KPMG's response to Federal Budget 2016

KPMG – Budget 2016 response

KPMG Partners respond to the 2016 Federal Budget on areas including Corporate Tax, Multinational anti-avoidance measures, personal tax, superannuation, infrastructure, innovation and the economic outlook.

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On Corporate Tax

David Linke, KPMG National Managing Partner, Tax, said:

“We welcome the proposed reduction in the corporate tax rate to 25 percent 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. 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.

“The new anti-avoidance measure – together with anti-hybrid rules, a new transparency regime and whistle-blower rules, and additional ATO cash to scrutinise multinationals – reflects the current politics of multinational business taxation, both in Australia and abroad.”

“All-in-all, what has been lost in the Federal Government’s economic plan is the opportunity for grand tax reform including a review of consumption taxation. One cannot see this happening for at least 5 years and possibly a decade. This is what we truly need.”

On Multinational anti-avoidance measures

Grant Wardell-Johnson, KPMG Tax Partner, said:

“What the new multinational anti-avoidance law – MAAL 2 – is fundamentally about is the balance of power in a negotiation. We already have the laws in place to deal with artificial and contrived structures, but if a taxpayer wants to play hard-ball, then this would make them think twice. Penalties at 40 percent, but most importantly paying the purported tax upfront. And that tax amount is based on information made available to the Commissioner.

“So delays in providing the Commissioner with material will not be a good strategy.

“Our anti-avoidance provisions now have four different hurdles for looking at whether there is an inappropriate tax purpose. They are the ‘sole or dominant purpose’ for general anti-avoidance; ‘more than an incidental purpose’ for franking credit schemes; ‘one of the principal purposes’ for avoiding a permanent establishment and now ‘designed to secure’ for structures designed to shift income. Whether we need four tests or could do with one is an interesting question. But this is certainly not simplification.”

“In addition the ATO is being funded with an additional amount of $680 million for compliance work on multinationals and high net worth individuals. This is expected to raise about $3.7 billion over 4 years. This is a return of 5.4 times the amount of the investment.”

On personal tax

David Linke said:

“On bracket creep, the government has gone with an adjustment to one bracket so that someone on average full time earnings does not creep into the second highest bracket. While this is welcome, more fundamental reform to the personal tax and transfer system needs to be undertaken.”

On superannuation

Dana Fleming, Head of Superannuation Tax said:

“We strongly support the government’s measures to allow those with broken work records, often women, to make top-up payments. This is a very fair and important move which will go some way to ensuring those individuals have a decent retirement package. Retaining the Low Income Super Contribution for low earners and allowing tax deductions for all contributions into superannuation are also welcome.

“Capping the balance in the retirement phase of the fund to $1.6 million, while allowing any excess to be retained in the accumulation fund, also strikes the appropriate balance.

“It was inevitable that such changes would be funded by paring back some current concessions – bringing down the 30 percent tax threshold from $300,000 to $250,000 seems to strike a reasonable balance between equity and incentives for people to fund their own retirement”.

On infrastructure

Paul Foxlee, KPMG Infrastructure Partner said:

The ongoing use of concessional loans signals the government's appetite to explore new methods for funding infrastructure, especially transport and economic infrastructure projects of national significance. Against this backdrop, the approaches outlined in the Smart Cities Plan, which are focused on incentive-based funding structures such as City Deals and on technology, are good news and look set to drive investment in the future.


On innovation

Paul Van Bergen, KPMG R&D Incentives Tax Partner said:

“The Budget contained some welcome news for innovative Australian companies:

  • Companies with under $10 million turnover will still attract 45 percent R&D tax offset and will have an effective tax saving of 17.5 percent, given lower company tax rate of 27.5 percent. Earlier proposals to drop the R&D tax offset rate have finally lapsed.
  • The R&D tax incentive has not changed. This provides stability. As part of the National Innovation and Science Agenda (NISA) the chairman of Innovation Australia Board carried out a review of the R&D tax incentive. Feedback from many Australian companies, professional bodies and advisers may have been helpful in maintaining the status quo.
  • The government is proceeding with all of the initiatives announced in December 2015 under NISA.
  • New rules for investment holding companies will make Australia more attractive for investment from overseas.
  • Internships to provide facilitated work experience for 100,000 youth may provide skilled workers for the ‘new economy’”

On the economic outlook

KPMG Chief Economist Brendan Rynne said:

“Tonight’s budget has seen a clear intent to reinvigorate investment by the business sector by phasing in a cut in corporate tax rates. This change to the corporate tax rate will stimulate investment, most likely foreign investment, lifting productivity and real wages, and reducing unemployment as flow-on consequences.

“This is much-needed – in the absence of stimulus like this, we expect Australia’s economy only to achieve only sanguine growth over the next few years, predominately as a consequence of declining net investment activity following the boom years of the commodity super cycle. Non-mining investment has not picked up, which has meant the declining mining investment has been in fact been a drag on economic growth. These concerns are obviously also worrying the Reserve Bank of Australia, who only today has cut the official cash rate down to 1.75 percent – the lowest on record.

“Domestically, Treasury is now forecasting the Australian economy will grow by 2.5 percent in real terms in each of 2015/16 and 2016/17, increasing marginally to around 3.0 percent for the remainder of the forward estimates period. Since MYEFO, Treasury now see:

  • inflation pressures being softer, down to around 1.25 percent for this financial year, increasing to the bottom of the RBA target band of 2.0 percent for FY17
  • unemployment falling to 5.5 percent by the end of FY17 and remaining there for the next 12 months
  • a further softening in wages growth, suggesting even though the unemployment rate is declining, the labour market isn’t feeling enough pressure to materially raise wages.

“Tonight’s Budget also reveals that the Commonwealth Treasury is less optimistic about global economic conditions than they were six-months ago, which is consistent with the IMF and World Bank, who have also recently downgraded their expectations of world growth. Concerns about the state of the Chinese economy, particularly debt bubble worries, European instability driven in part by the possible exit of the EU by Britain, and a softening in the US economy, have all collectively added to the uncertainty as to the short to medium term outlook for the world economy."

Further information

Ian Welch
Senior Communications Manager, KPMG
T: 02 9335 7765 / 0400 818 891

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