Bonus Episode — Post-election reflections

In this episode of TaxVibe, Robyn chats with Julie Abdalla, FTI, Tax Counsel at The Tax Institute about what the recent Federal election outcome means for you and your clients. They discuss:

• The state of the new Parliament
• What we can expect for tax policy under the new Government
• What The Tax Institute sees as the priority issues ahead of the updated Budget expected in October
• Can the independents put tax reform on the agenda?

Host: Robyn Jacobson, CTA 
Guests: Julie Abdalla, FTI

For more information about The Tax Institute: https://www.taxinstitute.com.au/

Transcript

 Robyn Jacobson:
Welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Julie Abdalla, who is the tax council at The Tax Institute. Julie is an experienced tax lawyer and emerging leader. She has practiced in the corporate tax teams of Big Four and top tier law firms in Sydney and Melbourne.

Robyn Jacobson:
Julie also gained experience across the spectrum of UK taxes while working at an international law firm in London. Julie has a strong passion for tax policy and reform, and the depth of knowledge to advocate for members. She's been recognized among her peers and throughout the profession for her leadership and excellence in tax. Julie holds a bachelor of arts and a Juris Doctor from the University of Sydney, and a master of laws from the University of Melbourne, part of which was completed at the University of Oxford. Julie, welcome once again, back to TaxVibe.

Julie Abdalla:
Thank you, Robyn. It's a pleasure to be back here on TaxVibe and in person too.

Robyn Jacobson:
Absolutely. So we are recording this episode live and in person at the Victorian Tax Forum. And to also let our listeners know that the conversation that Julie and I are going to have today is in part drawn from a session that we ran earlier today with our colleagues, Scott Treatt and Andrew Mills at the Victorian Tax Forum, and a recording of that session will be made available to all Tax Institute members.

Robyn Jacobson:
So Julie we're here today to talk about the election, it was last Saturday, and whilst the dust is still settling it's becoming very clear of certain ways the chambers are shaping up. So we're going to talk through what the House of Reps looks like and the Senate, and what this means for tax policy and for all the practitioners out there that are trying to advise clients when there is still some uncertainty in relation to some measures. So to make the point that The Tax Institute has always been apolitical and we will continue to be so, and it's important that we be able to work with any party that is in government and across all of the government agencies. But Julie, with the change in government, and we, of course, now know that Anthony Albanese has now been sworn in as the 31st prime minister of Australia. This does create new opportunities.

Julie Abdalla:
That's right, Robyn. There is an opportunity for us to develop new relationships with politicians and ministers that we haven't had relationships with before. What we have seen is that it's quite an interesting House of Reps and Senate, which we'll get into in a bit of detail shortly, but it's certainly more diverse than we've seen before, but it actually remains to be seen how things play out.

Robyn Jacobson:
And how effective it's going to be in terms of governing.

Julie Abdalla:
Absolutely.

Robyn Jacobson:
So it is yet to be determined whether the Labor Party will be able to form what's called a majority government or a minority government. So this, of course, focuses on the House of Reps, where there are 151 seats. So to have a majority government, you need to have a majority of the seats in the lower house, that would be 76 seats. Now we're following a combination of the ABCT outcome and also the Australian electoral commission.

Robyn Jacobson:
At the moment they're placing Labor on 75 seats, so we're still not sure whether they'll make it to 76, which would mean they would govern in their own right. If they remain at 75, they have certainly been assured of what is called supply and also confidence from cross benches. In other words, if a no confidence motion was put up, then the cross benches would vote against that but if they do stay put at 75 and don't get to 76, they would need the support of at least one green or one cross venture, or let me say it, one member of the liberal party or the Coalition, which is unlikely, in order to get their particular measure through. So it remains to see exactly where we land in terms of the lower house.

Robyn Jacobson:
Julie and I are also going to have a chat about the role of independence and smaller parties in terms of getting policy through and what that looks like. So let's take a slightly closer look at the lower house, as I said, Labor is sitting on 75, we know there's been a swing against, not just the Coalition, Julie, but also Labor itself. So in other words, both the major parties have had a swing against them in favor of the Greens and also the independence. So what does this mean?

