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Buddy, can you spare $12 billion?


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29 April 2013:  Today’s address by the Prime Minister to the Per Capita Reform Forum at the National Portrait Gallery saw her reveal the size of this year’s revenue shortfall at $12 billion.

Where did the dollars go?

The PM didn’t say where the money went missing, but preliminary Deloitte Access Economics analysis identifies the 2012-13 shortfalls in the chart below.

The three big shortfalls versus Treasury forecasts are all in ‘profit-related’ taxes – company tax, resource rent taxes (a group which includes the new mining tax) and ‘other individuals’ (which covers tax on unincorporated small businesses, as well as tax on interest, dividends and rent).

That is no surprise:  According to the Bureau of Statistics ‘company profits before tax’ fell by 17% through the course of 2012 as the high $A and falling prices for the likes of coal and iron ore ate into business profitability.

 

What does a $12 billion Budget shortfall mean?

There’s another thing the PM didn’t do, she didn’t indicate just how large the Budget shortfall is in practical terms.  Although we don’t need to do it tomorrow, or next year, Australia’s Government needs to get back to paying its way.

But filling a Budget hole of $12 billion a year will require some difficult national choices.

For example, it would require one of the following.

If the shortfall was made good entirely from spending:

  • Entirely abolishing all Family Tax Benefit A payments (saving $14 billion).
  • Or stopping all funding to the States for health care (saving $13 billion).
  • Or stopping all funding to schools (saving $13 billion).
  • Or stopping all funding to aged care homes (saving $8 billion), as well as community care ($2 billion) and veterans’ care ($2 billion).
  • Or cutting all Medicare payments by two-thirds (saving $12 billion).
  • Or cutting pensions to the aged by a third (saving $12 billion).
  • Or abolishing all disability pensions (saving $15 billion).

Or if the shortfall was made good entirely from taxes and ‘tax expenditures’:

  • Extending capital gains tax to the family home (raising – eventually – $15 billion a year).
  • Or raising the current 45% rate to 66% (raising $12 billion).
  • Or having the current 45% rate cut in at incomes of $65,000 rather than $180,000 (raising $12 billion).
  • Or raising the 32.5% rate to 37% (that is, do away with that rate completely, raising $10 billion).
  • Or lowering the $18,200 threshold to $12,500 (raising $13 billion, but you’d be taxing about an extra 650,000 people, including many pensioners).
  • Or taxing all superannuation contributions at marginal tax rates (raising $14 billion).
  • Or raising the rate of company tax from 30% to 35% (raising $12 billion – but also adding to franking credits that would cut the personal tax take).
  • Or adding 30 cents a litre in additional taxes on the price of petrol (raising $12 billion).
  • Or tripling the existing taxes on cigarettes (raising $12 billion, and adding about $17 to a pack of 25 cigarettes).
  • Or lifting the carbon tax to $60 dollars a tonne and removing the future link to the European carbon price (raising $12 billion).

Yet that isn’t the conversation that our politicians are having with us

Each of the above options would be really ugly.

Yet it is vital that Australians begin this conversation with ourselves, because our politicians aren’t.  Labor is busily talking about new spending on schools and disability insurance, while the Coalition is talking about rolling back the carbon and mining taxes.

So both sides are still talking about extra costs to be loaded on a Budget that is yet to make up a $12 billion shortfall.

So, what can we expect from the Budget…?

Gone are the days where the purpose of revenue raising proposals was to fund a cut in the corporate tax rate.  Obviously, the cut is off the table.

We’d expect that corporates will be targeted to (in part) plug the gap. Previously proposed revenue-raising measures (that were rejected by the business community last year) may be given new life in this year’s Budget.

We expect there could be a reduction of the thin capitalisation safe harbour from 75% to 60%. This would have a potentially significant impact on business by denying interest deductions available to both Australian and foreign companies.

We also anticipate measures targeted at the resources industry, including:

  • Reducing the diminishing value rate for depreciation to 150%
  • Spreading the deduction for first use exploration assets over five years or their effective life
  • Removing the capped effective life for certain exploration-related and primary production depreciating assets
  • Not limited to the Resource sector, abolishing the 40% non-refundable tax offset for companies with a turnover >$20 million.

Yet even these would provide only a fraction of the dollar shortfall in question here.  Besides, there was no consensus among taxpayers on any of these measures during last year’s consultation process; undoubtedly, many large corporates would be disappointed with these measures, which could adversely affect the international competitiveness of Australian-based multinationals and the resources industry. 

At the same time, there is an ongoing dialogue on the base erosion and profit shifting rules targeted at foreign multinationals, which may manifest in a new tax regime applicable to e-commerce and technology companies in Australia.

We can do better than that – join our Budget events and conversation

Australia deserves a better conversation.

Yes, there are hard choices ahead, but they need to be informed choices.

Deloitte will keep you connected to the critical conversation via the following:

Pre-Budget events.  On May 7 (in Sydney) and May 8 (in Melbourne), Deloitte will have Henry Ergas, Chris Richardson and Vik Khanna having a real Budget conversation – one which will canvas the Budget backdrop that Australians may not otherwise hear until after the Federal election.

Media who would like to attend a special Pre-Budget event briefing on Tuesday May 7 should contact Vessa Playfair (+61 2 9322 7576) or Johnny Sollitt Davis (+61 2 9322 7256) – places are strictly limited.

Pre-budget webcast - For those who miss out on attending, the event will also be recorded and released as an exclusive pre-budget webcast on Friday 10 May.  Sign up now for your copy via our Deloitte website at www.deloitte.com/au/federalbudget.

Twitter - We’ll also keep you connected in real time via our Twitter feed @federalbudget and via our free iPhone app, tax@hand.  Stay connected to exclusive analysis of tax changes as they happen.  Visit the iTunes app store at tax@hand app.

Budget Alert - And finally, our full Budget Alert the morning after the 14 May Budget will contain economic analysis as well as the thoughts of Australia’s leading team of Tax analysts (Vik Khanna, Mark Goldsmith and Peter Madden) and Small Business experts.

In the meantime, keep the following list handy ...

Deloitte federal budget Twitter feed: @federalbudget

Deloitte federal budget website:  www.deloitte.com/au/federalbudget

Deloitte tax@hand app: iTunes - tax@hand.

See Deloitte media releases and research at www.deloitte.com.au

Follow us – @DeloitteNewsAU

Last Updated: 

Contacts

Name:
Vik Khanna
Company:
Deloitte, Melbourne
Job Title:
Partner - International Tax
Phone:
Tel: +61 3 9671 6666, Mobile: +61 424 080 835
Email
vkhanna@deloitte.com.au
Name:
Johnny Sollitt-Davis
Company:
Deloitte Australia
Job Title:
Corporate Affairs & Communications
Phone:
Tel: +61 3 9671 6177, Mobile: 0431 134 850
Email
jsollittdavis@deloitte.com.au
Name:
Chris Richardson
Company:
Deloitte Access Economics
Job Title:
Partner
Phone:
Tel: 02 6175 2000, Mobile: +61 414 466 156
Email
chrichardson@deloitte.com.au
Name:
Vessa Playfair
Company:
Deloitte Australia
Job Title:
Head of Corporate Affairs
Phone:
Tel: +61 2 9322 7576, Mobile: +61 4 1926 7676
Email
vplayfair@deloitte.com.au

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