Archive: August 2012

This section provides a selection of media items from Aug 2012.


 On this page:

TAX POLICY ‘HITTING’ ENTREPRENEURS

Mahesh Sharma, Sydney Morning Herald, August 28, 2012

Start-ups want the ATO to simplify ESOP rules so they can reward employees and foster innovation onshore.

A taxation policy designed to close a loophole is penalising technology start-up businesses that want to offer stock options to employees to compete on the world stage.

Australian software developer Atlassian bore major expenses to offer stock options to about  500 employees, with the bet poised to pay off later this year when the company is expected to list on the US tech stock index NASDAQ. Australian e-commerce software maker Bigcommerce today announced it has issued stock to its employees at a great cost to the company. “From day one, it was obvious we needed an ESOP – timing was the only question,” Bigcommerce founders Mitchell Harper and Eddie Machaalani said in an opinion piece running in IT Pro today.

“This July, every one of our team members (all 170 of them) in the US and Australia became a stock owner of Bigcommerce. It was one of our proudest moments as founders.”

Other small companies and employees have not been so lucky.  Niki Scevak, founder of business accelerator Starmate said there are unnecessary hurdles for start-ups wanting to offer Employee Share Option Plans (ESOPs). “People should pay tax when they get the money from the sale. In Australia you pay tax upfront on a sketchy, best-effort valuation of the equity. It’s about paying tax when you get money, rather than paying tax before you get money,” Scevak said.

ESOP offers discounted shares to employees in the hope of a financial benefit when the company’s share price rises. The instrument incentivises hard work and long tenure. For cash-strapped, unlisted companies stock options complement wages, secure highly-skilled workers and allow them to compete with larger salaries offered by corporates. They are a cornerstone of the Silicon Valley entrepreneurial culture, having underpinned the growth of Google, Apple, Microsoft, and Facebook. In the US the tax is paid when the option vests. In Australia, companies must pay tax when the stock option is issued or acquired by the employee.

This is prohibitive for those generating small revenues, according to Atlassian vice president of human resources Joris Luijke, whose company offer options to every employee including the receptionist. “As an example, for a receptionist, to [get] $20,000 worth of options, you may have to put on the table $4,000,” according to Luijke. Atlassian afforded the expense but Luijke said many others can’t.

“To do that across the organisation will cost you too much. That’s why so many [companies] don’t do it. It’s a really big decision for us because we want people to feel that as Atlassian grows, they grow as well, and feel the direct result.”

The offending piece of legislation is Division 83A of the Income Tax Assessment Act 1987, according to Remuneration Strategies Group director Gary Fitton. Div83A stipulates employees be taxed when the options are issued. The tax can be deferred until vesting, Fitton said, but very limited conditions imposed by the ATO and Treasury prevent start-ups from qualifying for exemptions. “Div83A is messy, restrictive, and a disincentive to offering stock options,” he said.

The bureaucrats have imposed their idea of how an option should work, not what’s best for a start-up or company. Div83A was introduced in 2009 to curb exploitation of the system, but according to Andreyev Doman partner Andrew Andreyev, the law has regressed so far there’s no legitimate stock options regime for entrepreneurs.

“There were a lot of employee-type benefit arrangements that happened in early 90s and 2000s that were clearly artificial structures exploiting the system. They were turning what would be normal remuneration into an exempt benefit or capital gain, which was clearly contrary to the whole intention of the scheme.

“But [the government] has gone too far . There’s no legitimate regime for entrepreneurial businesses to offer equity in a high-growth business in Australia. That puts us at a competitive disadvantage.” 99designs CEO Patrick Llewellyn said the law was overly complex. “It would be terrific to see a simplification of the tax treatment of ESOPs in Australia so that more start-ups could cost-effectively use them.”

top


TAX MAN CRACKS DOWN ON TRUSTEES

Andrea Slattery, The Australian , August 28, 2012

The vast majority of trustees of self-managed super funds will have nothing to fear following the release of new draft legislation this week. But for the recalcitrant minority, life is about to become much tougher.

A bill that has been released for public consultation will give the Australian Taxation Office broader options when it comes to enforcing compliance with the superannuation laws (SIS Act) as they relate to SMSFs.

Trustees could face penalties of up to $6600 for contravening certain aspects of the act or regulations, or they could be forced to attend an SMSF educational course about their responsibilities. The ATO will also be given the power to direct the trustees to undertake specified action to rectify a breach of the legislation.

As the Cooper Review found, the ATO, which is responsible for SMSF regulation, had few options when trustees failed to comply with the superannuation laws. The courses of action open to the ATO, including making an SMSF non-compliant for tax purposes (referred to in the Cooper Review as the nuclear option in the ATO’s armoury) or applying to a court for civil penalties, were often too unwieldy, time-consuming and, potentially, far too draconian.

Making a fund non-compliant had the potential to halve the value of the assets overnight. Understandably, the ATO is loath to make a fund non-compliant, preferring to accept an undertaking from the trustees that they will fix the problem. What is missing are effective, flexible and cost-effective mechanisms to issue sanctions that reflect the seriousness of the breach.

What Cooper recommended, and SMSF Professionals’ Association of Australia supported, was for the ATO to be given additional powers (both punitive and educational), in conjunction with its existing powers, to enforce compliance with the act. The draft amendments released last week will give effect to the Cooper recommendations and will see a new penalty regime introduced from July 1, 2013.

The educational element of the proposed changes is an interesting development. It suggests that the government believes breaches of the act are often more by accident than design and that an educational course about trustees’ duties will improve the situation. The course will not be optional. It must be done in a specified time with evidence provided that it has been completed. Trustees will be required to re-sign their SMSF trustee declaration form to confirm they understand their duties.

Understanding your roles and responsibilities as a trustee and seeking advice from an SMSF specialist has never been more important. This new penalty regime is consistent with the principles of compliance and deterrence-based regulation and will help to support the ongoing integrity of the sector.

Andrea Slattery is the chief executive officer of the SMSF Professionals’ Association of Australia Limited

www.spaa.asn.au

top


CHILDCARE GROUP WARNS OVER SECTOR WAGE RISES

Patricia Karvelas, The Australian , August 23, 2012

The Australian Childcare Alliance has warned Labor and the Coalition to be cautious in supporting an “exorbitantly high” union wage claim, arguing it must not be at the expense of parents.

The alliance, representing 70 per cent of the long-daycare sector, argues that if a wage rise is granted, the government must guarantee parents and centres are shielded from any increases in payroll tax, superannuation and Work Cover premiums.

In a strongly worded blueprint handed to the government and the opposition, the alliance says the National Quality Agenda reforms introduced on January 1 had caused hardship for families. “Without an immediate injection of funds to cover the cost of these reforms,” parents will either be forced to reduce hours of care, work, use backyard operators or a combination of all three. A critical issue is the skills shortage, with a further 3000 tertiary qualified carers required to be hired by 2014.

“Assuming these graduates are halfway through university now, the sector fears they will not choose childcare over pre- or primary school. And if they did, the higher wages demanded would again put upward pressure on the fees for parents,” it says.

The alliance calls for the means-tested childcare benefit be increased next July 1 by 30 per cent for children aged up to three and 15 per cent for older kids and for income thresholds to be raised. While capping fees is on the government’s agenda, the alliance warns against such a move and calls for an independent funding review to consider, among other things, the rising living costs.

As foreshadowed in The Australian two weeks ago, the alliance wants the non-means-tested rebate increased from $7500 to $8100 to make up lost indexation and to cover centre workers moonlighting as in-home carers, as well as extend the operating hours of centres to close later and open at weekends. “Long daycare services have the qualified educators and the relationship with the families but need from government greater flexibility to extend hours and deliver in-home care to ensure continuity of quality education and care programs,” it says. “The alliance does not envisage that the demand for these services will be high but without the changes, the needs of families for a more flexible delivery will not be met.”

Childcare Minister Kate Ellis yesterday welcomed the report.”Prime Minister Julia Gillard has made it very clear that we are very interested in sitting down and working with you about what the ‘next steps’ are in this reform process and I welcome the opportunity to have a look at your 42 recommendations,” she said. Ms Gillard is considering a shake-up of the system, with the government modelling ideas including paying childcare centres the rebate directly in exchange for moderated fee rises.

top


LOCK IN THE INVESTMENT PIPELINE NOW

Tony Shepherd, The Australian Financial Review, 24 Aug 2012

We have seen a number of announcements this week about scaling back or deferring investment in major mining and capital projects. While we should not jump to any hasty conclusions about the fate of the resources boom, these events highlight that we cannot take investment in the resource sector for granted. Australia must take steps now to lock in a future investment pipeline by increasing our competitiveness, encouraging skills development and building economic infrastructure.

Since the great gold rush, Australia’s wealth of natural resources has helped to build an economically resilient and prosperous nation. Many of us take for granted our position as a formidable player in the global resources market and the enormous contribution that our resource industry has made to our quality of life and prosperity. In 2011, iron ore accounted for about 24 per cent of Australia’s total exports – in dollar terms $64.2 billion. Almost all, or $62.8 billion, of that revenue was generated in the Pilbara, one of the world’s leading iron ore regions.

