Government charts its course towards a return to Budget surplus

Canberra was buzzing yesterday as the Gillard Government handed down the 2011-12 Federal Budget to an audience of stakeholder groups, influencers and media commentators.

The 2011-12 Budget has unrealistically high expectations of the commodities boom to deliver major upward revisions to tax revenues over the four year period of the forward estimates.

One component of the projections that I am cautious about is our return to surplus in 2012-13, which has been built on quite optimistic assumptions about the strength of our non-mining sectors over the next two to three years. I think there is currently some 'softness' in the manufacturing, services and retail sectors that might continue for the next two years and beyond.

Overall, the budget contained very few surprises or measures that the public were not aware of ahead of Budget night.

Some of the most interesting announcements related to:

• Changes to the tax laws to provide incentives for private sector investment in infrastructure
• Reforms to the way in which fringe benefits tax is applied to salary-sacrificed motor vehicles
• The abolition of the low income tax offset for non-earned income distributed to minors.

All of these measures have policy merit in different ways and should therefore be supported.

One measure absent from the Budget was the creation of a permanent natural disaster relief fund, which is what the Institute had recommended to the government in order to alleviate the need to implement one-off taxes like the recently legislated flood levy. The government still has an opportunity to consider this advice ahead of the October tax forum.

 

It’s that time again; the federal budget is nearly here

There’s little over a week to go until the federal government opens up the nation’s accounts for everyone to see for yet another year. The federal budget is due to be handed down by the Deputy Prime Minister and Treasurer, the Hon. Wayne Swan MP, at 7.30pm on Tuesday 10 May in Canberra.

Expert commentary has already begun to reveal the high points of the story that is likely to be told on 10 May. The recent natural disasters across Australia will have a twofold impact on the budget: firstly, tax revenue collections will be down on expectations because many businesses will not have made the sort of profits they would have expected. Secondly, the federal government will have to meet unbudgeted costs associated with the rebuilding of lost or damaged infrastructure across various states.

As you are aware, the Prime Minister announced in January that from 1 July this year, a temporary one-year flood levy would be applied to all taxable incomes above $50,000 for the year. The levy is intended to help offset some of the infrastructure costs that will be borne by the federal government.

In the Institute’s budget submission earlier this year, we put forward the argument that we should avoid resorting to one-off tax increases to meet unplanned – but not completely unexpected – costs associated with natural disasters such as floods and bushfires. We argued the case for the creation of a permanent natural disaster relief fund, so that one-off tax increases can be avoided in the future.

We also recommended the government consider the introduction of a special investment allowance for disaster-affected businesses to encourage them to reinvest in plant and equipment damaged or lost during the natural disasters. While this would cost money, if calibrated well it could effectively pay for itself by encouraging more business activity and profits, which would lead to more taxes being paid.

There has been other speculation emerging in the last few days about what may or may not be in the budget. Two things appear likely:

• A crackdown on the tax rules that apply to trust distributions to minors
• Another attempt to put in place a phased means-testing of the private health insurance rebate for those earning more than $75,000 per annum.

The speculation will no doubt continue up until budget eve. But in the end, the only thing that’s certain is this: The Treasurer’s announcement on 10 May will only start the process – of course, Parliament will be required to debate and approve the proposals when it comes together in a couple of weeks’ time. We can all enjoy the political fireworks.
  
The Institute will keep you informed of all the latest information relating to the federal budget. Check our website for up-to-date information.

Time to give consumers more protection

Last Friday the Assistant Treasurer, Bill Shorten, released the Discussion Paper he referred to at our National Tax Conference last week, exploring the merits of granting professional accountants access to a form of legal privilege over the tax advice they provide to their clients.

For those of you following this policy debate, you’ll remember that in 2008 the Australian Law Reform Commission handed down a report called Client Legal Privilege in Federal Investigations, which concluded that a new form of legal privilege, tax advice privilege, should be created under statute and granted to professional accountants. Successive government ministers since the time of that report have shied away from tackling the issue and taking it forward. But fortunately, the Assistant Treasurer has decided that it’s time to dust-off the report and test the merits of the proposal.

The Discussion Paper explores the genesis of the policy proposal, and acknowledges some of the arguments both for and against implementing a new tax advice privilege.

In essence, the substance of this issue really boils down to one central policy question: should consumers have access to the same legal protections and safeguards regardless of whether they seek tax advice from a lawyer or an accountant? If the answer is yes – and I believe it is – then we must direct energy towards identifying the best way to implement a model that delivers on that policy objective.

Over the coming weeks the Institute will be working closely with its members, as well as the legal profession, to discuss the proposal and a present sensible way forward to implement the changes. Please feel free to post a comment with your thoughts or suggestions on this issue.

This could mark the beginning of one of the most significant changes to the way in which Chartered Accountants provide tax advice - and in the end, it's taxpayers who stand to gain the most.

Talking tax: professional privilege, trusts and ATO collaboration

You have probably heard about our exciting couple of days at the National Tax Conference in Melbourne last week. High profile presenters and tax experts generated quite a bit of dynamic debate and discussion!

Highlights from the two days included:

• A speech by Assistant Treasurer Bill Shorten, where he announced that the federal government is to release a discussion paper on professional privilege for accountants. This is an issue that we at the Institute have been advocating for some time, and it was great to see Minister Shorten acknowledging the role that professional accountants play in the community
• Shadow Treasuer Joe Hockey’s lunchtime address, where he generated a lot of controversy amongst delegates and in the media by bringing up the  taxation of trusts.  He also discussed how he would simplify the tax system
• Commissioner of Taxation Michael D’Ascenzo’s presentation, where he launched the ATO publication, Good Governance and Promoter Penalty Laws Guide, co-developed and designed with the ATO’s peak consultation forum, the National Tax Liaison Group, of which the Institute is an active member. The Commissioner talked about the importance of collaboration and how much he appreciated the Institute’s role in working with the ATO.

