Carrots and sticks

The Treasurer is clamping down on trust structures, education deductions and a range of offshore tax activity. Meanwhile, he’s promising new opportunity for infrastructure investors.

For investors, Wayne Swan’s 2013 budget is a classic mix of promise (in the form of potential infrastructure investments) and multiple progressive changes in the tax system that will incrementally improve the government’s bottom line (the most important this time are major cuts in allowable work-related expenses and an extension of PAYG).

In its broad sweep, the budget ranges between neutral to positive for most investors: It certainly creates no obvious impediments to the rising stock prices and improving housing figures we have seen so far this year.

Moreover, investors looking for a breakthrough in the infrastructure sector — which is still subdued in the wake of a string of debacles such as Brisconnections Ltd and the unfortunate sale offshore of key local assets — may have something to look forward to.

“In line with the Infrastructure Working Group Report, the Government continues to foster greater private sector involvement in infrastructure,’ the budget papers suggest: ‘The government is also looking to utilise new funding and finance arrangements to help attract private sector involvement in the Melbourne Metro and Brisbane Cross River Rail ‘mega projects’ .

It also says ‘ the Government is establishing a new advisory function within Treasury to provide guidance on the most appropriate funding and financing structures to bring complex infrastructure projects to market.’

At its best, the new commitment signals a change of heart within senior levels of government — including Treasury — to open up to the infrastructure sector to a new generation of retail investors who are desperately seeking yield in the market beyond the confines of our listed banks and a handful of industrials. Though details are slim at this stage, investors will be hoping government will create enticements such as capital protection measures to attract retail investors into vehicles that fund a range of projects in the coming years.

Beyond the promise of a changed emphasis towards supporting retail infrastructure investors, the budget carried a smattering of news relevant to investors or anyone in business …These are by nature, random, and here’s a list:

  • A sweeping crackdown on work-related self-education expenses with the imposition of a $2,000 cap on these expenses from July 2014. This is certainly one of the surprise items in terms of the expected saving the government will make … a whopping $514 million over the forward estimates period. This item had been flagged, though little reported upon, in the Gonski review.
  • Clampdown on family trust abuse. The ATO has been given $67 million to create a ‘trusts taskforce’: ‘to undertake compliance activity in relation to taxpayers who have been involved in egregious tax avoidance and evasion using tax structures. Specifically, this unit will target the exploitation of trusts to conceal income, mischaracterise transactions, artificially reduce trust income amounts and underpay tax.
  • A sharp crackdown on accessing government benefits from overseas: The allowed period of temporary absence from Australia will be reduced from three years to one year from July 1, 2014.
  • The government will phase out the net medical expenses tax offset over the next seven years (starting July 1 this year). This facility — the budget clarified — will remain available to taxpayers who incur expenses relating to disability aids, attendant care or eligible aged care expenses until July 1, 2019 when the Disability Care program comes into effect.
  • The government has made a series of targeted savings in the area of potential ‘middle class’ assistance by pausing the indexation of both the Childcare Rebate program and the upper income limits of family benefits. I.e., the government will maintain the current upper income test limit of $150,000 for family tax benefits such as dependency tax offsets and paid parental leave.
  • For resource investors a forecast of particular interest is located deep within the Budget strategy papers …Treasury forecasts an iron ore price for June 20125 of $US100 a tonne … a long way below recent levels. (It is, of course, only a forecast, and Treasury’s record on these items is not very good.)
  • In broader moves to ‘protect the integrity of the corporate tax base’ moves were announced to ‘improve the integrity of our foreign resident capital gains tax regime and addressing low levels of voluntary compliance.’ The Treasurer pointed out the new measures will not apply to residential property tax transactions under $2.5 million. Treasury put some very big, some might say ambitious, forecast savings opposite these initiatives including $1.5 billion for addressing aggressive tax structures.

Outside of these areas, which will directly affect both investors, high income earners and pensioners, the budget also introduced a range of measures that will have indirect effects on the domestic environment for Australian investors.

  • The PAYG tax net is to be widened: The requirement to make monthly PAYG payments will now extend to include all large entities in the PAYG instalment system including superannuation funds and trusts. This measure is expected to bring in $1.5 billionn. Most companies with an annual turnover of less than $20 million – and which report GST – will be exempt.
  • Both the markets regulator ASIC and the competition regulator ACCC have received extra funding … ASIC will get $7.8 million, while the ACCC will get a combined payment of $17.4 million, to assist substantial matters of public interest and $8.5 million specifically for ‘risk managing potential chemical hazards in consumer products'.
  • The Treasurer set out a series of measures to clamp down on tax strategies popular with both companies and individuals. The corporate tax changes, which aim to attack so-called ‘thin capitalisation ‘ structures, will chase a supposed a $2.5 billionn that has been kept offshore. There were also moves to close loopholes on offshore banking, resource exploration and onshore marketing hubs.

The Treasurer also used the budget announcement to confirm a range of measures that have been pre-announced or widely ‘leaked’ in recent months. Of immediate interest to investors, these would include:

  • The increase in the Medicare levy by half a percentage point from 1.5 to 2% from July 2014 to fund Disability Care Australia, a move which will raise a staggering estimated $20 billion in the period to 2019. The government will also increase the low income threshold for families to $33,693 in the 2013 income year.
  • Liberal Treasurer Peter Costello’s much-vaunted ‘baby bonus’ will be replaced by an increase to the family tax benefit.

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