Wednesday, May 5, 2010

Tax Reform in Australia - Impacts on Small Business

Dr. Ken Henry's tax review has been released and on Sunday the Australian government indicated some of the changes from the review which they'll be implementing.

The biggest impact is on miners. With China's growth the government has introduced a Resource Super Profits Tax of 40% on profits that miners earn from the exploitation of non-renewable resources. BHP and Rio Tinto's share prices are both down about 10% on the news.

An interesting fact I read recently is that 25% of Australia's GDP comes from mining. And with the mining boom, 21.4% of our total GDP is exports, more than half of which comes from mining. Only Germany and China have a higher percentage of their GDP coming from exports.

25% is a huge proportion of our GDP to come from one industry, and the country is making a lot of money selling our resources to China and other countries. However this is not something that will necessarily last forever and we need to be investing some of this money in education and encouraging growth in other industries so that our economy is prepared for any downturn in the mining industry in the future. So while I feel bad for the mining companies facing this new tax, I think it's a sensible move for the government to make.

The two main changes for a small business like ours are:

1. Company tax rate falls from 30%-28%
Without a change in personal tax rates this change won't necessarily have a big impact on what we earn from the business, but given we're unlikely to be drawing money out of the business for a while, paying 28% company tax instead of 30% improves our cash flow and leaves us with more money to invest in the business.

2. Employer Superannuation Contributions to rise from 9%-12%.
This is not quite so good for us, particularly as we look to hire our first Australian based employee, but like the new mining tax I think this is a reasonable thing to do. Australia's population is aging, our generation is likely to live longer than previous generations and we need to fund people's retirement. The changes are to be introduced gradually over 10 years so the impact won't be big initially. Australian wages should be a relatively small percentage of our costs too. This change will have a bigger impact on service based businesses where wages form a higher percentage of their costs.

The most disappointing thing about the government's announcement on Sunday is that very few of Dr. Ken Henry's recommendations are actually going to be implemented. Australia's tax system is very complex and the Henry Review had a whole raft of recommendations to simplify things like payroll tax and issues around trusts all of which the government has put on hold for the moment. While these changes aren't being implemented now the government has left them on the table to be discussed, so hopefully this or future governments look to implement some more of Ken Henry's changes moving forward.

Have you had a chance to read up on the new changes? Any thoughts?


  1. disagree about it being a good thing, it is basically counter-intuitive. By increasing taxes you are going to bring into question some of the mining investments that are semi-marginal, but acceptable from a capital investment standpoint. In doing so, you discourage investment that would bring with it mining royalties based on the tenements, company tax profits and personal income taxes associated with the ventures. In a sense what they manage to do is discourage investment and destroy potential jobs, epic fail Krudd (and I voted for him). Market intervention of any sort is always a bad thing.

  2. strongly agree that market intervention is largely a bad thing. Governments for years have thought that they can introduce tarrifs, taxes and surcharges to influence business and human behaviour, but the market usually proves them spectacularly wrong. The owner of red balloon days was on Sky News last week talking about how income tax was introduced in the war time to discourage people from working and encourage them to sign up for the various armies. Is it still being used for the same purpose today?

  3. Haha Michael - how do find time to sell shoes considering you have time to comment on tax reform? In saying that... your notes are always interesting & informative.

    The Resource Super Profit Tax (RSPT) does not look right on the surface, but when you look at the impact mining has on the Australian economy; it is probably the right answer. Australia cannot afford to have another economic boom like the one that ended around 2006/2007... the resources industry needs to slow down. The RSPT will assist with that slow down.

    You also need to look at the longevity of the Australian economy; we need more investment into infrastructure and ensuring other industries prosper.

    And resources is one of a few industries that cannot choose where to operate anywhere - only a limited amount can go off shore. If the coal/iron ore/oil/ other minerals are in Australian soil; you have to dig it up and pay the tax or defer digging it up. Putting off some resource projects is not a bad thing... they are limited resource after all.

    I have had some experience with new legislation from the current Govt and Beaucracy... whether this is ultimately a good thing depends on the legislative drafting.

    Didn't bother discussing the superannuation increase - it's a good thing. You don't need to think of it as an increase in business costs; I am not sure how the IR law works... but a number of people may see a decrease in their net pay, as their gross pay is stated as including superannuation.

