12 May 2009

CCIQ Commentary: The 2009 Federal Budget

The Federal Government's second Budget delivered by Treasurer Wayne Swan is a boat of promises but will it arrive at port in time?

From a business perspective we wanted spending measures to be responsible, and targeted towards economically valuable infrastructure. However on revenue measures, we looked to government to take cost pressure off doing business here and now which is unfortunately glaringly absent.

Infrastructure investment foreshadowed in the federal budget is a solid foundation for recovery but the budget misses opportunities presented by the recession to more widely reduce business taxes and make structured reforms to address the deficit.

The big plus is on the infrastructure side. The investment is overdue and will contribute to a more efficient and competitive economy when the recovery arrives. But more should have been done to take pressure off the cost of doing business at a time when the private sector is doing it very tough. That will delay the recovery.

On tax, the failure to set out a plan for restructuring Commonwealth-State financial arrangements so that taxes on jobs like payroll tax is a massive lost opportunity. The extension of the investment allowance to 50 per cent for small business until December 2009 is an excellent initiative. However until this change is legislated there will be reluctance on behalf of business to commit to the initiative. Retaining the legislated personal tax cuts will act as a stimulatory measure, and contribute to labour productivity and incentive.

Unsurprisingly in light of a $210 billion collapse in tax revenues the budget is heavily in deficit ($57.6 billion in 2009-10). Businesses were looking for evidence that the government has a plan to repay the deficit, and whether steps are being taken to reign in the size of government, red tape and waste. In our view their expectations will not be met.

It is essential that the Rudd Government implement a plan to return the budget to surplus and eliminate debt to avoid higher taxes in the future. In our view the Budget returning to surplus in 2015-16 is effectively leaving this problem to future Governments to clean up the mess.

Commonwealth spending will need to return to sustainable levels. This will only occur by taking tougher decisions in spending areas across portfolios and on the size of government.

In summary this 'Robin Hood' style of fiscal and economic management runs the serious risk of shooting an arrow through the heart of the Queensland business community.

Economic Outlook

Australia's real GDP is forecast to contract in 2009‑10, an inevitable consequence of the magnitude of the global recession. A fall of 0.5 per cent is forecast for 2009‑10. A recovery in the economy is expected to gather pace over 2010, although growth remaining below trend in 2010‑11 at 2.25 per cent.

Business investment is expected to contract sharply in 2009‑10, falling by 18.5 per cent.

Exports are forecast to fall in 2009‑10, consistent with the contraction in world trade. An overall fall of 4 per cent is expected.

Imports are forecast to contract by 6.25 per cent in 2009‑10, in line with the slowing in domestic demand and the depreciation of the Australian dollar since its peak in mid‑2008.

Employment is expected to fall by 1.5 per cent through the year to the June quarter 2010 as the global recession impacts on the domestic economy. Employment is expected to recover through 2010‑11, rising by 0.5 of a per cent through to the June quarter 2011. This would see the unemployment rate rise to 8.25 per cent by the June quarter 2010, peaking at 8.5 per cent in 2010‑11. The participation rate is forecast to decline by 1.25 percentage points from its recent record high, reaching 64.25 per cent by the June quarter 2011.

Wages growth is expected to slow to 3.25 per cent through the year to the June quarter of both 2010 and 2011, reflecting the easing in labour market conditions.

Inflation is forecast to continue to moderate over the forecast period, as the global recession eases previous demand pressures. Both headline and underlying inflation are expected to slow to 1.75 per cent through the year to the June quarter 2010, and 1.5 per cent through the year to the June quarter 2011.

Fiscal Outlook

The Federal Government has forecast a deficit of $57.6 billion, or 4.9% of GDP, in 2009-10. The budget is not projected to return to surplus until 2015-16.

Key Announcements

The Federal Government announced $22 billion of Nation Building Infrastructure.

