The Australian government has today announced a breakthrough in the ongoing stoush with Australian miners over the proposed minerals tax.  The RSPT is out, and instead there will be:

1. a new Minerals Resource Rent Tax (MRRT) regime applying to iron ore and coal in Australia, and
2. extending the current Petroleum Resource Rent Tax (PRRT) regime to all Australian onshore and offshore oil and gas projects, including the North West Shelf.

So instead of applying to all mining activities, the Government will focus the resource tax reforms on Australia’s our biggest and most profitable commodities: iron ore, coal, oil and gas.

Since the beginning of the mining boom, prices for iron ore have increased by over 400 per cent and prices for black coal have increased over 200 per cent.

The exclusion of other commodities reduces the number of affected companies from 2,500 to around 320, most of whom would not expected to pay significant amounts of RSPT anyway.

For full details of what had been announced, see the government’s media release.

Smooth sailing.

Earlier this week CPA Australia lodged a submission to the current Inspector General’s Review into the ATO’s Change Program (PDF).

The review emanated from a series of system problems that were being encountered by the ATO, many of which resulting in problems for taxpayers and their advisers.

Its important to understand that the ATO’s Change Program is of a scale unprecedented for the tax office, and long overdue.  It is replacing some 180 processing and other specialised systems that date back many years.  And it is to be expected that there will be teething problems.  Some problems may be ongoing.  Or a batch will be fixed, and others may take their place.  Welcome to the world of technology, business, politics and taxation.

So while we are empathetic to the difficulties being encountered and wish the tax office well in its endeavours, this has not been of much help to the many tax agents who on a daily basis are required to engage with the ATO’s systems.

CPA Australia’s submission (PDF) outlines many of the real life examples provided to us by members of the difficulties they have been experiencing.  These include cash-flow problems but also lost productivity, damage to client relationships and low staff morale given some of the significant reverse work flow  caused by many of the recent system bugs.

In many cases CPA Australia has been able to help get these problems addressed by the tax office.

And to their credit the ATO kept practitioners appraised via regular updates over recent months.

Two major improvements that practitioners and their clients would really benefit from out of the inquiry are that the teething problems will be sorted out expeditiously.  And secondly – and perhaps the one harder to achieve - is a more appropriate compensation mechanism to be available where a tax agent and/ or their client has incurred an economic loss as a consequence of systemic or in this case - system - problems.

Smooth sailing.

The now very public stoush on the proposed Australian RSPT continued to play out this week, and is likely to go on for some time.  As I mentioned in my last blog post, the decision on whether Australia has a Resource Super Profits Tax (RSPT) is really a matter for the resources industry and the government.  However most Australians would probably concur that a broader tax on Australia’s natural resources makes a lot of sense.  In fact in one of the many CPA Australia submissions to the Henry Tax Review (HTR) the organisation proposed that it as appropriate that Australia’s current resource tax arrangements be reviewed, taking into account what is happening in other jurisdictions such as profits based royalties imposed at lower/ more flexible rates.

The key issues that need to be addressed are whether a RSPT (or equivalent) can be developed and implemented without grinding economic activity to a halt both now and in the future.

So is it likely we will soon see a RSPT v.2?  What is currently being considered is whether it will apply to current projects as well as new projects, whether there is a more acceptable definition of a super profit than what has been announced (e.g. one that would cut in at some a higher rate), the government underwriting of losses, and whether 40% an appropriate RSPT rate, or should it be something less?

Although there are a few variables, the actual room to move does not seem that great.  There is little point in bringing in a new tax with all its associated compliance issues for the industry if the tax’s application is so narrow and/ or rate has been lowered so much that it collects little or no extra tax.

If an appropriate deal cannot be sorted out, what are the other options for reform in Australia?  As the Treasurer said when the HTR was released, other proposed tax measures hinge on the RSPT getting over the line so-to-speak.  This is simply because without the RSPT’s proposed new revenue stream, many other measures aimed at improving our international competitiveness and encouraging greater productivity are unaffordable.  That is of course, unless Australia took the fiscally irresponsible path some other countries have taken of running up ever-increasing debts.  And we’ve witnessed the end result of that type of approach to managing a country’s financial affairs almost daily recently.  One not to be recommended either in business or politics.

One key point of the HTR that seems to have been either lost or completely ignored by many commentators is that the HTR was never about collecting less tax.  In fact given the challenges the Australian economy faces over the decades to come, more tax revenue will be required.  Given these ‘known knowns’, the HTR’s approach was to consider tax and transfers while maintaining the overall tax take at around 30% of GDP (CPA Australia submitted that the target should be less than 30%).  So without a new tax on natural resources, it looks like we will soon be back at the tax reform drawing board.

Smooth sailing.

