While the Senate count continues, like the last Parliament, the Coalition will not have a majority in the Senate. The Government needs the support of Labor, the Greens, or a combination of smaller parties and/or independents to successfully push through its Budget reforms. From the outset we know that there will be immediate problems passing some of the Budget measures through Parliament; already there are unpopular elements that are unlikely to be supported. We look at the key issues:
Business Tax Cuts
Prediction: Heavily amended
The Budget proposed a company tax rate reduction to 25% over 10 years – starting with businesses with a turnover up to $10m accessing a 27.5% tax rate from 2016-17. It is unlikely these tax cuts will pass the Senate in their current form.
In general, tax cuts for Australia’s largest corporations are deeply unpopular despite modelling that shows an overall reduction in the corporate tax rate stimulates the economy. The Greens have stated that they will not support tax cuts for big business; describing the announced reforms in their budget reply as “liberal corporate welfare”.
Most Australian businesses are small and medium businesses – over 800,000 companies, only 0.3% are large or very large. Despite the big business focus during the election campaign, there is base level support to increase the threshold to access the current 28.5% small business company tax rate from $2m to $10m – a position supported by Senator Xenophon’s team which holds three Senate seats (the Greens also supported the current reduced tax rate for small business).
Our prediction; if the company tax cut makes it through Parliament it will be limited to expanding the existing small business tax rate to businesses up to $10 million turnover.
Income tax cuts
Prediction: In doubt
Depending on your perspective, the Budget announcement to increase the 32.5% personal income tax threshold from $80,000 to $87,000 from 1 July 2016 is a stopgap against bracket creep or a hand out for middle-income households.
The Greens have rejected the reform but Pauline Hanson, whose One Nation party may have up to three Senate seats, is quoted as saying, “…there are a lot of Australians who need a break in the cost of living, who face bracket creep and are paying a lot of income tax.”
There is a chance the personal tax cuts will pass Parliament, potentially with a different start date and depending on the final Senate composition. But, there may be a sting in the tail for high-income earners with Mr Xenophon calling for the Temporary Budget Repair levy (debt tax) to be extended (it’s due to expire on 30 June 2017). The debt tax came into effect on 1 July 2014 and is payable at a rate of 2% on every dollar of a taxpayer’s annual taxable income over $180,000 – increasing the top marginal tax rate to 49%.