Paid parental leave will be introduced from 1 July 2011. The scheme will provide for up to 18 weeks paid leave at the minimum wage (currently $544 per week). Payments will taxable and the scheme means tested. The Federal Government has committed to funding the scheme, however it is not clear if employers will incur a cost and compliance burden in administering the scheme

The Small Business and General Business Tax Breaks will be extended. The bonus tax deduction will be increased to 50% for small businesses and 30% for all other businesses. The small business deduction will be available for eligible assets acquired between 13 December 2008 and 31 December 2009, and installed for use before 31 December 2010. The 30% general business tax break is available until 30 June 2009, as well as the rate of 10% applying to eligible assets acquired prior to 31 December 2009.

The First Home Owners Boost will be phased down from 1 October 2009 and cease after 31 December 2009. Between 1 October 2009 and 31 December 2009, the value of the First Home Owners Boost will halve, to $3,500 for established homes and $7,000 for new homes, providing a total of $10,500 for established homes and $14,000 for new homes when combined with the First Home Owners Scheme grant. After 31 December 2009 when the First Home Owners Boost ceases, the $7,000 First Home Owners Scheme grant will continue.

The government has reaffirmed its commitment to previously announced personal income tax cuts.

Taxation

Tax changes, which will raise additional revenue of around $4.6 billion over the forward estimates, include:

• tightening the rules applying to the use of non‑commercial business losses to prevent high‑income individuals (those who earn $250,000 or more) from deducting losses against their salary, wage and other income from activities that are unlikely to make a profit, and which are often more like hobbies or lifestyle choices;
• limiting the scope of the tax exemption for the foreign employment income of Australians who work overseas for periods of 91 days or more so that this exemption only applies to aid workers (both government and non‑government organisations), charitable workers, certain government employees (such as defence and police force personnel deployed overseas) and those employed on overseas projects approved by the Minister for Trade as being in the national interest;
• better targeting the concessions for employee share schemes by abolishing the option to defer the tax on share discounts and means testing the availability of the $1,000 'up front' exemption for discounts, limiting this concession to individuals with an adjusted taxable income of $60,000 or less;
• reducing the generous concessional contributions cap for tax‑deductible contributions to superannuation;
• extending the tax file number withholding arrangements to include distributions by closely held trusts; and
• preventing company owners from getting tax‑free benefits through use of private companies.

Infrastructure

After carefully considering advice from Infrastructure Australia, the Government has decided to invest in the following 'priority' infrastructure projects in Queensland:

• Ipswich Motorway - Additional Works in Queensland: construction commenced in 2009 and is scheduled for completion by 2012.  Total Federal investment will be $884 million, bringing the overall Federal Government commitment to the Ipswich Motorway to over $2.5 billion.
• Gold Coast Light Rail in Queensland: construction is expected to commence in 2011 and is scheduled for completion in 2013.  Total Federal investment will be $365million.

In addition, the Federal Government will contribute funds towards two projects in the 'pipeline' of projects identified by Infrastructure Australia:

• Bruce Highway - Cooroy to Curra (Section B) Duplication: construction is expected to start in 2009 and is scheduled for completion in 2012. Total Federal investment will be $488 million.
• Brisbane Inner City Rail Feasibility Study: $20 million to undertake a feasibility study to determine potential route alignment, construction timetables and preferred funding model.

The Federal Government has also reaffirmed its commitment to a new national broadband network worth up to $43 billion with the initial government investment set at $4.7 billion.

Industry Policy

Energy & Climate Change

The Federal Government will invest $4.5 billion to support the growth of clean energy generation and new technologies, and to reduce carbon emissions and stimulate economic activity. The Government will invest:

• $2.4 billion in low emissions coal technologies, including new funding of $2 billion in industrial-scale CCS projects under the Carbon Capture and Storage Flagships program;
• $1.6 billion in solar technologies, including new funding of $1.365 billion in a Solar Flagships program; and
• $465 million to establish Renewables Australia to support leading-edge technology research and bring it to market, including new funding of $100 million. The new body will advise governments and the community on the implementation of renewable energy technologies, and support growth in skills and capacity for domestic and international markets.

