The Government's Mid-Year Economic and Fiscal Outlook 2019-20, announced yesterday, signals that the budget is scheduled to return to surplus in 2019-20. However the projected budget surplus in 2019-20 and over the next four years is set to reduce.
The budget is scheduled to return to surplus in 2019-20 for the first time in 12 years, with the Government pointing to strong fiscal discipline ensuring surpluses build over the medium term.
A downward revision of revenue (by about $32.6 billion over the four years to 2022-23) is mainly driven by downgrades to the forecasts for superannuation fund taxes and GST in the short term, and individual taxes, company tax and GST in the medium term.
No significant new tax measures have been announced as part of the MYEFO as the Government continues to implement the tax policy it took to the 2019 election.
As the Government settles in for the next three years in office, the Mid-Year Economic and Fiscal Outlook 2019-20 (MYEFO) was big on numbers, but small on tax.
While the MYEFO signals that the budget is scheduled to return to surplus in 2019-20, the headline announcement was the reduction in the projected budget surplus both in the 2019-20 year (from $7.1 billion to $5 billion), and over the next four years (from $45 billion to $23.5 billion). This was driven mainly by the reduction in revenue collected, stemming from previously announced income tax cuts, a slowing market economy and the ongoing effects of drought and bushfires.
Despite this reduction, the underlying cash balance is expected to improve from a broad balance of -$0.7billion in 2018-19 to a surplus of $5 billion in 2019-20. Although no new tax measures have been announced as part of the MYEFO, we take this opportunity to revisit some of the key policy decisions taken (and in some cases implemented) by the Government since the 2019 Pre-Election Economic and Fiscal Outlook (PEFO).
A $5 billion underlying cash balance is expected in 2019-20, with surpluses continuing over the remaining years of the forward estimates to cumulate to $23.5 billion.
As foreshadowed, the Government has announced additional funding in response to the severe drought and bushfires, and the MYEFO highlighted the impact of these domestic conditions on slower than expected growth. Other key priority areas include an additional $4.2 billion spent on infrastructure over the forward estimates, and further support for essential services such as aged care, in light of the ongoing Royal Commission.
Expected tax receipts have been revised down by about $2.2 billion in 2019-20 and $30.7 billion over the four years to 2022-23. This downward revision in the immediate term is driven largely by a reduction in collections from superannuation fund taxes and GST, reflecting foreign exchange losses and reduced consumer spending. In the medium term, downgrades to the forecasts for individual taxes, company tax and GST all contribute to a reduction in revenue collected, which is underpinned by average forecast wage growth and lower corporate profits.
The Government maintains that its tax policies and $100 billion Infrastructure Investment Plan continue to provide support to the economy and play a significant role in the return to budget surplus. However, this support is offset by the weak momentum in the global economy as well as domestic challenges, such as drought and bushfires.
The Government has forecast recovery in growth over the forward estimates as a result of the implementation of the personal income tax relief, an increase in spending on infrastructure and lower interest rates. The MYEFO signals that the mining sector is gaining momentum as mining investment is expected to grow significantly for the first time in seven years. However, lower farm production and exports resulting from drought are expected to continue to detract from this growth.
Better targeting the Research and Development tax incentive — refinements
The Government has announced refinements to the 2018-19 Budget measure 'Better targeting the research and development tax incentive' to:
- defer the start date by 12 months with the revised package to apply to income years starting on or after 1 July 2019; and
- introduce a simplified R&D premium for companies with an aggregated annual turnover of $20 million or more. This would reduce the number of intensity tiers under the proposed intensity test for business from four to three to provide greater support for initial R&D investment while still rewarding companies that commit a greater proportion of their business expenditure to R&D.
The R&D premium ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenses for the year. The marginal R&D premium will be the claimant's company tax rate plus:
- 4.5 percentage points for R&D expenditure between 0-4% R&D intensity;
- 8.5 percentage points for R&D expenditure above 4-9% R&D intensity; and
- 12.5 percentage points for R&D expenditure above 9% R&D intensity.
This measure is estimated to have a cost to the budget of $235 million in fiscal balance terms over the forward estimates period.
Tax integrity — improving the operation of the hybrid mismatch rules
The Government will amend the existing hybrid mismatch rules to provide greater certainty that these rules should not adversely impact legitimate business structures or operations.
The amendments appear to clarify the intention of the introduction of the hybrid mismatch rules, being to prevent multinational companies from gaining an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements and narrow the operation of the rules to this intention.
The proposed amendments will apply from 1 January 2019, ie the date of application of the hybrid mismatch rules.
The amendments appear to be curtailed to Additional Tier 1 capital instruments that give rise to an entitlement to a foreign income tax deduction. Franking credits will be available on distribution to holders of those securities if the issuing company does not claim the foreign income tax deductions.
The amendments seek to improve the operation of the dual inclusion income on payment rule so that it appropriately accommodates a chain of payments made within a consolidated tax group and allows the 'on payment' to be traced to income from multiple sources within the group.
Corporate taxation — removing the tax on refunds of large-scale generation certificate shortfall charges
The Government will amend the Renewable Energy (Electricity) Act 2000 (Cth) (Renewable Energy Act) to ensure no tax is payable on the refund of large-scale generation certificate (LGC) shortfall charges. The proposed measure will apply to refunds relating to all LGC shortfall charges including those charges already paid.
Currently, under the Renewable Energy Act, liable entities (usually energy retailers) must surrender LGCs to meet their legal obligations or pay a non-deductible shortfall charge.
