The Treasurer, the Hon Wayne Swan MP, has just delivered the most highly anticipated Budget speech for a long time. As promised, the 2012-13 Budget forecasts a surplus of $1.5 billion. Whether this forecast will be delivered on won’t be known for another year, unless the position is sufficiently clear by the time of the Mid-Year Economic and Fiscal Outlook due in November 2012.
Of course, a surplus means that the Government expects its revenue to exceed its expenditure. So what are the major business tax measures in the Budget that impact the Budget bottom line?
Company tax cut scrapped
The company tax rate was to have been reduced from 30% to 29% for small companies in 2012-13 and for all companies in 2013-14. The tax cut was to have been funded by the Minerals Resource Rent Tax but it has not survived the Budget. Query whether this is because the cut was opposed by the Opposition and the Greens (for different reasons) or because of the question mark over how much revenue the MRRT will raise? Most likely, it’s because it saves $4.755 billion over four years. The Government says it still wants to cut the company tax rate but it will need to be funded by other business tax reforms.
In 2009, the Henry Review recommended a reduction to 25% over the short to medium term to bring Australia into line with similar size OECD countries. The downward trend has continued since then. The United Kingdom is heading towards a 22% rate. Australia looks like it will go against the trend for the foreseeable future.
Tax loss carry-back
One bright spot for business is that companies will be able to carry-back some tax losses. From 1 July 2012, a company will be able to carry-back up to $1 million of losses and get a refund of tax paid in the previous year. From 1 July 2013, up to $1 million of losses may be carried back against tax paid in the previous two years.
Managed investment trust withholding
The rate of withholding tax on MIT distributions will increase from 7.5% to 15%. The Government says that 15% is competitive with the likes of Japan and the United States but the MIT rules were just starting to gain some traction and this will be a blow to the financial services sector.
Removal of capital gains tax discount for non-residents
Non-residents will lose the benefit of the 50% CGT discount on capital gains accruing after 7:30pm on 8 May 2012.
Changes to the scrip-for-scrip CGT roll-over relief
A number of changes will be made to limit the availability and benefits of scrip-for-scrip roll-over relief from capital gains tax. The changes are in response to the Commissioner losing the case of Commissioner of Taxation v AXA Asia Pacific Holdings Ltd  FCAFC 134.
Related party bad debts
Bad debts owed by related parties will no longer give rise to a tax deduction where the write-off occurs after 7:30pm on 8 May 2012.
Access to the tax concession for LAFHAs will be limited to employees who maintain a second home for their own use in Australia. The period during which a LAFHA may be paid will also be limited to 12 months.
Higher tax on employment termination payments
At present the tax payable on an ETP up to an indexed dollar figure ($165,000 in 2011-12) is a maximum of 15% or 30% depending on the age of the recipient. From 1 July 2012, an ETP will be taxed at marginal rates to the extent the recipient’s taxable income including the ETP exceeds $180,000.
The Budget contains many more tax measures but these are the major ones impacting on business.
Business won’t be thrilled with the Budget but should be relieved that a number of other changes floated in the lead up ended up on the cutting room floor. These include changes in relation to:
- the immediate deduction for exploration expenditure;
- the deductibility of financing costs under the thin capitalisation rules;
- statutory effective life caps that enable accelerated depreciation in the oil & gas, agriculture and transport sectors; and
- the research and development tax incentive.
These changes were, however, suggested by the Business Tax Working Group so they are not permanently off the table.
Lower than expected collections from the Minerals Resource Rent Tax have the potential to blow a big hole in this Budget. The Government estimates the MRRT will bring in $10.6 billion in the first three years but most commentators expect the actual figure will be a fraction of that. Already, the Budget Papers predict that collections in the first year will be down by $850 million due to lower coal prices and the high exchange rate.
In the current economic climate, it won’t take much to wipe out the whole $1.5 billion surplus.