Given comprehensive tax reform proved elusive in the last parliament, the question this term is whether the government will be able to both push through those tax policy reforms proposed in this year’s budget and move forward on further fundamental reform of the entire tax system
The Coalition has been returned to government with the smallest of margins, one seat. In the Senate, the government will not have a majority. On matters where the ALP opposes the government’s proposals, the government will require the support of the Greens or at least nine of the 11 other crossbench senators to progress legislation through parliament.
Tax reform has been heralded as a big ticket item on the government’s agenda. At time of writing, it’s hard to know exactly what will and won’t make the cut – but the below is still worthy of debate and discussion.
Tax cut for individuals: first off the blocks
The tax cut for individuals is the most pressing from a time and political perspective. Previously expected to commence on 1 July 2016, this legislation has been given priority. The measure is likely to quickly proceed given ALP support, but the issue could become tied to some robust debate around matters such as the extension of the 2 per cent temporary budget repair levy and a limitation on the deductions available to individuals for managing tax affairs: both of these related issues have been floated by one or other of the key parties.
Company tax: gliding or crashing?
The government has presented the 10-year glide path of company tax cuts as a single legislative package, but has subsequently decided to split this bill to ensure critical elements receive Senate support.
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In the upper house, the Greens, the Nick Xenophon Team and the ALP are opposed to a broad-ranging tax cut. At the time of writing, the announced positions of these parties are as follows:
| Party Positions | Detail |
| ALP | Support tax cut for “small business” to 27.5 per cent – under $2m turnover |
| Nick Xenophon Team | Support tax cut for “small business” to 27.5 per cent – under $10m turnover |
| Greens | Don’t advocate tax cuts for business. But support change in definition of small business to under $10m turnover. |
It will be a test of the government’s negotiating and communication skills to get the corporate tax rate cut glide path proposal off the ground. The political reality is that this long-term package of company tax cuts could be negotiated down, unless there is some significant policy compromise.
Anti-avoidance provisions: continued momentum
Anti-avoidance measures, especially relating to multinational tax and the OECD Base Erosion and Profit Shifting (BEPS) Action Plan, were the focus of several pre-election budget announcements:
- A new Diverted Profits Tax (DPT);
- Anti-hybrid changes;
- Adoption of new OECD transfer pricing guidelines;
- A new regime requiring tax and financial advisers to report potentially aggressive tax-planning schemes;
- Increased penalties for non-lodgement of tax documents for significant global entities; and
- New protection for tax whistleblowers.
The thrust of these measures is to address integrity concerns about the tax base, and all-party support is expected in principle, albeit differences may emerge in the detail. Most critical from a timing perspective is the development of the DPT and anti-hybrid legislation. Both measures are complex and important – adequate time is required for effective consultation and legislative development.
The ALP continues to support an overhaul of the rules for interest deductions – their proposal replaces the existing asset-based thin capitalisation rules and does not follow the OECD EBITDA approach, but instead caps interest deductions by reference to the actual worldwide gearing levels of the relevant group. The Greens also support such a measure.
Tax transparency will remain a focus, and further calls for new and increased transparency measures are likely to emerge in the political debate. This will manifest itself in various guises: the Coalition has stated it is considering options for a beneficial ownership register based on recommendations in the OECD BEPS Action Plan and this would get support from both the ALP and the Greens.
The exact form of the tax paid data published by the ATO may be revisited (e.g. the relevant turnover thresholds and the data disclosed). There will also be much focus on the take-up of the Voluntary Tax Transparency Code. We have already seen some companies taking the lead on that measure and setting out to meet, or exceed, public expectations. For companies debating whether to adopt the code, we consider that the position is clear: the public expectations of the tax environment have changed forever and the sooner that companies adjust to the new normal, the better.
Small business tax measures will fly
The government has proposed an increase to the small business turnover threshold from $2 million to $10 million from 1 July 2016, allowing more small businesses to access many of the small business tax concessions (including the instant asset write-off).
It has been reported that the Nick Xenophon Team supports lifting the limit on the small business tax breaks to $10 million, and at the time of writing the Greens also support an increase of the small business entity turnover threshold to an annual turnover of no more than $10 million per annum. As such, we expect that the increase to the turnover threshold for small business to $10 million would proceed as announced.
Other business tax changes: all in good time
The 2016-17 federal budget also contained a number of business tax changes such as:
- The creation of new forms of Australian collective investment vehicles (CIV) for investors to pool their funds with Australian fund managers;
- Tax consolidation amendments in respect of deductible liabilities, deferred tax liabilities and securitised assets which broadly address integrity concerns;
- Reforming the taxation of financial arrangements (TOFA) regime by implementing simplified rules;
- Targeted amendments to simplify Division 7A (transfers from private companies); and
- Removal of key barriers to use asset-backed financing (relevant to Islamic financing).
These measures are all positive changes for the Australian economy and the Australian taxation system, and are likely to have bipartisan support. The challenge will be to get the legislation through the consultation and drafting phases and onto the parliamentary calendar. The first round of the CIV changes is due to commence from 1 July 2017 and are therefore time critical.
And what of tax reform?
The tax reform white paper process was announced by the then-opposition leader in 2013. A 200-page discussion paper issued in March 2015 was followed by hundreds of submissions and millions of words: written, spoken and argued. The tax reform project team has since been disbanded and a new broader team within Treasury called the Tax Framework Division will continue to examine cross-tax system issues, including international developments in tax.
The right tax reform policy solutions remain open to debate, and the political challenges will continue to frustrate the process. But the pressing reasons for tax reform which were articulated prior to the election remain pressing reasons today.
Do we think our tax system in 2016 will be the optimal tax system for Australia in 2030 or even in 2020? If we acknowledge that change is needed, and if we anticipate increasing challenges due to globalisation, digitisation and other transforming influences, it is not an option to let tax reform wither and die.
David Watkins, partner, tax, Deloitte and Peta McFarlane, account director, tax insights and policy group, Deloitte
