Labor's tax reform package
On 27 August 1998 the Australian Labor Party announced its tax reform package, which is Labor's reply to the Government's tax package released two weeks earlier (refer "On Tax Reform" Issue 2). Tax will be the main battleground in the Federal election to be held on 3 October 1998.
Labor has made the following promises:
- It will not introduce a GST.
- From 1 January 2000, an annual tax cut for low and middle income working families worth up to $3,300 a year for a family with two children - cost to revenue in 2001-02 $3.1 billion.
- The current family allowance taper is to be reduced from 50 to 35% meaning gains of up to $1,147 a year for low and middle income families - at a cost to revenue of $300 million annually.
- A tax rebate of up to $750 a year to supplement the earned income of singles and up to $1,000 for couples with no children - cost to revenue in 2001-02 of $2.7 billion.
- The threshold at which the 34% personal rate increases to 43% will rise from $38,000 to $40,000 in 1999-00 to $42,000 in 2000-01 and $43,000 in 2001-02 - at a cost to revenue of $515 million in 1999-00, $995 million in 2000-01 and $1.42 billion in 2001-02.
- There will be a cash refund for shareholders who cannot make use of imputation credits because they do not pay income tax, which will be of use especially for self-funded retirees on lower incomes - at a cost to revenue of $550 million in 2001-02.
- The 150% research and development concession will be reinstated to benefit small and medium enterprises and high-innovation large firms.
- A new 20% development allowance to encourage private business especially in regions of high unemployment - at a cost to revenue of $86 million in 2001-02.
- Extension of the present rebate for infrastructure projects and a limited capital gains tax exemption for foreign fund investors in venture capital and abolition of the savings rebate (as also proposed by the Government).
- Many of the Government's proposals will be adopted including taxing trusts as companies, requiring company tax to be paid on all dividends and extending the new entity tax regime to life insurers and adoption of the basic elements of the Government's pay-as-you-go business
- payment system.
- Re-imposition of the 0.2% additional Medicare levy on those earning more than $50,000 to fund
- public hospitals.
Personal income tax
The centrepiece of Labor's package is a family tax credit. The amount of the tax credit rises at the rate of 10 cents for every dollar earned and continues up to a plateau level. The height of that plateau differs according to the number of children under 16 or student dependants under 18 in the family. After the plateau, the credit is withdrawn at the rate of 15 cents for every extra dollar earned. The details are shown in the following table:
The following diagram copied from Labor's tax reform package shows how the credit would work.
"Earned" income for the purposes of the tax credit includes salary and wages and income of a sole trader. Families with income of more than $5,000 in annual "unearned" income would not be eligible for the credit. "Unearned" income would include interest, dividends (excluding imputation credits), trust income, capital gains and rents.
Family tax credits
A feature of the family tax credits is the surprisingly high marginal rates that result from adding the 15% withdrawal rate where family income exceeds the plateau - see the boxed examples.
These effective marginal personal rates do not apply of course to those family earners who are not entitled to the family tax credit because family income is high enough not to attract the credit.
Tax rebates for working singles and couples without children
From 1 July 2000 a tax rebate for working singles and couples without children will provide annual tax relief of up to $750 for singles and single income couples without children, and a maximum of $1,000 ($500 each) for working couples without children. The rebate will be an off-set against tax payable at the end of the financial year.
The effect will be the same as increasing the tax-free threshold to at least $9,150 for singles and $7,900 for each member of a couple without children. Singles or couples without children in combination receiving more than $5,000 in unearned income will not be eligible for the rebate. Taxpayers with earned incomes below $38,000 will qualify for the maximum rebate, which will phase out to $60,000.
Tax relief for average wage earners
Labor will leave the personal tax rates and brackets unchanged, except that it proposes to increase the threshold at which the 43% marginal tax rate commences from $38,000 to $43,000. This would be in three steps, starting on 1 July 1999 as shown in the following table:
Refundable imputation credits
Labor proposes to allow excess imputation credits to be refunded to resident Australian shareholders, complying superannuation funds and registered charitable organisations. This appears to be identical to the Government's proposal.
Fringe benefits tax reform
Labor has adopted the Government's proposal to change fringe benefits and would include on group certificates the grossed-up value of fringe benefits for income-tested surcharges and government benefits where these are in excess of $1,000. In addition, it would limit the concessional rebate of FBT for benefits provided by not-for-profit institutions up to $17,000 of grossed-up benefits per employee. Other FBT proposals of the Government would also be adopted.
Capital gains tax reform
Labor proposes that capital gains tax will now accrue on assets from 1 January 1999 that were acquired prior to 20 September 1985.
Labor will abolish the savings rebate with effect from 1 July 1999.
