With less than a week to go, personal income tax cuts are expected to take centre stage in the 2018 Federal Budget, while plans to reduce the corporate tax rate have seemingly been placed on hold. Additional corporate tax revenue raised from the overhaul of the research and development (R&D) tax incentive and changes to the Petroleum Resources Rent Tax (PRRT) may set the stage for a resurgence of efforts to cut the corporate tax rate in the future.

The increasing probability of cuts to personal income tax rates in next week’s Budget comes off the back of increased tax collections which have already been announced by the Treasurer. That is not to say the Budget is no longer in deficit; it just means the Government has collected more tax than it had forecast in the previous Budget. And instead of putting that money away to move faster and closer towards a Budget surplus, it seems highly probable that it will be given away.

The big ticket items that are expected to be announced on Budget night include:

“Hamburger and milkshake” cuts to personal income tax:

Small personal income tax cuts targeted at middle-income earners (likely, the $37,000 to $87,000 tax bracket) are expected to be announced.

To show the practical impact of a tax rate cut in this bracket, let us assume the rate is reduced from 32.5% to 30% for illustration. This translates into a cut of $24 per week for anyone earning more than $37,000 (including anyone well into the top marginal tax bracket – some might wonder why a person on $18,000 should not receive $24 a week in cuts when a person earning $1,000,000 would).

The tax cuts are based on the Coalition’s policy that tax revenue should not be allowed to rise above 23.9% of GDP. Under this policy, tax cuts would be provided whenever tax revenue rises above this threshold. It is expected that the tax cuts would be implemented over a 10 year period, with more substantial cuts being expected if the budget returns to surplus in 2020-21.

An increase to the low income tax offset (rather than changes to the marginal tax rates) would achieve more targeted cuts for low income households – but this is not expected to be announced.

Abandonment of the increased Medicare levy:

A planned 0.5% increase to the Medicare levy to kick in on 1 July 2018 is expected to be abandoned.

The increase was originally introduced to raise approximately $8 billion to fund the National Disability Insurance Scheme. This expenditure is now expected to be absorbed by rising tax revenue (despite cuts to personal income tax).

Overhaul of the R&D tax incentive:

In a previous insight, we mentioned that R&D tax incentives (which currently cost the government approximately $3 billion) are expected to undergo significant changes. Changes are expected to include:

  • a general tightening of the type of expenditure that will be eligible for the incentive;
  • an eligibility requirement that 1-2% of business expenditure be on R&D (the intensity test);
  • a $2-4 million annual cap on the cash refund and a $20-40 million lifetime cap; and
  • A collaboration premium for R&D expenditure undertaken with publicly-funded research organisations.

Reduced concessions for oil and gas companies:

Oil and gas companies may be required to pay billions more under proposed changes to the PRRT. The measures are expected to restrict concessions which currently allow oil and gas companies to increase or “uplift” certain forms of un-deducted expenditure from prior income years to reduce their current year tax liability.

The measure is only expected to apply to new projects.

Introduction of measures to tax the digital economy

It is expected that international tax reform measures will be announced to combat the erosion of the Australian tax base by the business models of global digital and social media companies.

Following the introduction of the “Netflix tax” which came into effect on 1 July 2017, it will be interesting to see what form these new measures take. It is unclear whether these measures will seek to modify existing law, or introduce entirely new legal concepts (such as the EU’s recent proposal to introduce the concept of a virtual or digital permanent establishment).

Targeting the “black” economy

Measures to target the avoidance of tax by cash businesses are expected in response to the Treasury’s Black Economy Taskforce’s final report (which would also be expected to be made public at the same time). An amnesty is being mooted following the success of the Project DO IT amnesty which resulted in the disclosure of significant, previously “hidden”, offshore wealth and income to the Australian Taxation Office. Unlike Project DO IT, the tax administration benefits of an amnesty for cash businesses are not likely to be as long lasting.

Trust measures

Treasury has already released proposals to tighten up the taxation of managed investment trusts and stapled structures, although the measures do go beyond just those structures. Further details are expected in the Budget announcements.

Other measures may include:

  • A standard deduction for work-related expenses. This would be an important precursor to a pre-filled tax return system.
  • An extension of the $20,000 instant asset write-off beyond June 2018.
  • Superannuation reform to reduce complexities arising from last year’s introduction of the $1.6 million cap on super that can be transferred to a tax-free retirement account and an expansion of allowable SMSF members from four to six.
  • Compulsory employer super contributions (currently 9.5%) will remain frozen until 2020. They are expected to be lifted to 10% in 2021, then 0.5% each year until 2025 when the rate would be 12%.
  • Restrictions on the availability of fuel tax credits.

We are unlikely to see:

  • Changes to the goods and services tax, except perhaps to remove the so called “tampon tax”.
  • Changes to the company tax rate (other than those already legislated for smaller businesses).
  • Changes to negative gearing on residential property investments.
  • Changes to capital gains tax for individuals.
  • Broader tax reform policies.

Tax revenue is just one part of the equation – whilst some of the tightening measures will no doubt help fund the tax cuts, it will be interesting to see what flow on impact there is on spending – and for that, we will have to wait till Tuesday night, when G+T’s tax experts will be in Canberra on Budget night and providing updates and analysis on key measures as they are announced.

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