A new era of responsible economic management
This Budget ushers in a new era of economic responsibility, delivering a strong budget surplus and reprioritising spending to sustain growth in the long term, to ensure that fiscal policy plays its part in putting downward pressure on inflation and to ensure a strong economy at a time of international economic uncertainty. The Government has achieved savings by cutting back inefficient and wasteful programs, better targeting income support to those who need it most, reducing distortions in the business tax system, and making government more efficient.
Reprioritising spending
The Government is reducing spending on programs that do not meet the Government's objectives in the most cost‑effective manner. For example, the Government is:
- abolishing Australian Industry Productivity Centres and replacing them with the Enterprise Connect Innovation Centres that will provide greater support to small and medium enterprises particularly in the manufacturing sector;
- closing the Commercial Ready program to avoid supporting projects that would have proceeded without public support and where the national benefits are uncertain, generating savings of $707 million over four years; and
- reforming the workplace relations system, resulting in savings of $394 million over five years.
- Fair Work Australia will replace a multitude of agencies from 1 January 2010 and the modernisation of the award system and the transition away from individual statutory contracts will result in a decreased workload.
The Government has also reviewed spending within the health system to ensure that it is targeted towards better quality public health services. Savings measures include:
- $201 million over four years from reform of the Practice Incentive Payments Program;
- $105 million over four years from improving funding arrangements for chemotherapy drugs to reduce wastage;
- $103 million over four years from removing rebates for selected pathology tests and $18 million in 2008‑09 for reductions in particular collection fees; and
- $70 million over four years from increasing compliance with the Medicare Benefits Schedule.
The Government is seeking greater efficiency across the public sector and has applied a 2 per cent efficiency dividend to most of its agencies to improve cost effectiveness, generating $1.8 billion of savings over five years.
Going forward, through the second stage of its comprehensive review of expenditure, the Government will continue to identify areas where there is scope to achieve further savings.
Employment Services Reforms
The Government is committed to assisting income support recipients improve their skills and move into sustainable employment. From 1 July 2009 the Government will implement a reformed employment services system, with total funding of $3.7 billion over three years. The reformed system will better target assistance to the most disadvantaged job seekers, improve linkages with education and training, create greater flexibility in service delivery and improve engagement with employers.
The reforms will achieve gross savings of $370 million over three years from a more integrated and efficient employment services model.
Pursuing cost‑effective service delivery reforms
The Government will spend $10 million in 2008‑09 to investigate wide‑ranging options to improve the delivery of government services by Centrelink, Medicare Australia and other agencies in the Human Services portfolio.
Funding of $72 million in 2008‑09 will also be provided to enable Centrelink to maintain service delivery standards, through more resources for call centres and additional funding to maintain Centrelink's IT capabilities.
Centrelink compliance activities will be increased to maintain the integrity of the social security system, achieving net savings of $589 million over four years. The Government has abolished the Access Card announced by the previous Government, which will provide savings of $1.2 billion over five years. The Access Card was a costly and complex project which was difficult to integrate with other key initiatives.
Fairness and integrity in the transfer and tax systems
The Government will put fairness and integrity back into the income tax and transfer systems by better targeting benefits to families, making income testing arrangements more comprehensive and tightening the fringe benefits tax and employee share scheme provisions. Fairer systems will generate budget savings and support the delivery of the Government's broader economic and social policy in a fiscally responsible manner.
The Government will introduce a number of measures to improve the fairness and integrity of the tax and transfer systems. These measures are designed to target assistance to where it is needed most and improve the administration and delivery of payments. They include:
- introducing an additional income test on Family Tax Benefit Part B from 1 July 2008 so that it will only be available to families in which the principal earner has an annual income up to and including $150,000 per year;
- introducing an income test of $150,000 on the Dependent Spouse, Housekeeper, Child‑Housekeeper, Invalid Relative and Parent/Parent‑in‑law tax offsets from 1 July 2008;
- from 1 July 2009, aligning the definition of income for income testing these offsets with that applying to family assistance;
- increasing the Baby Bonus to $5,000 from 1 July 2008 and reforming it from 1 January 2009 by introducing an income test so that it will only be available where family income is not greater than $150,000 per year (assessed as not more than $75,000 in the six months after the birth of a child), paying it in instalments over six months for all recipients, indexing it annually, and extending eligibility to parents who adopt children under 16 years of age;
- removing the minimum rate of Child Care Benefit for high income earners, while ensuring that previous minimum rate recipients maintain eligibility for the enhanced Child Care Tax Rebate; and
- improving the administration of family assistance by moving functions from the Australian Taxation Office to Centrelink.
