A Steady Roadmap for Growth
As is custom, there were a number of official announcements and an abundance of rumours and unofficial ‘leaks’ in the lead up to the release of the 2016-17 federal budget. As widely anticipated, there was very little in terms of budget measures specifically aimed at housing. However, the significance of the tax reform contained within this budget was arguably underestimated, particularly if you consider the changes projected for the out-years. In the near term, small businesses are the main beneficiaries of the announced reforms.
The key areas addressed in the budget:
- the Government has held firm on their commitment not to make any changes to capital gains tax or negative gearing provisions. Furthermore, comments within the Treasurer’s budget speech suggest the coalition have solidified this position ahead of the upcoming election;
- the plan to lower the company tax rate to 25 per cent through a staged implementation over the next decade, with a number of changes for small businesses to take effect in this budget period;
- a modest change to the personal income threshold for the second highest marginal income tax rate which was increased from $80,000 to $87,000 (slightly higher than expected) in order to ameliorate concern about bracket creep;
- Commitment to the Smart Cities Plan;
- A Youth Employment Package
- significant reforms to the superannuation system;
- the ATO has been provided with additional resources to bolster enforcement activity, primarily aimed at addressing multi-national tax avoidance.
In the sections below we discuss the overall economic and fiscal outlook presented in the 2016/17 Budget along with some of the key forecasts. This is followed by additional explanatory detail regarding the key announcements most relevant to the residential building industry.
Economic Backdrop & Fiscal Position
The Budget presents a “steady as she goes” outlook for economic growth over its forecast horizon. The key economic assumptions on which the Budget was developed are summarised in the table below.
Key Treasury Forecasts underlying Budget 2016-17:
In terms of the economic assumptions underlying the Budget projections, the Treasury foresees the rate of economic growth returning to 3.0 in 2017/18 and remaining at this level over the forecast horizon. The acceleration of economic growth will help drive a reduction in the unemployment rate to 5.5 per cent by the end of the forecast horizon, a little lower than the 5.75 average rate expected for 2015-16. Against this backdrop, inflation is expected to pick up a little but remain in the relatively comfortable 2 per cent to 3 per cent range. Stronger GDP growth, and the decline in the cash value of the budget deficit over time means that the relative size of the deficit is expected to fall from 2.4 per cent of GDP in 2015/16 to 1.4 per cent of GDP in 2017/18.
Of note are the estimates of the contribution that dwelling investment will make to economic growth in the years ahead. HIA’s projections are for dwelling investment to fall by 5.4 per cent next financial year and by 6.7 per cent in 2017/18. The HIA’s forecasts are based on the assumption that new home commencements will decline from about 214,300 in 2014/15 to 160,100 in 2017/18, while renovations activity is projected to recover modestly over the same period. Realising the outcomes expected by Treasury will require a continuation of the current record levels of new housing activity and strong growth in the renovation market.
While the changes to superannuation and the lowering of the Official Cash Rate will encourage more investment in other avenues like rental investment, it is unlikely that this will be sufficient to deliver the continued growth in residential investment that Treasury is anticipating.
In terms of the projections contained in yesterday’s budget, the size of expected future deficits has increased since the forecasts in December 2015’s Mid-Year Economic & Financial Outlook. In 2015/16, the underlying cash balance is expected to reach $39.9 billion followed by $37.1 billion in 2016/17. Thereafter, the deficit is projected to decline significantly, falling to just $6.0 billion by 2019/20, the latest year for which Treasury forecasts have been prepared.
Key Budget Measures
‘Ten Year enterprise Tax Plan’:
- The tax rate applicable to small businesses has been lowered by 1 per cent to 27.5 per cent, which follows on from the 1.5 per cent cut in the previous year.
- The definition of small business has been expanded from those with revenue of less than $2 million to those with revenue of less than $10 million.
- Extension of the provision enabling small businesses to immediately depreciate assets valued up to $20,000 to the end of June 2017, and making this provision accessible to businesses with revenue up to $10 million.
- A ‘Ten Year enterprise Tax Plan’ aims to incrementally lower the company tax rate to achieve a 25 per cent rate for all companies by 2026/27. Over time, the size of companies eligible for the 27.5 per cent tax rate will be lifted each year until all companies are taxed at this rate in 2023/24. The rate for all companies will then be incrementally lowered over the ensuing four years to reach 25 per cent by 2026/27.
- The government will extend the unincorporated small business tax discount. From 2016-17, the discount will be available to businesses with annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8 per cent. The maximum discount available will remain at $1,000. Over the next decade, the discount will be further expanded in phases, to a final discount of 16 per cent.
The Youth Employment Package
- This program, Youth Jobs PaTH (Prepare, Trial, Hire), has three components: the first provides pre-employment skills training for young job seekers; the second provides a $1,000 inducement to businesses to provide a 4-12 week internship for program participants along with an income supplement for the participant; and the third is $6,500 ‘Youth Bonus’ wage subsidy payment for employers who take on a young worker who has been in employment services for longer than six months.
Reforms to superannuation
- The purpose of the superannuation system is to be enshrined in legislation in line with a recommendation of the Murray Review. This will define the purpose as: providing an income in retirement to substitute or supplement the Age Pension. This provides legislative basis the government of the day to target the superannuation tax concessions at those who would otherwise be likely to be remain dependent on the Age Pension, this is likely to come at the expense of tax concessions currently available to those likely to be self-funded in retirement.
- Those with combined incomes and superannuation contributions greater than $250,000 will pay 30 per cent tax on their concessional contributions, up from 15 per cent. This represents a lowering of the previous income threshold of $300,000.
- The superannuation concessional contributions (ie pre-tax contributions or contributions where a deduction is claimed) cap has been lowered to $25,000 per annum, down from $30,000 for those under 50 and $35,000 for those over 50.
- This has been partially balanced by enabling unused concessional contribution caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 or less.
- The government have introduced a $500,000 lifetime cap for non-concessional contributions (ie contributions made from savings for which no deduction is claimed).
- The Government will introduce the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it expires on 30 June 2017.
- From 1 July 2017, the Government will lift current restrictions and allow individuals under the age of 75 to claim tax deductions for personal superannuation contributions to eligible superannuation funds.
- The current spouse tax offset has been broadened. The income threshold for the receiving spouse (whether married or de facto) will be lifted from $10,800 to $37,000
Tax Integrity Package’ – additional resources for the ATO
- The government have provided additional resources to the Australian Tax Office to establish the Tax Avoidance Taskforce. The key focus will be pursuing tax avoidance by multinationals and high wealth individuals.
- The government will introduce a new ‘Diverted Profits Tax’ targeting multi-nationals shifting profits earned in Australia to lower taxing jurisdictions.
Source: HIA Economics Research Note – May 2016