2005/2006 FEDERAL BUDGET REPORT
The Federal Budget handed down by Treasurer Peter Costello is positive for economic growth.
The personal tax cuts and abolition of the inefficient superannuation surcharge will do a great deal to encourage Australians to work, and to save. Employment and productivity translate into a healthy economy. And a healthy economy is of benefit to all Australians.
However, the recent Productivity Commission report on the economic implications of an ageing Australia noted that people who have had the benefit of higher education also have higher workforce participation rates.
At Advantage One we are disappointed by the failure to ensure increased opportunities for undergraduate to postgraduate education across the board, in all industries and professions, to ensure worker participation and economic growth.
Budget strategy and economic implications:
The Budget strategy is based on four key elements:
- Maintain moderate budget surpluses to demonstrate fiscal responsibility
- Return a portion of the greater than expected net revenue growth back to the electorate through ongoing tax cuts, targeted most heavily at higher income earners
- Build the Future Fund ahead of the full privatisation of Telstra by paying the budget surpluses from FY05 into the Fund and adding a significant share of the Commonwealth's funds currently on deposit at the RBA
- Undertake fiscal reforms to deal with longer run pressures on budget expenditures from the ageing of the population and welfare dependency
Taxation:
The personal tax cuts announced as part of the Federal Budget are another significant step towards encouraging Australians to work hard, save for their retirement and invest for their future. These tax cuts have been framed in the context of helping address worker participation and encouraging future economic growth, an issue identified in the recent Productivity commission's Ageing Population Report. They are the fourth round of tax cuts we have had since 2000, and give a clear indication of the government's strategy to tackle the issue.
We expect that the community will welcome the tax cuts and welfare reforms to the extent that it puts more money in the hip pockets of 'mums and dads'. Importantly, the tax cuts are good news for many businesses as well. Most businesses in Australia are taxed at personal tax rates.
Superannuation:
Full points to the Government for removing the surcharge. It is an inefficient tax that should never have been introduced. Removal of the surcharge is an important step in simplifying our tax superannuation laws, encouraging individuals to make voluntary contributions towards funding their retirement and also ensuring that contributions are given a greater opportunity to grow. However, serious reform of superannuation taxation, particular contributions tax, is still needed to improve the attractiveness of superannuation as a savings vehicle and improve retirement savings.
The removal of the surcharge, along with the Government co-contribution, will provide encouragement for both high income earners and low to middle income earners to contribute to superannuation. For everyone else, those in the middle who aren't high income earners but earn more than $58,000, there is still no incentive to contribute to superannuation.
Superannuation Splitting:
The Government will allow the splitting of superannuation contributions for contributions made on or after 1st July 2006. This policy will allow eligible persons to split their employer and personal contributions with their spouse.
The provision of splitting to fund members will be voluntary to superannuation funds (previously proposed to be mandatory to superannuation funds).
Comments: Whilst these provisions have been delayed for a year, they will potentially have a massive impact on the financial planning industry.
Education:
Although the Government has allocated to skills and training for trades and apprenticeships, the cap on university places for some professional degrees remains unchanged. The Ageing Population Report by the Productivity Commission makes it clear that qualified workers make a greater contribution to economic growth. There is a serious skill shortage of young professional graduates which will continue into the medium term as the economy continues to grow. We urge the Government to work closer with professional bodies to provide the higher education sector with ongoing information about future professional skills requirements in business.
The Government should also address the critical shortage of young academics to enable universities to meet the demand for professional graduates and to invest to ensure Australia's position as a quality provider in the global education market is maintained and enhanced.
Financial literacy:
The Financial Literacy Foundation will be responsible for co-ordinating and improving financial education initiatives provided by public, private and community organisations. This includes establishing a website for financial literacy education and information resources, and working with state and territory governments to incorporate financial literacy into school curricula.
Advantage One is delighted the Government is serious about ensuring all Australians are armed with the knowledge and skills to make informed financial decisions, particularly as people prepare to fund their own retirement, make choices about super, and continue to work, save and invest. Financial literacy in schools is important in the long term. It is an investment in the future.
Small business:
Advantage One wanted to see the Government make a real investment to cut red tape and paperwork for small business, so its $50 million over three years to encourage local governments to reduce regulatory complexity and compliance requirements for home based businesses is a step in the right direction.
Entrepreneurial small business should be encouraged. We are pleased to see the Government doing this by providing $4.5 million over four years to improve indigenous entrepreneurial skills and financial literacy, and introducing a 25 per cent entrepreneurs' tax offset on the income tax liability attributable to the business income of certain small businesses in the simplified tax system with an annual turnover of $50,000 or less.
Bankruptcy:
The announcement of ITSA's fee system appears to strike a reasonable balance of its funding needs through the introduction of targeting cost recovery arrangements. Beyond this development, overriding regard is needed to ensure ITSA's continued pivotal role in the fulfilment of the significant social role of bankruptcy administration and the balancing of needs of the community and business through the ongoing development of bankruptcy law.
Venture capital:
The Government appears to have an ongoing commitment to improving the conditions and outcomes of venture capital activities in Australia. The Venture Capital Industry Review should be warmly received as it will provide the opportunity to identify the contributions that venture capital activities make to Australian economic and employment growth and encouragement of entrepreneurship and innovation.
The venture capital limited partnership (VCLP), as a structure, is commonly used internationally. With regard to VCLPs, operating in Australia under the Venture Capital Act 2002, there are restrictions which need to be considered with respect to the ambitions of the Government for venture capital activity within Australia. We now operate in an increasingly globalised economy. We have to recognise that if we want to develop a knowledge economy with strong entrepreneurial and innovative activities, investment of international funds is essential. This is why the restrictions have to be removed in order to encourage venture capital activity - a fundamental driver of these outcomes.
Senior Australian Tax Offsets:
Senior Australians eligible for the Senior Australians Tax Offset and the low income tax offset will now not pay any income tax for income levels up to $21,968 for singles and $36,494 for couples.
The Medicare levy threshold that applies to senior Australians will also be increased to ensure that senior Australians do not pay the Medicare levy until they begin to incur an income tax liability.
Comment: These changes are made to reflect the reduction in the lowest marginal tax rate to 15%.
Medicare - Increasing the Medicare Levy low income thresholds:
With effect from 1st July 2004, the Medicare levy low income thresholds will be increased to $15,902 for individuals and $26,834 for families. The additional amount of threshold for each dependant child or student will also be increased to $2,464.
Similarly for pensioners below age pension age the threshold will rise to $19,252. This will ensure they do not pay the Medicare levy while they do not have an income tax liability.
Comment: The increase in the Medicare levy low income threshold is designed to take into account movements in the CPI and ensures that low income families and individuals are exempt from paying the levy.
Other Measures:
- The Futures Fund - By 2020 could be as large as $100 billion; almost fully off setting the government's unfunded public sector pension liability. At this size, the Futures Fund could be expected to have a significant impact on Australian financial markets.
- Business - There was also a surprise tax cut for business through the removal of the 3% tariff applying to business inputs imported on tariff concessions, which will benefit manufacturing.
Tony Martin and Geoff O'Neil- Directors
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