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Federal Budget 2020-21: Restore business confidence to drive Australia’s economic recovery

Federal Budget 2020-21: Restore business confidence to drive Australia’s economic recovery

We recently asked for your input on the key issues and policy areas most important to you ahead of this year’s Federal Budget.

Your response, along with the responses from many other private and family-owned businesses across Australia, provided valuable insight into your shared concerns about Australia’s economy and the need to stimulate business activity and investment.

Survey insights

Your message was loud and clear – you believe it’s critical the Government works to restore business confidence and provide businesses with the tools and resources needed to recommence investment into the economy.

The impact of COVID-19 has been significant for many businesses in the middle market. While many of the Government’s initiatives (such as JobKeeper, the Cash Flow Boost and rent relief measures) have provided much needed assistance in order for businesses to survive during this period, there is substantial concern in the middle market about the uncertainty of the future.

Over two-thirds of respondents (65.83%) have actively sought to reduce their costs, while just over a third (37.19%) of respondents have deferred capital expenditure in response to COVID-19. These two decisions will likely have an impact on economic activity and our recovery going forward unless expenditure can be stimulated through targeted policy measures.

Looking to support, JobKeeper is the most common support measure accessed by respondents, with 60.8% of you accessing the scheme.

While measures such as JobKeeper have helped businesses weather the impacts of COVID-19, you want to see further support in the form of tax rate reductions, grants and subsidies. Many of you indicated you’d invest further support of this nature in hiring new staff, expanding into new markets and capital expenditure, which is not only critical for business growth but the country’s economic recovery and growth as well.

Other key observations based on the 199 responses we received, include:

  • Key industries that require critical Government spending are infrastructure, health and education.
  • The majority of participants favoured an increase in the rate of GST as a lever to provide relief in other areas, with an overwhelming majority of those (93.4%) supporting an increase in rate to either 12.5% or 15.0%.
  • Approximately 85% of participants either supported or strongly supported a resurgence in the local manufacturing industry in Australia.
  • Future investment (depreciation) allowances, industrial reform, payroll tax reductions and R&D subsidies were cited as the more critical measures that would support the resurgence of manufacturing in Australia into the future.
  • The projected unemployment rate and (to a lesser extent) funding the budget deficit were identified as two of the economy’s greatest challenges over the next 12 months.

Access the complete pre-budget survey insights.

Pitcher Partners Federal Budget 2020-21 submission

Based on your responses to our pre-budget survey and the expertise of our team, we prepared a pre-budget submission to outline the policy areas we believe need to be addressed to restore business confidence and stimulate business activity in Australia.

The proposals we outlined in our pre-budget submission are organised across three policy areas:

  • Addressing domestic unemployment and underemployment rates
  • Stimulating the growth of GDP in the short to medium-term (through domestic manufacturing, future-focused industries and structural reform)
  • Ensuring the sustainability of the tax system

These policy areas are critical for the Government to address for middle market businesses to move towards economic recovery and reinvesting in their businesses.

The specific tax law proposals outlined in our pre-budget submission are also organised under these policy areas and focused on restoring business confidence. Some of these proposals are outlined below. Refer to pages 6 to 9 of our pre-budget submission for full details on each tax law proposal.

Measures to address domestic unemployment and underemployment rates

Bringing forward income tax rates for individuals

Under the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018, marginal tax rates for individuals are set to reduce from 1 July 2022, with a further reduction from 1 July 2024. If the Government were to bring these tax cuts forward, for example, to start from 1 July 2021 (or even earlier), this would be equivalent to an effective after-tax pay rise for many individuals and have an immediate positive effect on cash flow for individuals.

Pausing HELP loan repayments

Another proposal included for the Government to consider other ways of using the tax system to put money into the hands of individuals is through temporarily pausing HELP loan repayments. For example, a taxpayer earning $80,000 of taxable income could increase their take-home pay by $4,000 if their HELP repayment for the current financial year was deferred.

