Unfortunately the Gillard Government does not have a majority in Parliament and needs the support of the independents and Greens to implement its agenda. For this reason, the budget tries to appease various stakeholders while trying to return to a surplus position in two years. The political environment has limited the Government’s flexibility in implementing its agenda and the opportunity to address structural problems that are threatening long-term sustainability of the federal budget.
This is the first budget in the last eight years where there are no tax cuts. We have become accustomed to looking forward to tax cuts in the new financial year and advising clients to defer the attribution of income wherever possible until the following year. This year’s scenario is the complete opposite. Those who have a taxable income that exceeds $50,000 will incur an increase in their marginal tax due to the introduction of flood tax.
Economic factors
Australia is experiencing its best terms of trade since records started. This has insulated our economy from full impacts of the GFC. Our good fortunes are expected to continue for a few years before we start to see a significant drop in commodity prices. Recent governments, however, are treating the resources boom as permanent, enabling the structural deficit in the budget to be hidden.
The federal budget commences the process of trying to rein in middle-class welfare, which had grown exponentially during the Howard Government era. Three out of every four families are in receipt of some sort of family assistance payment and this level of assistance is unsustainable in the long run. What we are seeing is the slow unwinding of these benefits.
On the issue of tax reform we are going to have to wait until the proposed tax summit in October to see any real action on this front. Once again, only a few more of Henry’s recommendations made the cut, with the Government choosing to implement only some of the low-hanging fruit
What follows is a summation of the major impacts arising from this year’s federal budget from a personal and small business perspective.
Personal taxation
One of the biggest changes in this year’s budget was removal of access to the low income tax offset (LITO) for under 18s on unearned income from interest, dividends, royalties, trusts etc. Some 200,000 taxpayers were taking advantage of this offset to income split between adults and children. For the 2010/11 year the LITO is worth $1500, which meant that minors effectively had a tax-free threshold of $3333. The 2010/11 income year will be the last year to take advantage of this offset. From the 2011/12 income year we will be back to old rules, which mean that there will be no tax benefit for families who divert more than $416 of unearned income to minors.
Personal tax rates for 2011/12 are shown in Table 1.
Business impacts
Another change relates to the entrepreneurs tax offset (ETO), which will be abolished with effect from the 2012/13 income year. It represented a tax cut for micro businesses. The entrepreneurs tax offset (ETO) is a tax offset equal to 25 per cent of the income tax payable on your business income if you have an aggregated turnover of $50,000 or less.
One of the good features of this offset was that it was available irrespective of the structure chosen to run a small business (sole trader, company, partnership, trust). While the ETO had some design faults in that it phased out as businesses grew, the principle of taxing small business less represents good policy. The IPA will continue to advocate for lower taxes on small business to compensate them for the disproportionate cost of compliance they face.
