Stunning and unexpected Coalition victory – the tax changes

By Professor Robert Deutsch

Infographic: Coalition's proposed package of personal tax cuts
Click through to infographic above: Coalition's proposed package of personal tax cuts

Q: Will the Coalition likely be able to get its proposed package of personal tax cuts approved by Parliament?

A: The answer to this question will very much depend on the composition of the Parliament – in particular, the new Senate and the ability of the Government to negotiate with the unaligned parties and independents.

There are actually three stages of personal tax changes that are proposed by the newly elected Government.

Stage 1

Stage 1 commences on 1 July 2019 and will include a minor adjustment to the marginal tax rates and the introduction of a new $ 1,080 low and middle income tax offset to apply with effect from 1 July 2018.

Ideally, Stage 1 would be passed by Parliament before 1 July 2019; if after that date, more complex administrative arrangements may be required. The way the quirky Australian electoral system works is that the Senate as it stood before the 18 May election will continue until 30 June 2019. This means that the Government will be working on the basis of holding 31 Senate seats out of 76. While that leaves the Government well short of the required majority of 39, this stage is supported by the Labor party, which holds 26 seats and the Greens, which holds 9.

Accordingly, Stage 1 will pass, although whether that will happen before or after 1 July 2019 is not clear at this stage.

Stage 2

Stage 2 which is scheduled to commence from 1 July 2022, sees more changes to the marginal tax rates which are more meaningful than those which are to be adopted in Stage 1.

Stage 3

Stage 3, which is scheduled to commence 1 July 2024, is more controversial with far more aggressive changes to the marginal tax rates including a streamlined marginal tax rate such that there will only be four marginal tax rates namely zero, 19%, 30% and 45%, with the 30% marginal rate applying controversially to all income from $ 45,000 up to $ 200,000.

Stages 2 and 3 will be more difficult since both Labor and the Greens have already indicated that they will oppose both stages. These stages will need to pass through the new Senate, which commences from 1 July 2019. That Senate will most likely have the Coalition on 34 (possibly 35) seats, Labor on 27 and the Greens on 9.

Labor and the Greens will oppose the measures, which means that the Coalition will need the support of 5 of the 6 other senators. This is where the Government’s negotiating power will be critical. The Government and in particular the Prime Minister himself have gained considerable authority as a result of the stunning election victory but whether that will be enough to carry 5 of the 6 minor party/independents is difficult to assess. I would rate their chances of passing Stage 2 at slightly better than 50-50 and the chances of passing Stage 3 as slightly less than 50-50.

Q: The Coalition had previously tried to sharply reduce taxes for all corporations but was unable to drum up enough support in the Senate. Do the election results suggest that plans for corporate tax cuts might be revived? 

A: The position in Australia relating to corporate tax rates is now very confusing with some companies paying tax at 30%, some at 27.5% and at various stages, some as low as 25%. This is a most unsatisfactory arrangement and, in my view, it would be preferable if the rate was a flat 25% for all companies.

The Government will certainly feel emboldened by its success and may well seek to revive the possibility of a flat rate of 25% for all companies. Again the Senate will become critical and again Labor and the Greens who will likely control 36 of the 76 seats in the Senate will almost certainly oppose this measure if the Coalition seeks to revive it. The likelihood of the Coalition securing 5 out of the 6 minor party/independents on this issue would in my estimation be low. Consequently, I do not believe that they will revive this possibility.

Q: Labor campaigned hard on the issues of curtailing what it described as tax loopholes for franking credits and negative gearing. Did that strategy backfire?

A: With the mess that election night presented for the Labor party, it is difficult to be specific on what was the main cause of their poor performance.

However, it is clear that in a number of key seats where Labor lost ground unexpectedly, there was a very high number of taxpayers who would be effected by both these measures. In the campaign, the Prime Minister, in particular, highlighted Labor’s franking credit policy time and time again. The name given to it by the Government namely the “Labor party’s retiree tax” did seem to create a very visible and vocal negative atmosphere around the Labor campaign. In my estimation, these two measures had an impact on Labor’s vote in at last a dozen key seats which Labor absolutely needed to win. There is, in my view, little doubt that the strategy backfired very badly for Labor.

Q: Do you have any other thoughts?

A: At one stage there had been a political strategy that ran along the lines: “Never ever go to an election with a platform including more taxation”.

It seems that the message had been largely forgotten by Labor in preparation for this election. I do not believe that we will ever see a campaign again in Australia where a party advocates for any significant new taxation measures.

The stunning unexpected Coalition victory was certainly in part driven by the attack which was launched against Labor’s platform of tax proposals. Clearly there were other issues in play – climate change, superannuation, childcare worker benefits – nonetheless Labor’s policy on tax was clearly a gift to the Coalition which they exploited to great effect.

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