Last month I visited two of Fortescue Metals Group’s mines. I was interested in the challenges and opportunities we face as a nation, including some of the key issues we are working on at the Business Council such as infrastructure investment, the supply of skilled labour, productivity, regulation, international trade and indigenous participation.  The first thing that strikes any visitor to the Pilbara is the sheer scale and complexity of construction and mining operations in a harsh and remote environment.

The community benefits heavily from the taxes they pay, the employment they generate and the influence they bring to bear at the international trade level.  All Australians are sharing directly or indirectly in the wealth generation created by the resources sector and the secondary and tertiary industries that support it.

What is often forgotten or not fully understood is the significant risk taken on by the owners, investors and financiers in these mega projects, which are key contributors to the national economy. Tax and other policies should act to promote, rather than deter, the investment required to establish and expand these projects.

The flawed process that led to the poorly designed mining tax is an example of how not to do tax reform, as it undermined confidence in Australia as an investment destination. Excessive layers of environmental regulation continue to cause delays in the development of major projects and affect their ability to bring products to market.

The Business Council is working with the commonwealth and the states, through the Council of Australian Governments process, to streamline approvals and reduce double handling. There is also strong evidence of investment in future productivity in the sector, with a focus on training and preferential employment of Australian rather than overseas workers for both operations and construction. More skilled workers from the eastern states are also taking the opportunity to work in Western Australia.

Another important aspect of increasing productivity is the level of innovation and preparedness to innovate, for example the use of surface miners rather than the conventional drill and blast method of mining. This both improves yield and reduces the impact on the environment  The Pilbara also provides an example of how Australian employers can engage traditional indigenous owners. For example, Fortescue has established dedicated Vocational Training and Employment Centres (VTECs) in Port Hedland and Roebourne. VTECs provide skills training and medical and other assistance to Aboriginal people to prepare them for jobs guaranteed by Fortescue and its contractors. VTECs operate with the support of the West Australian and federal governments, and have delivered strong results for Aboriginal people.

Rio Tinto and BHP Billiton also have extensive programs for indigenous participation. The resources industry is the single largest contributor to our export revenue. The benefits of mega projects extend throughout the national economy through training and employment of many thousands of people, and the involvement of Australian businesses in supply and support industries.  We need to ensure that our policies at the federal and state levels reflect an understanding of the scale and the risk that our resources companies and their investors are undertaking, so we can all continue to enjoy the benefits.

Tony Shepherd is president of the Business Council of Australia.

top


RENTAL SCHEME BENEFITS LANDLORDS AND TENANTS

Philip Hopkins, The Age,  August 27, 2012

IT IS a win-win situation: developers and investors make money from providing social housing, while low-income renters receive the benefit of quality accommodation at a cheaper price.

The National Rental Affordability Scheme, set up by the Rudd government in 2008, offers tax-free financial incentives to build and rent dwellings to poorer households at rates below market value for 10 years. It creates a new residential asset class for property investors.

Eligible participants include financial institutions, investors, private developers, not-for-profit organisations and local governments. They may build, own, finance or manage the NRAS dwellings. One participating company, My NRAS Property, which has an education and real estate role in the process, has just sold its 10th property. ”We have been going since the start of the year and are slowly building momentum,” the company’s head of investment, James Thorpe, said.

The company’s role is to educate clients about NRAS, usually through seminars, and help them select the property that suits their requirements. It is akin to that of a normal real estate agent in that it makes the sale and takes a small percentage of the sale price as income.

The properties sold by Mr Thorpe’s company range in value from $250,000 to $500,000. Towards the inner city they are apartments, but further out they are house and land packages. ”They are in a variety of places, such as North Melbourne, Box Hill, Geelong, Preston and Ballarat,” Mr Thorpe said. Each state has several companies involved in the $1 billion scheme, which aims to add 50,000 affordable rental dwellings to the market. It is managed by the Department of Sustainability, Environment, Water, Population and Communities.

The dwellings must be rented to low or moderate-income households at least 20 per cent below market rates. For the investors and developers, the annual incentive is tax-free income, indexed annually and complemented by other benefits such as depreciation. The incentives include annual payments of $7143 and $2381 per dwelling from the federal and state governments respectively.

Mr Thorpe said the benefits of investing in an NRAS-approved property were varied. They include an increase in income, potential for big capital gains, negative gearing benefits and positive cash flow at the same time, tax-free income and tax offsets indexed for 10 years, and tax deductions on interest payments and depreciation. Investors can earn at least $109,228 in tax-free income from government incentives for every property bought and held for 10 years. ”You have flexibility, so you can opt out of the scheme at any time,” Mr Thorpe said.

top


GOVT CLAIMS OPPN HAS LET SLIP ‘RADICAL’ HIGHER EDUCATION AGENDA

Tony Eastley, ABC, August 27, 2012

TONY EASTLEY: The Federal Government says the Opposition has tied itself in knots and in doing so has revealed its “radical” higher education agenda.  As the Coalition’s education spokesman Christopher Pyne tried to scotch speculation about plans to raise the cost of university courses and limit the number of student places, he pledged the Coalition would bring back full fee paying places for Australian students.

From Canberra here’s Alexandra Kirk.

ALEXANDRA KIRK: The Federal Government has been trying for months to flush out the Coalition’s higher education policy, without success. The Opposition’s argued the exact details depend on many things including the state of the Commonwealth’s finances.

But it’s now shed some light after a weekend report that the Coalition’s razor gang is considering whether to charge students 25 per cent more for their degrees and put a cap on university places, which Labor removed in 2007. The education spokesman Christopher Pyne released a brief statement saying “the Coalition has no plans to increase university fees or cap places”. He added, “Only the Coalition supports bringing back full fee paying places for Australian domestic students,” currently restricted to overseas students, saying, “That alone would give universities greater freedom to grow.”

CHRIS EVANS: Conservative governments both under Howard and in the UK, when they have to find money they attack tertiary education.

ALEXANDRA KIRK: The Minister for Tertiary Education Chris Evans doesn’t accept Mr Pyne’s assurances, claiming an Abbott-led government would cut higher education spending and pass the costs onto students.

CHRIS EVANS: With a $70 billion black hole they’re going to have to find savings measures elsewhere to fund paying Rio and BHP back the super tax on their mining profit.

ALEXANDRA KIRK: The Minister says even if the Coalition didn’t cap places or raise fees it couldn’t possibly deliver on its third promise because no-one would opt to pay the full cost of a degree if they had the choice of a Commonwealth subsidised place.

CHRIS EVANS: If there’s no cap then there’s no market for people to pay the full fee. They could access a Commonwealth supported place.  I mean what the Liberals are going to do now is make a cap on the number of places, which means only a select group, an elite group will get Commonwealth supported places and other people will have to pay the full fees. Which means quite frankly only those with the capacity to pay $30,000 a year or more will be able to access those places at university.

ALEXANDRA KIRK: But the shadow minister for education Christopher Pyne says “the Coalition has no plans to increase university fees or to cap places.”

CHRIS EVANS: I don’t accept that. If you’re going to move to full fee paying places you have to have a cap. In fact they’d have to have a quite tight cap.

ALEXANDRA KIRK: Christopher Pyne wasn’t available to speak to AM. Neither was the higher education spokesman Brett Mason. Mr Pyne’s office says the Coalition will reveal its higher education policy some time before the next election.

TONY EASTLEY: Alexandra Kirk.

top


NEW TOOLS TO HELP AUSTRALIANS TRACK THEIR SPENDING

Parliamentary Secretary to the Treasurer Media Release, 14 August 2012

The Parliamentary Secretary to the Treasurer, the Hon Bernie Ripoll MP, has welcomed the release of the MoneySmart TrackMySpend smartphone app to help Australians track their spending and better manage their finances. This is one of a suite of tools the Government’s MoneySmart initiative has developed to help all Australians take control of where their money goes each week, so they can reduce money stress and stay on top of their bills.

Australian Securities and Investments Commission research shows many people fall into the trap of living from one payday to the next and inadvertently spend thousands of dollars more than they expect each year because they are not keeping track of their money. For example, the Australian Bureau of Statistics Household Expenditure Data shows average Australian households spend around $1,236 per week, yet only 54 per cent of 1,400 people who completed the Money Health Check tool on the MoneySmart website said they knew exactly what their money is spent on.

Mr Ripoll said a new TrackMySpend mobile app is available for free from the App Store and is a great way to keep track of your spending while you are on the move. “This app helps you set realistic spending limits and stick to them.

You can enter your expenses by category so your money goes towards the things that are important, and you can include whether the expense is a want or a need.””The app can be tailored to your individual circumstances. You can stay within the budget you set for yourself, so you can save for a holiday or pay off a debt,” said Mr Ripoll.

In addition, a new Managing Your Money booklet provides a step-by-step guide to budgeting, with a lift-out budget template for those who prefer pen and paper. This builds on the very popular Budget Planner on MoneySmart’s website, which is used by 28,000 people every month. Mr Ripoll said tools like these are particularly important given many Australians are concerned about the cost of everyday expenses like electricity, food and housing.

“These MoneySmart tools complement a range of measures the Federal Labor Government has put in place to help people better manage their finances.” “MoneySmart tools are simple and convenient to use and I encourage people to download the app and start taking charge of their spending,” he said.

