The Turnbull government’s appetite for major reform is largely gone and it’s eyeing the next election, but that doesn’t mean it will be dishing out meaty vote winners in the upcoming budget.
“The government is going to be holding off giving away too much because they want to push through the corporate tax cuts which are going to remove $60 billion from the budget,” said Thomson Reuters’ Senior Tax Writer Ian Murray-Jones.
The pledge to progressively reduce the tax rate for all companies to 25% by 2026–27 is a hangover from the Turnbull government’s first budget, handed down in 2016.
“That was a really big thing for this government — it was central to everything — and it didn’t go through. So everything else looks slightly peripheral,” said Murray-Jones.
In the intervening two years, government appetite for major reform has faded.
“Last year there was some tinkering with housing affordability but there wasn’t a huge amount in the budget,” Murray-Jones added.
That said, the government heads into the May 8 budget with a narrowing budget deficit, giving it a small opportunity to deliver some pre-election budget sweeteners.
“There has been talk of a small personal tax cut,” Murray-Jones said, although only on the condition that any cuts do not risk the planned return to budget surplus by 2020-21.
Little margin for error
The Mid-Year Economic and Fiscal Outlook in late 2017 showed the budget deficit sitting at $23.6 billion — a $5.8 billion improvement since the last budget.
This was thanks largely to stronger commodity prices and higher forecasts for company tax.
Since then the economic news has been generally positive, with employment adding 400,000 more jobs, and prices for bulk commodity exports also higher than previously assumed.
However, forecasting commodity prices is notoriously difficult and wage growth has been more subdued than expected since last budget (0.25% lower).
Thomson Reuters Australia Senior Tax Writer, Stuart Jones, said this all meant the government had little margin for error with budget sweeteners.
“It is also a reminder that the improving budget position hasn’t been ‘hard won’, and instead represents a windfall from global economic activity that can quickly evaporate,” Jones said.
It remains unclear whether this will be the government’s last, or second last, budget before an election is called.
The Labor opposition, however, is becoming increasingly vocal about its agenda, announcing in March its plans to abolish cash refunds for shareholders with excess franking credits in order to save the budget more than $5 billion a year.
Labor is also promising changes to negative gearing and capital gains tax (CGT), and a 30% tax on distributions from family trusts.
Meanwhile, key stakeholders are keeping up the pressure for reform.
The Tax Institute has weighed in on CGT in its pre-budget submission, proposing a discount reduction.
“A significant reduction of the discount available on capital gains derived by individuals from the current 50% (to 20-25%) would allow for reductions of marginal tax rates on income,” it stated.
Chartered Accountants Australia and New Zealand, meanwhile, has reiterated calls for fundamental changes to “uncompetitive” corporate tax and personal income tax settings.
“We urge the government not to make piecemeal changes to the tax system in this budget. Such changes risk portraying the government as populist and devoid of any big picture, long-term strategy,” the professional body stated in its pre-budget submission.
So, what can we expect?
The treasurer will need to come up with something positive for the average worker, said Jones.
“Don’t be surprised to see a small, but welcome, tweak to the personal tax rates and thresholds,” he said, warning that any changes were unlikely to be as significant as those made in 2016, when the 32.5% personal tax threshold increased from $80,000 to $87,000.”
“That measure cost the government $4 billion, so don’t expect anything more than a token ‘sandwich and milkshake’ tax cut in a non-election year.”
Standard deduction for work expenses
Earlier this year the Australian Tax Office (ATO) flagged a crackdown on work-related expense claims, saying rorting was costing the budget more than $2.5 billion a year.
2018 may well be the year when we finally see a firm announcement on a standard tax deduction, likely in the ballpark of $500, for work-related expenses.
“The government has tantalised taxpayers with the prospect of a standard tax deduction for work-related expenses … it’s long been recognised as an important element towards a system of pre-filled tax returns,” Jones said.
Goodbye $20,000 instant asset write-off?
The $20,000 instant asset write-off for businesses is set to end on June 30, 2018. From that time, the threshold will revert to $1,000.
But in March last year, Labor announced its own “permanent” accelerated depreciation policy, which would see businesses receive an immediate 20% tax deduction for new eligible assets worth more than $20,000.
The pressure is now on the government to extend its existing measure beyond July 1, 2018.
Company tax talk
Further changes to the company tax rate are unlikely to be announced in this year’s budget but Jones said to “watch for any fine-tuning to win support from the cross benches”.
“In the face of the US tax reforms, the government may be reinvigorated to push for a further reduction in the corporate tax rate to maintain international competitiveness against the US rate of 21%,” he said.
Ending superannuation suffering
Following the major reform announcement last year, the super industry can expect this budget to include some refinements aimed at addressing unanticipated consequences.
“Watch for changes to reduce the complexity surrounding death benefit planning under the new $1.6m pension cap,” said Jones.
“In a welcome move, the ATO has already extended the lodgement date for SMSF annual returns to June 30, 2018. This has provided some breathing space for SMSF trustees and advisers.”
Taking your medicine early
While the nature of the economic outlook and election cycle makes it hard to anticipate major changes, you can be sure that any hard-to-swallow measures will be publicised before budget night.
“Traditionally what governments do is leak the bad stuff so that on budget night there’s a lot more focus on the ‘good’ things,” said Murray-Jones, a 20-plus year veteran of the theatre surrounding the budget lock-up in Parliament House.
Murray-Jones will be joining Thomson Reuters’ team of tax writers in Canberra again this year.
By the time the treasurer delivers his speech they’ll have a comprehensive and detailed 2018 Weekly Tax Bulletin Federal Budget Report ready.
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