2019 Federal Budget: What it means for Small and Medium Business
From NAB Business Research and Insights 3rd Apr 2019.
Small business won tax cuts, an increase to the instant asset write-off, increased infrastructure spending and investment in apprenticeships.
By NAB Group Economics
Our Group Economics View
Alan Oster, Group Chief Economist, NAB
This Budget needs to be seen in its political context. It is more like an election manifesto than a traditional Budget and big questions remain around what parts, if any, will actually be implemented.
Firstly, the fact that the Budget is projected to return to surplus is unquestionably a good start. That has largely occurred on the back of expenditure constraint, bracket creep and higher commodity prices (especially iron ore, where the difference between the current and the previous forecast price is – on our estimates – around $7bn per annum). Also, the economic forecasts are unlikely to fundamentally change.
The Budget itself included a lot of headlines about personal income taxes. In the near term the low to medium income tax offset has doubled to a maximum of $1,080 per annum and the second tax threshold (of 32.5%) has been raised from $87k to $90k. However, the significant tax adjustments don’t come until 2022/2023. The near-term cost to the Budget is only $700m per annum, whereas $4.5bn of the total spend of $6.7bn will come in the final year (in 2023). Also, a lot more money is given to the tax office to improve integrity but again is mainly spent in the out years.
The infrastructure package has been boosted by around $25bn to around $100bn in the long-run. However, in the next four years the additional spend is around $4.5bn with the big-ticket items including the Urban Congestion Fund, Victorian fast train (Melbourne to Geelong) and the Road Safety Program. To alleviate the impact of high energy prices the Government is also making a one-off tax-free payment to about 3.9 million welfare recipients (singles receive $75 and couples $125). SMEs also get a tax cut to 25% (phased in over three years) while the instant asset write-off rises to $30k per investment (and $50m of turnover).
It will be interesting to see how Labor responds to the personal tax changes. Labor may keep the near-term adjustments but aim to produce bigger and nearer cuts at the bottom end (their current stance is to concentrate tax cuts below the $125k).
It is clear that the Budget has been constrained to keep the surplus. The Government has retained the tax to GDP limit of 23.9% of GDP but the surplus doesn’t go much above 0.7% in the next four years. That means that the Budget over the next few years adds little by way of fiscal restraint in the out years. Most of the improvement in revenue continues to rely on income taxes (bracket creep) till 2022/2023. The outlays continue to shrink as a percent of GDP (a better performance than in recent years – which may have benefited from NDIS underspend).
In our view, the Budget is not as stimulatory as is seems to be – or is being promoted as. It does not change our view on the economic outlook or how consumers will see their expenditure decisions. Nor would the outlook of the RBA be much affected.
Small business groups’ agenda for reform
Small business is the backbone of our economy and our communities – there are over 2 million small businesses in Australia employing more than 4.7 million people.
NAB’s latest Quarterly SME Business Survey (Q4 2018), showed SME business conditions continued to decline, though remain just above average (after reaching high levels earlier in the year). Confidence also weakened and is below average. Conditions remain most favourable on the east coast, with Victoria still recording well above average conditions, while WA and SA continue to lag the other states. The major constraints on output identified by SMEs continued to be sales and orders (i.e. demand) and the difficulty in finding suitable labour.
In this environment, businesses set out a wish list of potential reforms and changes as part of their pre-budget submissions. This year, the list of recommendations included a range of ideas.
Extension of instant asset write-off: In January 2019, the Government announced the $20,000 instant asset write-off scheme for businesses turning over less than $10m will be extended to 2020. The scheme will also be extended to cover assets up to $25,000. While many business groups welcomed the announcement, many have also called for the instant asset write-off to be permanent for small business, with some groups even urging Government to explore further investment allowances for asset purchases above $25,000.
Tax cuts: Currently, companies with an aggregated turnover of less than $25m, and have no more than 80% of their assessable income as base rate entity passive income have a tax rate of 27.5%. In October 2018, the Government introduced the Treasury Laws Amendment to accelerate future reductions in the corporate tax rate for small businesses to 26% for the 2020/2021 and 25% in 2021/2022 and subsequent income years. This move has been strongly supported by small business groups.
