The 2017-18 Federal Budget indicates the Turnbull government is in a state of readiness for an earlier than expected Federal Election according to Chartered Accountants Australia and New Zealand.
The pre-Budget announcement of needs-based school funding – together with big bets on infrastructure, the removal of the Medicare rebate freeze, a crackdown on non-residents investing in Australian real estate and a one year reprieve for the popular small business $20,000 instant asset write-off – will have broad electorate appeal.
In economic terms, the Treasurer remains optimistic that Australia will continue its slow recovery, returning to surplus by 2020-21 (same as predicted last year). This rosy outlook is based on assumed real GDP growth of 3% per annum (also predicted last year).
Michael Croker, Head of Tax at Chartered Accountants ANZ said political caution was understandable given the Government’s knife-edge majority and numbers in the Senate, but the approach nonetheless left Australia vulnerable to local and international shocks.
“Underemployment, low wages growth, the rising cost of energy, high levels of personal indebtedness and vulnerability to interest rate hikes – these are just some of the factors contributing to a sense that many Australians are not getting ahead. Rising inequality in our society is also a major concern.” Mr Croker said.
On infrastructure and good vs bad debt reporting
Mr Croker noted the new approach to dual reporting of the underlying cash balance and the net operating balance (the latter does not include net new capital investment such as spending on infrastructure and defence assets) – the so-called ‘good’ and ‘bad’ debt distinction.
“This initiative is an important development in government financial reporting”, he said. “We support educating Australians about the longer-term consequences of government spending because it’s such an important intergenerational equity issue”.
Mr Croker said this initiative needed to be supported by educating Australians more about servicing the “good” debt and the parameters for selecting, holding and (in some cases) selling infrastructure investments so that the overall fiscal implications of key, nation-building “good debt” policy decisions could be better understood beyond the forward estimates.
“Much depends on the forecast economic return and risk to which public balance sheets are exposed. Along with potential returns, higher levels of public debt can increase our economy’s vulnerability to shocks.”
Looking to the longer term, Mr Croker said the new approach to reporting also had the potential to help re-ignite the tax reform debate.
“If it is accepted that recurrent spending should be funded by revenue, then potential future revenue gaps – caused perhaps by older citizens leaving the workforce, low wage growth and tax competition in areas such as company tax – may be laid bare. That could start a conversation about GST rate increases and base broadening.”
“The bank levy was Scott Morrison’s rabbit out of the hat. Although carefully crafted to appear benign to average Australians, the levy raises many questions: ascertaining which liabilities are in scope, territorial issues, quarterly reporting obligations, competitive issues, and importantly, who actually bears the burden of the tax? Early days yet, but the banks may well argue the tax could do more harm than good to financial markets and raise less revenue than the Treasurer hopes.”
“CAs will welcome the one year extension of the small business $20,000 instant asset write-off. We think it should become a permanent feature of the tax law.”
“The growing array of tax hurdles for non-resident investors in Australian real estate will send negative messages. Determining the tax profile of vendors and buyers will become even more important after this Budget. Compliance around the new Ghost House tax will be interesting to say the least.”
“Disallowing deductions for rental property travel expenses and depreciating assets not personally purchased by the investor will be seen as the thin edge of the wedge by some CAs. We know the ATO is also worried about increasing deductions for work-related expenses. Are other deduction claims in the government’s sights as part of a slow-burn approach to reducing deductions Australian’s claim? If so, let’s get this on the table and start talking about it.”
“A 2% deficit repair levy comes off on 1 July 2017 but the Medicare levy lifts 0.5% on 1 July 2019 to help fund the NDIS. Perhaps it’s time to abandon levies and create a clearer personal rate scale which citizens can more easily understand and compare with other countries.”
“This Budget only reveals the Stage 1 recommendations of the Black Economy Taskforce. Extending taxable payments reporting to couriers and cleaning industries is a good start, but ever-improving tax technology offers the opportunity for more business to business payments to become reportable. Sales suppression software – particularly in the restaurant and bar industry – has been a big issue overseas so outlawing it in Australia makes sense.”