Australian Budget May 2014 - what the tax industry is expecting: preliminary views

May 2014 Budget Australia – Background and what is likely

Overall no major tax hikes anticipated

Long term deficits are clearly a reality unless some realignment takes place. With current debt levels and long term deficits being a problem combined with our terms of trade and high cost of doing business in Australia, it is clear that action is needed.

One problem however is that the political system isn’t conducive to the long-term thinking needed to improve the tax system. So what is likely to be in store has been the subject of much debate but the general theme that is emerging from the economic observers is as follows:

Raising income taxes is not the issue especially if looked at on a global scale when comparing Australia’s revenue as a percentage of GDP with other economies. Australia is quite high which is why there has been a long time call for lowering Australia’s income tax .

Tax incentives in order to stay competitive on the international stage. By way of example employee share plans need a strong overhaul to stop companies exiting Australia as a corporate headquarters.

Large spending cuts are not considered likely but the pension and social security aspects are very much a target with the likely lifting of the pension age. In addition the level of services being provided is likely to be reworked.

Health care is a global issue and Australia is no different. There may be some changes here. One possibility is the change to the funding model for public hospitals. The suggestion is to move to a model that sees funding based on procedures.

OECD - Global standard on information exchange - just released

OECD and BEPS – Global standard on information exchange.

For those in the cross border tax advisory arena, the world is a rapidly changing one. The changing face of business and cross border dealings including but not limited to e commerce is pregnant with issues of how business and the tax regimes can cooperate while not adding disproportionate costs (being only one of the concerns) in preserving the tax base.

Last week the OECD unveiled a uniform global standard for the automatic exchange of information between tax authorities worldwide.

Discussion about this new standard by some respected commentators and industry participants suggest that it does not achieve what it set out to do. One concern as expressed by PWC was that it caters for needs of the revenue authorities without regard to business. Concerns include costs and confidentiality. These aspects alone gives rise to serious reservations about the success of the standard.

Of particular concern was the 2 tier file system that business will need to maintain. Specifically the requirement to keep a file that meets country requirements as well as a separate “Master” file that will need additional documentation. One fear is that there will be a mismatch resulting in double taxation.

Some interesting points are also made in a paper put out by Bond University and whether the ‘modernisation’ provides a solution to BEPS or whether the solution to BEPS lies in international cooperation. The paper can be found at : http://epublications.bond.edu.au/rlj/vol23/iss1/3

Dirkis, Michael Dr. (2013) “On the eve of the global response to BEPS: Australia’s new transfer pricing rules,” Revenue Law Journal: Vol. 23: Iss. 1, Article 3.

According to the OECD, the standard is a “game changer” in terms of cooperation and transparency in the fight against tax evasion. The underlying thinking behind the strategy is an extension of the thinking behind the US legislation FATCA and general anti money laundering positions of many jurisdictions. The question is whether in fact it has given sufficient thought to the totality of the situation?

Annual data is to be automatically provided rather than on a request basis. The level of data to be provided by financial institutions and the taxpayers to whom it applies will be better known once the report is presented at the next G20 meeting in Australia on February 22nd / 23rd .
Apart from the strong reservations of PWC, other jurisdictions have made comment that they are reviewing the standard but they may not adopt it at this stage.

Hong Kong by way of example is of the view that their current legislation which was introduced in 2009 is adequate to protect against inappropriate taxation practices and in principle is in line with the OECD program. Hong Kong will seek feedback from stakeholders at this stage.

The OECD is expected to deliver a more detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.

Australian property

There has long been a debate about property pricing in Australia and in particular with respect to residential property. In October last year the independent think tank, The Grattan Institute , published a report that stated all options must be on the table in order to address the property pricing situation in Australia. A significant part of this strategic rethink challenged the sacred cow of negative gearing.

Saul Eslake in his submission to a senate inquiry, again raises the prospect of fundamental changes but goes one step further. He articulates what everyone has been thinking for so long but hasn’t been quite so direct .

GST for on-line sales - What is the real impact?

There is much debate globally about taxing on line sales and no more recent than the treasurers ( Federal & States ) meeting this last week in Australia to look at the GST for on line sales with a view to cutting back the $1,000 GST free threshold on imports. As was noted by the Grattan Institute following the announcement and politics aside, the economic impact/benefit of lowering the $1,000 threshold does not appear to be a worthwhile exercise. Not at this stage anyway.

According to the Grattan Institute, Treasury estimates suggest a loss of $650 million in revenue in 2013, growing to $860 million in 2016 is not going to deliver a meaningful result. While making changes to achieve such savings are desirable, in context they would appear to be small in light of the overall budgetary savings that need to be achieved. The Institute suggests that the focus should be on more effective strategies that will yield greater economic benefits given that the budgetary hole is circa $60 billion. This argument is given further credibility when the savings noted by Treasury don’t take in to account collection costs. The debate is heading towards broadening the GST base which will yield far greater results even after providing certain safety nets to protect those sectors of the community that would be adversely impacted .