Breaking down the Budget

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Rebecca Archer 

Welcome back to Beyond the Numbers with Grant Thornton – a podcast unpacking marketplaces shifts in today’s dynamic business landscape.

I’m Rebecca Archer, and today I’m joined by Corporate and International Tax Partner, Vince Tropiano.

After the Budget on Tuesday 12 May, the Government delivered adjustments to CGT, negative gearing and introducing a minimum tax rate for discretionary trusts, but what does it all mean?

Now that the dust has settled, there’s been no shortage of commentary on what these changes might bring and how businesses might be impacted.

Welcome, Vince!

Vince Tropiano 

Thanks very much, Rebecca. Good to talk to you again.

Rebecca Archer 

Okay, so one week on. What are your thoughts?

Vince Tropiano 

I have some mixed thoughts. I can understand a lot of the logic behind the changes. So, from a tax person, I can see what the government was trying to do.

What I'm also seeing though is a lot of confusion, getting a lot of calls, people trying to understand what it means, trying to work their way through the various methodologies and the changes in the system with things that don't apply today but apply in 12 months, and then you've got, you know, for example, with CGT, you've got the discount which runs through to the end of next June, and then you've got the CGT indexation. So, you've got both things going.

So, people are still trying to figure out what it actually means. So, they're a little bit confused, and I guess, as I said, I understand why these things came through in terms of helping with housing affordability; it'll be interesting to see what that actually does to housing prices over the next 12-24 months.

Rebecca Archer 

Yeah, it's the washout I think that everyone's going to be looking at to see has this measured up in terms of effectiveness.

Let's have a look at some of the announcements that potentially could help business. First off, the instant asset tax write off has been made permanent.

Vince Tropiano 

Yeah, look, that's great. There's certainty now for businesses within that category and it's a $20,000 instant asset write off. It's come through a couple of times and then got taken away. There was a COVID support measure. It also came in earlier, I think, when we had a bit of a turndown. The fact that it's now been made permanent is, I think, a great move. It supports business to invest in their business. It gives them some cash flow support in terms of the immediate tax deduction. It removes the admin issues in terms of depreciation over a period of years. You can just claim it all in one go, and most importantly, it gives them certainty, and as we talk about the tax system ad nauseam, and you and I have spoken about it before, we're always after simplicity and less administration, and this is one of those steps where it certainly does reduce the admin burden for businesses who are looking to invest in their own business without too much difficulty.

Rebecca Archer

And let's look at the loss carry back scheme. Firstly, can you give us a bit of a sense of what that actually means, how it works in practice and what's changed?

Vince Tropiano 

What happens now is if a company incurs a loss, they're entitled to carry those losses forward indefinitely to use against future income.

So, if my company made a $1m tax loss last year and this year it makes a $2m taxable income, I could apply that $1m loss to this year. So, my taxable income for this year is only a million and I'd pay tax on the million.

What happens now with the loss carry back is a reverse transaction. If I paid tax in the last two years and then for whatever reason, economic downturn or the like, and I have a tax loss this year, I can apply back to the earlier two years and effectively get a refund of previous tax paid.

So again, it's a great process, a great system to help business and it helps business during lumpy periods. They've had good years; they may have a bad year for whatever reason and given global instability and given what's happening in the economy, it's not beyond the realms that there'll be a number of businesses having a tough year.

So, what it does is it helps them through that year so they're not, they're not going to the wall, they don't need to be wound up. They get a bit of a cash flow support in terms of tax that they've paid in earlier years.

So, we think it's a great idea. Again, it's been in and out a couple of times now. It's been brought in to be permanent for, certainly for small business and we think that's a real positive.

Rebecca Archer

There were some R&D changes, so research and development in this budget as well. Vince, what can you tell us about those?

Vince Tropiano 

There's been a whole raft of different changes with the levels of incentive so the, the idea is to encourage access to R&D for a number of different organisations looking to reinforce the government's aims of productivity and competitiveness. We'll wait and see what happens with that because there's also some up and downside with some of the R&D where turnover thresholds will increase, refundability may has reduced for some in different categories. So, there's a bit of a wait and see.

There's little doubt that R&D is crucial for the Australian economy and we definitely need more support in that area. We've seen over the last couple of years with again the global instability we've seen over the last few months with supply chain issues. We really need to do more ourselves here in Australia – more development, more manufacturer, more activity. So, R&D is a crucial part of that.

Rebecca Archer

And what about any other productivity changes or anything else of note that you think is worth highlighting here?

Vince Tropiano 

Well, there's a whole bunch of little changes. I noticed speaking to our customs people that there was a whole bunch of tariffs which were really unnecessary have been removed. So, there's been reductions in admin in certain areas, investments in areas like fuel security. Again, we're all living through the challenges there.