The MoneySmart app, Managing Your Money booklet, Budget Planner and other publications can be ordered for free on the MoneySmart website.

top


GET PUBLIC WORKS BACK ON THE ROAD

Tim Hampton, Australian Financial Review, 22 Aug 2012

Infrastructure spending, and public investment more generally, is in decline and is expected to keep falling for at least the next two years. But to avoid a growth-threatening infrastructure bottleneck, the federal government should consider reforming the mining tax and raising the goods and services tax, and taking on more debt, to help fund infrastructure investment.

Public investment has fallen by 10 per cent since the Building the Education Revolution peaked in 2010. Further, as former Treasury secretary Ken Henry warned earlier this week, infrastructure spending is likely to be one of the casualties of the government’s failure to address its shrinking tax base adequately.

With state governments accounting for almost 80 per cent of total general government investment, it is the health of the state governments’ finances that matters most. Unfortunately, state finances are being squeezed by the federal government and weakness in their own revenue.

Almost half of state government revenue comes from federal grants, with GST accounting for about half of that. Slow growth in GST revenue and the federal government’s determination to achieve a fiscal surplus mean these grants and subsidies are expected to decline sharply as a share of the economy over the next couple of years, and remain down – similar to what occurred during the mid-1990s.

This federal government funding squeeze is occurring at the same time that state government revenues such as payroll tax and stamp duty are also under pressure. Further, the state of international financial markets and the nervousness of ratings agencies mean state governments are reluctant to increase debt.

State governments have little choice but to rein in expenditure, and with rising future costs in areas such as health and education, they have had to scale back investment plans. This reduces activity and demand for jobs in the near term, and the resulting infrastructure bottlenecks limit the medium-term ability of the economy to grow.

This occurred in the early to mid-’90s when the federal budget deficit blew out to about 10 per cent of gross domestic product. In response, federal grants and subsidies paid to state governments fell from about 6 per cent of GDP to just above 5 per cent for about seven years, until the GST was introduced in 2000. The cuts from 1994 on led to 15 years of underinvestment in the public sector. Such a cycle is emerging again, but perhaps not as severe given that the federal budget deficit is more manageable this time.

Unfortunately, the private sector is unlikely to step in any time soon given the financial system has not yet righted itself after the GFC. The risk premium is still high. The private sector has also been scared off after previous public-private partnerships resulted in them carrying more of the financial risk than they desired. To entice private sector involvement in future, the various governments probably need to retain more of the financial risk associated with these projects.

Some state governments are pursuing privatisation. This frees up funding for new public sector expenditure while providing the private sector with an investment option that carries less risk than being involved from the planning and construction phase. The federal government has scope to loosen the fiscal purse strings to support public sector investment. It could raise the rate of the mining tax and broaden its base, scale back inefficient tax breaks and transfers to high- and middle-income earners, and extend the coverage and increase the rate of the GST.

Much of the extra GST revenue will be used to compensate low- and middle-income households, but it would still boost the share of total revenue that goes directly to state governments. All this could allow more public infrastructure investment that generates jobs and supports medium-term growth. A return of the private sector over time would assist this.

Unfortunately, no such recovery in public sector investment is likely over the next few years as neither side of the political divide is willing to consider these options. Eventually they will have to.

top

 

TAX POLICY ‘HITTING’ ENTREPRENEURS

Mahesh Sharma, Sydney Morning Herald, August 28, 2012

Start-ups want the ATO to simplify ESOP rules so they can reward employees and foster innovation onshore.

A taxation policy designed to close a loophole is penalising technology start-up businesses that want to offer stock options to employees to compete on the world stage.

Australian software developer Atlassian bore major expenses to offer stock options to about  500 employees, with the bet poised to pay off later this year when the company is expected to list on the US tech stock index NASDAQ. Australian e-commerce software maker Bigcommerce today announced it has issued stock to its employees at a great cost to the company. “From day one, it was obvious we needed an ESOP – timing was the only question,” Bigcommerce founders Mitchell Harper and Eddie Machaalani said in an opinion piece running in IT Pro today.

“This July, every one of our team members (all 170 of them) in the US and Australia became a stock owner of Bigcommerce. It was one of our proudest moments as founders.”

Other small companies and employees have not been so lucky.  Niki Scevak, founder of business accelerator Starmate said there are unnecessary hurdles for start-ups wanting to offer Employee Share Option Plans (ESOPs). “People should pay tax when they get the money from the sale. In Australia you pay tax upfront on a sketchy, best-effort valuation of the equity. It’s about paying tax when you get money, rather than paying tax before you get money,” Scevak said.

ESOP offers discounted shares to employees in the hope of a financial benefit when the company’s share price rises. The instrument incentivises hard work and long tenure. For cash-strapped, unlisted companies stock options complement wages, secure highly-skilled workers and allow them to compete with larger salaries offered by corporates. They are a cornerstone of the Silicon Valley entrepreneurial culture, having underpinned the growth of Google, Apple, Microsoft, and Facebook. In the US the tax is paid when the option vests. In Australia, companies must pay tax when the stock option is issued or acquired by the employee.

This is prohibitive for those generating small revenues, according to Atlassian vice president of human resources Joris Luijke, whose company offer options to every employee including the receptionist. “As an example, for a receptionist, to [get] $20,000 worth of options, you may have to put on the table $4,000,” according to Luijke. Atlassian afforded the expense but Luijke said many others can’t.

“To do that across the organisation will cost you too much. That’s why so many [companies] don’t do it. It’s a really big decision for us because we want people to feel that as Atlassian grows, they grow as well, and feel the direct result.”

The offending piece of legislation is Division 83A of the Income Tax Assessment Act 1987, according to Remuneration Strategies Group director Gary Fitton. Div83A stipulates employees be taxed when the options are issued. The tax can be deferred until vesting, Fitton said, but very limited conditions imposed by the ATO and Treasury prevent start-ups from qualifying for exemptions. “Div83A is messy, restrictive, and a disincentive to offering stock options,” he said.

The bureaucrats have imposed their idea of how an option should work, not what’s best for a start-up or company. Div83A was introduced in 2009 to curb exploitation of the system, but according to Andreyev Doman partner Andrew Andreyev, the law has regressed so far there’s no legitimate stock options regime for entrepreneurs.

“There were a lot of employee-type benefit arrangements that happened in early 90s and 2000s that were clearly artificial structures exploiting the system. They were turning what would be normal remuneration into an exempt benefit or capital gain, which was clearly contrary to the whole intention of the scheme.

“But [the government] has gone too far . There’s no legitimate regime for entrepreneurial businesses to offer equity in a high-growth business in Australia. That puts us at a competitive disadvantage.” 99designs CEO Patrick Llewellyn said the law was overly complex. “It would be terrific to see a simplification of the tax treatment of ESOPs in Australia so that more start-ups could cost-effectively use them.”

top


TAX MAN CRACKS DOWN ON TRUSTEES

Andrea Slattery, The Australian , August 28, 2012

The vast majority of trustees of self-managed super funds will have nothing to fear following the release of new draft legislation this week. But for the recalcitrant minority, life is about to become much tougher.

A bill that has been released for public consultation will give the Australian Taxation Office broader options when it comes to enforcing compliance with the superannuation laws (SIS Act) as they relate to SMSFs.

Trustees could face penalties of up to $6600 for contravening certain aspects of the act or regulations, or they could be forced to attend an SMSF educational course about their responsibilities. The ATO will also be given the power to direct the trustees to undertake specified action to rectify a breach of the legislation.

As the Cooper Review found, the ATO, which is responsible for SMSF regulation, had few options when trustees failed to comply with the superannuation laws. The courses of action open to the ATO, including making an SMSF non-compliant for tax purposes (referred to in the Cooper Review as the nuclear option in the ATO’s armoury) or applying to a court for civil penalties, were often too unwieldy, time-consuming and, potentially, far too draconian.

Making a fund non-compliant had the potential to halve the value of the assets overnight. Understandably, the ATO is loath to make a fund non-compliant, preferring to accept an undertaking from the trustees that they will fix the problem. What is missing are effective, flexible and cost-effective mechanisms to issue sanctions that reflect the seriousness of the breach.

What Cooper recommended, and SMSF Professionals’ Association of Australia supported, was for the ATO to be given additional powers (both punitive and educational), in conjunction with its existing powers, to enforce compliance with the act. The draft amendments released last week will give effect to the Cooper recommendations and will see a new penalty regime introduced from July 1, 2013.

The educational element of the proposed changes is an interesting development. It suggests that the government believes breaches of the act are often more by accident than design and that an educational course about trustees’ duties will improve the situation. The course will not be optional. It must be done in a specified time with evidence provided that it has been completed. Trustees will be required to re-sign their SMSF trustee declaration form to confirm they understand their duties.

Understanding your roles and responsibilities as a trustee and seeking advice from an SMSF specialist has never been more important. This new penalty regime is consistent with the principles of compliance and deterrence-based regulation and will help to support the ongoing integrity of the sector.

Andrea Slattery is the chief executive officer of the SMSF Professionals’ Association of Australia Limited

www.spaa.asn.au

top


CHILDCARE GROUP WARNS OVER SECTOR WAGE RISES

Patricia Karvelas, The Australian , August 23, 2012

The Australian Childcare Alliance has warned Labor and the Coalition to be cautious in supporting an “exorbitantly high” union wage claim, arguing it must not be at the expense of parents.

