Turning the corner? KPMG responds to Federal Budget 2017

KPMG responds to the Federal Budget 2017

The Budget housing affordability moves are fairly modest and unlikely to have a major impact. The measures aimed at boosting supply by encouraging the development of new dwellings and better use of existing stock might help the overheated Sydney and Melbourne markets a little.

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Housing, Economics

Brendan Rynne, KPMG Chief Economist

The Budget housing affordability moves are fairly modest and unlikely to have a major impact. The measures aimed at boosting supply by encouraging the development of new dwellings and better use of existing stock might help the overheated Sydney and Melbourne markets a little.

The First Home Super Saver Scheme will also help new buyers to compete against investors, but overall the Budget is just a first step. More policy initiatives will be needed to tackle this complex problem, with greater co-ordination between all tiers of government and the private sector.

The Underlying Cash Balance (UCB) presented in the Budget is slightly worse, by $1.8bn in aggregate for 2016-18, than was forecast in the government’s last MYEFO statement. But from 2018/19 the UCB is forecast to improve dramatically, with a surplus of $7.4bn by 2020/21.

I consider this forecast path to budget repair to be at the optimistic end of the spectrum of possible outcomes. The underlying economic forecasts contained in the budget do not indicate boom times ahead, and there is current excess capacity within the Australian economy which will take some time to be taken up.

Superannuation

Damian Ryan, KPMG Tax Partner

There are two welcome superannuation moves in the Budget.

The extension of the CGT rollover relief for super fund mergers until 2020 is an excellent move. Ending this in July 2017 would have been contrary to the regulatory and government exhortations on funds to merge.

From next year, non-concessional contributions up to $300,000 per individual selling their principal residence, if held for 10 years or more, will not be subject to a cap. Allowing older couples downsizing to contribute to their super funds is welcome news. This will allow some older Australians to sell the family home and contribute some of the proceeds into superannuation. Those on the age pension are unlikely to take up this initiative.
The impact on housing affordability of contributing the proceeds of downsizing to superannuation will be interesting.

This measure will be attractive to a group of superannuation members who would like to sell their family home but due to contribution caps would have been prevented from topping up their superannuation balance, essentially transferring funds from one tax-preferred asset to another.

Tax reform, business and personal tax

Grant Wardell-Johnson, Tax Partner

Tax reform
It seems from the Budget that substantial tax reform is still off the table – though the moves on the black economy are important for the integrity of the system. People pay their tax if they believe others are paying their share.

With the US now embracing significant tax cuts, there is a clear need to extend company tax cuts to companies of all sizes – there is no sound economic basis for providing lower rates for smaller companies only. Inaction at the larger company sector does not help Australia’s competitiveness in attracting Foreign Direct Investment.

Personal Tax
It is welcome that the government has confirmed that the Temporary Deficit Levy is ending on 1 July. Even though that was the plan in 2014, there has been speculation it may be extended due to ongoing Budget repair. But it has had a damaging effect on those very groups which are already highly taxed and has dampens down economic activity.
 

GST

Kate Law, KPMG Indirect Tax Partner

From 1 July 2018 the government will require purchasers of new residential premises to remit the GST directly to the ATO as part of settlement. This announcement comes as a surprise and is a significant divergence from the way the GST system currently operates where GST is collected from the supplier (developers). The government has announced this change as a tax integrity measure.

Around 4 years ago, ATO compliance programs targeted illegal “phoenix” activity, purportedly from a number of property developers who repeatedly placed companies in liquidation with outstanding GST obligations, despite having claimed input tax credits on construction costs.

However, KPMG is not aware of more recent industry consultation on this issue and we question the practicality and administrative cost of imposing GST on unregistered ‘mum and dad’ purchasers. Where developers use the margin scheme to calculate the GST liability, the purchaser is unlikely to be aware of the amount of GST included in the purchase price. This measure will therefore require developers to change the way they disclose the price to ensure the GST liability is disclosed as a separate line item.

The Budget papers state that this measure is estimated to increase GST revenue by $660 million and associated payments to the states and territories, net of administrative costs, by $1.6 billion over the forward estimates period (4 years to 2019-20). However, the Budget papers state that the difference is due to the timing of when GST is collected and recognised. This suggests that it is not a permanent GST difference - which is seemingly at odds with the government’s statement that some developers are failing to remit the GST to the ATO.
 

Small business

Simon Thorp, KPMG Enterprise Partner

We welcome the extension of the small business instant asset write-off - this will provide a much needed shot in the arm for many small businesses across the country and will stimulate the economy and increase the investment and productivity of small business.

This is particularly important, as KPMG’s pre-budget survey indicated that the recent small business cuts had not been sufficient to boost economic activity. 40 percent of small business said the tax cuts would make no difference and 24 percent indicated further tax cuts would be need to be truly effective. So the extension of the asset write-off is very significant.
 

