Henry Tax Report and Government’s response released
On Sunday, 2 May 2010, 4 months and 9 days after the Government received the final report of the Australia’s Future Tax System review team (the Henry Report, as it has become known); the Government publicly released the report and its initial response. However, although the Henry Report contains sweeping recommendations to reform Australia’s tax system, the Government has initially focused on the resources sector and superannuation. The company tax rate is also to be reduced and there are some benefits for small business.
The highlights are:
• a Resource Super Profits Tax that will tax non-renewable resource projects (at a rate of 40%) on their profits rather than just their production (taxpayers will be eligible for a credit for royalties paid to State and Territory Governments)
– this will apply from 1 July 2012;
• a refundable tax offset (the Resource Exploration Rebate) at the company level, set at the prevailing company tax rate, for exploration expenditure in Australia incurred on or after 1 July 2011;
• reduction in company tax rate to 28% – small businesses will benefit from 2012-13, but it will be phased in for other companies (29% for 2013-14 and 28% from 2014-15);
• small businesses will be able to immediately write-off assets valued at under $5,000 (currently $1,000) and all other assets (except buildings) will be written off in a single depreciation pool at a rate of 30% – this will apply from 1 July 2012;
• super contributions cap concession: workers aged 50 and over with super balances below $500,000 will be able to make up to $50,000 in annual, concessional superannuation contributions – to apply from 1 July 2012;
• Superannuation Guarantee age limit will be increased from 70 to 75 from 1 July 2013;
• Superannuation Guarantee rate will rise to 12% by 2019-20 (to be phased in); and
• Government will provide a $500 annual superannuation contribution to individuals with an adjusted taxable income up to $37,000.
The Prime Minister and the Treasurer said that "the first wave of [its] agenda is to reform resource, company and small business taxes and superannuation". They also said that they are "attracted to developing changes in a number of other areas considered by the Henry Report, especially making tax time simpler for everyday Australians, improving incentives to save and improving the governance and transparency of the tax system." However, these will be considered in the government’s second term (if re-elected).
Some Henry Report recommendations have been specifically rejected, including: removing the CGT exemption for pre-CGT assets; applying a discount to negative gearing deductions; reducing indexation of the age pension; including the family home in means tests; removing the Medicare levy; introducing a bequests tax; indexing fuel to CPI; removing the luxury car tax; and changing alcohol tax (in the middle of a wine glut and where there is an industry restructure underway).
The Prime Minister and the Treasurer said that other recommendations in the Henry Report are not government policy and should be debated further in the coming years.
The Government’s initial response to the Henry Tax Review marks a timid first step towards serious tax reform, according to the Institute of Chartered Accountants in Australia.
The Institute’s Tax Counsel, Yasser El-Ansary, said the overarching objective of Dr Ken Henry’s review into Australia’s Future Tax System was to build a stronger, fairer and simpler tax system to meet the challenges that lie ahead. While Dr Henry has delivered on what was asked of him, the Government has only addressed a handful of the review’s 138 recommendations. The Government’s initial response could be mistaken for a series of budget announcements rather than a more strategic outlook for serious tax reform in Australia, Mr El-Ansary said.
The Institute considers that there is clearly a lot more work for the Government to do in mapping out a tax reform agenda for the decades ahead. While the Government’s initial response was certainly a start, it didn’t go far enough in meeting our expectations, Mr El-Ansary said.
Mr El-Ansary also warned that the introduction of a significant new tax impost on the resource sector would be met with considerable resistance from those impacted. While it’s a debate that we should, and need to, have over the months ahead, any new tax on the critically important resources sector must be carefully considered before being implemented, he said.
On a positive note, the Institute welcomed that, for the first time, Australia has a tailor-made reform agenda for the decades ahead in the form of Dr Henry’s report. However, Mr El-Ansary called on the Government to demonstrate in the next few months a firm commitment to address as many of Dr Henry’s recommendations as possible. To this end, he indicated that the Institute will be preparing a comprehensive response to the Henry Report and the Government’s response to it over the coming weeks, after consultation with its members.
