Australia

Details

  • Service: Tax, Topics, Federal Budget
  • Industry: Government, Federal Government
  • Type: Press release
  • Date: 14/05/2014

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Media contacts
Journalists looking for comment on a particular subject or sector can contact KPMG's media team.

2014 Federal Budget 

2014 Federal Budget: KPMG’s reaction

Tax reform

Rosheen Garnon, KPMG National Managing Partner, Tax said: “The Government has framed this Budget as a response to Australia’s current financial position, where we all must ‘share the pain’ with a levy on higher earners and cuts to expenditure. In reality, what is needed is more fundamental tax reform, which genuinely addresses the structural issues we face. The Government has made some serious cuts to the expenditure side of the ledger, but the revenue side has yet to be addressed.

 

The announcement of the process for the Government’s tax reform White Paper is an important first step.

 

But the current norms behind our tax system need to be looked at afresh. It is conventional wisdom that broadening and increasing GST is politically difficult. Yet we rely disproportionately on income taxes and inefficient indirect taxes. Letting the current mix continue will lead to a drag on the economy, and may drive down participation rates in the economy. Doing nothing is not an option.”

 

Temporary Budget Repair Levy / bracket creep
Rosheen Garnon said: “The ‘Temporary Budget Repair Levy’ – even though for 3 rather than 4 years as widely predicted – still comes on top of an already high personal tax rate and leaves Australia near the top of the global scale for direct taxes. This is unsustainable if we want to be internationally competitive, and shows the desperate need for comprehensive tax reform.

 

In a recent paper, KPMG challenged some of the conventional thinking behind the current combination of taxes and pointed out that in Treasury’s own figures, people earning around $70,000–$80,000 will be paying an average of 28 percent tax rather than 23 percent, in 10 years' time. We cannot keep relying on bracket creep, which will undermine the social compact between taxpayers and the Government.

 

Modest single-earner households will be worst hit by bracket creep, facing a 60 percent increase in income tax within a decade. Households with a single income of $70,000–$80,000 pay almost 20 percent of their income in tax now. After 10 years, assuming a 3 percent a year increase in income, they will move into the next tax-bracket and will pay about one-quarter of their income in tax, resulting in a 60 percent increase from their current income tax levels.”

 

Company Tax

David Linke, National Corporate Tax Leader, said: “The Government’s commitment to reduce company tax from 30 percent to 28.5 percent albeit with the Paid Parental Leave Levy of 1.5 percent is a small step in the right direction but an effective company tax rate of 30 percent for medium-sized businesses is still increasingly uncompetitive for a medium sized economy competing for foreign capital.”

 

Country

Effective Corporate Tax
rate 2014

Indirect Tax
rate 2014

United States

40.0%

0.0%

Japan

36.0%

8.0%

India

34.0%

14.0%

Australia 

30.0%

10.0%

Germany

 29.6%

19.0%

Canada

 26.8%

 5.0%

Brazil

 25.0%

 19.0%

China

 25.0%

 17.0%

United Kingdom

 21.0%

 20.0%

Singapore

 17.0%

 7.0%

OECD Average

 25.3%

 19.1%

 

 

“We would have liked the Government to have gone further, given we are competing with Asian neighbours who mostly have lower rates. We disagree with those who say that lowering company tax would benefit shareholders rather than the general public. There is considerable evidence to suggest that in a medium-sized open economy like Australia’s, a lower company tax rate would actually help workers by generating increased capital intensity, greater technology transfer, and R&D per employee. This would lead to greater productivity and hence higher wages. We cannot keep relying on direct taxes.

 

KPMG’s recent Corporate and Indirect Tax Rate Survey shows that in the last year, 13 countries increased their indirect tax rate and none decreased. By contrast, nine countries increased their corporate tax rate and 24 decreased. The increases in indirect tax rates are evidence of it becoming the ‘tax of choice’ for governments around the world who are looking to raise much needed income. Australia’s GST rate is low by international standards while our company tax rate is relatively high.”

 

R&D funding

David Gelb, National Partner, R&D Incentives KPMG said: “It is a huge disappointment to see a 15 percent Budget cut to the R&D tax incentive for the 2014/5 financial year and 10 percent for SMEs.

 

It comes as a complete surprise and contradicts the government's purported support for R&D and innovation.

 

Such a reduction in funding is likely to reflect poorly upon us internationally, lessen Australia’s innovation credentials, and increase the cost of domestic R&D – thereby driving R&D activities offshore where it will be undertaken in the most after-tax cost effective country.

 

Last year, when the government proposed restricting R&D relief for the largest 20 Australia companies, the French Minister for Innovation invited them to undertake their R&D in France. The UK too has expanded its R&D program in recent years, during a tough economic period as the promotion of R&D assistance across all sectors is considered as beneficial to the economy.

 

Innovation is a dominant factor in economic growth and patterns of world trade. There is considerable global evidence that innovation is not just beneficial to the company concerned but creates spin-off effects in local supply chains, and flow-ons to employment. This explains the crucial nature of innovation hubs. Government policy in the 21st century must do all it can to foster and facilitate this kind of win-win situation. Effective tax policy is crucial to this, though it is only one element. In a recent Australian Industry Group survey, 39 percent of respondents had stronger R&D tax concessions in their top three budget priorities.”

 

Share schemes

Andy Hutt, Executive Remuneration Partner, KPMG said: “KPMG is disappointed by the lack of action on share scheme taxation. Employee share schemes are key to most companies’ remuneration strategies, especially start-ups, and are a valuable recruitment, retention and motivation instrument. Ever since the tax rules changed in 2009, companies of all sizes have not been able to use employee share schemes to their fullest advantage.

 

We strongly urge the Government to consider acting as soon as possible on this. Firstly, we would encourage it to introduce a slimmed-down version of the information disclosure requirements of the Corporations Act, which are more onerous than in many other countries and a significant barrier to unlisted companies seeking to implement an employee share scheme.

 

And secondly, we would urge the Government to increase the tax exemption on share schemes from $1,000 to $5,000 over a 3-year period, which would specifically address some of the concerns of start-ups – which as a country we need to encourage - when they have little spare cash. This would genuinely encourage wider and deeper participation in share schemes, the whole point of which is to incentivise people by the success of their companies. This is surely a good starting point for any remuneration system.”

 

Pensions
Rosheen Garnon, KPMG National Managing Partner - Tax said:

“This is inevitable as recent analysis by Bernard Salt, KPMG Demographics, has shown that while the assumptions underlying Australia’s pensions system are that 20,000 people reach 70 years old each year, it is now up to 60,000 and in 3 years' time would be 80,000. So these fundamental demographic changes require a clear response. It is likely to have a positive impact on participation rates for older Australians.”

 

 

Media enquiries

Ian Welch

Senior Communications Manager

KPMG in Australia

+61 2 9335 7765, 0400 818891

iwelch@kpmg.com.au