The alliance, representing 70 per cent of the long-daycare sector, argues that if a wage rise is granted, the government must guarantee parents and centres are shielded from any increases in payroll tax, superannuation and Work Cover premiums.

In a strongly worded blueprint handed to the government and the opposition, the alliance says the National Quality Agenda reforms introduced on January 1 had caused hardship for families. “Without an immediate injection of funds to cover the cost of these reforms,” parents will either be forced to reduce hours of care, work, use backyard operators or a combination of all three. A critical issue is the skills shortage, with a further 3000 tertiary qualified carers required to be hired by 2014.

“Assuming these graduates are halfway through university now, the sector fears they will not choose childcare over pre- or primary school. And if they did, the higher wages demanded would again put upward pressure on the fees for parents,” it says.

The alliance calls for the means-tested childcare benefit be increased next July 1 by 30 per cent for children aged up to three and 15 per cent for older kids and for income thresholds to be raised. While capping fees is on the government’s agenda, the alliance warns against such a move and calls for an independent funding review to consider, among other things, the rising living costs.

As foreshadowed in The Australian two weeks ago, the alliance wants the non-means-tested rebate increased from $7500 to $8100 to make up lost indexation and to cover centre workers moonlighting as in-home carers, as well as extend the operating hours of centres to close later and open at weekends. “Long daycare services have the qualified educators and the relationship with the families but need from government greater flexibility to extend hours and deliver in-home care to ensure continuity of quality education and care programs,” it says. “The alliance does not envisage that the demand for these services will be high but without the changes, the needs of families for a more flexible delivery will not be met.”

Childcare Minister Kate Ellis yesterday welcomed the report.”Prime Minister Julia Gillard has made it very clear that we are very interested in sitting down and working with you about what the ‘next steps’ are in this reform process and I welcome the opportunity to have a look at your 42 recommendations,” she said. Ms Gillard is considering a shake-up of the system, with the government modelling ideas including paying childcare centres the rebate directly in exchange for moderated fee rises.

top


LOCK IN THE INVESTMENT PIPELINE NOW

Tony Shepherd, The Australian Financial Review, 24 Aug 2012

We have seen a number of announcements this week about scaling back or deferring investment in major mining and capital projects. While we should not jump to any hasty conclusions about the fate of the resources boom, these events highlight that we cannot take investment in the resource sector for granted. Australia must take steps now to lock in a future investment pipeline by increasing our competitiveness, encouraging skills development and building economic infrastructure.

Since the great gold rush, Australia’s wealth of natural resources has helped to build an economically resilient and prosperous nation. Many of us take for granted our position as a formidable player in the global resources market and the enormous contribution that our resource industry has made to our quality of life and prosperity. In 2011, iron ore accounted for about 24 per cent of Australia’s total exports – in dollar terms $64.2 billion. Almost all, or $62.8 billion, of that revenue was generated in the Pilbara, one of the world’s leading iron ore regions.

Last month I visited two of Fortescue Metals Group’s mines. I was interested in the challenges and opportunities we face as a nation, including some of the key issues we are working on at the Business Council such as infrastructure investment, the supply of skilled labour, productivity, regulation, international trade and indigenous participation.  The first thing that strikes any visitor to the Pilbara is the sheer scale and complexity of construction and mining operations in a harsh and remote environment.

The community benefits heavily from the taxes they pay, the employment they generate and the influence they bring to bear at the international trade level.  All Australians are sharing directly or indirectly in the wealth generation created by the resources sector and the secondary and tertiary industries that support it.

What is often forgotten or not fully understood is the significant risk taken on by the owners, investors and financiers in these mega projects, which are key contributors to the national economy. Tax and other policies should act to promote, rather than deter, the investment required to establish and expand these projects.

The flawed process that led to the poorly designed mining tax is an example of how not to do tax reform, as it undermined confidence in Australia as an investment destination. Excessive layers of environmental regulation continue to cause delays in the development of major projects and affect their ability to bring products to market.

The Business Council is working with the commonwealth and the states, through the Council of Australian Governments process, to streamline approvals and reduce double handling. There is also strong evidence of investment in future productivity in the sector, with a focus on training and preferential employment of Australian rather than overseas workers for both operations and construction. More skilled workers from the eastern states are also taking the opportunity to work in Western Australia.

Another important aspect of increasing productivity is the level of innovation and preparedness to innovate, for example the use of surface miners rather than the conventional drill and blast method of mining. This both improves yield and reduces the impact on the environment  The Pilbara also provides an example of how Australian employers can engage traditional indigenous owners. For example, Fortescue has established dedicated Vocational Training and Employment Centres (VTECs) in Port Hedland and Roebourne. VTECs provide skills training and medical and other assistance to Aboriginal people to prepare them for jobs guaranteed by Fortescue and its contractors. VTECs operate with the support of the West Australian and federal governments, and have delivered strong results for Aboriginal people.

Rio Tinto and BHP Billiton also have extensive programs for indigenous participation. The resources industry is the single largest contributor to our export revenue. The benefits of mega projects extend throughout the national economy through training and employment of many thousands of people, and the involvement of Australian businesses in supply and support industries.  We need to ensure that our policies at the federal and state levels reflect an understanding of the scale and the risk that our resources companies and their investors are undertaking, so we can all continue to enjoy the benefits.

Tony Shepherd is president of the Business Council of Australia.

top


RENTAL SCHEME BENEFITS LANDLORDS AND TENANTS

Philip Hopkins, The Age,  August 27, 2012

IT IS a win-win situation: developers and investors make money from providing social housing, while low-income renters receive the benefit of quality accommodation at a cheaper price.

The National Rental Affordability Scheme, set up by the Rudd government in 2008, offers tax-free financial incentives to build and rent dwellings to poorer households at rates below market value for 10 years. It creates a new residential asset class for property investors.

Eligible participants include financial institutions, investors, private developers, not-for-profit organisations and local governments. They may build, own, finance or manage the NRAS dwellings. One participating company, My NRAS Property, which has an education and real estate role in the process, has just sold its 10th property. ”We have been going since the start of the year and are slowly building momentum,” the company’s head of investment, James Thorpe, said.

The company’s role is to educate clients about NRAS, usually through seminars, and help them select the property that suits their requirements. It is akin to that of a normal real estate agent in that it makes the sale and takes a small percentage of the sale price as income.

The properties sold by Mr Thorpe’s company range in value from $250,000 to $500,000. Towards the inner city they are apartments, but further out they are house and land packages. ”They are in a variety of places, such as North Melbourne, Box Hill, Geelong, Preston and Ballarat,” Mr Thorpe said. Each state has several companies involved in the $1 billion scheme, which aims to add 50,000 affordable rental dwellings to the market. It is managed by the Department of Sustainability, Environment, Water, Population and Communities.

The dwellings must be rented to low or moderate-income households at least 20 per cent below market rates. For the investors and developers, the annual incentive is tax-free income, indexed annually and complemented by other benefits such as depreciation. The incentives include annual payments of $7143 and $2381 per dwelling from the federal and state governments respectively.

Mr Thorpe said the benefits of investing in an NRAS-approved property were varied. They include an increase in income, potential for big capital gains, negative gearing benefits and positive cash flow at the same time, tax-free income and tax offsets indexed for 10 years, and tax deductions on interest payments and depreciation. Investors can earn at least $109,228 in tax-free income from government incentives for every property bought and held for 10 years. ”You have flexibility, so you can opt out of the scheme at any time,” Mr Thorpe said.

top


GOVT CLAIMS OPPN HAS LET SLIP ‘RADICAL’ HIGHER EDUCATION AGENDA

Tony Eastley, ABC, August 27, 2012

TONY EASTLEY: The Federal Government says the Opposition has tied itself in knots and in doing so has revealed its “radical” higher education agenda.  As the Coalition’s education spokesman Christopher Pyne tried to scotch speculation about plans to raise the cost of university courses and limit the number of student places, he pledged the Coalition would bring back full fee paying places for Australian students.

From Canberra here’s Alexandra Kirk.

ALEXANDRA KIRK: The Federal Government has been trying for months to flush out the Coalition’s higher education policy, without success. The Opposition’s argued the exact details depend on many things including the state of the Commonwealth’s finances.

But it’s now shed some light after a weekend report that the Coalition’s razor gang is considering whether to charge students 25 per cent more for their degrees and put a cap on university places, which Labor removed in 2007. The education spokesman Christopher Pyne released a brief statement saying “the Coalition has no plans to increase university fees or cap places”. He added, “Only the Coalition supports bringing back full fee paying places for Australian domestic students,” currently restricted to overseas students, saying, “That alone would give universities greater freedom to grow.”

CHRIS EVANS: Conservative governments both under Howard and in the UK, when they have to find money they attack tertiary education.

ALEXANDRA KIRK: The Minister for Tertiary Education Chris Evans doesn’t accept Mr Pyne’s assurances, claiming an Abbott-led government would cut higher education spending and pass the costs onto students.

CHRIS EVANS: With a $70 billion black hole they’re going to have to find savings measures elsewhere to fund paying Rio and BHP back the super tax on their mining profit.

ALEXANDRA KIRK: The Minister says even if the Coalition didn’t cap places or raise fees it couldn’t possibly deliver on its third promise because no-one would opt to pay the full cost of a degree if they had the choice of a Commonwealth subsidised place.