But given many small businesses rely on sales and services contracts with larger businesses, industry groups such the Australian Chamber of Commerce have also called for a single company tax rate of 25% for all businesses (small, medium or large) by 2024/2025 to encourage larger business to invest, with flow on benefits for small businesses.
Training, Education & Employment: The Council of Small Business of Australia (COSBOA) has urged Government to focus on the skills needs of employees and businesses (rather than the training sector) and to move skills training back to the Department of Industry. They also want funding of welfare and community-based training to be separated from skills-based training, as COSBOA is of the view employers should not be asked to take the place of welfare and social workers. COSBOA is urging the Government to provide greater support for group training of apprentices into small businesses. NAB’s latest Quarterly SME Survey (Q4 2018) also indicates that finding suitable labour continues to be a key constraint to output and it remains at a relatively high level.
Business simplification: According to NAB Bankers (NAB Business Banker Survey January 2019), Government policy and regulation is the most influential factor influencing the business conditions of their customers. Business groups are also calling for the removal of unnecessary red tape or poorly designed compliance processes. For example, COSBOA believes employers need to be removed from managing paid parental leave (PPL) payments on behalf of the Government. Master Builders Australia believes the burden of regulation and bureaucracy is particularly onerous on the building sector and recommended the Federal Budget take account of this situation.
Access to finance: Tighter lending requirements in the wake of the Banking Royal Commission have been particularly problematic for small business looking to access funds. Indeed, NAB’s latest Commercial Property Surveys found accessing finance for developers was harder than at any time since the Survey began in 2010. Consequently, industry groups have called for a review of prudential regulations and capital requirements that increase the cost of capital for small businesses.
Other: There were a range of other ideas including: relief from high energy prices; and reducing company registration fees charged by ASIC as a tangible measure to support Australian small businesses.
What the budget actually delivered for SMEs
While not meeting their entire “wish list”, small business is a winner from the Budget, with the Government describing it as “the engine room of the economy”. The most significant benefits for small business include tax cuts, an increase to the instant asset write-off, increased infrastructure spending and investment in apprenticeships. Personal tax cuts and increased infrastructure spending should also flow through to SMEs. While the Government announced plans to hand out one-off payments for consumer electricity bill relief, missing was any relief for small business.
The instant asset write-off, which allows businesses to write-off assets (such as tools or equipment) against their taxable income,has been extended and expanded. It will now cover purchases under $30,000, up from $25,000, and can be used by businesses with an annual turnover of under $50m, up from a $10m limit previously. Medium sized businesses will welcome this new access to the scheme. The threshold applies on a per asset basis so businesses will be able to instantly write off multiple assets. Around 22,000 additional businesses employing approximately 1.7 million people will now be eligible for the tax write-off with the changes projected to cost the budget $400m over four years. These changes will apply from April 2019 to 30 June 2020 – it isn’t a permanent scheme like the industry had hoped for. In total, these changes will benefit around 3.4 million businesses employing around 7.7 million workers. The Government’s decision to increase and extend the instant asset write-off should help to alleviate cash flow pressures for SMEs and help them with their expansion plans.
The Government also announced that the corporate tax rate for companies with annual turnover of less than $50m will fall from 27.5% to 26% next year and 25% starting in 2021/2022. This five years earlier than previously planned and is expected to benefit roughly 970,000 companies. The Government will also increase the unincorporated small business (up to $1,000) tax discount rate from 8% in 2019/2020 to 13% in 2020/2021 and 16% in 2021/2022.
In recognition of SME concerns around skill shortages(a key constraint to their output), the Budget contained a $525m investment in vocational education and training directed towards “areas of future high demand” – albeit only $54.2m is new money over five years and the majority ($463m) in part from reallocating Skilling Australians Fund money unspent because Queensland and Victoria did not sign up to the scheme.
