The Federal Government is putting small business in the spotlight with its response to the Henry Tax review, cutting the corporate tax rate by 2% from 2012 and allowing the immediate write-off of assets worth up to $5,000.
But while small businesses will receive a large portion of the benefits, larger mining companies will be slogged with a 40% tax on profits in order to fund the Government’s new initiatives.
The new Resource Super Profits Tax is at the core of the reform, with treasurer Wayne Swan saying they “depend entirely” on the new tax charge. The Government is framing the reform as a “stronger, fairer, simpler” tax system.
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There is no sign of the introduction of an optional tax return system, a tax on cars and trucks to fund infrastructure or any type of scheme that would see the ATO take over the distribution of state taxes, as some experts predicted.
The Government says the new Resource Super Profits Tax will be imposed so small businesses and individuals can receive the benefits larger mining companies are enjoying from their success.
Treasurer Wayne Swan and Prime Minister Kevin Rudd say the new tax “will ensure Australians get a fair share from our valuable non-renewable resources”.
The new tax is set to deliver the Government an extra $9 billion in revenue by 2013-14, offsetting the costs of the response of the various new initiatives. The most costly of these is the cut in the company tax rate, which will cost $2 billion by 2013-14, while the instant write-off scheme will cost $1.03 billion.
The Government is set to see an overall tax loss of $50 million during 2011-12, due to the early introduction of the corporate tax cut for small businesses, with benefits of $635 million and $2.59 billion expected in the following two years.
However, while businesses will be handed much of the tax relief, there will also be some pain with an increase in the superannuation guarantee to 12% over the next decade. The increase will occur in .25% increments until 2019.
The age limit on the guarantee will also be lifted from 70 years of age to 75, with Swan and Rudd placing a large emphasis on the importance of retirement savings as the Australian population continues to age.
While the Henry Review itself has recommended a number of initiatives which have been left out, here are the Government’s five main reform points:
The Government will introduce a 2% cut to the current corporate tax rate from 30% to 28%, with small businesses given a head start to the cut from the 2012-13 financial year.
All businesses will see their tax rate slashed to 29% from the 2013-14 year, with a further 1% cut to follow during the 2014-15 financial years. Small businesses, which have been defined by the Government as entities with turnover less than $2 million, will receive the full benefit from July 1, 2012.
The cut comes in response to findings from the Henry Review which suggested the current rate of 30% is too high compared to other OECD countries, with that rate about 5 percentage points higher than average for small to medium sized countries.
The Government has specifically pointed out the economies of Hong Kong, Taiwan, Singapore and Vietnam as examples. The reduction to 28% will now put Australia’s corporate tax rate below those of Spain, New Zealand, Luxembourg, Norway and Mexico.
The Government says the early reduction for small businesses will provide cash flow benefits and “enable them to reinvest more of their profits”, with about 720,000 companies set to benefit from the measure.
“The measure will provide a direct benefit to small business companies that retain their profits and will provide an incentive for many more to do so. This will promote investment and help many small businesses to expand and grow,” the Government said in its response.
Small businesses with revenue of less than $2 million will be able to write off eligible assets worth up to $5,000, in a move the Government says will reduce red tape and complexity in tax compliance.
It is one of the initiatives introduced in response to a recommendation from the Henry Review, although the report itself proposes a $10,000 asset limit instead. The scheme will be introduced from the 2012-13 financial year, with assets able to be written off immediately.
In addition to this, small businesses will be able to allocate all other depreciable assets, (excluding buildings), into a single depreciation pool which can be written off at a rate of 30%.
The Government says this will allow businesses to simplify their tax affairs, and “will boost their cashflow at a time when they are investing for growth”.
The superannuation guarantee will be increased to 12% from the current rate of 9% over the next decade, with the first two increments worth 0.25% to be introduced on July 1, 2013 and 2014.
Following 2014, the superannuation guarantee will be lifted by increments of 0.5% per annum. The Government says this will “increase the adequacy of retirement incomes for Australian workers over time”, no doubt as a response to the question of an aging population.
The extra savings are set to generate an extra $10 billion by 2020 and $35 billion by 2035.
Lower-income earners will also benefit from some of the Government’s new initiatives, including a contribution of up to $500 for workers earning up to $37,000, effective from July 1, 2012.
Additionally, from that date the Government will allow individuals aged 50 and over with superannuation balances below $500,000 to make an extra $50,000 in concessional superannuation contributions, doubling the current cap of $25,000.
From July 1, 2013, the superannuation guarantee age restriction will be increased from 70 to 75, with the Government saying this will ensure “they are remunerated on the same basis as their younger co-workers”.
The resources industry will be hit with a 40% Resource Super Profits Tax, with the revenue to be used in order to fund the Government’s new tax reform initiatives.
The RSPT, which is one of the first of its kind in the world, will be payable at a rate of 40% on the realised value of resource deposits, measured by the difference between the revenue generated from extracting resources and associated costs.
Additionally, the RSPT will be a deductible expense for income tax purposes. Differing from income tax, the RSPT will guarantee to credit firms for the tax value of extraction and exploration, and will refund that credit when a project finishes.
The Federal Government will also provide resources companies with a refundable credit for state royalties, available at least up to the amount of royalties imposed at the time of announcement. The Government says this will allow revenue from royalties, while removing any effects they may have on resources and production.
The Government says that by imposing this tax, both individuals and smaller business will benefit from the success of the mining boom with no discouraging effect on investment in the miners themselves.
Following on from the Government’s “Nation Building” project from the 2009 Budget, which included $22 billion in infrastructure spending, a new infrastructure fund will be set up with annual contributions of $700 million to be made each year.
The initiative, which will begin from 2012-13, will be used to increase the opportunity for development in resource-rich areas.
The funds will be delivered to the states as projects are built, with more details to emerge as the Federal and State Governments negotiate the terms of the fund.
“This infrastructure fund will be distributed to the States in a manner which recognises that resources-rich States’ large associated infrastructure demands,” the Government has said.
“Resources-rich states will receive relatively more funding which can be used to support investment in infrastructure, including that necessary for the ongoing development of the resource industry.”