Budget 2016 - Is this a blueprint for transformation?

Photo: Pixabay/CC0

Photo: Pixabay/CC0

In summary: 
  • The government says it has laid out a blueprint for jobs and growth in this week's federal budget
  • Experts from UTS Business School give their opinion on its impact in a number of areas including innovation, small business, superannuation and hospital funding

Federal budget measures tackling challenges such as the innovation gap and excessive superannuation benefits are welcome but could have gone further UTS Business School experts believe. Here's what they had to say about innovation, SMEs, tax, super and hospital funding, among other issues.


Support for startups in the 2016 budget is to be applauded but startups cannot bear the burden of economic transition alone – scale up activity is needed as well, says Professor Roy Green, Dean of UTS Business School and an expert in innovation.

And while the budget's extension of tax cuts for small and medium business will stimulate activity, it will be "more of the same", says Professor Green, author of the issues paper for the recent innovation inquiry. 

"A tax cut by itself will not build the innovation capability in our firms so essential for 'smart specialisation' in global markets and value chains," he says.

"Beyond startups, we need a lot more 'scaling up' in our advanced manufacturing and internationally traded services to fill the gap left by mining exports."

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In a major plank of the budget, the government extended last year's tax cut for small to medium businesses and instant write-off for assets costing up to $20,000.

The tax rate was cut last year from 30 per cent to 28.5 per cent for businesses with turnover of less than $2 million, and now it will fall to 27.5 per cent for businesses with turnover of less than $10 million. The write-off is extended to those latter businesses as well.

Associate Professor Antoine Hermens says the small-medium-sized businesses he has spoken too are very positive about the tax cut but also the redefinition, in effect, of SMEs to include firms up to $10 million in turnover.

"That is much more the reality, and it now captures manufacturing businesses, not just services businesses," Associate Professor Hermens says.

Disappointing is the failure of the government to connect the word innovation with medium-sized businesses.

"Generally speaking, while the emphasis on startups is good, the success rate of startups is only 15%. If the government really understood what innovation is about they would know that innovation is not just done by startups. Most innovation is done by established businesses with leading edge technology who now need to upgrade and scale up – the $20,000 immediate write-off is not a great help in this."

Dr David Bond from UTS Business School's Accounting Discipline Group points out that, just like last year, the instant write-off doesn't change the eligibility for tax deductions of these assets; it simply changes how quickly a small business is able to receive the tax deduction.

"They are hanging their hat on ‘Tony's tradies' again this year, but on steroids," he says.

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The federal budget took a small step towards reversing inequities in the superannuation system associated with its tax incentives but we remain "locked in a flawed system", UTS Business School Professor of Finance Ron Bird says.

The main changes are a $1.6 million cap on the amount people can transfer into tax-free retirement phase super accounts, a lower threshold for the 30 per cent super contributions tax rate and a $500,000 lifetime cap on non-concessional contributions.

The government is also lowering the annual cap on contributions entitled to the concessional tax rates to $25,000, from the current $30,000 for under-50s and $35,000 for those aged 50-plus.

"By the government's own admission, these changes will only reduce the extent of tax benefits associated with contributing to superannuation for the top few per cent of income earners," Professor Bird says. "It still remains that something like the top 30% will continue to receive annual gifts from the government."

"We are locked into a flawed system that this and probably no future government is likely to be willing to redress."

Finance lecturer Rosalie Degrabriele, who specialises in superannuation, says the measures do reverse many of the changes brought down by the Howard/Costello government in 2006 – changes that favoured high-income earners.

This Budget helps moves superannuation away from being a tax planning tool to being a genuine accumulation device, she says. 

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Researchers who found that Australia is forgoing billions of dollars in revenue because of the low rates of tax being paid by large multinational companies welcomed the introduction of a "Google tax" in the budget.

Associate Professor Roman Lanis led a team of corporate tax specialists from UTS Business School who recently analysed financial data from 76 of Australia's largest multinationals.

They showed these companies paid an average effective tax rate of 16.2 per cent – half the statutory corporate tax rate of 30 per cent and that Australia could have raised $5.37 billion more in tax revenue in 2013 and 2014 had the full rate been paid.

Their findings were included in a report commissioned by GetUp and the researchers addressed a Senate tax inquiry last week, speaking up for a diverted profits tax (DPT), also known as a Google tax. 

Federal Treasurer Scott Morrison has announced that from July 1, 2017, a DPT will penalise companies found to have shifted profits offshore by taxing those profits at a rate of 40 per cent. 

"We are happy that the government has accepted our main recommendation," Associate Professor Lanis says. 

"However, the amount raised will ultimately depend on how hard the government and the ATO enforce the DPT. Additionally, the ATO will need to be vigilant about multinationals restructuring in a way to avoid the DPT."

The Treasurer also announced the creation of a 1,300-person Tax Office taskforce to crackdown on multinationals. The UTS researchers had recommended better resourcing of regulatory bodies such as the ATO to facilitate investigation and prosecution.

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The federal budget's increase in the Commonwealth's contribution to public hospital funding is very much a "stop-gap" measure that defers the issue of escalating cost, Professor of Health Economics Michael Woods says.

As expected, the Commonwealth's contribution to public hospital funding reflects an agreement negotiated with the states in April that restored $2.9 billion in federal funding over three years, says Professor Woods, from the Centre for Health Economics Research and Evaluation (CHERE) at UTS Business School. 

"[But] The underlying problem for the states is the escalating cost of delivering public hospital care. The issue may have been deferred, but it hasn't gone away."

Health is the single largest expenditure item in all of their budgets, he says. And expenditure has been growing at around 5% in real terms over the past decade.

"This isn't sustainable," he says. "Over the next three years the incoming federal government, of whatever political persuasion, will need to sit down with the states and territories and agree on reforms to reduce the rate of growth of health expenditure."

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Meanwhile, tourism management specialist Dr David Beirman is disappointed that the government did not kill its planned "backpacker tax" in the budget.

There are unconfirmed reports that it may yet delay the tax for six months, but Dr Beirman argues that it is shortsighted and unfair.

The proposal is that travellers on working holidays should pay a flat rate of 32.5 cents in the dollar for every dollar they earn up to $18,000. In comparison, Australian citizens and residents pay zero tax on their first $18,000 of income.

"Discriminatory, excessive and opportunistic tax imposts are poison for tourism. Governments need to realise tourists make destination choices which factor in value for money," he says.

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