Henry Tax Review – clipping the wings of the golden goose

05 May 2010

The Government’s long-awaited response to the Henry Tax Review was disappointing. The Government’s response was only focussed on three areas: superannuation, business taxation and mining taxation. Of the 138 recommendations delivered in the Henry Tax Review, the Government has accepted only a few, explicitly rejected 27 measures, and has said that it will announce its response to the remaining recommendations in coming months. At the same time, it announced a phased increase in the superannuation levy which wasn’t recommended in the Henry Tax Review.

The key thrust of the Government’s response is the introduction of a 40% Resource Super Profits Tax. The additional money raised by this measure – $12bn in the first two years of the tax – will be channelled into three areas: lower business taxation; increased superannuation concessions and increased infrastructure spending.
The mining sector is the big loser from the Governments’ response to the Tax Review, whereas there are many potential winners, particularly small business who will enjoy lower tax rates, and increased concessions.

It is worth noting that even where the Government has accepted the recommendation of the Henry Tax Review – such as reducing the corporate tax rate – it has not moved as far as suggested by Henry. For example, the Henry Tax Review suggested cutting the corporate tax rate to 25%, whereas the Government only intends to cut the corporate tax rate to 28%, and not until 2014-15.

The second point to note is that many of the Government’s changes are slow burners. While the proposed increase in the superannuation levy from 9% to 12% is significant, it will not reach 12% until 2019-20.

Third, there is still the potential for the Government to make significant changes in coming months. For example, the Henry Tax Review recommends providing a 40% tax concession to income earned from bank savings accounts and this would be important if it is accepted.

Last, it is worth noting that there is also the real risk that some of these reforms will be blocked in parliament. Some of these changes may not need legislation passed to become effective, but many of the proposed changes could be blocked in a hostile Senate.
Resources Super Profits Tax

The Government will place a 40% tax on super profits from resource projects. This means that the tax will be placed on profits after allowing for extraction costs, recouping capital investment and after providing shareholders with a normal return on their investment. The new tax will be phased in over five years from 1 July 2012.

The existing state royalties regime (whereby resources firms paid tax to the State Government on the level of production) will be retained, but the Federal Government will refund these payments back to the mining companies – i.e. avoiding issues of double taxation.

The revenue gains of this reform are anticipated to be $3b in FY13 and $9b in FY14. The Government has provided some indication of how these gains are to be spent. This includes lowering the company tax rate, assisting small business (details below) and setting up an infrastructure investment fund. This fund will be established with a $700m contribution in FY13, growing to $5.6b over the next decade.

Lowering the company tax rate and other benefits for small business

The company tax rate will be lowered from its current level of 30% to 28% by 1 July 2014. This will be done in two steps, with the first reduction to 29% occurring on 1 July 2013. While this is beneficial for businesses, it is a very modest change when compared to the Review’s recommendation for a reduction in the rate to 25%.
Small businesses will benefit sooner, with the reduction to 28% occurring in FY13 (one year earlier). From 1 July 2012, small businesses will also be able to immediately write-down assets valued at under $5,000 (an increase in the limit from $1,000 currently).

Finally, changes will also allow small businesses to write-off all other assets (except buildings) in a single depreciation pool at a rate of 30 per cent (from 1 July 2012). This is expected to reduce complexities surrounding taxation of small business.

Changes to savings and superannuation

The compulsory superannuation contribution will rise incrementally from 9% to 12% by 2019-20. Changes will come in annual increments of 0.25ppt in FY13 and FY14, before increasing by 0.5ppt annually to FY20.

Other changes for superannuants include extending the superannuation guarantee for those aged 70-74 as well as providing a savings tax rebate of up to $500 for low income earners. This ensures that no tax will be paid on superannuation contributions for workers with incomes below $37,000.
It is estimated that these changes will add an extra $85b over the next 10 years to Australia’s existing $1 trillion pension pool.

Economic implications

In summary, the big loser from these recommendations is the mining sector, with the Government redistributing the money through other sectors of the economy. Thus, while there is one big loser, there are many potential winners. The 2.4 million small businesses are the obvious example, but the changes to superannuation are also very favourable, with plenty of additional carrots, and no additional sticks.