Nassim Khadem Reporter

Nassim covers the accounting and tax rounds for BRW, as well as general business news. She previously worked for The Age newspaper covering general news, state politics and economics.

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Budget expected to cut tax breaks for companies

Published 30 April 2013 11:41, Updated 02 May 2013 00:45

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Budget expected to cut tax breaks for companies

A black day for business . . . companies fear they will pay heavily to plug the Gillard Government’s $12 billion revenue shortfall. Photo: Andrew Meares

Companies are likely to be targeted as part of the Gillard government’s hunt for savings in the May budget as it rushes to plug a $12 billion revenue gap.

Prime Minister Julia Gillard this week confirmed the amount of tax revenue collected by the government will be down by at least $12 billion by the end of the financial year, which will result in some “urgent and grave decisions”.

Gillard’s comments came after Federal Treasurer Wayne Swan last week said the May 14 budget will be “brought down in the most challenging circumstances we have seen in decades” as the high Australian dollar and lower terms of trade have taken a $7.5 billion “sledgehammer to revenues”.

Economists previously predicted a deficit of more than $17 billion this financial year, with another $7 billion deficit the following year unless the government starts making drastic cuts or begins playing clever accounting tricks.

Confronted by falling tax revenue, Gillard says the government needs to spend “less in some areas than we had hoped, to raise more in revenue in some areas than we had planned”.

The problem isn’t just that the revenue coming to the government is lower. In reality, the government is still expected to see some lift in revenue (but not as high as it expected).

The bigger issue is the government has made massive new spending commitments in education and health. One is the National Disability Insurance Scheme, which was previously estimated to cost as much as $22 billion by 2018.

Gillard promises the budget would not be a political pamphlet designed to attract votes but about shaping the “nation’s future”. She would not discuss specific measures but rules out changes to the GST, declaring: “Better school funding and school improvement will not be jeopardised.”

So, without touching the GST and still delivering on billions of dollars worth of new promises, who will be the target?

Business groups believe it will be companies. The government may pick some of the concessions that were proposed by the Business Tax Working Group last year. These were, at the time, mentioned as perks companies had to give up if they wanted a corporate tax cut.

Although the government abandoned its promise to deliver company tax cuts, and isn’t going to deliver one any time soon, it may now get rid of the much-loved concessions.

Companies have already been subject to cuts in the area of research and development concessions. In February, Gillard said the government would cut $1 billion in funding for big companies doing research and development, and channel it to smaller manufacturers struggling under the high Australian dollar.

“There’s almost certainly going to be a tightening of target thin capitalisation rules affecting multinationals,” says the Institute of Chartered Accountants’ head of tax policy, Paul Stacey.

Treasury’s estimate of savings to be made by targeting this area is about $300 million a year. Thin capitalisation is designed to limit the amount of debt multinationals use in their Australian operations. The current system has a number of debt limits – if the Australian operations have debt deductions above the maximum allowed, they don’t get to claim tax deductions.

Deloitte yesterday released a research note saying “we’d expect that corporates will be targeted in part to plug the gap”.

“Previously proposed revenue-raising measures – that were rejected by the business community last year – may be given new life in this year’s budget.”

Deloitte says changes to thin capitalisation will have a “significant impact on business by denying interest deductions available to both Australian and foreign companies”.

Bearing the brunt of cuts

Deloitte’s research note also said the government may target a number of measures currently benefiting the resources industry.

Last year the Business Tax Working Group looked at the time over which assets can be depreciated. The government may decide to abolish ‘‘statutory effective life caps’’ that allow accelerated depreciation for some transport equipment, gas pipelines and buildings.

Statutory caps on items such as planes and helicopters represent the maximum period over which depreciation deductions can be taken – sometimes 15 to 20 years. One of the changes examined by the working group was whether to limit write-offs to a shorter time, for example over five to 10 years.

Deloitte says the government may also decide to abolish the 40 per cent non-refundable tax offset for companies with a turnover of more than $20 million.

No matter where the cuts are made, Gillard has confirmed one thing: “Australia will not go back to the extraordinary revenue peaks of ‘mining boom mark I’ from 2002-03 to 2007-08.”

Which means that, even as governments revenues grow, tough decisions don’t just await the government this budget, but on upcoming budgets over the next few years.

The problem, as Deloitte points out, is “Labor is busily talking about new spending on schools and disability insurance while the Coalition is talking about rolling back the carbon and mining taxes so both sides are still talking about extra costs to be loaded on a budget that is yet to make up a $12 billion shortfall”.

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