CHRIS EVANS: If there’s no cap then there’s no market for people to pay the full fee. They could access a Commonwealth supported place.  I mean what the Liberals are going to do now is make a cap on the number of places, which means only a select group, an elite group will get Commonwealth supported places and other people will have to pay the full fees. Which means quite frankly only those with the capacity to pay $30,000 a year or more will be able to access those places at university.

ALEXANDRA KIRK: But the shadow minister for education Christopher Pyne says “the Coalition has no plans to increase university fees or to cap places.”

CHRIS EVANS: I don’t accept that. If you’re going to move to full fee paying places you have to have a cap. In fact they’d have to have a quite tight cap.

ALEXANDRA KIRK: Christopher Pyne wasn’t available to speak to AM. Neither was the higher education spokesman Brett Mason. Mr Pyne’s office says the Coalition will reveal its higher education policy some time before the next election.

TONY EASTLEY: Alexandra Kirk.

top


NEW TOOLS TO HELP AUSTRALIANS TRACK THEIR SPENDING

Parliamentary Secretary to the Treasurer Media Release, 14 August 2012

The Parliamentary Secretary to the Treasurer, the Hon Bernie Ripoll MP, has welcomed the release of the MoneySmart TrackMySpend smartphone app to help Australians track their spending and better manage their finances. This is one of a suite of tools the Government’s MoneySmart initiative has developed to help all Australians take control of where their money goes each week, so they can reduce money stress and stay on top of their bills.

Australian Securities and Investments Commission research shows many people fall into the trap of living from one payday to the next and inadvertently spend thousands of dollars more than they expect each year because they are not keeping track of their money. For example, the Australian Bureau of Statistics Household Expenditure Data shows average Australian households spend around $1,236 per week, yet only 54 per cent of 1,400 people who completed the Money Health Check tool on the MoneySmart website said they knew exactly what their money is spent on.

Mr Ripoll said a new TrackMySpend mobile app is available for free from the App Store and is a great way to keep track of your spending while you are on the move. “This app helps you set realistic spending limits and stick to them.

You can enter your expenses by category so your money goes towards the things that are important, and you can include whether the expense is a want or a need.””The app can be tailored to your individual circumstances. You can stay within the budget you set for yourself, so you can save for a holiday or pay off a debt,” said Mr Ripoll.

In addition, a new Managing Your Money booklet provides a step-by-step guide to budgeting, with a lift-out budget template for those who prefer pen and paper. This builds on the very popular Budget Planner on MoneySmart’s website, which is used by 28,000 people every month. Mr Ripoll said tools like these are particularly important given many Australians are concerned about the cost of everyday expenses like electricity, food and housing.

“These MoneySmart tools complement a range of measures the Federal Labor Government has put in place to help people better manage their finances.” “MoneySmart tools are simple and convenient to use and I encourage people to download the app and start taking charge of their spending,” he said.

The MoneySmart app, Managing Your Money booklet, Budget Planner and other publications can be ordered for free on the MoneySmart website.

top


GET PUBLIC WORKS BACK ON THE ROAD

Tim Hampton, Australian Financial Review, 22 Aug 2012

Infrastructure spending, and public investment more generally, is in decline and is expected to keep falling for at least the next two years. But to avoid a growth-threatening infrastructure bottleneck, the federal government should consider reforming the mining tax and raising the goods and services tax, and taking on more debt, to help fund infrastructure investment.

Public investment has fallen by 10 per cent since the Building the Education Revolution peaked in 2010. Further, as former Treasury secretary Ken Henry warned earlier this week, infrastructure spending is likely to be one of the casualties of the government’s failure to address its shrinking tax base adequately.

With state governments accounting for almost 80 per cent of total general government investment, it is the health of the state governments’ finances that matters most. Unfortunately, state finances are being squeezed by the federal government and weakness in their own revenue.

Almost half of state government revenue comes from federal grants, with GST accounting for about half of that. Slow growth in GST revenue and the federal government’s determination to achieve a fiscal surplus mean these grants and subsidies are expected to decline sharply as a share of the economy over the next couple of years, and remain down – similar to what occurred during the mid-1990s.

This federal government funding squeeze is occurring at the same time that state government revenues such as payroll tax and stamp duty are also under pressure. Further, the state of international financial markets and the nervousness of ratings agencies mean state governments are reluctant to increase debt.

State governments have little choice but to rein in expenditure, and with rising future costs in areas such as health and education, they have had to scale back investment plans. This reduces activity and demand for jobs in the near term, and the resulting infrastructure bottlenecks limit the medium-term ability of the economy to grow.

This occurred in the early to mid-’90s when the federal budget deficit blew out to about 10 per cent of gross domestic product. In response, federal grants and subsidies paid to state governments fell from about 6 per cent of GDP to just above 5 per cent for about seven years, until the GST was introduced in 2000. The cuts from 1994 on led to 15 years of underinvestment in the public sector. Such a cycle is emerging again, but perhaps not as severe given that the federal budget deficit is more manageable this time.

Unfortunately, the private sector is unlikely to step in any time soon given the financial system has not yet righted itself after the GFC. The risk premium is still high. The private sector has also been scared off after previous public-private partnerships resulted in them carrying more of the financial risk than they desired. To entice private sector involvement in future, the various governments probably need to retain more of the financial risk associated with these projects.

Some state governments are pursuing privatisation. This frees up funding for new public sector expenditure while providing the private sector with an investment option that carries less risk than being involved from the planning and construction phase. The federal government has scope to loosen the fiscal purse strings to support public sector investment. It could raise the rate of the mining tax and broaden its base, scale back inefficient tax breaks and transfers to high- and middle-income earners, and extend the coverage and increase the rate of the GST.

Much of the extra GST revenue will be used to compensate low- and middle-income households, but it would still boost the share of total revenue that goes directly to state governments. All this could allow more public infrastructure investment that generates jobs and supports medium-term growth. A return of the private sector over time would assist this.

Unfortunately, no such recovery in public sector investment is likely over the next few years as neither side of the political divide is willing to consider these options. Eventually they will have to.

top

 

TAX REVENUE OUTLOOK ‘DESPERATELY BAD’, HENRY WARNS

Clancy Yeates, Sydney Morning Herald, 20 Aug 2012

Governments will be unable to fund the nation’s ballooning infrastructure needs unless they can extract more tax revenue from the economy, former Treasury secretary Ken Henry says. Following a similar warning from the Treasury last week, Dr Henry today said the tax system would not collect enough revenue as the population expanded in decades to come. State governments without the buffer of mining royalties were especially vulnerable to the trend, and they faced a ‘‘desperately bad’’ situation, he said.

The warning comes after the Treasury Secretary, Martin Parkinson, last week said the days of big budget surpluses were gone, and the run of Howard government tax cuts in the mid 2000s were funded by a ‘‘temporary bubble’’ in revenue.

‘‘It is true as Martin said the other day that the Australian tax base simply will not deliver what people expect of it,’’ Dr Henry said at a business forum in Canberra today. ‘‘In the states, they are in a much worse position. The states’ revenue systems are especially fragile.

‘‘At the moment it looks OK for the resource-rich states, and for the others it looks desperately bad. But even for the resource rich states … at some stage the royalties will deliver less revenue than they are presently delivering.’’

Tax revenue has slowed sharply in recent years due to weak capital gains in the property and share markets, and a peak in commodity prices. Dr Henry said the ratio of tax to gross domestic product was unlikely to recover to previous levels.

Australia’s tax revenue as a share of GDP is among the lowest in the developed world. It is estimated to have fallen to 23.8 per cent this financial year, compared with more than 25 per cent for much of the previous decade. “We don’t have the infrastructure, that’s obvious, for another 14 million Australians. But we don’t at the moment have the mechanisms for thinking about what sort of infrastructure we are going to need,’’ he said. “The fundamental question of course confronting all of us about that infrastructure build requirement is how’s it going to be funded?’’

Dr Henry, who works as an economic adviser to the Prime Minister and a NAB board member, is finalising a white paper on how Australia’s economy can make the most of the ‘‘Asian Century’’.

top


A QUESTION FOR ALL: HOW WILL YOU PAY?

Ross Gittins, Sydney Morning Herald, 20 Aug 2012

‘The less your ability to save, the smaller incentive you are given, and vice versa.’ Note well: the secretary to Treasury, Dr Martin Parkinson, has provided voters with the only no-bulldust budgetary advice they’re likely to get between now and the federal election. Everything they get from the politicians – on both sides – will be straight from vote-chasers’ fantasy land.

Even much of the media believe their interests lie in feeding their customers more of the self-delusion they prefer to hear rather than reminding them of the harsh realities of fiscal arithmetic.

In a speech last week, Parkinson noted the community’s demand for the sort of “superior goods” governments provide – such as healthcare, aged care, disability assistance, education and social welfare – will only continue to rise. That’s because demand for superior goods grows faster than our income grows. Using that term is an implicit admission the community’s demands are legitimate rather than populist.