Vocational education and apprenticeship numbers have suffered in recent years, with funding cited by businesses as a significant factor. Incentive payments to employers will double to $8,000. Employers will receive $4,000 ($2,000 after the first 12 months of an apprenticeship and $2,000 at its completion) on top of an existing $4,000 employer incentive. There is also a total payment of $2,000 for the apprentices themselves ($1,000 after 12 months and $1,000 at the end of their apprenticeship). The Government says these measures (at a cost of $156.3m), will support up to 80,000 new apprenticeships over five years and the list of eligible occupations will be reviewed annually to reflect skills shortages.
An additional $48.3m will be put into establishing a National Skills Commission. The package is in response to an as-yet unpublished review by former New Zealand tertiary education minister Steven Joyce. A national careers institute and careers ambassador will also be introduced to help promote vocational education.
The Budget also proposes 10 “training hubs” across Australia at a cost of $50.6m over four years, focusing on training in industries that have a local skills shortage. It is designed to target youth unemployment in regional areas.
The Government will also provide $60m over three years from 2019/2020 to top up the Export Market Development Grants (EMDG) scheme (along with a further $1m in 2019/2020 for promoting Australian industry overseas). The EMDG scheme is aimed at helping SMEs to develop export markets and is a popular support program for tech companies and start-ups. The Export Market Development Grants (EMDG) program provides reimbursement for export promotion expenses for businesses with an annual turnover of less than $50m. Eligible activities include attending trade shows overseas, digital advertising, marketing consultant fees and visa fees. The scheme reimburses up to 50 per cent of eligible expenses above $5,000, with a total grant on offer of $150,000.
While this new money will be welcomed by SMEs, the Budget did not address concerns that Government grant programs are inaccessible and onerous for SMEs to apply for. Moreover, the Budget papers did not provide detail in regards to how Australian industries would be promoted overseas.
How did business react?
Australian Small Business and Family Enterprise Ombudsman, Kate Carnell said they were “pleased the instant asset write-off has been increased to $30,000 and expanded to businesses with a turnover of up to $50m, but had hoped the threshold was higher to capture capital intensive businesses, such as primary producers”. Ms Carnell also noted that “personal tax cuts to more than 10 million taxpayers means more money in people’s pockets which means more capacity to spend in their local small businesses” and that “an increase in infrastructure spending – $100bn over 10 years – is a positive for all Australians and particularly for small to medium enterprises (SMEs)”.
The Australian Chamber of Commerce and Industry welcomed the support for small business and skills. CEO, James Pearson, said: “The Government has heard our calls for greater investment in the skills needed by industry. Both job seekers and business will benefit, including from the extra support directly to apprentices and the businesses that employ them….This investment in skills, combined with the increase in investment in infrastructure in both cities and regional communities, should deliver a meaningful and positive impact on productivity….Making it easier for people to get to and from their place of work, speeding up the transport of goods and delivery of services, and encouraging growth in regional communities makes sense”.
Business Council of Australia’s chief executive, Jennifer Westacott said, described the Budget as “strong and responsible” as it delivers “a surplus, lowers personal income taxes and invests in jobs, health, education and infrastructure…Returning to a serious and credible surplus matters enormously to meeting the cost of the future such as the $100bn earmarked for much needed infrastructure and sustaining high living standards.” And, the increase in the instant asset write-off for small and medium business and expanding the eligibility to claim “will help drive activity in the business community”.
To find out more, read our 2019 Federal Budget
2019 Federal Budget: What it means for Individuals
From NAB Business Research and Insights 3rd Apr 2019.
Personal income tax cuts were the headline of the 2019 Federal Budget – along with a change to super contributions and a new work test age.
By NAB Group Economics
Treasurer Josh Frydenberg’s first Budget focuses on reducing the tax burden for the majority of working Australians, greater superannuation flexibility for retirees and a one-off energy relief payment for eligible income support recipients.
Personal tax savings
• Immediate tax relief: Low and middle income earners will receive a tax saving of up to $1,080 per person. This can be claimed in the 2018/19 tax return.
• Preservation of tax relief for low and middle income earners: From 1 July 2022, the 19 per cent tax bracket will increase from $41,000 to $45,000, with an increase in the low income tax offset from $645 to $700.