Resources "super profits" tax
A Resource Super Profits Tax (RSPT) will be introduced on 1 July 2012 at a rate of 40% on profits made from the exploitation of Australia’s non-renewable resources. Details of the RSPT are contained in a separate Paper, The Resource Super Profits Tax: a fair return to the nation.
The RSPT will apply to all legal entities (companies, partnerships and trusts) directly involved in the exploitation of Australia’s non-renewable resources. In principle, RSPT will only be payable on resource extraction activities.
The RSPT will not be levied on shareholders in a company or beneficiaries of a trust that are involved in exploitation of non-renewable resources.
The RSPT will be calculated separately for each project interest. This is important for joint ventures where partners contribute different capital to a project.
RSPT payments will be deductible for income tax purposes. Conversely, RSPT refunds will be assessable for income tax purposes. Resource entities will continue to be subject to income tax on their exploration and production activities.
Projects within the scope of the Petroleum Resource Rent Tax (PRRT) will have the option of opting into the RSPT or staying in the PRRT (see transitional arrangements below). The election into the RSPT will be irrevocable.
The RSPT will replace the crude oil excise and operate in parallel with State and Territory royalty regimes.
Reduction in company tax rate
The company tax rate will be reduced to 28%. The timing of this will depend on whether an entity qualifies as an "eligible small business company".
The reduction in company tax rate is to be done in 2 stages, commencing from the 2013-14 income year.
Income year Corporate tax rate (%)
2012-13 (i.e. current rate) 30
Eligible small business companies
Eligible small business companies will move straight to the 28% rate with effect from the 2012-13 income year. The rate for small business companies will start one year before the phase-in for other companies.
There is no indication in the Government papers as to what entities will qualify as eligible small business entities. The papers do indicate that there are approximately 720,000 small business companies that can benefit from this measure.
The Henry Report recommended that the small business entity turnover threshold should be increased from $2m to $5m, with adjustments to the $6m net asset value test recommended for consideration: Recommendation 30. There is no formal response to this Recommendation.
The Fact Sheet states that the Government will consult on exposure draft legislation, with "relevant issues" to include instalment and franking arrangements.
Small business asset write-off
The existing capital allowance concessions available for small businesses will be expanded by:
• allowing small businesses to immediately write-off assets valued at under $5,000 ($1,000 under the present law); and
• allowing small businesses to write-off all other assets (except buildings) in a single depreciation pool at a rate of 30% (currently, small businesses allocate assets to 2 different depreciation pools).
This measure will commence from 1 July 2012. The Government will consult on the details of the changes in 2010-11.
Superannuation Guarantee: rate phased increase to 12%
The superannuation guarantee rate will increase from 9% to 12%, phasing in from 1 July 2013. There will be with increments of 0.25% in the first 2 years and 0.5% thereafter.
Commencing Super Guarantee rate (%)
1 July 2013 (i.e. current rate) 9
1 July 2014 9.25
1 July 2015 9.5
1 July 2016 10
1 July 2017 10.5
1 July 2018 11
1 July 2019 11.5
1 July 2020 12
Superannuation Guarantee: age limit raised to 75
The Superannuation Guarantee age limit will be raised from 70 to 75, with effect from 1 July 2013.
Currently, the SG only applies to people aged to 70. However, employers can make deducible super contributions for employees aged under 75, while self-employed people can make deductible contributions until they turn 75.
The commencement date of 1 July 2013 is designed to coincide with the increase in the SG rate. The Government papers state that around 33,000 employees are expected to benefit from this measure.
Concessional contributions caps for over 50s to continue
From 1 July 2012, the Government will allow individuals aged 50 and over with total superannuation balances below $500,000 to make up to $50,000 in concessional superannuation contributions.
The current $50,000 superannuation concessional contributions cap for individuals aged 50 or over is a transitional cap scheduled to expire from 1 July 2012.
Under the Government’s measure, the $50,000 cap will be extended permanently for individuals aged 50 or over with total superannuation balances of less than $500,000.
This means that individuals aged 50 or over with total superannuation balances of less than $500,000 can continue to make up to $50,000 per year in superannuation concessional contributions.