“At the same time, the taxation base is weaker than we had imagined in the mid-2000s,” he says. “With hindsight, it is apparent that part of revenue collections then reflected a temporary bubble in the economy.” Translation: perhaps it wasn’t smart to award ourselves eight income-tax cuts in a row. (Some of us don’t need to rely on hindsight for that judgment.) “The take-out message is that the days of large surpluses being delivered by buoyant tax receipts are behind us … tax receipts are expected to remain substantially lower – around $20 billion per annum lower at the Commonwealth level alone – than pre-crisis projections.

“The outcome is that … we face, as a community, a widening gap between the demands we are placing on government and what we are prepared to pay to fund government.”

Now get this: contrary to every impression the pollies will be giving you, “we will not be able to meet these demands for new spending by increasing the efficiency and effectiveness of existing government spending alone (although this is important in its own right)”.

“Nor can we rely solely on our existing tax bases, as these are expected to deliver less revenue as a proportion of gross domestic product … What will be required – of governments at all levels – to meet the community’s demand for new spending, will be more revenue or significant savings in other areas.”

That’s the news the national dailies didn’t think fit to print: the Treasury secretary, high priest of economic rationalism, has countenanced higher taxes and even new taxes. All this is a blow to those people anxious to see both sides of politics commit to introducing the national disability insurance scheme at an extra cost of $8 billion a year (closely followed by those people anxious to see both sides commit to introducing the Gonski reforms to education at an extra cost of $5 billion a year).

So what on earth can we do? Limiting our focus to the disability scheme, how could we possibly find that kind of money? Well, one possibility not to be dismissed lightly is using an increase in the Medicare levy to pay for it. But as Dr Richard Denniss and David Richardson of the Australia Institute suggested last week, there’s another, less obvious source of revenue: reform the concessional tax treatment of superannuation to make it more effective and less inequitable. Using the savings to pay for the disability scheme would strike a double blow for fairness.

It would take money disproportionately from the well-off (the top 5 per cent of income earners get 37 per cent of cost of the super tax concessions) and give it to some of the most disadvantaged people in our community: the disabled and their carers. The Treasury secretary is telling us we have to make hard decisions about our priorities; we can’t afford all the things we’d like to do. Just so. So consider this: within a few years, the rapidly growing revenue forgone on super tax concessions is projected to equal the cost of the age pension itself: $45 billion a year.

That’s way more than the feds spend on education, almost twice what they spend on defence, and more than twice what they spend on the family tax benefit or on Medicare. We can afford to shower this largesse on the better-off 60 per cent of the population of pension age while the disabled get screwed? The grossly underpaid financial services industry and the direct beneficiaries of the super concessions argue they’re justified by the consequent saving to the taxpayer in reduced pension payments.

But as best Denniss and Richardson can determine it, it costs the taxpayer $2 for every $1 saved. That’s an overall average, of course. People at the top would save a lot more than $2 for every $1 they gave up, while many towards the bottom would save less than they gave up. (We should know the exact distribution, but the government won’t tell us, for some reason.)

It’s not hard to see why the super tax concessions offer other taxpayers such a rotten deal. As a supposed incentive to people to make their own provision for retirement they’re hopeless. bMost of the people who receive it save no more than they’re compelled to, while people at the top of the tree are hugely rewarded for saving they’d do anyway. The less your ability to save, the smaller incentive you’re given, and vice versa. For those organisations urging us to spend big on worthy causes, the “take-out message” from Parkinson’s sobering assessment of our scope for greater spending is clear: don’t waste your breath unless you’re prepared to get your hands dirty and suggest a good way to pay for it.

top


TAX SYSTEM FAILING FUTURE NEEDS: KEN HENRY

Jacob Greber, Mathew Dunckley and james Massola, Australian Financial Review, 20 Aug 2012

Former Treasury secretary Ken Henry has warned the tax system will be unable to fund the infrastructure needs of the extra 14 million Australian citizens forecast by 2050, comments that add to the pressure for taxation reform.

Dr Henry, one of the Gillard government’s top economic advisers, said the government faced a budget crisis if it didn’t address its shrinking revenue base, which has been hurt by falling commodity prices and weak consumer spending. “If we don’t lead it, it’ll lead us – that is exactly what happens,” Dr Henry told a Canberra forum organised by the Australian Industry Group
In a sign of a split over budget policy between political leaders and senior Canberra bureaucrats, Dr Henry warned that under the current tax system, the federal government’s tax-to-gross-domestic-product ratio would not return to where it was before the global financial crisis.
The comments were similar to those last week from Treasury Secretary Martin Parkinson, who suggested the government’s mounting list of big-ticket spending promises would have to be funded by deep cuts elsewhere.
In Parliament yesterday, the opposition questioned if the government would raise taxes to pay for expensive policies including the Gonski education plan and the National Disability Insurance Scheme (NDIS).

Prime Minister Julia Gillard vowed that Labor “will continue to be a lower-taxing government” than the Howard government. “On funding promises, we have a tax-to-GDP ratio which is less than the one that we inherited from the other side,” she said.

Economists say the tax take compared with the size of the economy has fallen under Labor partly because consumers are saving more.

The chair of lobby group Infrastructure Partnerships Australia, Mark Birrell, said the government should be the lead funder of important projects, such as public transport in Melbourne, Sydney and Brisbane.

Mr Birrell wants the government to encourage superannuation funds to invest in “annuity products, which would allow them to match the long-term use of their funds with a long-term returns of infrastructure assets”.

“It means you have to look at the super sector and say ‘what way could we make infrastructure more attractive for more funds?’” he said.

Dr Henry, who is preparing the Australia in the Asian Century white paper for the federal government, said Australia needed a “hell of a lot better-quality debate” about the dangers and risks the tax system faced, and its ability to fund citizens’ expectations.

He said it was often forgotten that a 2010 Treasury Intergenerational Report said the population was expected to hit 35.9 million within four decades.

“We don’t have the infrastructure – that’s obvious – for another 14 million Australians,” he said. Australia doesn’t “even have the mechanisms for thinking about what sorts of infrastructure we’re going to need”.

“But the fundamental question of course confronting all of us about that infrastructure build requirement is how is it going to be funded,” he said.

Australia’s tax-to-GDP ratio fell to 20.1 per cent in 2010-11 – the lowest level in almost two decades, and it is forecast to edge up to 22.1 per cent this financial year. During the eight years from 1999-2000 to 2007-08, the ratio averaged 23.9 per cent and peaked at 24.2 per cent from 2005 to 2006.

Treasurer Wayne Swan said yesterday that if Australians had kept paying tax at the same rate they were in the last year under the last Coalition government, they would be paying an extra $24 billion in tax in 2012-13. The lower tax take comes as demands on future budgets increase. The NDIS is expected to cost at least $6.5 billion a year by 2018, or about 2 per cent of the federal budget, and the proposed Gonski education plan would cost $5 billion a year.

Dr Henry said the situation was worse for state governments, particularly those not involved in the resources boom. “But even for the resource-rich states, at some stage, the royalties will deliver less revenue than they are presently delivering,” he said.

Even those collecting strong resources royalties would at some stage confront a “grimmer fiscal reality as well,” he said.

The credit ratings of most Australian states have come under pressure since the global financial crisis, following falls in stamp duties caused by the falling property market, as well as slower GST growth as consumers cut discretionary spending in favour of savings.

He said many of the reforms of the 1980s were done because the tax system was in serious trouble. “[Back then] there was that sense of being on a burning platform,” he said.

Peter Downes, director of Outlook Economics, there was a need for a strong public advocate of policy change – someone like former prime minister Paul Keating. “I’m not sure Swan is up to the task – he wasn’t up to it on the mining tax,” he said.

Dr Parkinson said last week: “The days of the large surpluses being ­delivered by buoyant tax receipts are behindus.”

Ms Gillard said: “Company tax will always be higher under those opposite than under us, because of their tax on companies to pay for their paid parental leave scheme.

“Less tax, less company tax, a prudent budget, a surplus and a better deal for people with disabilities.”

Ways of fixing the tax base included increasing the GST, and reducing the jobless rate, with every 1 percentage point fall in unemployment adding about 1 per cent of GDP to the budget — or about $12 to $13 billion a year, Mr Downes said.

Dr Henry said his pending Asian Century white paper was a strategy for the next decade rather than a “shopping list of spending promises”. “If there is one message from the Asian century, it is we can’t be complacent,” he said.

top


DISABILITY PLAN COULD TOP $10BN

John Kehoe, Australian Financial Review, 18 Aug 2012

The cost of the National Disability Insurance Scheme could blow out to $10.5 billion a year by 2018-19, partly due to the industrial umpire’s decision to award big pay increases to community workers.

The warning from the Australian Government Actuary, in a document released by Treasury under freedom of information late on Friday, highlights further budgetary risks associated with big ticket spending items flagged by both sides of politics.

Reviewing the Productivity Commission’s costing of the NDIS, the actuary said that though the methodology was sound, it contained some risks.

“Factors that have the potential to increase the estimated cost include the wage case for social and community sector workers, possible overstatement of offsets and the treatment of the psychiatric disability group,” the actuary said.

“Strong governance arrangements will be required to manage the cost pressures that are expected to emerge for a range of reasons and ensure the scheme remains financially sustainable.”

It estimated that Fair Work Australia’s decision to deliver wage rises of up to 45 per cent over eight years to about 150,000 social and community workers, could add $1 billion a year to the NDIS.