The decision on whether Australia has a Resource Super Profits Tax (RSPT) is a matter for the resources industry and the government.  Core design elements such as application, retrospectivity, the definition of what a super profit is, and the rate of the RSPT will need to be resolved by them.  But given the significance of the outcome to the Australian economy, and as strategic business managers of scarce resources, the accounting profession has an important role to play regarding the proposed RSPT also.

If the proposed RSPT is introduced, it is important that it has been appropriately designed and this is where we expect CPA Australia will be able to make an important contribution.  Also the accounting profession will certainly have a key role to play in both implementation and ongoing compliance should it be introduced, so best not to leave the design to others.

To this end CPA Australia recently met with the RSPT Panel at one of its many consultative forums to provide some initial thoughts regarding the architecture of the proposed RSPT.  We expect these thoughts will be factored in to the Review Panel’s Issues Paper due for release in July 2010.

If you have a stake in the RSPT and haven’t done so already, its not too late to attend a public consultative hearing – see the Consultation Calendar.

For a copy of the RSPT 40 page paper see here

For more information on the Henry Tax Report more generally see our dedicated web page.

Smooth sailing!

‘The report of my death is an exaggeration’,  1897, Mark Twain, New York Times, May.

Recent reports of the death of the individual tax return – also colloquially know as the ‘I return’ - have been exaggerated.  However doubtless it will have many tax agents, especially those who rely heavily or exclusively on individual tax return preparation for their income, to be decidedly nervous.  So whilst the I return may live on, the question arises as to what the impact will be on those tax agents whose incomes rely extensively on completing I returns.

If the relevant legislation is ever passed, and this is no certainty, from 1 July 2012 individuals will be able to choose a standard deduction of $500 for work related expenses (WREs) including the cost of managing their tax affairs.  Based on the current (2009) TaxPack version of the I return, we’re talking about labels D1 – D6 inclusive, and D9.

We note the old WRE limit of $300 without receipts/ substantiation has been in since the 1980’s and never indexed.  However the old $300 limit did not include the cost of managing your tax affairs, which could easily be another $200+ per annum – so in year one most taxpayers are not likely to get any pecuniary benefit from the proposed standard deduction.  So there appears little incentive to choose it.  And even if they do, they will still need to complete the rest of the I return – for example, all the income labels, plus interest and dividend deductions, donations, gifts, prior year losses, business income, trust distributions, private health details, Medicare, dependants, education tax refund, baby bonus etc, etc.

Further, if they do choose the standard deduction, it’s a small bananas increase really.  This is because most taxpayers pay tax at the rate of 30% or less, so on a 30% income tax rate the new deduction will only give them $60 extra per annum without any substantiation.

The choice factor is important – as many taxpayers will have deductions that exceed the proposed standard amount.  For example, currently the average deduction for taxpayers from WREs is around $2000 per annum.

The real sting as far as tax agents are concerned however may come at the end of the 2013-14 financial year, as the non-substantiated amount for work related expenses plus the cost of managing your tax affairs goes to $1000 from 1 July 2013.  But whether this results in either some individuals ceasing to use a tax agent (and how many) or alternatively some individuals not seeking to engage one to assist them with their tax affairs (and how many) remains unknown at this point.

Its unlikely that the I return will ever be scrapped.  And in fact CPA Australia is a champion of retaining the I return or its equivalent.  For example, in its evidence to one of its many meetings with the Henry Review Committee, CPA Australia went to some lengths to make the point that elimination of the I return should not be an objective of reform, as the I return is at the core of the effective administration of Australia’s income tax system.

Amongst other things, it is the mechanism that draws together all income and expenses and keeps the individual engaged with the revenue authorities on an annual basis.  This is a key factor - and one often overlooked by many of those calling for ‘simplification’ - in having a robust income tax system.

The necessity to complete an individual tax return also an enabler that encourages an annual financial health check-up where the client and adviser can discuss future business, investment and tax strategies.

Arguably those who call the loudest for the abolition of individual returns will also be those with the least to lose.  It’s a bit like the bright spark who quipped around the time the GST was introduced in Australia that it should only apply to bananas – as they didn’t eat bananas.

CPA Australia supports simplification, including pre-populating returns and also the proposed standard deduction initiative to make compliance easier for taxpayers.  But as regards the I return, there remain very good reasons for keeping it, for a while longer at least.  And at the risk of being labelled rent seekers there may be a case for compensation for many tax agents should they be ultimately scrapped altogether.

For more information on last week’s Federal Budget please see our dedicated web page.

Smooth sailing!

As expected, the Government yesterday released the much awaited Henry Tax Report as well as their ‘first wave’ response.  The Report is to be commended on its breadth, and will serve us well for the future.  It now forms the information base from which future tax reform will be ultimately developed and implemented for many years to come.  The government suggests 10+ years; I suggest make that 20+ if the Asprey Report (1975) experience is any guide.

