. Additionally, funding has been allocated to improve cyber security capabilities and support SME innovation.

Federal Treasurer Scott Morrison said that the $3bn R&D tax incentive is being amended to improve the program’s integrity, fiscal affordability and sharpen its focus. The changes will see companies rewarded for diverting more money into R&D which means that very large businesses now face the same limits as small businesses, providing scope for Australia’s small businesses to become more competitive.

Over the next four years, $29.9m has been assigned to improve Australia’s artificial intelligence and machine learning capabilities, with funding split between programs at the Department of Industry, Innovation and Science, the CSIRO and the Department of Education and Training. The government will also continue to allocate funding into supercomputing, with $140m earmarked for the Pawsey Supercomputing Centre in Perth and the National Computational Infrastructure facility at the Australian National University in Canberra. The government is also giving the Digital Transformation Agency (DTA) $700,000 to investigate the use of blockchain technology to improve government service delivery.

The government will provide $14.2 million to support the new functions of the Office of the eSafety Commissioner. These new functions include administering a new civil penalty regime to combat the non-consensual sharing of intimate images, and providing guidance and support to Australians who experience online abuse. The Department of Parliamentary Services has received $9 million to establish a cyber security centre which will improve the cyber security of the parliamentary computing network. $44.6m will be allocated to help Australian consumers easily access and use their own data, with the banking sector to be the first Australian industry sector to be subject to this new initiative.

In a surprise move but much to the relief of many small and medium business owners, the asset write-off has been extended yet again to encourage investment in new equipment by enabling businesses to claim a deduction for goods on purchases under $20,000. Meanwhile, $40m will be provided to assist Australian SMEs to strengthen initiatives such as Asian Innovation Strategy and SME Export Hubs which will help Australian businesses and researchers tap into new growth opportunities overseas. Meanwhile, the government claimed that a streamlining of GST reporting has delivered an average $590 annual cost saving to SMEs by reducing the number of BAS GST questions down to three from 20. Despite these measures, the reaction from the wider start-up ecosystem suggests that the government has missed an opportunity to reward collaboration between start-ups and large corporations through the R&D scheme.

A number of funding measures have also been announced, including $100,000 to help promote Australia’s fintech outfits.

 

Resources, Energy & Climate

These industries were not a major focus of this year’s budget, but there were a number of announcements that will have an impact across these sectors.

The environmental centerpiece of the budget is a five-year reef package for the Great Barrier Reef, which is set to receive $535.9 million to secure its future. The government has committed to providing $443.8 million towards a partnership fund with the Great Barrier Reef Foundation, which will work to deliver programs to address the key challenges facing the Reef. In a statement, Environment Minister Josh Frydenberg said these contributions would improve water quality, control crown-of-thorns starfish and boost science for the reef restoration.

Also on the environmental front, the budget includes $13 million a year for Antarctic research and $5.3 million in annual grants for heritage sites and groups.

Household power prices have dominated the news agenda over the past year, and last night the Treasurer used his budget speech to reaffirm the Coalition’s promise that their national energy guarantee will lower average power bills by $400 a year by the end of the decade. As reported by The Australian, $28.7 million over five years was allocated to energy policy, including the design of the NEG, the implementation of the Finkel review to the national energy market, and better modeling and forecasting to ensure the security and resilience of the nation’s energy infrastructure. 

The Minerals Council of Australia has responded to the budget noting that this year’s budget economic and fiscal outlook is once again heavily reliant on strong growth in resources exports and the significant contribution of the mining sector to government tax receipts, while The Australian’s Glenda Korporaal has reported that higher-than-expected commodity prices were a key factor behind last night’s better than expected fiscal position for the government. However, the federal government does expect that prices for key commodities, such as iron ore and coal, will ease over the next few years.

 

Housing

While still a big concern for many Australians, particularly the younger generation, last night’s budget announcement contained barely a whisper on the issue of housing affordability. In fact, the issue was not mentioned once in the budget speech. There are however a few budget announcements that will affect housing affordability, for better or worse.

The measures from last year’s budget to encourage older generations to sell their homes and downsize through tax incentives appear to have been all but forgotten, with the expansion of the Pension Loan Scheme announced last night allowing pensioners to borrow against the value of their home without selling. Combined with the announcement that there would be an increase in home care places to “support the choice of older Australians who wish to stay at home”, the government is effectively making it more financially and physically viable for older Australians to stay put for longer, potentially reducing the rate of housing supply across the country.

On a more positive note, the government continues to keep its promise from last year’s budget to address housing affordability by “unlocking Commonwealth land”. Last night the budget announced a few hundred homes will be freed up in Queensland’s Redland City area, on land currently owned by the Australian Communications and Media Authority, which should serve to increase housing supply in Australia’s third-largest city.

The contentious issue of negative gearing was once again omitted entirely from the budget, however the government is taking a stand on another contentious practice: “land banking”. Under the new budget, from July 2019 the government will deny tax deductions associated with holding vacant land not intended for use. The measure may offer some hope to would-be home buyers as “land-bankers” are forced to sell up and free the supply of land for building homes.

 

Immigration

Newly-arrived migrants will have to wait longer to access certain welfare benefits from July 1, 2018.

The government has lengthened the current waiting period from three to four years for migrants accessing key Centrelink payments including Newstart, paid parental leave, Carers Allowance and the Family Tax Benefit. However, there are some exemptions for vulnerable groups, including refugees and those who come into sudden financial hardship.

It is expected to save government an extra $200 million over five years on top of $1.3 billion in savings announced in the mid-year budget review, when the waiting period was extended from two to three years.

In addition, newly-arrived refugees will now have to wait six months, rather than three months, before unlocking access to Centrelink’s full job search program. This is to encourage migrants to focus on learning English and adjusting to Australian life, the government announced.

The Commonwealth is also cutting Australia’s annual intake of overseas-trained GPs by 200 places. The total number of GPs granted visas each year will fall from 2,300 to 2,100 in a move designed to limit an “oversupply” in some urban areas.

Religious organisations will now be able to hire temporary migrants as bishops, ministers and religious assistants without needing to pay into the apprenticeship fund. Employers who hire a migrant worker under a temporary skills visa or an employer-nominated visa will pay a levy but religious groups will be exempt according to the budget papers.

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