Julie Abdalla:
So we've seen an increase from about six to 16 cross benches, which is interesting, I touched on there being a more diverse makeup, but it's going to be interesting to see how this actually plays out in practice in terms of developing policies and getting legislation put through, and even more so in the Senate, we will come to that shortly.

Robyn Jacobson:
So we've got increased diversity, Julie, but how workable, that is, what that looks like and how they're going to come together will be really interesting to watch, but what is more interesting is the look of the Senate. So can you talk us through where we are landing based on current count?

Julie Abdalla:
Yeah. So in the Senate, there's 76 seats and the key number is 39, so we need 39 to form a majority. Right now it's looking like the Coalition's got 31 seats, Labor has 26 and the Greens have 12. So there are still two in doubt yet to be confirmed, but if you think about Labor and the Greens, even together that only forms 38, and so they'll need at least one cross venture to get things through. The challenge here is, where you've got the Coalition 31 seats, so it's not a majority either, but there is a risk posed by the ability to block measures, and that actually creates influence in terms of the independence.

Robyn Jacobson:
We know the new treasurer is Jim Chalmers, and he's indicating that they will deliver a revised budget because of course we have the 22-23 federal budget delivered on the 29th of March by the Coalition, but with a changing government, it looks like we'll have an October budget, and that will be an opportunity to potentially reset but at least revisit policies that have been announced and hopefully get some certainty on where the new government stands on on each of those policies.

Robyn Jacobson:
Certainly in terms of the way Jim Chalmers is talking up the economic situation, don't be surprised if we see deficits that could even be larger than what have been forecast. It is often the case of either side of politics that an incoming government will say that the books are in a worse state than we thought and we also know that there may be a priority over certain spending measures to boost productivity and get the economy going again, and of course, to curb rising inflation, as opposed to the priority being to make sure that deficits are brought down, and they're going to be reasonably high in the short to medium term, at least.

Robyn Jacobson:
So moving onto, what can we expect for tax policy under a Labor government? Well, I'm going to start with personal income tax cuts and the lay of the land there. Labor has indicated that they have committed to delivering the already legislated stage three income tax cuts that are due to start on the 1st of July, 2024. And this will provide tax relief for more than 9 million Australians earning over $45,000 a year. Now, Julie, it remains to be seen whether in fact that already legislated series of tax cuts does proceed, or whether in fact, given dynamic environment and anything can change between now and then, whether in fact, we do see that come to fruition, so it will be interesting to watch.

Julie Abdalla:
That's right, it might not necessarily be the best policy to stick to what has been announced when things are changing so quickly. If the government's getting advice from treasury external economists, that this is going to exacerbate a problem, then it may actually be prudent to step away from it and consider other measures that might be more suitable in changing economic climate.

Robyn Jacobson:
Still on the personal tax front, Labor government has also committed to supporting the increase in the low and middle income tax offset. So in the budget, this was called the cost of living tax offset, but it's actually just an increase in the LMITO by $420 for 21-22. Now that is expected to conclude after the end of this financial year, you'll still be claiming it or of course the ATO will be processing it through 22 tax returns but it won't apply beyond June 30 this year. So I also wonder whether that's a policy that Labor would question or revisit its effective removal is going to result in a tax increase for millions of Australians who for four years now have become very accustomed to seeing that being built into their tax liability as a reduction thereof.

Robyn Jacobson:
Julie, on the main tax policies and platforms that were put forward by Labor. There really wasn't much that they spoke of, and maybe that's a result of the policies they put forward in 2019 that they didn't want to revisit necessarily in this election campaign. But there was certainly talk about their intention to target multinationals and whether there is any more revenue that if you like, or lemon juice that could be squeezed out of that lemon, what are your thoughts on this?