The definitions of income used to income‑test government financial assistance have not kept pace with the range of remuneration and investment structures now available to selected people in the workforce. This has enabled some high income earners to structure their affairs to access financial assistance. The Government will improve fairness by broadening the definition of income to include certain salary sacrificed contributions to superannuation, net financial investment and rental property losses and reportable fringe benefits, amounting to $522 million of savings over four years.
In recent years, innovative tax planning arrangements and changes in technology have eroded the fringe benefits tax (FBT) base. The Government will restore fairness and integrity in the taxation of fringe benefits by subjecting 'meal card' type arrangements to FBT, restricting the FBT exemption for work‑related items (such as laptops) to those used primarily for work‑related purposes, and removing depreciation deductions to employees for FBT exempt work‑related items. Closing these loopholes will save $1.4 billion in revenue over four years.
The Government will also amend the FBT law to restore equity between taxpayers who incur expenses on jointly held investments.
The Government supports employee share schemes as a means to promote increased workplace productivity, but this objective must be achieved in an equitable manner. To ensure integrity, the Government will tighten the rules for choosing the time of assessment for shares and rights to ensure that income is properly included in taxpayer assessments.
Fairness and integrity in the business tax system
As part of its broader review of expenditures, the Government has commenced a systematic examination of spending through the tax system to ensure tax concessions operate as intended and are consistent with the Government's objectives of promoting equity and boosting productivity.
In addition to the FBT changes, the Government will abolish or improve the operation of other tax concessions. All together, this will reduce the drain on tax revenue overall by $8.7 billion over four years. Collectively, these measures will contribute to a fairer tax system, a more productive economy and a fairer return for the use of Australia's non‑renewable resources.
Reducing tax distortions to investment decisions fosters productivity and supports economic growth. Capital expenditure on computer software will now be depreciated over four years, which is the same period as computer hardware. To remove a bias in favour of capital protected investments, the interest expense apportionment rules will also be changed.
In addition, the Government will end the crude oil excise exemption for condensate ― a light crude oil extracted from natural gas ― increasing the return to the community from the use of this non‑renewable resource.
Since 1979, successive Australian Governments have taxed 'luxury' vehicles more heavily than other vehicles. The Government believes that Australians who can afford luxury vehicles have the capacity to contribute to revenue at a higher rate than other car buyers. The Government considers it appropriate to increase the luxury car tax rate from 25 per cent to 33 per cent from 1 July 2008. The measure is expected to raise $555 million over four years.
Australia's Future Tax System
A major theme of the 2020 Summit was 'the need for a holistic tax system that is fair, simple and efficient. Australia needs a tax system that supports the global competitiveness of our economy, provides incentives, minimises distortions and supports fiscal responsibility.'
The Government has commissioned a comprehensive review of Australia's tax system to create a tax structure that will position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century. The review will encompass Australian Government and State taxes, and interactions with the transfer system. It will reflect the Government's policies not to increase the rate or broaden the base of the GST and to preserve the tax‑free status of superannuation payments for those aged over 60. It will take into account the Government's aspirational goals for the income tax scale.
The review will consider:
- the balance of taxes on work, investment and consumption and the role for environmental taxes;
- further improvements to the tax and transfer system facing individuals, working families and retirees;
- the taxation of savings, assets and investments, including the role and structure of company taxation;
- the taxation of consumption (excluding GST), and property and other State taxes;
- simplifying the tax system, including across the Australian Federation; and
- interrelationships between these systems as well as the proposed emissions trading system.
An initial discussion paper will be released by the end of July 2008 and a final report provided to the Treasurer by the end of 2009.
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