• Reduction in key marginal tax rate: From 1 July 2024, the current 32.5 per cent marginal tax rate will drop to 30 per cent for income between $45,000 and $200,000.
• Minimisation of bracket creep: The Government estimates that from 1 July 2024, 94 per cent of taxpayers will have a marginal tax rate of no more than 30 per cent.
Greater superannuation flexibility for retirees
• Changes to voluntary super contributions: Australians aged 65 and 66 will be able to make voluntary super contributions without meeting the work test – removing the need for people of this age to work a minimum 40 hours over a 30 day period.
• Increasing age limit for spouse contributions: The age limit for people to receive contributions made by their spouse on their behalf increases from 69 to 74 years.
• Extended access to bring-forward arrangements: People aged 66 and under will now be able to make three years’ worth of non-concessional contributions to their super in a single year, capped at $100,000 a year.
Small to medium business
• Increase in instant asset write-off: The threshold for the instant asset write-off increases to $30,000 from $20,000. It has also been broadened to include businesses with up to $50 million in turnover, making it available to around 3.4 million Australian businesses.
Pensioners and welfare recipients
• Energy Assistance Payment: Over 3.9 million eligible Australians will automatically receive a one-off payment of $75 for singles and $125 for couples (combined) to assist with their energy bills. This payment will be exempt from income tax and not counted as income for social security purposes.
Note: These changes are proposals only and may or may not be made law.
For more insights about what the federal budget means for you visit mlc.com.au/eofy.
One Nation leader Pauline Hanson has dealt a blow to the Federal Government by withdrawing her party’s support for the Coalition’s company tax cuts. From ABC News, www.abc.net.au/news/2018-05-22
• Pauline Hanson struck a deal with the Coalition in March to support tax cuts in exchange for an apprenticeship pilot program
• Now she says no money has been put aside, and is effectively withdrawing support
• Finance Minister Mathias Cormann said the apprenticeship scheme was always conditional on the tax cuts passing
Senator Hanson said she regretted pulling out of a deal with the Government, but it had failed to deliver on a string of her demands, including reducing the immigration rate, building a coal-fired power plant in north Queensland and lowering spending.
She said she had not spoken to Finance Minister Mathias Cormann directly about her new position.
“I know he is devastated over this, but it is not Minister Cormann, it is his colleagues and the Government that have let him down,” Senator Hanson said.
Senator Cormann is pessimistic that the Government will ever reach a deal with One Nation on cutting the company tax rate.
“It looks that we might not ever get to that point,” Senator Cormann said.
Senator Hanson struck a deal with the Coalition in March to support the tax cuts in exchange for an apprenticeship pilot program for young Australians.
But the One Nation leader — who controls three votes in the Senate — says no money has been put aside for the program.
Will company tax changes pass the Senate?
76 senators are expected to vote on this bill. 39 votes are required to pass this bill. 38 votes are required to block this bill.
There appears to be a major dispute between Senator Hanson and the Government over the timing of what was agreed.
While Senator Hanson said no money had been set aside, Senator Cormann said the apprenticeship scheme was always conditional on the tax cuts passing.
“It was always understood and accepted by Pauline Hanson and One Nation that the things we agreed were conditional on the successful passage of the legislation in full, to reduce the business tax rate over time for all businesses down to 25 per cent and that remains the Government’s position,” Senator Cormann said.
He said One Nation had given firm private and public commitments that they would support the company tax cuts legislation when they negotiated earlier this year.
“I am obviously very disappointed with this latest development, but self-evidently I hope this is not the last word,” Senator Cormann said.
One Nation’s latest position makes it even harder for the Government to get the company tax cuts through Parliament before the next election
Senator Cormann told a Senate estimates committee the Government was committed to taking the company tax cut to the next election.
“Yes and I can explain why because it is even more important now than it was when we took it to the 2016 election,” he said.
Hanson wants lower immigration in exchange for support
Senator Hanson now says the Federal Government has not done enough to reduce debt, and the company tax cuts would not create enough jobs in the short term.