Julie Abdalla:
That's right. So we know that both major parties declined to put any sort of holistic or significant tax reform on the table, but multinationals did get quite a bit of attention from the incoming government and in a few different measures they've looked to target the way that multinationals could avoid their tax obligations. So one way the government is looking to target this is by supporting the adoption of the OECD/G20 Inclusive Framework on BEPS 2.0 proposals, including global minimum tax rate or 15%, and other ways, a proposed modification of the thin cap rules, to reduce a safe harbor, to a cap of 30% of EBITDA, which is earnings before interest tax depreciation and amortization, and that's really to limit debt related deductions by multinationals.

Julie Abdalla:
We would still be maintaining the arms length test and the worldwide gearing ratio, which allow a taxpayer to justify a higher interest deduction than the safe harbor. I won't get too much into the detail, as Robyn mentioned earlier, we did speak about these measures at length in the earlier session today, but this is really consistent with the OECDs recommendations from the 2015 BEBS action for limitation on interest reductions report, and it would be not inconsistent with what other countries have implemented, where they've taken on board these recommendations.

Julie Abdalla:
Another measure is about treaty shopping, and it's really trying to target royalty payments where they're made to a jurisdiction with a favorable tax system, but that only applies to quite a limited group of significant global entities. Finally, there were measures that were announced in relation to transparency, which relate to country by country reporting data being made public, a potential beneficial ownership registry, as well as exposure to tax havens and dealings with tax havens, and finally, in relation to government tenders.

Robyn Jacobson:
Julie, how does this align or otherwise with the Greens position, because they've also talked about targeting multinationals and certain multi-individuals. So how does that align?

Julie Abdalla:
That's right. So the Greens have looked to put forward policies, which target essentially rich companies and rich individuals. So there is a proposed billionaires tax, and also a 40% super profits tax on large corporations, which has actually got a lower threshold than the significant global entity concept.

Julie Abdalla:
Given the policies announced by the Greens in relation to multinationals and wealthy individuals, it'll be easier for Labor to garner some support from them in terms of its policies in relation to multinationals, but there is always the question of what the Greens will be getting in return in making those alliances.

Robyn Jacobson:
And this billionaires tax, Julie, where is it going to kick in or what's the rate that would be applied?

Julie Abdalla:
It's a rate of 6% and I think initially it was targeting about 110 billionaires, although it's looking now to be about 122 or so. It would be a tax of about 60 million per year, assuming each of them had a billion each, but obviously that's just the minimum, that's just the starting point.

Robyn Jacobson:
So if you are worth 10 billion dollars, it would be 600 million?

Julie Abdalla:
600 million dollars, that's right. Which seems astronomical, but I suppose relative to a billion, that's another story.

Robyn Jacobson:
All right, so another policy that the Labor party has been putting forward during the election campaign is what's called their electric car discount. Now, it's interesting when we look at climate policies, and of course there's been a huge push through particularly the independence about ensuring that there are better policies that target climate change and environmental impact. So this one is designed to encourage greater use of electric vehicles, and the way this would work is that the government would remove or exempt from the 5% import tariff and from FBT, electric vehicles that cost less than the fuel efficient luxury car tax threshold, and that's sitting just below $80,000 for this income year.

Robyn Jacobson:
So if you buy a 70 or $75,000 electric car, then under this policy there would be no FBT and no 5% import tariff. It's not just a case of eliminating the tariff and FBT on this, which immediately you would think would favor businesses and employers, but as an employee, anyone who can access exempt benefits through salary packaging is going to benefit as well. So it certainly would involve a rethink of what benefits could be packaged up and this would be another one you could add to that collection, where employees who would like to drive a fuel efficient car and be able to do so tax effectively through salary packaging may also benefit from this policy so we need to see a bit of detail around that one. While we're still on the idea of transport, Julie, the reduction in the fuel excise.

Julie Abdalla:
Well, that's only a temporary measure, that's due to come to an end on the 28th of September. So it will be interesting to see what happens then, but actually, if you think about it now, the price of petrol is creeping up quite quickly, and it's almost back to where it was even with the fuel excised reduction.

Robyn Jacobson:
I filled up on the weekend and it was $2.25 a liter. Goodness, if that had the additional 22.1 cents reduction not built in, it would be a $2,50.