It was a great forum to hear from influential speakers about the big issues in the tax world, particularly in the lead-up to the federal government’s tax forum. More information about the sessions, including video recordings, will be available on the Institute website.

I’d love to hear your feedback or thoughts on some of the issues that came up!

Another big week lies ahead in the tax world

Tax reform has been a big issue on the public agenda over the last month, following government announcements on the carbon tax, mining tax, national tax forum and the review of GST funding.

With that in mind, the Institute's inaugural annual tax conference, appropriately titled, ‘the Big 1’, couldn’t have come at a better time. It starts this coming Wednesday, 6 April in Melbourne.

The conference runs for two days and features speakers ranging from Assistant Treasurer Bill Shorten, Shadow Treasurer Joe Hockey, through to Tax Commissioner Michael D'Ascenzo and former High Court judge Michael Kirby.

With so many different initiatives underway right now in the tax arena, the conference presents a unique opportunity to debate and discover the tax reform priorities of conference speakers and delegates. Some of the areas that will be discussed include:

• The development of a tax reform blueprint for Australia, which is back on the agenda following the recent announcement by the Federal Treasurer of details on the national tax forum to be held in early October this year
• The next steps in the introduction of the proposed new resource tax arrangements. The formation of a new Implementation Group (which I am fortunate to be a part of), and the commitment by the government to adopt all 94 recommendations from the Policy Transition Group, means the momentum is certainly about to gather pace again in this area.

These recent developments, as well as a raft of others, will be comprehensively debated at the tax conference by a wide cross section of experts. It's going to be fantastic to watch and participate in.

If you haven't registered to attend the National Tax Conference yet, visit www.charteredaccountants.com.au/NTC to find out more. In the meantime, you can follow the latest updates at twitter.com/Chartered_Accts by referencing #taxconf.

New thinking: link carbon pricing to tax reform

Late last week, Professor Ross Garnaut released Paper Number 6 as part of his 2011 update review into climate change.

In this paper, Professor Garnaut discusses a number of issues that link climate change policy to the need for major tax reform in Australia. There are a few points made in his report that resonated with me.

Firstly, he points to the fact that the implementation of a carbon price in Australia will, inevitably, have short-term negative effects on economic growth and real wages. He says that ‘judicious’ use of the revenues generated from the carbon price could help to offset many of those short-term negative effects on the economy. Specifically, he suggests that half of the anticipated $11.5bn in revenue generated in 2012-13 should be used to fund cuts to personal income tax rates and provide incentives for people to return to the workforce. I believe that these ideas are appropriate, and entirely consistent with those set out by Dr Ken Henry is his landmark Future Tax System Review.

Secondly, Professor Garnaut criticises the current concessional fringe benefits tax rates that apply to motor vehicles. These rules essentially provide a direct incentive to reduce tax liabilities by travelling greater distances in a 12 month period. This runs counter-productive to the broader policy efforts by the government to encourage environmentally responsible behaviours. This is a point that we, at the Institute, have been making for a number of years.

We are yet to see a specific response from the federal government to Professor Garnaut’s recommendations around the need for tax reform. However, his arguments provide further evidence of the need to urgently commence a broad-based discussion about the make-up of Australia’s future tax system. The government’s national tax forum, now to be held in October this year, will be the opportune time for this conversation to take place.

Tax time: deal or no deal?

Since the federal government announced the first major step towards simplification of Australia’s complex personal income tax return system last week, there has been a lot of talk about how the changes will impact the Australian public.
 
The initiative follows last year’s announcement by the Treasurer that from 1 July 2012, individual taxpayers will be entitled to claim an automatic deduction of $500 (rising to $1000 in the following financial year) for work-related expenses and costs of managing tax affairs.
 
In other words, the government is making a ‘deal or no deal’ offer to taxpayers: claim $500 without needing to keep any receipts, or claim a different amount if you want to maintain documentation to support your claim. From a policy perspective, it’s one of those rare ‘win-win’ scenarios for individual taxpayers and is a good first step towards the simplification of tax compliance.
 
For some tax agents, this sort of simplification would be considered a win as well. Freeing up resources from focussing on straightforward tax returns enables more time to work with clients who have more complex business affairs and therefore require high value-add advice.
 
In order for this simplification idea to be effective, however, there needs to be a significant take-up of the offer. The question is whether or not $500 (or even $1000) will be enough to entice people to take the deal. Data suggests that individuals claim an average of around $2,000 every year for work-related expenses. When budget conditions allow, I think the government will need to make the offer much more attractive in order to ensure a significant take-up across the population.
 
While the standard deduction is a good first step, I predict that in the next few years the Australian Tax Office (ATO) will be capable of taking a giant leap forward around simplifying compliance further. For taxpayers with straightforward affairs, I would like to see a one-page tax return from the ATO, pre-populated with information already received from third parties, (such as employers, banks and companies). Taxpayers would simply sign the form, send it back, and wait for their refund.
 
Don’t think that this sort of idea is a distant dream – simpler tax returns are just around the corner.

Find out more about this issue from Assistant Treasurer Bill Shorten at the Institute's National Tax Conference in April.