Cash-strapped states, including NSW and Victoria, have raised concerns with the Gillard government about the budgetary impact of the FWA decision in February on the cost of the scheme, which would see disabled people receive a funding entitlement based on need, and replace the existing system of grants to mainly not-for-profit service providers.

The revelation comes a day after Treasury secretary Martin Parkinson warned that there isn’t enough money in the federal budget to pay for expensive policies being pursued by Labor and the Coalition.

Ten of billions of dollars will need to be found in new tax revenue or via spending cuts if the government is to fund its aspirations. These include the Gonski education reforms ($5 billion a year), the reopening of asylum seeker centres on Nauru and Manus Island ($2.9 billion over four years) and the NDIS.

The Coalitions’s big spending promises include a highly generous paid parental leave scheme and the unwinding of cuts to the defence budget. A spokesman for Treasurer Wayne Swan said last night: “The Productivity Commission estimated that the costs of a full scheme would be between $5 and $8 billion in today’s dollars.

“The Australian Government Actuary has confirmed that their estimates are within that range.

“It’s been clear for some time that the cost of an NDIS would be impacted by the Fair Pay decision – that’s because if you want to deliver better care and support to people with disability, you have to pay a fair wage to those workers.”

Prime Minister Julia Gillard has so far pledged to provide funding to support trials of the scheme. There has been no funding put forward for implementing the scheme beyond the budget’s four-year forward estimates.

The actuary’s estimates published in April are the net costs over and above the existing Commonwealth and state and territory funding. The $10.5 billion additional expense is about $7.5 billion in today’s dollars, which compares to a net cost of about $6.5 billion projected by the Productivity Commission. The PC’s estimate did not factor in the rise in community workers’ pay as a result of the FWA decision.

The widely quoted total cost of $13.6 billion produced by the PC, is the gross cost including existing spending by the commonwealth and states and territories. It is not comparable with the actuary’s estimates.

top


TAX AUDIT CRITERIA TO COME UNDER SCRUTINY

Peter Ryan, ABC News, 18 Aug 2012

The man watching the tax man has raised concerns about the way some taxpayers are selected for much-feared audits of their tax affairs.

The inspector-general of taxation, Ali Noroozi, is about to review so-called “risk engines” used by the Australian Tax Office (ATO) to determine whether audit targets are selected by computer programs or ATO staff.

He has told ABC’s AM that some feel the right taxpayers are not being targeted.

“We have had [taxpayers from] across the board, right from the very large to the very small, saying that perhaps this risk-identification process, or this risk engine, is not yielding the right results,” he said.

“In other words, some of those that have been identified feel that they’re not risky enough to have been identified or practitioners feel sometimes that they have not identified the right taxpayers.”

Mr Noroozi says the ATO compares incomes and deductions to the average to determine if there needs to be a closer look at a business.

“Let’s say if you’re a coffee shop for example with a turnover of a certain amount, they would expect you to have reported income of this much and perhaps this level of deductions. If you fall outside of that range, you may well be selected for the Tax Office to have a further look at,” he said.

Mr Noroozi says it is important for the taxation system to have greater transparency. “I think taxpayers want to understand how that risk engine works, but one of the things I think taxpayers take a lot of comfort from the work of this office, is that I can shed light on what they sometimes see as a black box of the Tax Office,” he said.

“How much is computer-based, how much of it is human interaction is something that will come to the fore when I conduct a full review.”

Mr Noroozi says the issue of delays in tax returns needs to be looked at. “The Tax Office is on record as saying that some of it [the delay] is due to their more improved IT systems, where they are capturing more people, based on different indicators on their system,” he said.”So it needs to be looked at and [we need to] find out why – is it really because these refunds were held up for good reason and whether those delays were reasonable.”

top


PREPARE FOR NEW TAXES, TREASURY BOSS WARNS

Peter Martin, The Age, 17 Aug 2012

Treasury boss Martin Parkinson has raised the prospect of new taxes, saying the days of big budget surpluses are gone.

In a sombre assessment of Australia’s tax position – the second in a fortnight from a senior Treasury official – Dr Parkinson told a corporate audience in Brisbane that Australia would soon be unable to meet demands for new government spending from its existing taxes. ”These are expected to deliver less revenue as a proportion of GDP, given capital and labour will become more mobile and the costs of securing that revenue will increase,” he told the Committee for the Economic Development of Australia (CEDA).

”In addition, greater use of the tax bases we currently rely most heavily on – personal and corporate income tax – can adversely impact on productivity, participation and investment if not designed well.”

The Treasury secretary’s warning against trying to squeeze more out of existing taxes did not extend to the goods and services tax.

Rob Heferen, head of Treasury’s revenue group, told a Canberra audience this month Australia undertaxed the consumption of goods and services compared with other developed nations, but said ”a sustainable rebalancing” would need to gain community acceptance.

Dr Parkinson told CEDA in Brisbane that ”with hindsight” it was apparent the Howard government’s run of surpluses during the mid-2000s were the result of ”a temporary bubble”.

Australia’s terms of trade had since peaked and economic activity was shifting into forms that could not be taxed as easily. ”The takeout message is that the days of large surpluses being delivered by buoyant tax receipts are behind us,” he said.

”While economic activity rebounded quite quickly after the global financial crisis, tax receipts are expected to remain substantially lower – around $20 billion per annum lower at the Commonwealth level alone – than pre-crisis projections.”

This was happening at a time when rising incomes propelled Australians to demand more of government. So-called ”superior goods” such as health, disability care and education were becoming more important. The ageing of the population would only exacerbate the pressures.

”We will not be able to meet these demands for new spending by increasing the efficiency and effectiveness of existing government spending alone, although this is important in its own right,” Dr Parkinson said. ”Nor can we rely solely on our existing tax bases. ”What will be required to meet the community’s demand for new spending will be more revenue or significant savings in other areas. In short, the public will need to make thoughtful decisions about what it wants government to provide, and how it expects these things will be provided.”

Dr Parkinson said his own department was already trying to do more with less. ”As with a number of other agencies, we have already started the process of downsizing. Indeed, we are reducing staff numbers by over 20 per cent by mid 2014,” he said.

Treasury has commissioned a panel of outside experts to review its macro-economic and revenue forecasts.

top


BUDGET CUTS NEEDED, NOT JUST TWEAKS

The Australian Financial Review, 16 Aug 2012

The Labor government’s promise to produce a budget ­surplus this year has become a lot harder because of the big licks of money it will need to implement the Houston report on asylum seekers and the Gonski report on education ­funding.

Prime Minister Julia Gillard’s commitment to fund the two reform packages as part of a renewed policy assault on the opposition could end up costing the government a combined $4 billion a year. Funding the national disability insurance scheme will also be a multibillion-dollar exercise.

All of that will put enormous strain on a wafer-thin budget surplus of $1.5 billion for 2012-13 that was never much more than smoke and mirrors in the first place and which has been looking less and less achievable as a downturn in commodity prices threatens to erode tax receipts.

The government is scrambling for options to cover what could turn out to be a substantial shortfall, including a controversial proposal to add more than $400 million a year to its bottom line by excluding Future Fund costs from the underlying budget cash balance. Communications Minister Stephen Conroy also ­somewhat dubiously claims that the $44 billion national broadband network can remain off-budget because it will make a commercial return.

But the deep structural problems with the budget require a lot more than just accounting fiddles. As Reserve Bank of Australia governor Glenn Stevens suggested late last month, ­Canberra should have built up much bigger budget surpluses in order to help protect the economy from external volatility.

Labor needs to stop thinking up new spending initiatives to bolster its dismal support among voters and begin the task of substantive fiscal consolidation.

There is plenty of fat that can be trimmed from the federal budget, including the billions wasted on middle-class welfare and handouts to uncompetitive rent-seeking industries.

top


CALL TO REDRAFT LABOR LIVING-AWAY PERK BILL

Joe Kelly, The Australian, 16 Aug 2012

The Tax Institute has seized on a report on Labor’s proposed changes to the living-away-from-home allowance, saying it effectively demands that the government redraft its legislation from scratch.

A parliamentary committee yesterday called for greater clarity on new restrictions to the tax concession, limiting it to those who are required to leave their primary residence for work reasons.

The new bill requires an employee to live away from a residence that is either owned or leased and that is available at all times for their “immediate use and enjoyment” to qualify for the concession.

But the house economics committee recommended that the benefit be treated “wholly within the fringe benefits tax system”, warning that the government’s bill complicated the tax treatment of the concession.

“While the bill is designed to bring living-away-from-home allowances into the income tax regime, in reality employers are left straddling both the income tax and FBT regimes,” it found.

For example, the government’s bill would see the treatment of the first $42 of the food allowance subject to the FBT provisions and place reporting obligations on the employer.

However, the tax liability for the remainder of the food allowance would lie with the employee and be dealt with through the income tax system.

“The committee has effectively told the government to go back to the drawing board and completely redraft the fundamental tax basis on which this bill has been drafted,” said the Tax Institute’s senior tax counsel, Robert Jeremenko.

The committee also conceded that many people, including fly-in, fly-out workers, would not meet the required home “ownership interest” test to qualify for the allowance because they might live with family during off-periods.

top


PREMIERS GANG UP ON LEVY REFORMS

Annabel Hepworth, The Australian 15 Aug 2012

The Gillard government’s business tax review faces a backlash from the conservative bloc of states, which fear the resources powerhouses of Queensland and Western Australia will be hit hardest.

