An increase of the small business tax threshold to $10 million and a reduction of the company tax rate to 27.5 per cent from July 1 is the first step in a plan to hit a rate of 25 per cent in a decade, Treasurer Scott Morrison said in his first budget.
An increase of the small business tax threshold to $10 million and a reduction of the company tax rate to 27.5 per cent from July 1 is the first step in a plan to hit a rate of 25 per cent in a decade, Treasurer Scott Morrison said in his first budget.
There's also a change to the income tax thresholds to alleviate bracket creep for full time workers and a crackdown on multinational tax avoidance.
The company tax reduction will be phased in over more than a decade, starting with a rate reduction to 27.5 per cent for small businesses with revenue under $10 million on July 1 this year.
That’s larger than the reduction announced in last year’s budget, to 27.5 per cent applying to companies with revenue below $2 million.
The threshold will grow to $100 million by the end of the decade, covering all but the 2,000 largest companies.
By 2023-24, the threshold will cover all businesses, with the rate then cut to 25 per cent.
Mr Morrison said Australia had the seventh highest tax rate of 34 countries in the OECD and was uncompetitive against our Asian neighbours.
“We will not be able to rely on our natural advantages in resources to secure the jobs of the future like we have in the past,” he said.
“If we wish to continue to see our living standards rise with more jobs and higher wages, we need to ensure our tax system encourages investment and enterprise.”
The reduction will reportedly raise GDP by 1 per cent in the long term, while modelling suggests the impact of such a reduction will mostly flow through to higher wages for average workers.
KPMG national managing tax partner David Linke backed the reduction.
“We welcome the proposed reduction in the corporate tax rate to 25 per cent but transitioning it over an eleven-year period is likely to result in Australia falling further behind the tax rates of other capital-importing countries,” Mr Linke said.
“Increased foreign investment is particularly important for our living standards in the future.
“It cannot be stated often enough that a significant portion of the benefit of a reduction in the company tax rate flows through to higher real wages.
“This measure will ultimately give businesses greater incentive to invest.
Ratings agency Moody’s commended the tax reduction but said a protracted return to surplus would leave the country vulnerable to economic shocks.
“If successful, the announced10 year enterprise tax plan will contribute to sustain robust growth in Australia, relative to other advanced economies,” the agency said.
Bracket creep
A lift in the threshold for the second highest tax bracket from $80,000 to $87,000 will be worth up to $315 a year for 3 million Australians, according to the budget documents.
About 500,000 will be prevented from moving up into the bracket.
It comes after years of inflation continued to push average income earners into higher tax brackets, a trend known as bracket creep.
Treasury modelling released earlier in the year showed taking no action to prevent bracket creep would result in GDP being 0.55 per cent lower in the long term.
Mr Morrison said the government would like to do more but is doing what it can afford today.
“Those earning average wages, full-time or otherwise, should stay in the middle income tax bracket,” he said
“This will stop around 500,000 taxpayers from facing the 37 per cent second top marginal tax rate in each and every year.
“This is about providing room in our tax system for average full-time wage earners to earn more without being taxed more.
“This change also builds on the tax cuts provided to those on incomes of less than $80,000 to compensate for the carbon tax.
“By abolishing the carbon tax and keeping the tax relief in our first budget we delivered a genuine tax cut for those earning up to $80,000 a year.”
Funding
Mr Morrison said the reductions to company tax would reduce revenue by about $5.3 billion across the forward estimates.
“Any increases in tax revenue as a result of measures contained in the budget have been re-invested back into lower taxes, not towards fuelling unsustainable higher spending.” he said.
Mr Morrison said there would be a new 1,000 person task force at the Australian Taxation Office to target avoidance by both multinationals and high wealth individuals.
“This will be added to new measures to combat multinational tax avoidance which include:
- Embracing a new diverted profits tax, as implemented in the United Kingdom, that taxes multinationals on income they have sought to shift offshore at a penalty rate of 40%, that is higher than the current company tax rate;
- Strengthening the protections for whistleblowers who come forward and report tax avoidance; and
- Increasing penalties for multinationals that fail to meet their compliance and disclosure obligations to the ATO.
“These measures will raise an additional $3.9 billion in revenue over the next four years, helping us to reduce the tax burden on hardworking Australians and small business.”