Julie Abdalla:
It does come back to that bigger challenge of the cost of living on the impact of inflation as well.

Robyn Jacobson:
And if you look at the inflationary impact, we know the reserve bank is forecasting a peak in inflation, which of course recently hit the headlines at 5.1% for the 12 months to March, could well peak at 6%, by the end of the year. Now, the timing of this increase in the fuel excise when the temporary reduction ceases, would mean an automatic increase of 22 cents after the 28th of September. So firstly, you're going to have an inflationary impact, which we know has already contributed to the inflationary figures at 5.1%. So what would it do to take it even further towards six or beyond?

Robyn Jacobson:
And secondly, when you've got the price of fuel being advertised every few kilometers, driving around the suburbs, it's a very visible reminder of the cost of living, and when not just fuel for cars is going up, but transportation generally. So if you think about all the deliveries of goods and services, and how that impacts ultimately what hits our supermarket shelves and the prices there, it's going to be really interesting to watch this politically play out as well as from an inflationary perspective.

Robyn Jacobson:
So Julie let's return to a closer look at the independence who now make up what looks like to be 16 seats in a long house, we've never seen this many, previously six and now we're looking at 16. We know that the media has focused on primarily three aspects to their collective platforms. Most of the independence and many of them indeed are women, have been looking at policies that focus on climate change, greater equality for women and establishing a federal integrity commission, and certainly on that last one, it looks as though that may well be progressed in the next three to six months so this calendar year. But that was the media focus, if we actually peel back some layers and dig a bit deeper, what else have the independence been looking at and does any of it relate to what we would love to see on the agenda tax reform?

Julie Abdalla:
Yes, actually. So if you dig a bit deeper, you'll see that quite a few of the independents have a strong interest in RND, innovation and supporting small businesses. And indeed two of the new independence, Kate Chaney for Curtin and Allegra Spender for Wentworth, have both come out and made comments about the need for tax reform and to revisit our system.

Robyn Jacobson:
And indeed Allegra Spender has suggested a formal tax review to be concluded or reporting back by September of 2023. Now it's music to our ears, but perhaps too ambitious?

Julie Abdalla:
It could be challenging with everything else going on at the moment. It could be challenging to get that through in the timeframe she suggested, but it's really great to see them putting tax reform on the agenda and prioritizing that. And then if you think about the independence, you made a comment earlier that really the sum of their paths worth more. Together they can have such significant influence in the way government operates, they'll be making noise in public and bringing attention and drawing light to these issues, which is great.

Julie Abdalla:
And we talked about earlier the opportunity to build new relationships with different ministers and politicians, and certainly with the independence, that's what The Tax Institute will be looking to do.

Robyn Jacobson:
So regardless of the lower house, it's certainly looking like Labor would need all of the Greens and at least one independent to be able to get anything through. So there may be opportunities for an independent to say, "Well, yes, I'm happy to give you my vote on X, as long as you can provide Y." And that does create enormous opportunities. So yeah, that's why I say potentially the sum of the parts is greater than the whole, that individually there might be just one vote, but they may collectively be able to have a much greater voice in the parliament.

Robyn Jacobson:
Julie, what is The Tax Institute doing in terms of activities? And now that we effectively know the election outcome, what happens from here and what are our top priorities?

Julie Abdalla:
The team has been working hard on is preparing an incoming government brief, which will be provided to the new treasurer, Jim Chalmers. And that's drawn from our state of tax policy report, which many members will recall, we recently put out a federal budget, election special edition, and this incoming government brief will set out what we think are the priorities in terms of announce, but unenacted measures from a tax perspective, that we think should be at the forefront.

Robyn Jacobson:
So can you provide some examples of what we are considering are some of those key priorities?

Julie Abdalla:
Yeah. So one of the first that I would suggest is the corporate tax residency changes, we're a few years into it now, and we haven't seen draft legislation yet. So as many listeners would know, there was an announcement in the 2021, 2022 federal budget, which proposed technical amendments to the corporate residency test. And this follows on from the decision in, by water and the board of tax review. And essentially the law is proposed to be amended to provide that a company that's incorporated offshore will be treated as Australian tax resident if it has a significant economic connection to Australia. That of course will be where it's the company's central management and control is in Australia and its core commercial activities are also undertaken in Australia.