Business tax measures
Labor will tax trusts as companies and will adopt the Government's proposals, together with some additional measures:
- it will tax distributions flowing from the revaluation of unrealised gains on trust assets which have accrued from 1 January 1999, irrespective of when the asset was acquired
- it will tax distributions consisting of realised real gains on assets acquired prior to the introduction of capital gains tax which accrue from 1 January 1999
- it will review the treatment of trust losses to ensure that the current arrangements are adequate to ensure that trust losses cannot be transferred between persons who have not borne the economic risk of those losses
- it will tax distributions of interest made to non-resident beneficiaries from 1 January 1999, where the effective control of the income remains with the trustee, at ordinary non-resident personal income tax rates, rather than under the interest withholding tax regime
Labor will also adopt the Government's proposal for a deferred company tax and to tax life insurers in the same way as other business entities.
Pay as you go
Labor will adopt the basic elements of the pay-as-you-go business payments system (including the abolition of provisional tax) proposed by the Government, and devote substantial resources to the Australian Taxation Office to improve compliance.
Not surprisingly the ALP has focused on the need to leave the existing indirect taxes system intact. They have spent more time saying why they will not introduce a GST rather than offering constructive comment for improvement of the existing indirect tax system.
A Labor Government will, from 1 July 1999:
- Remove the 12% wholesale sales tax ("WST") currently imposed on fruit, cordial and fruit juice products (including vegetable juice) - a drop in tax of $73.2 million in 1999-00.
- Remove the WST exemption for caviar and tax it at the luxury rate of 32% - increase of tax of $100,000 in 1999-00.
- Remove the WST exemption currently applying to business jets and impose the standard rate of 22% - $10 million in 1999-00.
- Increase the customs duty rates for four-wheel drive vehicles from 5% to 20% (the rate currently applying to passenger motor vehicles).
- Apply a "per stick" excise to cigarettes. The ALP has indicated that it will apply the tax to the number of cigarettes produced, not the weight of tobacco in the cigarettes. Cigars and other tobacco products will continue under the weight-based system. This policy is in line with that of the current Government as announced in their recent tax policy. Tax increases in 1999-00 are estimated at $250 million.
Business tax incentives
Labor has indicated that it will increase the present 125% R&D tax concession to 150%. However, the concession will only be available to:
- companies with fewer than 500 employees; or
- companies with over 500 employees which spend 2.5% of their turnover on eligible R&D activities.
Labor has focused its concession on what it describes as "high growth sectors" such as telecommunications, pharmaceuticals, computer software and automotive components.
The ALP proposes to provide a fast tracked claiming procedure for businesses with less than $250,000 per annum of R&D spend.
Labor estimates that the R&D changes will cost $51 million in 1999-00 and $238 million in 2000-01.
A new development allowance will be introduced to provide an accelerated tax deduction at a rate of 20% on total eligible investment expenditure undertaken after 1 July 1999 and before 30 June 2003.
The scheme will be capped at $5 billion of eligible expenditure. Although the allowance will be similar to the 1992 scheme, it will not be focused on such large scale projects. For instance, one of the priorities for approval will be for investment between $5 million and $100 million.
Entitlement to the development allowance will flow from certification by the Treasurer after evaluation by Labor's proposed new National Development Authority.
Extension of infrastructure rebate
A Labor Government will:
- Retain the existing Infrastructure Rebate, but broaden its scope beyond road and rail projects to cover investments such as electricity, water, sewerage, renewable energy projects and gas pipelines.
- Lift the current funding cap of $75 million per annum to ensure an additional $2.5 billion of regional infrastructure projects obtain assistance over a 5 year period. The investment profile equals $500 million per annum for each of the years of income 1999 to 2003.
- Provide an additional amount of $10 million in 2000-01 and $20 million in 2001-02 to assist in the construction of a very fast train link between Sydney and Canberra should that project proceed.
Incentives for venture capital
A Labor Government will put in place a series of measurements to encourage more venture capital investments in "start-up" and early stage enterprises.
To encourage specialist US investment funds to invest in Australian venture capital projects, Labor will allow the overseas fund, in concert with Australian investors, to invest through a limited number of tightly regulated Approved Venture Capital Funds (AVCFs). The AVCFs will not have to pay capital gains tax on gains made on their approved venture capital investments. This tax-free status will flow back to investors in the AVCFs. The net cost of allowing the exemption in question is estimated at less than $1 million in 2001-02.
To further encourage venture capital activities, Labor will commit $12 million to develop a partnership with Australian business schools, regional development organisations and the venture capital industry.
Labor will commission an Inquiry into the venture capital industry with particular emphasis on what additional initiatives are needed to accelerate the successful growth of start-up an early stage Australian industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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