So, I think that shows that there's a greater understanding of some of our economic challenges and some of these things will help us become more resilient in dealing with the volatility that surrounds us at the moment.

Rebecca Archer

Let's dig a little bit deeper into one of the big pillars that was delivered. So, CGT discount moving from 50 per cent to an inflation indexed discount from 1 July next year. What does that do to investment horizons and for business planning?  

Vince Tropiano

This is where it starts to get a little bit confusing, and we've had a lot of questions from clients and just people in the market generally asking about what does this mean and what do I need to do today? Because as you say the rules come in from 1 July 2027. The confusion will then lie in I have assets, they're currently subject to the CGT discount. Should I sell before 30 June 27, what happens when I hold it afterwards?

And then you've got the two systems with discount to a certain period, then indexation after that. So, there's a lot of uncertainty around how assets should be held, how long they should be held. There's some interesting announcements with that, especially around the pre-CGT assets now that is assets bought pre1985. So, we're talking stuff that's been held for 40 odd years and now being brought into the net because then they'll be subject to CGT after the 1st of July 2027. They'll be subject to indexation based on the value at that time.

So again, that provides some, some challenges to investors of all types. Shares, property, the like any CGT asset now. There's a few different models they're going to need to work through. Questions are coming through about should I sell, should I hold, what happens if I hold? How's it going to work? Do I need to get valuations on the 1st of July 27? The answer is probably yes, if you want some certainty. So, there's some real concerns there about holding onto assets and what you need to do, what sort of structures will help or hinder that sort of thing, what structures they're in now. Do I need to move them to something else?

Succession planning is an issue again because, you know, plans about people retiring, doing all sorts of things and passing assets on CGT outcomes will be different. We understand why this has come through. I think the government, if nothing else, has been very transparent about this.

This has been the conversation for three months, six months that this has all been done to soften the housing market and to assist home ownership. It'll be interesting to see how much impact it has on home house prices and the like. So that's going to be probably one of those wait and see, and from a tax person, we're always talking about simplicity and reducing admin. This change especially goes the other way. It does take us back to the original CGT model, which relied on indexation but you know, remembering that the 50 per cent discount was brought in to make it less administratively difficult, make it easier for people to calculate their CGT and just move on rather than working at indexation rates at the date of purchase, indexation rates at the date of sale. If you've done any material improvements to it, you need to index those amounts as well. So, it does get a bit messier.

So, and as I said, the challenge is now kind of working through your investment strategies and what do you need to do pre and post the 1 July, as I said, whether you need to get valuations and I think probably will, and these are, these are the conversations we're having with clients already, you know, setting a price at the 30 June and the like.

Probably the good news is that there's a 13-month window. We've got plenty of time to look at this, see where it all lands from a political scenario in terms of legislation when it gets through because we need to see all the detail first, and that gives you time to sort of plan your strategies appropriately.

Rebecca Archer

And just on the strategies, so we have got that transition window. But for businesses right now, what should they be doing? Should they be calling to make an appointment to get the right advice? Should they be let the dust settle a little bit longer? What would you advise?

Vince Tropiano 

I think that the dates won't change. There will be some intricacies that we're not aware of. You know, you need to look at the legislation and see what other fiddly bits may appear in there. I don't think it hurts to start talking to your advisers.

It's not too soon to start having those conversations and looking at your particular circumstances. Everyone's going to have a different set of situations, different scenarios, and some might be easier to modify, some might be harder to modify.

So, it's worth starting those conversations and starting to get a handle on what you think you may need to do, what the tax costs might be by leaving it, by moving it, by doing all sorts of things like that.

So, it doesn't hurt to actually get on and start trying to plan what you may need to do with your investment portfolio.

Now we're talking about people pushing their business strategies because of tax. Now, tax is always an important part of your business strategies, but you don't like a situation where tax drives the process. Tax is a consideration, but what we're talking about now is you need to reevaluate your business strategies to deal with the changes in tax, and that's not always ideal.

Rebecca Archer

It's really good advice and a good point to remember. I know that with most Federal Budgets, we always see the leaks happening in the weeks leading up to whenever the budget is due to be delivered – usually in early May – and there were a few things that were telegraphed quite heavily ahead of this budget. But I'm wondering on the night when we saw the detail, were there any surprises from your perspective?

Vince Tropiano 

Well, you're right, Rebecca. A lot of it has been discussed ad nauseam.

So, the CGT issues were expected. Negative gearing is one that's been talked about a lot, and they tend to go hand in hand with the housing affordability issue.

The taxation of trusts was something which popped up probably in the last couple of weeks. It sort of started to float to the top. So, it wasn’t a surprise, but it didn't seem to be one of their core issues for some time. The one that did pop up was the fact that pre-CGT assets are now being brought into the net.