Robyn Jacobson:
So to be clear, Julie, we're only talking about companies that are not incorporated in Australia, because if they're incorporated here, they're automatically a tax resident?

Julie Abdalla:
That's right. So public consultation, as I said, hasn't occurred yet, but treasurer will need to consult on a workable definition of core commercial activities to give taxpayer certainty in this regard. One other measure that I would like to mention as a priority is the patent box regime. So the original measure related to medical and biotechnology innovations, although that bill has since lapsed, there was a subsequent announcement which expanded the patent box regime to agricultural businesses and low emissions technology innovations, although that has not yet been introduced. So we would like to see the original measure reintroduced and the expanded version introduced into legislation.

Robyn Jacobson:
So have to pick up the original measure plus the additional one and both effectively, still in limbo.

Julie Abdalla:
That's right, yeah.

Robyn Jacobson:
Now, another measure that has been of interest to a number of practitioners is what is known as NALI, this is non-arm's length income. So this is where you have a superannuation fund that has incurred a non-arms length expense, and that can effectively taint or change the tax character of income derived by the fund where it's taxed at the top rate, rather than the 15% concessional rate. Now, around April the former minister for superannuation, Senator Jane Hume advised that they would amend the law, they would consider looking at what was necessary to make the provision work as intended.

Robyn Jacobson:
Now, given that she's no longer the minister for superannuation. And of course, we're still waiting to see who is going to be sworn in as that relevant minister, but certainly The Tax Institute will continue to engage, and has been with both the now opposition and the now new government so that we can ensure that tax law works as they're supposed to. And this isn't just about self-managed funds with a small property that's not being treated concessionally, this can affect really big funds as well and unintentionally so. So we hope that we can get some resolution and some legislative clarity on that one very soon.

Robyn Jacobson:
Probably the biggest measure that is of interest to the small business sector at the moment is the small business boost. In fact, there are two of them, the small business skills and training boost and the small business investment in digital technology boost was announced in this year's budget. And this provides an additional or a bonus 20% deduction for eligible expenditure where the entity has an aggregated turnover of less than 50 million. Now, the skills and training boost started on budget night, 29th of March this year, and will end on the 30th of June, 2024, whereas the investment in digital technology boost, while also starting on budget night this year, will end on June 30, 2023, a year earlier.

Robyn Jacobson:
The problem is, Julie, that these two measures did not make their way into parliament before it was prorode back in March following the budget. So neither of these booths are law and we yet to understand exactly where Labor sits on both of these. I'd like to think that they would support them and that this will be a fairly swift passage of legislation but until parliament resumes, and we're unclear whether that will be at the end of June or perhaps not until the 9th of August, and whether or not in fact, we could be waiting until October in this so-called budget that's going to be handed down, to gain some certainty around this, but it makes it very difficult for advisors in the meantime.

Julie Abdalla:
That's right. The difficulty is with these kinds of measures they're designed to incentivize spending on these kind of categories. The difficulty with these kind of measures is that they're designed to incentivize spending, but the challenge is, where they're not legislated businesses don't have enough certainty, and this is the challenge for the businesses and their advisors. It's not law yet and so it's not clear whether it will be legislated, whether it will be legislated in the form that it was announced, we just don't know. So it's hard to encourage that spending to take place now.

Robyn Jacobson:
That said, Julie, remember that these measures while starting budget night, we're never going to permit the boost to be claimed in the 22 tax return. So whilst you may have eligible expenditure now, assuming this does become more, the first time you would actually claim this would be through the 23 and 24 tax returns. And to go a step further, I'm expecting to see that your basic expenditure, let's call it the base amount, so let's say spend a hundred dollars that would still be deductible in the year you've incurred or spent it, but the boost component would not be claimable until the 23 and or the 24 tax return, depending on which particular boost you're looking at. So I just want to assure our listeners that it's not as if this is going to impact on the preparation of 22 tax returns, because we're about to go into that compliance season.