She is also listing other major changes she wants the Government to make.
In an interview with The Australian, Senator Hanson reiterated her party’s support for changing the petroleum resource rent tax, to make large companies pay more tax.
Senator Hanson’s change of mind presents a headache for the Federal Government, which has failed to convince enough crossbench to support the change.
It wanted to pass the legislation before the budget but was forced to defer debate with new independent senator Tim Storer unconvinced.
The two Centre Alliance senators (formerly the Nick Xenophon Team) are also unprepared to back the company tax cuts now.
CA senator Stirling Griff said the evidence so far “certainly would indicate to us that it’s not really the right time to have tax cuts or corporate tax cuts”.
NEWS FROM THE BUDGET 2018
The Government is pitching a plan to deliver tax relief to lower and middle-income Australians, which it says will benefit more than 10 million people.
The most immediate measure will be changing the low-income tax offset (LITO) — essentially a lump sum on your tax return.
From next July, those who earn up to $37,000 will see their tax bill reduce by $200.
The offset increases incrementally for those earning between $37,000 and $48,000, before the maximum offset of $530 is applied to those earning between $48,000 and $90,000.
The benefit then gradually decreases to zero at a taxable income of about $125,000.
There will also be a measure to combat bracket creep, introduced in stages.
From July next year, people earning between $87,000 and $90,000 will move back into the lower tax bracket and pay 32.5 per cent instead of 37 per cent in tax on those earnings.
In 2022, the top threshold of the lower tax bracket will be increased from $37,000 to $41,000, meaning more earners will fall inside the 19 per cent tax rate bracket.
Treasurer Scott Morrison says the plan will mean 94 per cent of Australian taxpayers will pay no more than 32.5 cents in the dollar.
Pensioners will be able to earn more money without impacting their pension under the Pension Work Bonus scheme. The program will be expanded to include the self-employed.
Overall, the cost to the budget is $227 million.
The Pensions Loan Scheme will be boosted to enable everyone over pension age to effectively mortgage their home to the Government to access fortnightly payments.
These payments are now as much as one-and-a-half times the pension rate.
An additional 14,000 high-level home care support packages will also be introduced over the next four years.
Big changes in superannuation are designed to secure the retirement incomes of Australians.
A 3 per cent annual cap on fees for accounts with less than $6,000 will be applied.
Exit fees on all superannuation accounts will be banned.
In addition, all inactive super accounts with balances less than $6,000 will be transferred to the Australian Taxation Office, which will then “proactively” reunite these inactive accounts.
Small businesses now have longer to write off business purchases.
The Government extended the $20,000 instant asset write-off for another 12 months to June 30, 2019.
The initiative was initially introduced in the 2015-16 budget and has been kicked along at a cost of $350 million over the forward estimates.
People who own vacant blocks of land will no longer be able to claim tax deductions against them from July next year.
The restriction won’t apply to any expenses incurred after construction begins on the vacant block or any land being used by owners to carry out business, such as farmers’ crops.
The Government estimates this will save the budget $50 million over the forward estimates.
Personal income tax cuts could boost economy, relieve households
From ABC News www.abc.net.au
By Saul Eslake
Updated 24 Apr 2018, 6:11am
A large proportion of any cut in personal income tax — especially if the cuts were skewed towards lower and middle-income households with a higher propensity to spend — would likely provide a greater direct stimulus to the Australian economy than an equivalent cut in company tax.
Cutting personal income taxes seems likely to provide much more of a boost to the Australian economy than cutting company income tax. As the government’s own published modelling shows, the benefits of its proposed cuts to the company income tax rate are small relative to their cost.
Do workers need income tax cuts?“The Treasurer and I have been working on how we can provide more tax relief for hard-working middle income Australian families.” Prime Minister Malcolm Turnbull
Over the past five years, household spending has grown by just 2.6 per cent per annum in real terms, on average — of which more than half has been the result of population growth — compared with an average of 3.6 per cent per annum over the preceding 12 years. Even with that lower growth rate in their spending, households have reduced their saving rate, from about 7 per cent of disposable income five years ago to about 2.5 per cent in 2017. That’s the lowest saving rate since before the financial crisis.