You know, when the CGT rules were initially brought in, generally it was an announcement on the night, like the old budgets, it's like from tonight. So, any of the pre-CGT assets were not bought with CGT in mind, they were just bought and held, and it just happened to be that it was before the 19 September 1985.

As we talked about, you've still got two different methodology calculations which will roll forward for quite some time. So that was a bit of a surprise. The trusts, not so much. The 30 per cent – probably a lot of our trusts and beneficiaries, they'd be paying that 30 pe rcent anyhow because I think it kicks in at about $45,000. So, they're not going to be massive amounts.

So again, I'll be curious to see how much revenue is collected by those changes. So,they're probably the two, but certainly the pre-CGT stuff was a bit of a surprise.

Rebecca Archer

Just anecdotally I did read some commentary that was saying that, well, you know, perhaps people wouldn't be rushing to set up trusts and look at that model for their businesses were it not for the threshold at which the 45 per cent tax rate kicks in being I think it's $190,000 and that, you know, perhaps it's time to reevaluate given cost of living pressures and life is just so much more expensive nowm tweaking where that rate sits, that threshold sits.

Vince Tropiano 

And I know there's been conversations about indexing the tax rate thresholds and the like, but the fact of the matter is that our individual tax rates are too high. The majority of government tax revenue is from you and I – individuals.

So, the tax rates are too high. And you know, we could spend days talking about, you know, we really need to double GST and reduce income tax rates. It would be a more efficient system. The Government would make more money out of that and make it easier and people would be able to choose where they spend their money.

There are other things you need to deal with there, like remembering that the collection of revenue, it's not the tax system, it's a tax and transfer system. So, you need to look after pensioners, low-income earners who aren't paying tax anyhow, but now all their goods would increase, but if you talk to any of the GST guys, they'll remind you that our GST rate is historically low in comparison to global rates. Global average is closer to 20 per cent now.

Rebecca Archer

So, Vince, it can be easy of course, to focus on the headline announcements when it comes to federal budgets. But sometimes it's actually about taking a step back and considering how the changes apply to your specific circumstances. What would be your thoughts to businesses and also individuals right now?

Vince Tropiano 

Firstly, don't panic. You know, we've been through all these before. There's always these changes and there's doom and gloom and the like, and we get through them when we work through them. You know, government needs to do what government does, and then we would all, as advisers and companies and individuals would react accordingly.

We haven't seen the legislation, you know, it hasn't been signed off, it hasn't gone through government. So, we need to kind of work our way through that and see whether there's anything else there that we need to do. So, the starting point is today is not disaster day. It's not ground zero.

We don't need to do everything today. What we do need to do is be smart about planning. We need to start the conversations. We need to start looking our existing structures and think about what these rules might do to them. Maybe do a bit of modelling, do a bit of planning.

Talk to your advisers, you know, your trusted advisers, those that know your business and know your structure. Talk to them about what you should be thinking of doing at a corporate level, individual level, investment level, all of those, and try and get a handle on what it will cost to restructure, for example, the trusts, the taxation of trusts. The Government's talked about providing rollover opportunities so people can roll out of trusts into companies.

The bit that's missed there is that income tax, is a federal issue, but then the State Government's going to come after you for stamp duty on any asset transfers, so you need to factor that into your pricing as well.

So, look at the overall cost of the restructuring and what's left behind. You know, what does the structure look like after you've gone through this? And does it work for your business? Does it work for individual investors? And like I've talked about, tax not driving business decisions, but to a great extent it probably will, certainly for the next 12 months, please, as people look at their structures and need to factor that in. So, as I said, it's probably not great, but it's important.

So, it's certainly something that you'll need to do and acknowledge the fact that some of your business decisions will change because of the potential tax liability.

Rebecca Archer

Vince, as always, it has been a pleasure to talk to you and thank you so much for making the time for those people who are listening who would like to connect with you, maybe delve a bit deeper into the kind of work that you do and perhaps even explore potential ways that you could assist them directly. What's the best way for them to reach out?

Vince Tropiano 

LinkedIn's probably the best. My contact details are there. People, please feel free to reach out on LinkedIn and I'll certainly get back to you or I’ll send you in the right direction. You know, website has details, but LinkedIn's probably the easiest way to get directly to me.

Rebecca Archer

If you enjoyed this episode, make sure to follow Grant Thornton Australia on Apple Podcasts or Spotify so you never miss new insights. Do you have a burning question or a challenge keeping you up at night? Drop us an email. We’d love to hear from you. Our experts are here to break down the business, tax, advisory and consulting landscape, so you can focus on building your business. Thanks for listening.

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