Eligible individuals under the age of 75 will still be able to make non-concessional contributions to superannuation up to $150,000 per year. Those who are under 65 can also bring forward 2 years’ worth of non-concessional contributions, allowing them to contribute up to $450,000 of non-concessional contributions in any 3-year period.
The papers state that the Government will consult on the details of the changes.
Government superannuation contributions for low-income earners
From 1 July 2012, the Government will provide a contribution of up to $500 for workers with incomes up to $37,000.
This ensures that no tax will be paid on super guarantee contributions for those with incomes up to that amount in 2012-13.
The amount payable under this measure will be calculated by applying a 15% matching rate to the concessional contributions made by or for individuals on adjusted taxable incomes of up to $37,000, with an annual maximum amount payable of $500 (not indexed). The amount will be paid into the individual’s super fund.
Concessional superannuation contributions made from 1 July 2012 will be eligible, with the first Government contribution paid in 2013-14. The papers state that the Government will consult on the details of the changes.
Currently, all concessional superannuation contributions are taxable in the fund at a flat rate of 15%.
State infrastructure funding
A new infrastructure fund is to be established to help the States and Territories to invest in major infrastructure.
This infrastructure fund will be distributed to the States and Territories in a manner which recognises that resource rich ones face large associated infrastructure demands. Resource-rich States and Territories 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.
The final details for the infrastructure fund will be negotiated with the States. The infrastructure fund will be paid to the States each year from 2012-13 to coincide with the introduction of the RSPT (see  of this Bulletin). The initial total amount in 2012-13 will be $700m.
The Henry Report simply recommended that the Australian and State governments should negotiate an appropriate inter-governmental allocation of the revenues and risks from the RSPT (Recommendation 48).
Recommendations Rejected by Government
Summary of recommendations rejected by the Government
The Prime Minister and the Treasurer has stated that, in the interests of business and community certainty, the Government will NOT implement the following recommendations contained in the Henry Tax Report at any stage:
• including the family home in means tests (Recommendation 88(c));
• introducing land tax on the family home (Recommendations 52 and 53);
• requiring parents to work when their youngest child turns 4 (Recommendation 85);
• hitting single income families (Recommendation 92 and 93);
• restricting eligibility to rent assistance for families (Recommendation 103);
• making any changes to the tax system that harm the not-for-profit sector, including removing the benefit of tax concessions; raising the gift deductibility threshold or changing income tax arrangements for clubs (Recommendations 9(e), 13, 41, 43 and 44);
• reducing overall remuneration to members of the Defence Forces (Recommendations 6d, 8c and 9e);
• reducing the CGT discount, applying a discount to negative gearing deductions or changing grandfathering arrangements for GST (Recommendations 14 and 17(c));
• removing the Medicare levy (part of Recommendation 5);
• reducing indexation of the age pension (Recommendation 84);
• removing the benefits of dividend imputation (Recommendation 37);
• hitting pensioner and low income concessions for utilities, transport and other essential services (Recommendation 107);
• introducing a bequests tax (Recommendation 25);
• aligning the preservation age with the pension age (Recommendation in Australia’s Future Tax System Retirement Income Strategic issues paper);
• offering a Government annuity product (Recommendation 22);
• asking the States to charge market rents to public housing recipients (Recommendation 106);
• indexing the fuel tax to the consumer price index (CPI) (Recommendation 65); and
• changing alcohol tax, that is, all alcoholic beverages should be taxed on a volumetric basis (Recommendation 71).
The Prime Minister and the Treasurer also reaffirm that the Government will never increase the rate or broaden the base of the GST, or remove tax-free superannuation payments for those over 60 years of age.
According to the Hon Mr Rudd and the Hon Mr Swan, the long-term tax plan is to apply a Resource Super Profits tax to the profits earned from resources that are owned by all Australians. The Government will use the revenue collected from the Resource Super Profits tax to:
• generate more superannuation savings for working families;
• lower tax for all companies, especially small businesses; and
• invest in Australia’s future infrastructure needs, particularly for mining States.
Other Henry Recommendations
Henry recommendations neither accepted nor rejected can be found in the ICAA’s full version of this report at http://www.charteredaccountants.com.au/files/documents/Henry%20Tax%20Review.pdf