The government’s response on the other hand has been greeted as being at the lower end of moderate, or in other words, underwhelming.  But expectations have certainly been high.  However by only announcing what it did the government is demonstrating its fiscally responsible credentials - a fully costed proposed start to a 10+ year reform agenda.

And the Treasurer said from the outset it was never proposed to have a big bang approach to reform, even though some may have liked to see such an approach.

In what may be an election year, the door is still open for further tax change proposals.  And don’t forget that the Federal Budget which is to be handed down next Tuesday will also have at least news of further L-A-W tax cuts for individuals from 1 July 2010.

For more information see CPA Australia’s initial response to the government’s first wave response.

Smooth sailing!

A long time ago, long before we were getting worried about carbon emissions, I completed a leadership management course where one of the lessons was about how to eat an elephant – the answer – piece by piece.  Trying to digest a whole elephant in one sitting will only give you indigestion, if not worse.  The Henry Report will be a bit like this metaphorical elephant  - so we will be trying not to digest it all at once, and suggest you don’t try to either  (but watch for our forthcoming Professional Development that will be advertised on our Henry Tax Review webpage).

In my last blogpost I gave a heads up on what we expect to see in the report.  I now want to provide some thoughts on one thing we do not expect to be in the report - the GST (which was ruled out by the government), and why I think this is quite ok in the circumstances.

My argument is basically as follows.  If the GST had been part of the recent root and branch tax and transfer review it would’ve become the centre of a political slanging match, therefore risking derailing the whole Henry Committee Review process.  Therefore it was both strategic and appropriate for the government to leave the GST out of this review.

Also, the fact that it was not included the review does not mean the rate or base cannot ever be changed.  This could be done at some point in the future with the States agreement - perhaps under the ‘never let a serious crisis go to waste’ approach to policy making.

So if it was increased at some point in the future, what might such a change look like?  Basic food in? The GST rate up to 12.5% or even 15%?  An increase 12.5% does not provide much extra revenue to ‘retire’ a lot of other taxes.  However an increase to 15%, ruling out any reduction in consumption such an increase may cause, could enable all or most  inefficient state taxes to be removed.  Alternatively, some combination of an increased GST and/or pay-roll/land taxes redesign could also ‘do the job’.

For the record CPA Australia is not recommending any change to the GST at the moment, but note that some others seem to be prepared to go down this path without any work being done on the possible economic implications, let alone the issue of compensation for lower income earners.  Both of these issues would need to be worked through to enable an informed decision to be made.  And this in itself is another elephant.

As always I’m interested in your thoughts, so why not drop me a line?

Smooth sailing!

With the Henry Tax Report imminent, please consider participating in our short survey.

The survey is open until Friday 30 April 2010 or until the Report is released, whichever comes first.

Smooth sailing.

As we continue our ‘Henry countdown’, I thought I’d share with you some of the important issues expected to be canvassed in the upcoming Henry Report:

• lower taxes on capital income (including interest) and also a more consistent treatment of different forms of saving
• imputation system expected to be retained
• lower company tax rate but timing uncertain due to budgetary constraints
• some possible changes to the taxing of super with perhaps more assistance being targeted to lower income earners
• reduction in effective marginal tax rates (EMTRs) via rationalisation of social security benefits
• some further developments in respect to the taxing of MITs
• further reforms to state taxes could be on the agenda
• possible introduction of a new onshore resource rent tax (RRT) in lieu of existing state royalty regimes
• some changes to existing excise arrangements particularly in respect to alcohol
• possible consideration of road user charges and/or congestion taxes
• property taxes such as duties, land tax and negative gearing may be addressed
• a federal take-over of pay-roll tax could also be proposed to minimise business compliance costs, and
• the report may also argue for better incentives for people wanting to be self-employed.

We are hoping, of course, that all this amounts to a better tax system rather than a higher tax burden and we shall be looking to see that the PM has kept his promise to ensure that the current tax/GDP ratio is not increased.

Smooth sailing!

Given the Prime Minister’s current preoccupation with finalising his major health reform plans with the states, it seems likely that the release of the Henry Tax Report will be delayed at least until this occurs.

As the next major COAG meeting on health will occur on 19 April, this suggests that we may not see the tax report until sometime between then and Budget day.  The guessing game as to when it may be released also needs to factor in the G20 Finance Minister’s meeting in Washington on 22- 23 April, so it would seem unlikely that the report would be released while the Federal Treasurer was out of the country.  But then again who really knows?

It is also important to bear in mind that the government’s preliminary response to the report’s major proposals or recommendations are expected to be released at the same time, and this is probably the major factor bearing on the timing of the final release of the report, particularly since 2010 is likely to be an election year.

In the meantime, the waiting game continues…

Smooth sailing.