  4. AHAHAHAHAHAHAHAHHAHAHAHHA Fraser did you say just say that market intervention is ALWAYS a bad thing?? I don't know if you missed it, but we had this little thing recently called the GFC? you might have read about it somewhere? well it seems pretty clear in the washup that apart from the incredible stupidity of people working in investment banks, the primary reason was, wait for it, lack of market regulation. Now while i respect you defending your former emplyers in the mining industry, would you care to reframe your argument? And also please address how this tax will discourage investment when the tax breaks on exploration and development have been significantly increased?

  5. I am working for another one now ;) r&d concesions do nothing for new projects being that will not be done. R&d doesn't get dirt out of the ground. You are a pinko leftist hippie :)

  6. P.s. One intervention that I do think is effective is the minimum liquidty standards for banks.

  7. so can you guess where this wonderful idea came from? teh bloody unions i hear you scream? pinko, commo, lefty latte sipping chardonnay swilling greenie scum you ask? well actually, it came from that very well known, left leaning, anti-business, anti-mining group the Australian Minerals Council who first proposed it to the Henry Tax review in 2008. That's right, the very same group who have been screaming like a schoolgirl who lost her dolly. They even came up with the term 'super tax'. It replaces a raft of existing taxes and levies and so the net increase it will impose is minimal, depending on the companies particulars. have a look at moody's review on the super tax if you don't want to take the word of pinko leftist hippie....

    once again, the short term memory and shallowness of journalism in this country are a disgrace. wait for fox news, sorry The Australian, to report how this tax is sending us all to hell.

  8. yeah, I am only about 2mm deep in the detail about it, I should replace Robyn Ironside at the courier mail

  9. Some good chat here!

    I agree with the statement that in an ideal world, government intervention in markets would be quite limited, perhaps only to things like minimum liquidity standards for banks and other measures that help protect our economies from global meltdowns. But the reality of the situation is if we want to have effective governments they need to raise revenue, and that's got to come from somewhere. In this case the logic of the governments new tax on miners is to tax mining more heavily and tax other businesses less through the reduction in the corporate tax rate. And I think that move makes sense.

    As Mat points out, we have a lot of resources in the ground and it's not so easy for mining companies to just set up in another country, so the impact on mining investment really shouldn't be too bad, and while I haven't read the details, hopefully the new incentives for miners to keep investing in the industry offsets what might otherwise be lost. And I really can't see miners not spending all they can to find new mineral deposits and opening new mines given the unbelievable margins they're making at the moment.

    With higher taxes on miners the government has more money and they're spending that to reduce the corporate tax rate. This encourages business that can easily move to another country, to invest in Australia. Because this tax reduction comes about through a reduction in the corporate tax rate, but not income or capital gains tax, businesses are encouraged to retain these extra profits and re-invest them. And given mining makes up 25% of our GDP I think it's good to encourage investment in non mining businesses to help diversify our economy.

    Another thing worth pointing out is that non-mining business, and particularly exporters do suffer a little because of the mining boom. The demand for our resources means there is a strong demand for Australian dollars and our currency is at near record highs against most other major currencies. This makes it much harder for Australian exporters to compete in the world market, so while mining booms, our other exporters suffer meaning we rely on mining a lot more than we would otherwise. The same goes for business costs like wages. The mining boom forces a lot of these costs up which negatively impacts other Australian businesses.

    So as I see it, higher mineral prices have been a massive benefit to the mining industry and in some ways they've been a negative for other Australian businesses. I think it makes sense to redress some of that imbalance with the tax changes the government is introducing.

  10. I think the main point of the tax on mining particularly is that it is not a renewable resource. Once a company (the miners) have made a profit from it, and paid the related taxes, we will never see a cent again from them exploiting this resource. We (the Australian people) are selling this resource to them, which they then refine and sell on.

  11. If the threat of these multi National Companies (miners) leave thay cant take the resources. Why so many people have this complete devotion to 1 side of the fence is....

  12. This tax will be passed on to workers in the industry resulting in smaller pay checks, And with the 12 percent superannuation increase (no doubt being pulled from wages) i see the average Jo Blogs being alot worse off. As for the small businesses it sounds GREAT