The key reason for this “squeeze” on household spending and saving is of course the ongoing weakness in the growth rate of household disposable income. Over the past five years, real per capita household disposable income has grown at an average annual rate of just 0.4 per cent, compared with an average of 2.6 per cent per annum over the preceding 12 years.
Households paying most tax in 13 years
One reason for this is that Australian households have been paying an increasing proportion of their income in taxes. In the years prior to the onset of the financial crisis, almost every budget included personal income tax cuts in some form or other.
By contrast, there have been no changes to Australia’s personal income tax scale since 2008 — apart from the increase in the tax-free threshold (paid for by an increase in the bottom rate) in 2012, the temporary surcharge on top-rate taxpayers which applied between 2014-15 and 2016-17, and the increase in the threshold for the second-top rate (from A$80,000 to A$87,000) which took effect in the 2016-17 financial year.
As a result, in 2017, Australian households in aggregate paid 19.5 per cent of their taxable incomes in income and other direct taxes — the highest proportion since 2005 and continuing a steady rise since 2011.
Households are also spending almost two and a quarter percentage points more of their after-tax disposable incomes on education, health, insurance and other financial services, and utilities than they did five years ago.
Given all this, it’s little wonder that household spending in more “discretionary” areas has been so weak in recent years.
Well-targeted personal income tax cuts could thus help to ameliorate this multi-faceted “squeeze” on household incomes and provide a direct boost to the economy.
Tax cuts to offset stagnant wages?“It’s been a long time since any Australians had a decent pay rise … this is a real pressure on Australians … we can give them some relief when it comes to their personal income tax.” Treasurer Scott Morrison
The other major reason for the very slow growth in real household disposable income over the past few years has been the unprecedented slowdown in wages growth. Wages have risen at an average annual rate of just 2.2 per cent over the past five years (only 0.3 of a percentage point above the inflation rate), down from 3.7 per cent per annum over the preceding 12 years.
Although, as RBA Governor Phillip Lowe noted in a speech that “the latest data suggest that the rate of wages growth has now troughed”, he went on to warn that the pickup which the RBA expects “is likely to be only gradual”.
Recent experience in other advanced economies clearly suggests that the unemployment rate needs to be lower for longer than in previous business cycles before wages growth starts to pick up. So even assuming that Governor Lowe is right, it may be one or two years before Australian households can expect any meaningful improvement in their financial position from faster growth in their wages or salaries.“Well-targeted personal income tax cuts could help provide at least some offset to this likely continuing stagnation in wages growth over the next year or so.”
What’s the verdict?
Targeted personal income tax cuts could reduce the squeeze on households and make up for persistent low wages.
Of course, it remains crucial that any cuts in personal income tax be sustainable — that is, that they are not funded by bigger deficits, and do not materially detract from the task of putting the nation’s public finances on a sounder footing. This is so we are better placed to withstand any unforeseen economic shocks.
And it’s important to remember that government spending has moved to what appears to be a permanently higher level as a proportion of GDP since the financial crisis. The government’s underlying cash payments averaged 25 per cent of GDP from 2011-12 through 2017-18, up from 24 per cent from 2001-02 through 2007-08. That also represents a constraint on the scope for tax cuts.
However, the apparently greater improvement in the budget so far this financial year, compared with what was forecast as recently as last December’s Mid-Year Economic and Fiscal Outlook, could give the government a little more latitude for financially sustainable personal income tax cuts in the upcoming budget.
Perhaps the most sustainable way of providing the “relief” which the Treasurer says many Australian households need, would be to abandon the tax cut for companies turning over more than A$50 million a year. The government hasn’t been able to get these through the Senate. These cuts would do far less to boost the Australian economy than well-targeted personal income tax cuts of a similar order of magnitude.
Saul Eslake is an economist and vice-chancellor’s fellow at the University of Tasmania. This article originally appeared on The Conversation.