After Wayne Swan’s advisers suggested more than $11 billion in savings by cutting tax breaks to resources, agriculture, infrastructure and tourism, Queensland Treasurer Tim Nicholls vowed to “strenuously oppose” changes that would hit investment in those sectors.

“At first glance, the reforms appear to penalise those industries that are a significant component of Queensland’s economy for little immediate gain,” Mr Nicholls said.

“It would seem to penalise both Queensland and Western Australia — the states doing the most to support the national economy.”
West Australian Mining Minister Norman Moore warned: “Any more tax on the mining industry would be totally counterproductive.”

The tax review’s discussion paper proposes cuts to tax breaks on mining and gas exploration, depreciation and to the research and development tax offset. The review has infuriated the mining industry because it has canvassed savings including cutting exploration deductions, prompting the industry to accuse the group of a bias towards increasing the tax burden on the resources industry.

Victoria’s Treasurer Kim Wells slammed the proposal to dump the 40 per cent R&D tax offset for companies with turnovers of more than $20 million. “The Victorian Coalition government has very significant concerns about proposals to scrap tax exemptions for research and development,” he said.

“The fact that this proposal is even being considered to fund a reduction in the corporate rate shows the commonwealth has put the working group in a straitjacket. “This process is not a path to real tax reform.”

Victoria spends more than $7 billion a year on R&D and has wooed biotechnology and medicine investment.

NSW Treasurer Mike Baird said it was crucial that the tax system did not penalise businesses competing nationally or abroad. “Continued capital investment across the economy is essential to underpin our standard of living and a stable investment environment is essential for business to have the confidence to invest,” he said. “Making changes that stymie private investment is the last thing the national economy needs.”

top


CORPORATE TAX CUT NEEDS BUSINESS CONCESSIONS: JORDAN

Katie Walsh, Australian Financial Review, 13 Aug 2012

The federal government’s chief adviser on tax reform has warned business that it can’t expect a company tax cut without giving up some concessions.

Ahead of the release of a discussion paper on Monday, business tax working group chairman Chris Jordan called for a mature debate on how to fund a corporate tax cut, in response to fierce reactions from industries that fear losing tax breaks.

Mr Jordan, a former KPMG partner who also heads the Board of Taxation, said a cut to the 30 per cent corporate rate would bring economy-wide gains – but there were not economy-wide savings to fund it.“Business has to take a mature approach to this because we are operating under a very big constraint, and that is that it has to be fully funded from the business tax system,” Mr Jordan told The Australian Financial Review.“So there’s little point in business saying ‘we want the cut but not the savings measure’, because then they won’t get the tax cut.”

The group was formed by Treasurer Wayne Swan after the tax forum last October. It was asked to reform tax loss rules to help small businesses; and to consider changes to increase productivity, in particular the merits of a company tax cut and an allowance for corporate equity. Both reforms had to be revenue-neutral, funded using savings from within the business tax system.

The loss reforms were introduced in the May budget and a discussion paper on a corporate tax cut is due to be released on Monday. That paper will do two things: make the case for lowering company taxes to increase productivity, and; list options to fund it.

Mr Jordan said there were two arguments to support a lower corporate rate. Not only did it make Australia more competitive globally – particularly crucial given our small size and reliance on foreign input – but it could lead to an increase in productivity and wages over time.

“If the government takes less tax from corporate profits, the returns to capital increase, therefore that increase gets shared between the capital owner and labour,” Mr Jordan explained.“We as a group believe there are benefits in the economy to having a lower, broader based rate, but we want to hear people’s opinion on that. You’re only reducing the corporate tax rate if people believe there’s a benefit in doing so.”

The options listed in the paper for funding the cut, including reduced debt deductions for multinationals, cuts to faster write-offs for some industries and to research and development concessions, and ending up-front deductions for mining exploration, were just that – options.“It’s not a white paper; it’s purely there to stimulate discussion, to canvass the issues. It very much depends on the response we get as to what we put in our draft paper,” Mr Jordan said.

People will have a chance to give further feedback on release of that draft. Anticipation of the content of the discussion paper has triggered a backlash from businesses, particularly in defence of research and development concessions and mining exploration deductions.

Cutting depreciation write-offs for oil, gas, transport and agriculture would save $4.4 billion over four years while scrapping immediate deductions for mineral exploration would save $1.2 billion over the same period. Cutting small business tax breaks that started in July could save more than $2.5 billion while new write-offs for shipping could save $150 million.

Reducing the tax offset for R&D from 40 per cent to 37 per cent would save another $500 million while tightening the thin capitalisation rules would save at least $300 million a year, on conservative estimates.

Mr Jordan called for a “calm, considered debate” about whether a cut was worth it.“We’re not trying to justify a particular cut,” he said. He acknowledged that some options were industry-specific, such as accelerated depreciation for oil and gas industries. However, others would affect a broader base, such as any changes to thin capitalisation rules.

Starting next week, the group will travel to Brisbane, Sydney, Melbourne and Perth to talk with industry bodies, professional associations and companies. “We’ll be taking all that feedback on board,” Mr Jordan said.

It is hoped that businesses and other stakeholders will suggest other options for savings beyond those canvassed in the paper. “Let’s not try just to focus on some of the narrow areas the paper focuses on,” he said.


TAKING THE BUDGET FIGHT TO OBAMA

Ben Potter, Australian Financial Review, 13 Aug 2012

To see why Mitt Romney’s choice of Paul Ryan as his Republican presidential running mate is a bold, clarifying and risky choice, look at the stalled US economy and delinquent federal budget.

Barack Obama argues the United States can be lifted from its deep malaise by taxing, spending and tweaking healthcare and social security programs that are set to break the budget over the next two decades. He hints at bolder reforms if re-elected, but gives no details.

House budget chairman Ryan and Romney argue for sweeping tax and entitlement reform to kick-start the stalled economy and jobs market, and control health and social security spending, deficits and debts. They’ve put out enough detail to hang themselves, and Obama is obliging.

Ryan can help Romney right a drifting campaign. He makes a stronger case for Romney than Romney does. But they need to put out more, and refine their tax and long-term spending plans, to blunt Obama’s assault.

That means a defining debate on the role of government, not just hand-to-hand combat over Romney’s business career and tax records.

Under current policy, federal deficits will contract from about 7.5 per cent of gross domestic product today, $US 1 trillion plus, to 5.9 per cent of GDP in 2022. Then they’ll blow out to a ruinous 17.2 per cent by 2037, the Congressional Budget Office predicts.

Federal debt held by the public, about 75 per cent of GDP, will blow through the record 109 per cent (post-World War II) peak in the mid-2020s to nearly 200 per cent of GDP by 2037. Long before that, America would face a financial crisis and the economy would seize up.

The drivers of the blowout are the healthcare and social security entitlements of the ageing baby boomers. On current policy, federal spending on healthcare and social security will soar from 10 per cent of GDP today, about $US1.5 trillion, to nearly 16 per cent by 2037. That would squeeze other spending – defence, education, transport, R&D – to 1950s levels, or require crippling tax rises.

How does Obama propose to fix this? His (stillborn) 2013 budget would raise taxes on rich households, investments and companies to Clinton-era levels and above, pulling in an extra $US2 trillion. He’d spend more on infrastructure, police, teachers and construction workers short term to boost the economy. He’d try to control healthcare costs by cracking down on providers.

But Obama would not alter the basics of healthcare envisaged by the Affordable Care Act, or shift the needle on costs of healthcare and social security. These would still blow out to budget-smashing levels, and the Medicare trust fund would still be broke by 2024. Neither does he offer personal income tax reform to boost incentives, just a limited and dubious corporate tax reform plan to reward manufacturers and punish oil and gas producers.

Is there a better way? Yes. There’s “premium support” for Medicare, an idea originally suggested by Democrats like Clinton-era budget director Alice Rivlin and centre-left scholars like the Brookings Institution’s Henry Aaron. The idea is to introduce a market brake on Medicare’s open-ended promise of federally funded care for over-65s, by offering the alternative of a federal subsidy for seniors to buy their own health plans on an “exchange”, similar to Obamacare.

The federal subsidy would be held at the lowest bid for a private plan that met Medicare’s requirements. Other cost controls would have to be introduced. This idea is now championed by Ryan, Romney and other Republicans, and demonised by Obama and the Democrats. They ran an ad depicting Ryan pushing a wheelchair-bound grandmother off a cliff last year.

Ryan got a single brave elected Democrat, Oregon senator Ron Wyden, to endorse a version of this plan, but not the tighter cost controls in his (stillborn) 2013 budget. Rivlin “strongly support[s]” Ryan’s plan.

Two bipartisan fiscal commissions, including Rivlin’s, have also endorsed rate-slashing, concession-busting tax reform of the kind proposed by Ryan and Romney. But Ryan and Romney need to embrace higher revenues and investment taxes to blunt Obama’s charge that they reward the rich at the expense of ordinary households.

In their favour, they’re closer to the bipartisan plans than the President, and willing to start a debate the Democrats don’t want. Their gamble may not pay off. If not, at least they’ll go down fighting.

 

top