Eight energy efficiency measures have been announced as part of the National Strategy on Energy Efficiency in the 2009-10 Budget, including four measures focusing on commercial buildings:

• Disclosure of commercial building energy efficiency - $5.3 million over four years.
• Improvements to the Building Code of Australia requirements for commercial buildings - $3.3 million over four years.
• Commercial building rating tools - $2.6 million over four years.
• Improvements in heating, ventilation and air conditioning systems - $2 million over three years.

Support for small business

The Australian Tax Office (ATO) will receive $168 million to assist small businesses and help them remain viable. The government has also provided cash flow relief to small businesses by announcing reduced PAYG instalments in 2008-09 and 2009-10.

A new Small Business Support Line and referral service will be established at a cost of $10 million over two years to assist small businesses affected by the global financial crisis. The support line will provide initial advice and referral services to small business owners on such matters as obtaining finance, cash flow management, retail leasing, promotion and marketing, and personal counselling.

Research & Development

The 2009‑10 Budget also includes funding of $500 million over four years to encourage the commercialisation of ideas, improve the incentives for business research and development and collaboration, and provide for key enabling technologies. The Government will provide $196 million over four years to establish the Commonwealth Commercialisation Institute, which will bring together research, business and finance in the Australian economy.

The Government will replace the current research and development tax concessions with an expanded tax credit from 1 July 2010 that improves support for smaller firms in tax loss as well as rewarding larger firms for their research and development efforts. The new research and development tax credit will feature a 45 per cent refundable credit for firms with an annual turnover of less than $20 million - equivalent to a tax concession of 150 per cent.

Education & Training

The Federal Government's $277 million Compact with Young Australians will:

• guarantee an education or training place for every young person under the age of 25 who wishes to up-skill;
• require participation in school, training or work for anyone under the age of 17; and
• bring forward to 2015 the COAG goal to lift the national Year 12 or equivalent attainment level to 90 per cent.

The Government's $438 million Compact with Retrenched Workers will provide immediate assistance to Australians who have become unemployed. The compact will provide $299 million to give retrenched workers immediate and personalised intensive employment assistance through Job Network and the new Job Services Australia.

The Government's Compact with Local Communities will provide the regions and communities hardest hit by the global recession with priority assistance through the $650 million Jobs Fund, announced on 5 April 2009. The projects funded will support local jobs and also help the environment, improve community amenity and boost services provided by not‑for‑profit organisations.

The Government will provide $83 million over four years to help eligible job seekers on income support through a temporary Training Supplement. The Training Supplement provides an ongoing payment of $41.60 per fortnight to eligible job seekers on Newstart Allowance or Parenting Payment who are undertaking approved training. The Training Supplement will be available from 1 July 2009 until 30 June 2011.

The Government will invest $491 million over four years to uncap the number of public university places from 2012, allowing universities to offer a place to all eligible students. This will allow an extra 50,000 students to commence studies over the next four years.

For Individuals

Private health insurance

Private health insurance will be means tested and the Medicare levy surcharge increased for high income earners who do not have private health insurance. These changes will affect singles with an income above $75,000 and families with a combined income in excess of $150,000.

Family payments

The government will make changes to the indexation arrangements for a number of family-related payments. These include Family Tax Benefit Part A & Part B, and the Baby Bonus. The Low Income Tax Offset will be doubled from $750 to $1,500 from 1 July 2010.

Concessional super contributions

From 1 July 2009, the Government will reduce the cap on concessional superannuation contributions from $50,000 to $25,000 (indexed), and the transitional cap from $100,000 to $50,000. From 2012‑13 those aged 50 years and over will be subject to the lower $25,000 (indexed) cap. Under current arrangements, concessional superannuation contributions are taxed at the concessional rate of 15 per cent up to the concessional contributions cap. The concessional contributions cap is currently $50,000 per annum and the transitional cap (which applies until 30 June 2012 for those aged 50 or over) is $100,000 per annum.

The co‑contribution matching rate will be reduced from 150 per cent to 100 per cent for contributions made between 1 July 2009 and 30 June 2012, and to 125 per cent for contributions made between 1 July 2012 and 30 June 2014. The co‑contribution matching rate will return to 150 per cent for contributions made from 1 July 2014.

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Source: Australian Government Budget papers