The amendments allow for entities, liable to pay the shortfall charge, to apply to have the charge refunded if they surrender the outstanding certificates within the allowable refund period.
This measure is estimated to have a cost to revenue of $70 million over the forward estimates period.
The Government continues to tweak the measures being introduced to tackle the black economy including:
- Introducing a sharing economy reporting regime
A third party reporting regime will be introduced that will require sharing economy online platforms to report identification and income information regarding participating sellers to the ATO for data matching purposes. The measure will apply to:
- ride sourcing and short-term accommodation platforms from 1 July 2022; and
- asset sharing, food delivery, tasking-based platforms and other platforms from 1 July 2023.
It would appear that the introduction of these measures will take time to implement and no doubt will be subject to considerable consultation. The aim of the measures is to increase self-reporting of currently unreported income by sellers and assist the ATO to identify under-reporting of sharing economy income or non-lodgement and take corrective action where necessary.
The measures are estimated to have a cost to the budget of $5.1 billion in fiscal balance terms over the forward estimates period, however are estimated to increase GST payments to the States and Territories by $4.1 million over the forward estimates period.
- Assisting businesses to meet their reporting obligations
The Government proposes to provide the Commissioner of Taxation a discretion to direct taxpayers to undertake an approved record keeping course instead of applying financial penalties in order to support businesses who are struggling with their reporting obligations.
The discretion will be exercisable where the Commissioner reasonably believes there has been a failure by the taxpayer to comply with their reporting obligations and the taxpayer has not disengaged with the tax system or deliberately avoided their record keeping obligations. As with all matters involving the exercise of a discretion, the facts and circumstances of a taxpayer will be critical.
Capital Gains Tax — main residence exemption for foreign tax residents — amendments
Proposals announced in the 2017 Federal Budget that sought to deny capital gains tax (CGT) main residence exemption to non-residents from July 2019, which are yet to be passed, will be amended to soften the effect of the proposed rule in two ways:
- Individuals that have been foreign residents for six years or less will be allowed to utilise the CGT main residence exemption if they face a CGT event that is due to certain circumstances outside of their control (such as death, illness or divorce).
- Grandfathering arrangements for properties held prior to 7.30pm on 9 May 2017 (start date of the proposed measure) will be extended for one year, to 30 June 2020, to allow additional time for foreign residents to consider and plan their affairs.
The clock is ticking for taxpayers who seek to take advantage of the softening effect of these amendments.
This measure is estimated to have a cost to revenue of $60 million over the forward estimates period.
Income Tax Private Business
Tax integrity — deny deductions for vacant land — amendments
The Government made amendments to clarify the scope of deduction denials for vacant landing holding on 28 October 2019.
- The Government has made it clear that taxpayers carrying on a primary production business are not affected by the measure. It remains to be seen what the scope of a primary production business is, as a business may be conducted, albeit in a small way.
- The deductions will continue to be available where a taxpayer rents out their vacant land on an arm's length basis to an entity carrying on a business.
- The Government has ensured that deductions may be available where land, previously not vacant, becomes vacant due to exceptional and unforeseen circumstances. Fire, flood and substantial building defects are provided as examples of 'exceptional and unforeseen circumstances'. The exemption will apply for three years from the date of the exceptional circumstance.
Protecting Your Super Package — putting members' interests first — amendments
The Government proposed to amend the 'Protecting Your Super Package' announced in the 2018-19 Budget to:
- Allow trustees to elect to use a dangerous occupation exception to provide insurance on an opt-out basis for members employed in emergency services or in the top 20 per cent riskiest occupations.
- Delay the start date to 1 April 2020 for insurance within superannuation to be only offered on an opt-in basis for accounts with balances of less than $6,000 and new accounts belonging to members under the age of 25 years.
This measure is estimated to have a cost to the budget of $78.2 million in fiscal balance terms over the forward estimates period.
Superannuation — facilitating closure of eligible rollover funds
In order to assist in the closure of eligible rollover funds (ERF), the Government will now allow ERF trustees to transfer any amounts they hold to the ATO. ERF trustees must:
- by 30 June 2020, transfer all accounts below $6000 to the ATO;
- by 30 June 2021, transfer all remaining accounts to the ATO; and
- prevent all new amounts being paid to ERFs.
Consistent with current arrangements, the ATO will then be able to pay amounts received under this measure, together with interest, to active superannuation accounts or directly to individuals.
This measure is estimated to have a gain to the budget of $143 million in fiscal balance terms over he forward estimates period.
Superannuation Guarantee — salary sacrifice integrity measures — change in start date
The 2017-18 MYEFO measures to close the loopholes in the laws governing the superannuation guarantee charge to ensure salary sacrificed superannuation contributions made by an employee do not reduce an employer's minimum superannuation guarantee obligation will now commence on 1 January 2020 (rather than 1 July 2018).
Superannuation Guarantee Amnesty — extension of the amnesty period
As announced by the Assistant Minister for Superannuation, Financial Services and Financial Technology on 18 September 2019, the amnesty for historical superannuation guarantee non-compliance for employers who voluntarily disclose historical superannuation guarantee shortfalls in respect of their employees will be extended.
The amnesty will operate from 24 May 2018 (being the original announcement date) to six months following the date the amending legislation receives Royal Assent, and will cover historical non-compliance up to and including the March quarter of 2018. Extending the amnesty period aims to ensure that employers who have already qualified for the amnesty will continue to be eligible.