On 2^nd May 2010 the Government released to the public the “Henry Report” on the future of Australia’s taxation system. 

In all, there are 138 recommendations – more than 100 of which the Government has put its response to on the “back-burner”, probably until after the next election. 

Henry Review - Key Points:  

Recommendations

• Impose a 40% “resources rent tax” on the mining sector
• Cut the company tax rate from 30% to 25%
• Increase personal tax-free threshold to $25,000 and flatten other rates
• Replace state taxes such as payroll with broader consumption taxes
• Combine all family tax benefits into a single means-tested payment
• Reform superannuation taxes to help lower-income workers
• Introduce traffic congestion charges 

Wayne Swan’s Response

• A 40% “resources super-profit tax” on mining sector from 2012-2013
• Raise compulsory superannuation rate from 9% to 12% by 2019-2020
• Cut the company tax rate from 30% to 28% by 2014-2015
• Create $700m infrastructure fund for state infrastructure from 2012-2013
• Continue to allow workers approaching retirement to top-up their super by $50,000 a year 

Many of the recommendations will cost taxpayers dearly should they become law.

For example, recommendations still “live” include: 

• Taxing fringe benefits in the hands of employees
• Removing important small business concessions (eg the 50% active asset reduction and the 15 year exemption)
• Taxing superannuation contributions in the hands of employees, and
• Changing the nexus rules making it more difficult to claim personal tax deductions 

Below is a summary of the taxation measures actually announced by the Government as part of its response to the Henry Report. 

1.       Taxation measures announced by Government 

1.1        Increasing the Superannuation Guarantee (SG) contribution rate 

The SG contribution rate will be increased to 12% by 2019-20 (from the current 9%) with gradual increases commencing on 1^st July 2013. 

1.2         Increasing the SG age limit from 70-75 

From 1^st July 2013 the SG age limit will be increased to 75 years (currently 70 years), which means that for the first time, employees aged 70 to 74 will generally be eligible to have SG contributions made on their behalf. 

1.3         Low income earners Government contributions 

From 1^st July 2012 the Government will match concessional contributions made by or for the benefit of individuals with adjusted taxable incomes of up to $37,000.  The amount payable by the Government will be calculated at the rate of 15% for each $1 of concessional contributions, with an annual maximum amount payable of $500 (not indexed). 

1.4         Concessional contribution caps for people aged 50 or more 

From 1^st July 2012, individuals aged 50 or above with superannuation below $500,000 will be entitled to make concessional superannuation contributions of up to $50,000 without exceeding the cap. 

This measure effectively extends the existing transitional concessional contributions cap beyond 30^th June 2012, but only for those individuals with account balances below $500,000. 

1.5        Cutting the company tax rate 

The company tax rate will be reduced as follows: 

• For eligible small business companies – the company tax rate will be reduced to 28% from the 2012-13 income year; and
• For other companies – the company tax rate will be reduced to 29% for the 2013-14 income year, and then down to 28% from the 2014-15 income year. 

1.6        Capital allowance concessions for small business assets 

From 1^st July 2012, the following capital allowance (ie depreciation) concessions will be available to small businesses: 

• A immediate write-off for assets valued at under $5,000 (currently an immediate write-off is generally available for assets valued at less than $1,000) and
• All other assets (except buildings) can be depreciated in a single depreciation pool at a rate of 30% (currently small business assets can be allocated to two different pools, according to their effective life – ie a general pool or a long-life pool).

 1.7        Resource super profits tax 

From 1^st July 2012 a Resource Super Profits Tax (RSPT) will be introduced at a rate of 40% on profits made from the exploitation of Australia’s non-renewable resources. 

The RSPT will replace the crude oil excise and operate in parallel with State and Territory royalty regimes.  Projects within the scope of the Petroleum Resource Rent Tax (PRRT) will have the option of opting into the RSPT or staying in the PRRT.  The election into the RSPT will be irrevocable. 

Under the RSPT a refundable credit for royalties paid to State and Territory Governments will be available.  The refundable credit will eliminate investment distortions associated with the state royalty systems and ensure there is no ‘double taxation’ of resource profits. 

The Government will consult extensively with stakeholders on the design of the RSPT. 

1.8        Resource exploration rebate 

A refundable tax offset will be available at the company level (set at the prevailing company tax rate) for exploration expenditure incurred on or after 1^st July 2011. 

Under this measure the definition of exploration expenditure will be expanded to include expenditure incurred in exploring for geothermal energy. 

All companies will be able to access the Resource Exploration Rebate to avoid the complexity of defining the concept of an ‘Australian small listed exploration company’ in the tax law. 

SUMMARY OF WHAT’S IN AND WHAT’S OUT 

 Summary Opinion

 The Government’s response to the Henry Tax review reveals the character of this Government as it heads to an election it is now worried it could lose.

In the face of those fears, economic “reform” has taken a back seat as it relies on the soft political option of taxing the “lucky country’s” golden resource sector to plug revenue holes of its own making and reward some of its own.

This is all about socialization of profits!

The “reform” was largely gutted from the outset when the Government specifically ruled out any review of the rate of the GST!

Given these constraints, on this subject Henry only had this to say:

“State payroll taxes should eventually be replaced with revenue from more efficient broad based taxes”. 

Translation – the GST rate should increase!

And by the way, whilst we like to think we lead the way in terms of economic sophistication with our fellow ANZAC partners; well think again!

The Kiwis just announced an increase from 12.5% to 15% to their GST and a reduction of personal tax rate to 38%!

Whilst we welcome the planned reduction in company tax rate to 28% - it is still disappointing as it did not go far enough.  Hopefully this measure will not hinge on the RSPT proposal being implemented.

Raising the SGC to 12% sounds good but still has to be funded by employers.  This is a 33% increase in what it costs employers.  To adopt this, business will be looking for wage trade offs similar to those of the early 1990s.

Why not shift some of the responsibility to Employees to save - say 3% of wages – with incentivies through the tax system?

Why not reduce the tax on the contributions to superannuation funds?

So clearly, while the Government’s actual response falls a long way short of sweeping long-term tax reform, a pathway to tax reform now exists to be discussed and agreed some time in the future and by a political leader with some real conviction.

 Tony Martin – Director Advantage One