The Rudd Government has produced a cautious package of measures in response to the Henry tax review, aimed at business, superannuation and infrastructure.

The overall goal of the package is to drive greater investment, particularly in resources, by cutting corporate tax, restructuring resource tax arrangements and boosting Australia’s long-term savings pool by increasing the compulsory superannuation level from 9-12%.

The Henry Review’s recommendations about personal income tax and transfer payments reform have been left until the Government’s second term, but announcements on personal income tax simplification — think pre-filled tax returns and easier deductions process — will be announced between now and election.

The two key reforms of the package are the introduction of a Resources Super Profits Tax from 2012-13 and the long-term increase of compulsory super contributions.

The RSPT will be the most controversial proposal but the Government has ducked a fight with the states by adopting one of the Review’s options of not replacing existing state-based royalties on the resources sector. Instead, a new 40% profit tax will be imposed, but existing state royalties will be rebated and the tax will only be levied on the difference between revenue generated and the cost of exploration and extraction.

The tax, to be introduced after a significant period of consultation, will remove the damaging impacts of state-based resource royalties — identified by the Review as the least-efficient tax in the country — and reduce the tax paid by less profitable projects but increase the tax paid by highly-profitable projects.  It will be accompanied by a new resource exploration rebate to encourage minerals exploration.

The RSPT will fund a new, $700m pa state infrastructure fund aimed at the resource-rich states like WA and Queensland to assist with the cost of resources-related infrastructure projects.

The Government has also moved to realise Paul Keating’s original vision for a superannuation system based on a 12% compulsory levy. The compulsory rate will commence rising from 2013-14 and won’t reach 12% until 2020, but is estimated to add $85b to the national savings pool over the next decade.  This is at odds with the Review, which in its report on retirement income last year found that the current 9% requirement would provide “adequate” retirement in come.  Today’s Review also notes that the Government’s increase to the Age Pension last year has “considerably increased the potential retirement income of Australians.”

The Government has ignored the Henry Review’s recommendations to simplify the treatment of superannuation in favour of creating an “artificial” concession for low-income earners, in the form of a $500 pa Government-funded contribution, increasing the capacity of over-50s to make “catch-up” super contributions up to $500,000 and increasing the super guarantee age limit to 75.

The Government also proposes to reduce the company income tax rate to 28%, in a stepped reduction between 2013 and 2015, but small businesses will go directly to 28% in 2012-13 and also be given access to an instant $5000 asset write-off.

The overall package will be revenue-positive in the long-term for the Government, with the RSPT expected to generate $9b in 2013-14 on the back of “Commodity Boom Mark 2” as the Government calls it, while losing $3b to the company tax cut.

The Government has also explicitly ruled out a range of Review recommendations:

  • Family home will not be means-tested
  • Family homes will not be subject to land tax
  • Families will not face a work test when their youngest child turns 4
  • Reduce tax concessions for the not-for-profit sector
  • Reduce Defence Force remuneration
  • Change CGT tax arrangements
  • Offer a government annuity product
  • Return to fuel excise indexation
  • Introduce volumetric taxation of alcohol

Peter Fray

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