Julie Abdalla:
No, that's right, and there might need to be some new labels on the tax returns to be able to distinguish between the different categories.

Robyn Jacobson:
The other elephant in the corner of the room, and I call it an elephant because I know there's been a lot of talk in recent months about Division 7A and Section 100A, and whether there would be any legislative reform or push for legislative change. So let me take each of these in turn. The Division 7A legislative reforms... Look, Julie, we've hit 10 years, it was 2012 when the then Labor government commissioned a review by the board of taxation, and it was 2016 when the Coalition government said that they would amend the law. We've not seen those changes beyond a discussion paper released back in 2018, nothing since. So we know we've got a draft position from the commissioner to do with unpaid present entitlements, but that doesn't address the other aspects that were proposed in the discussion paper to reform Division 7A more generally.

Robyn Jacobson:
So we've got to be careful what we wish for as a profession, and while many would still like to see legislative reform and there were some good measures proposed, there were others that greatly concerned the profession. There's no mention, as far as we're aware that this is a priority for the government, certainly there's been no mention of legislative change since the measures were last deferred at the end of 2020, to start on the first one, July following enable in legislation being enacted and goodness knows when that's going to be. On Section 100A, this is not the time or the place to get into a big discussion on all the draft guidance issued by the commissioner, and we've had other discussions on that separately and I refer you to a previous podcast where I spoke with Jonathan Ortner about these issues.

Robyn Jacobson:
But there's certainly been a push by the profession to remove the unlimited amendment period that applies when 100A assessments are raised, and I just think this is something that the government should think about. If you look to the late seventies, when the provision was introduced, it was amidst the bottom of the Harbor schemes and trust stripping schemes and arrangements, and maybe there was an argument for it being unlimited, particularly in those days where access to information is not what it is today. But if you consider the fraud innovation provisions that are unlimited versus Part 4A which is only a four year amendment period, is it still appropriate that 100A is an unlimited amendment period?

Robyn Jacobson:
So we know both the former assistant treasurer, Michael Sukkar and his counterpart at the time, the shadow assistant treasurer, Steven Jones, undertook that they would be prepared to look at the legislation if legislative change is warranted. That it would be interesting too, to see whether an administrative approach can be the most suitable pathway to handle this rather than amending the law. So all of this still to play out but it's a really interesting period in terms of guidance from the ATO, potential policy changes at a treasury and in parliamentary level, and in the meantime you've got all the practitioners who are just trying to carry on and advise their clients.

Robyn Jacobson:
So in terms of where we go to from here, The Tax Institute will continue to engage with the incoming Labor government and the independence and the minor parties in relation to tax policy and continue to push, as far as our commitment is concerned, to genuine and holistic tax reform, there was talk from one of the independence Kate Chaney, and this is the new member for Curtin in WA, about a tax system that is future fit. It's a great expression, and we often talk about whether the tax system is sustainable or able to encourage growth and productivity and investment in businesses, et cetera, but I think that all boils down to it being future fit and we need a system that can carry us through the decades ahead.

Julie Abdalla:
While major tax reform wasn't on the agenda this election, there is hope for the next election, and it's really something that we need to make a mom and dad issue. Tax effects everybody directly and indirectly and we have a role to play in educating government on its impacts and on the importance of tax reform.

Robyn Jacobson:
Julie, I think we've covered so much ground today, but there is so much more we could say about the election. Look, more to discuss in the future, and I'm sure you'll be invited back onto TaxVibe, after the budget, and we can have another chat and break down what all this looks like with a bit more information from the government.

Julie Abdalla:
I look forward to joining you again, thank you for having me.

Robyn Jacobson:
Thanks, Julie. Thank you for listening to this episode of TaxVibe. I've been chatting with Julie Abdalla, FTI tax council at The Tax Institution. To keep up to date with tax five, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit tax institute.com.au/membership, you can also contact us by emailing tax vibe@taxinstitute.com.au. We look forward to you joining us next time.