Analysis: The aftermath of the 2016 budget

Small to medium businesses (SME) – which include a high proportion of mortgage brokers, financial planners and real estate agents – should be pleased. Multinationals and smokers, not so much.

Leading the critics was Opposition Leader Bill Shorten, who took to Twitter to air his displeasure with the budget, saying, “There’s nothing in it for everyday Australians”.

“Someone earning $1 million got a $16,715 tax cut while three quarters of Australian taxpayers got absolutely nothing,” Mr Shorten wrote.

Australian Greens leader Richard Di Natale echoed Mr Shorten’s sentiment, criticising Prime Minister Malcolm Turnbull and Treasurer Scott Morrison.

“This budget is a massive letdown, just like Malcolm Turnbull has turned out to be,” Mr Di Natale tweeted. “The treasure[r] is relying on fanciful economic assumptions to justify unfair tax cuts.”

However, the general consensus at NAB’s Budget Breakfast the morning after was that ScoMo delivered a sensible and ‘no surprises’ budget.

“There is not a heck of a lot of room to move if Australia wants to [maintain its AAA credit rating],” NAB head of research and managing director, Peter Jolly, said.

“Australia doesn’t have an awful lot of debt compared to a lot of other countries… GDP is pretty modest relative to a lot of other countries but one of the points is a lot of those other countries are not AAA countries.”

Mr Jolly suggested that this year’s budget focused on short-term, rather than long-term, implications.

“Our very quick judgment would be that most of this budget was around short-term measures rather than thinking about those long-term fiscal challenges that are not only Australia-focused but [in the context of] the world,” he said.

Big winner: SMEs

• The government has changed what defines a small business by extending the annual turnover allowed to less than $10 million, up from less than $2 million previously.
• The tax rate applicable to small business has been lowered by 1.0 per cent to 27.5 per cent, from 28.5 per cent.
• Over the next decade, the government plans to lower the company tax rate for small business even further to 25 per cent through staged implementation of its ‘Ten Year Enterprise Tax Plan’. This will see the size of companies eligible for the 27.5 per cent tax rate lifted each year until all companies are taxed at this rate in 2023-24. The rate for all companies will then be incrementally lowered over the next four years to reach a final rate of 25 per cent by 2026-27.
• The unincorporated small business tax discount has been extended. From 2016-17, the discount will be available to businesses with annual turnover of less than $5 million – up from the current threshold of $2 million – and will be increased to 8.0 per cent. The maximum discount available will remain at $1,000. Over the next decade, the discount will be further expanded in phases to a final discount of 16 per cent.
• An extension enabling small businesses to immediately depreciate assets valued up to $20,000 has been set to the end of June 2017, and is now accessible to businesses with revenue of up to $10 million.

The measures targeting small- to medium-sized businesses were widely welcomed by much of the mortgage sector.

Scottish Pacific head of debtor finance, Greg Charlwood, said the tax rate reduction was a welcome initiative and should provide a significant boost to the SME community.

“Having supported SMEs in working capital since 1988, we are pleased to see the benefits for companies with a turnover of $2 million being extended to a sensible level of $10 million turnover where we see it will have greater impact in terms of business investment and boosting job growth and employment,” Mr Charlwood said.

His comments came after the most recent SME Growth Index by Scottish Pacific revealed that 58 per cent believed they were in positive growth mode, with this likely to rise following the budget rollout.

HIA chief executive Graham Wolfe said the changes to small business would deliver a “steady roadmap for economic growth” and provide much-need confidence for the residential building industry in particular.

“When combined with the decision taken to lower the official cash rate, which [has] already started to flow through to housing interest rates, the budget will help maintain the residential building industry’s capacity to make a significant contribution to employment and economic activity,” Mr Wolfe said.

“The reduction in the company tax rate, its immediate extension to businesses with turnovers up to $10 million and the continuation of the $20,000 asset write-off program will also help the small businesses that dominate the residential construction industry to grow their employment and investment.”

While the Retail Council was also among those pleased with the new measures, its chairman Peter Birtles expressed disappointment that many would have to wait a decade to feel the effects.

“We are encouraged by the government’s commitment to reduce the company tax rate for all businesses,” Mr Birtles said.

“However, we are disappointed that these measures will take a decade to implement, particularly as those companies that must wait the longest are the very companies that employ a high proportion of the workforce and make a significant contribution to economic output.

“Furthermore, it delays flow-on benefits delivered to Australian households who would also benefit from a reduction in the company tax rate, primarily through higher real wages and increased employment.”

Everyday Australians

As part of the government’s plans to alleviate stress from Australia’s middle income earners, the budget contained significant changes to the tax bracket.

The 32.5 per cent tax threshold will only be moved from $80,000 to $87,000 in 2019-20, offering relief to approximately 500,000 taxpayers facing the 37 per cent marginal tax rate.

The measure – combined with the Reserve Bank’s recent decision to cut the official cash rate to a record low 1.75 per cent – will ensure mortgages and loans remain within the grasp of the average, working Australian, according to FBAA spokesperson, Peter White.

“The overall tax package for individuals should help lift the burden on the household budget and relive pressure on mortgage repayments,” Mr White said.

“Thousands of Australians will now be able to experience the benefits of investment property ownership and as we’ve seen with most of the banks cutting rates after the RBA decision, the time is perfect for property purchasing.”

Negative gearing and CGT

As expected, the government kept the current negative gearing legislation and capital gains tax unchanged – a decision welcomed by the mortgage industry.

HIA chief executive Graham Wolfe said the government’s commitment to maintaining the current tax regime for investors would “deliver certainty to the market, maintain a steady supply of residential rental properties and avoid panic decisions by investors that could disrupt the rental market as occurred in the 1980s”.

Aviate Group managing director Neil Smoli also welcomed the government’s decision to leave negative gearing unchanged.

“Some of the negative gearing discussion leading up to the budget did not properly take a long-term view of any potential policy changes, so it was perhaps the safest option to leave the current arrangements in place,” Mr Smoli said.

“The important role the property industry plays in an economic sense is clear, and negative gearing does support new construction and the supply of new rental shock, which alleviates the reliance of low income earners on public housing.

“When investors are active in the market, they are providing direct housing options for Australians and the more options there are on the market, the more choice is offered to tenants.”

In relation to any changes that may be considered in the future, Mr Smoli said the definition of what constituted a “new” property should be at the forefront of all discussions, adding that one option was to make negative gearing only accessible to those who invested in new developments.