Health, aged care and welfare

Liz Forsyth, KPMG National Sector Leader, Health Ageing and Human Services

Health
The government has clearly set out its position with regard to Medicare and the Pharmaceutical Benefits Scheme by establishing the Medicare Guarantee Fund and restoring MBS indexation over time. Although the staging of the increase will not satisfy all stakeholders, it is a clear means of neutralising the perception that Medicare is under threat.

Underpinning the health budget was the government’s establishment of new “health compacts” with five key stakeholders which outline shared principles relating to transparency in decision-making, accountability for reforms and stability and certainty in regard to government investment. These compacts set the foundation for long-term engagement and cooperation with stakeholders – including the AMA and the Pharmacy Guild – to increase the pace of reform across Australia’s health system.

Aged Care
The Aged Care sector continues to be impacted by reform and market pressures. It is vital that appropriate governance, including quality controls, and funding support the needs of older Australians. Unfortunately there was no significant investment in this year’s Budget to support the Aged Care sector.

Welfare
While there are a range of savings measures in the welfare budget and an attempt at payment simplification, it is unfortunate the government has not taken the opportunity to commence a necessary and more fundamental reform of welfare payment arrangements. It is recognised, however, that the new National Housing and Homelessness agreement and the full future funding of the NDIS provide welcome certainty to those Australians requiring support.
 

Education

Stephen Parker, KPMG National Education Sector Leader

Politically, I believe it is likely the Senate will agree to the Budget measures, after some arm-wrestling. The groundwork has probably already been done, the flashpoints of the 2014 proposals have been removed, and the feeling that "it could have been worse" will make the proposals more palatable.

From a fairness point of view, Australian students are already amongst the highest proportionate contributors to their degree costs in the OECD, possibly sixth highest. However on average they will still only pay 46 percent by 2021, compared with 42 percent at present, and it is hard to argue with precision for any specific split between the public good and private gain components of a degree.

From an equity point of view, increased tuition fees mean longer repayment periods, but there is little evidence that this yet deters students from aspiring to university.

It is true that graduate unemployment is currently above the long-term trend, and the lifetime earnings premium on a degree has probably come down, but it is still a good investment for those inclined to a profession rather than a trade.

A HECS debt seems still to be good debt for the graduate and good debt for the country.
 

Defence

Mike Kalms, KPMG Defence Partner

The Federal Budget Defence implications of the Budget can be summed up as – good news for the defence industry, but bad news for defence consultants.

The Budget makes much of $200 billion for the defence industry, particularly in Australia, for major defence projects. But at the same time the government will reduce by $300m over 4 years the amount spent on consultants and contractors.

Infrastructure

Paul Foxlee, KPMG National Sector Leader, Transport & Infrastructure

The government’s new “good debt/bad debt” classification will help pave the way for funding of nationally significant projects. But to avoid the spending on unproductive assets incorrectly falling into the ‘good’ debt basket, we encourage tightening of project selection governance.

The new terminology does not alter the need for robust project selection criteria. Given Australia’s fiscal constraints, our focus needs to shift to getting the most from our existing investment in infrastructure. We need to ensure we fully investigate and invest in demand management and capacity enhancement opportunities, not just deliver new mega projects.
A proper assessment of asset management requirements is also key.

Project selection must include full assessment of options and economic benefits to support funding announcements. In cases where the government opts for an equity investment, we look forward to further insights on the mechanics for capturing revenue sources to secure returns on these investments.

The government’s commitment to investing in productive infrastructure supports its agenda to drive national growth and generate increased productivity benefits. But we need to improve our project selection procedures to get the best from this additional investment. 

Badgerys Creek airport

David Pring, KPMG Managing Partner, Greater Western Sydney

The Budget go-ahead for the Badgerys Creek airport is excellent news. This substantial investment is a vote of confidence in Western Sydney and its population – which in years to come will become as large as Melbourne is now.

To make it a success will require further infrastructure spend. This provides a real opportunity for NSW to get its train transport right and consideration must be given to fast train links with Parramatta, CBD and Sydney airport.

This is a once in a lifetime opportunity to create a hub of high-end knowledge jobs in Western Sydney. From logistics perspective, it will create a new business precinct around the airport. There is an opportunity to create an aerotropolis of associated businesses needed by the airport and to create links with science and technology park.

This project will means jobs for Western Sydney in the construction phase for the next decade. It will cause increase in asset values in Western Sydney which can assist existing landholders and existing businesses.

Read KPMG’s full Budget Brief
 

Further information

Ian Welch
Senior Communications Manager
T: 0400 818 891
E: iwelch@kpmg.com.au

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