Corporate tax rate cuts

To further support businesses during this time, we proposed that the Government could consider further cuts to the corporate tax rate. These cuts could be introduced on a temporary basis, to allow a reduction of costs for businesses during the transitional recovery period post COVID-19. This would encourage reinvestment of earnings into the business, as profits extracted from the business (i.e. by way of dividends) would still be subjected to “top up” tax at the shareholder level.

We also proposed that the Government consider limiting the reduction to base rate entities to target reductions to those undertaking activities beyond passive investment and leave the corporate tax rate at 30% for all other companies. This temporary measure could also remove the $50m aggregated turnover cap that applies to base rate entities presently to provide relief to a broader range of businesses.  For example, a temporary cap could be $500m of aggregated turnover as was used for the enhanced instant asset write-off and businesses investment incentive announced in March available to “medium sized businesses”.

Reducing on-costs associated with employment

To stimulate employment growth, we proposed that the Government should consider reducing on-costs associated with employment through:

  • A substantive reduction or the elimination of payroll tax (being a regressive tax), which could be achieved through a Government led COAG agreement with the States. In our view, this would support greater business activity and would help to provide an incentive to increase domestic employment.
  • Measures that encourage local businesses to use local employment instead of offshoring, which could range from certain incentives (e.g. tax reductions) to discouraging outsourcing (e.g. withholding on offshore payments).
  • A deferral of the increases to the superannuation guarantee charge would also reduce the cost of employment, making it easier for businesses to hire and reward staff.

Measures to stimulate growth of gross domestic product in the short-to-medium term

Encouraging businesses to invest in capital expenditure is crucial to stimulating economic growth at a domestic level.

General capital allowance measures

To encourage business investment, we proposed that the Government consider extending capital allowance extensions on a longer-term or permanent basis.

In particular, the reversion to a $1,000 instant asset write-off for small businesses and $300 for medium sized businesses after 31 December 2020 appears to be outdated and these thresholds should be changed permanently rather than being extended one year at a time.

Targeted capital allowance measures

To reinvigorate and encourage investment in certain specific, strategic, key industries in Australia, we recommended the Government consider a next level asset write off concession that is linked to capital investment. There are numerous ways this policy could be implemented, however, we provided two examples:

  • Certain asset classes could be given a statutory effective life in the capital allowance provisions.
  • Alternatively, such a capital allowance provision could be labelled as “capital investment” rules and could be limited to those taxpayers that are private companies only that satisfy the lower corporate tax rate threshold (i.e. with less than $50 million turnover on an aggregated basis). The rules could be limited to certain assets (capital intensive assets), with qualifying expenditure on such assets capped at up to $2 million (total investment cost).  The write-off concession could be spread over a short-term period (e.g. a 3-year period).

Measures to improve the sustainability of our tax system

Beyond the immediate and medium-term proposals outlined above and in our pre-budget submission, we also outlined longer term measures aimed at improving the sustainability of our tax system.

Reform of the goods and services tax (GST)

We stated that we would support a wholistic review of the GST including assessing the suitability of the current rate and application (including redistribution to the states), and how an increase in the rate can be balanced with the reduction in and removal of other taxes.

Land tax and stamp duty reform

In conjunction with a review of the GST, we proposed that, with State Government cooperation, such a review be coupled with land tax and stamp duty reform to promote economic activity surrounding construction and remove barriers to the mobility of the workforce.

Review the suitability of the capital gains tax (CGT) framework

We proposed that the Government review the suitability of the current capital gains tax (CGT) framework in providing a fair and equitable tax system.  For example, given the high cost of CGT concessions, consideration should be given to the rate of concessions and the broad availability of exemptions.

Universal investment allowance

Finally, we encouraged the Government to reconsider the capital allowance regime which is based on effective lives and therefore does not otherwise encourage capital spending.  Providing a simpler system that promotes accelerated depreciation will help to promote business spending. We stated that, over the longer term, we would encourage a universal investment allowance that provided depreciation claims (other than on capital allowances) over a period of 5 years.

Looking ahead to economic recovery and growth

What’s clear from your feedback, and we’ve outlined this in our pre-budget submission, is that privately-owned and family businesses are focused on recovery and continuing to grow but you need the incentives to do so. 

Access our pre-budget submission.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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