Victorian State Budget

Transcription

1 Victorian State Budget Growing Victoria Wednesday 27 April 2016

2 1 Budget overview Victorian Treasurer Tim Pallas handed down the Andrews Government s second Budget, committing the government to significant spending in the areas of health, education and transport infrastructure projects. The spending promises are supported by a strong surplus position, which is underpinned by continued growth in state tax revenue. The Victorian economy has performed well over the past 12 months, as evidenced by the government s projected operating surplus of $2.9bn for , with projected total surpluses of $9.2bn over the forward estimates period. This is a noticeable increase from the surpluses forecast in last year s Budget. Victoria s growing surplus has been achieved through a significant uplift in projected taxation revenue in particular revenue from property taxes. Economic growth is projected to be 3% over the next 12 months, which is up from 2.5%. The unemployment rate will continue its downhill run from 6.5% in 2015 to a projected 5.7% in The Andrews Government has committed to ongoing investment in infrastructure projects, which will create more procurement opportunities for our clients as well as helping them to move people and goods more easily around the state. Infrastructure investment will average $7.4bn a year over the next four years, with funding for key projects in urban and regional transport, health and education. We are pleased to see that for the first time since 2002, the government has decided to increase the payroll tax threshold by $100,000 over the next four years, to $650,000. Pitcher Partners has for many years advocated for payroll tax relief for the middle market. A $25,000 increase in the threshold each year for the next four years is a good start, but we believe that further payroll tax reform is needed to reduce employment costs incurred by business. The proposed increase in the threshold will translate into a modest saving of $1,200 per annum for those businesses still above the threshold. And Victoria s increased threshold still looks low when compared to NSW at $750,000 and the national average of $1,050,000. Despite the threshold increase, the Government is still projecting a 5.4% increase in payroll tax revenue to $5.7bn in In this context we will continue to advocate for a more substantial increase in the payroll tax threshold on behalf of our clients. Property taxes continue to prop up the government s revenue position and remain a significant cost for many of our clients. Stamp duty on land transfers grew by 23% in to $6.064bn due to the booming property market, and will increase by a further 16% over the next four years. Land tax revenue is projected to increase by a staggering 28% in as it will be a revaluation year and there has been strong growth in the property market since the last revaluations were performed. In the context of the existing strength in property tax collections, it is disappointing that the government has decided to increase the stamp duty surcharge payable by foreign purchasers of residential property in Victoria from 3% to 7% and the land tax surcharge payable by absentee owners of Victorian land from 0.5% to 1.5%. We believe these increases will have a detrimental impact on the appetite of foreign developers and investors to continue investing into Victoria s property market. Although the government has said that no Victorians will pay the surcharges, we are already seeing the flow-through impact of the land tax surcharge in terms of increased rents payable by Victorian businesses. And the stamp duty surcharge is leading to higher development costs for local developers who have partnered with offshore investors on Victorian property development projects. Victoria s population is predicted to steadily increase over the forward estimates period and the government s own figures have our population overtaking Sydney s by With this in mind, we are concerned that a reduction in offshore investment due to the surcharges could have an adverse impact on the level of supply of housing stock over the medium turn, which could in turn translate into higher prices for Victorian home buyers. On the one hand the government has announced in the Budget that it will commit $237m to attract investment to Victoria and that it wants to bring the biggest international companies to our soil. But on the other hand it is targeting some of the biggest international property companies through increased stamp duty and land tax surcharges, which seems to fly in the face of a commitment to attract offshore investment into Victoria. We congratulate the government for the sound economic platform achieved in this year s Budget, and encourage it to continue investing in infrastructure projects that will create more jobs for Victorian businesses and their staff. We believe that Victoria s strong financial position over the next four years should be seen as an opportunity for the Andrews Government to review its state taxes policy and provide further targeted tax relief for the middle market businesses that are the backbone of Victoria s economy.

3 +1.8% Population growth unemployment rate Victorian State Budget Highlights Where the money comes from? Property Related Taxes Payroll Tax Gambling Taxes Motor Vehicle Taxes Insurance Taxes Miscellaneous Taxes Interest Revenue Dividends Sales of Goods and Services Grant Revenue Miscellaneous Revenue $21.5b tax revenue 45% 6.0% Payroll tax threshold $550k Today 4% $575k 5.75% $600k 15% 11% $625k YR1 YR2 YR3 9% 3% 4% 2% 2% 2% 1% $650k YR Surplus $2.9b Where the money goes... $2.9b Health $455m Arts, Culture & Events Land tax surcharge 0.5% 1.5% Stamp duty surcharge FOREIGN INVESTORS 2016 forecast $9.2b 2015 forecast $5.8b 3% Economic growth $1.2b to help business grow HEALTH EDUCATION LAW & ORDER INFRASTRUCTURE 3% $1.1b Education $678m Other 7% $2.0b Law & Order $1.2b Jobs $10.4b Infrastructure 2 $2.9b $335m to decrease wait times for elective surgery $1.1b $924m for new and upgraded schools $2b $572m to reduce the impact of family violence $10.4b $1.5b for the Western Distributor

4 3 Victoria s reliance on property taxes Property-based taxes including stamp duty, land tax, the congestion levy and the Growth Areas Infrastructure Contribution are projected to contribute more than 42% of Victoria s tax revenue base in These property-based taxes are a key reason for the Andrews Government s large operating surplus projected over the forward estimates period. These taxes will continue to be the main source of revenue for the government into the future. The year saw the introduction of the foreign purchaser additional duty and absentee owner land tax surcharge in Victoria. This was the beginning of the state government s initiative to tax foreign property developers and investors, and it has now been compounded by the government s announcement that the rates of both surcharges will more than double in Victoria is the only state that imposes these taxes. In addition to the increases in the foreign investor surcharges, the government will commence a new tax compliance program which is expected to target noncompliance in the land tax and stamp duty areas. In the land tax area, the government will focus on noncompliance in relation to the principal place of residence exemption, absentee owner surcharge, business partnerships that own land, and land held in trusts that have not yet been declared to the State Revenue Office. These areas are particularly relevant to small to medium size business operators and high wealth individuals. Please contact us if you believe you are at risk of an SRO review in respect of the above areas. The Budget projects additional tax revenue of approximately $200m over the forward estimates as a result of the SRO s compliance program. State tax reform again became a popular topic of discussion among economists and lobby groups in the lead up to the Budget. The reform discussions continue to focus on reducing or abolishing inefficient taxes such as stamp duty and payroll tax, with a broad-based land tax that captures the family home as the likely replacement. However, apart from the ACT, which has a long term plan of phasing out stamp duty and replacing it with a land tax system, no other state or territory government has taken steps to implement such a concept. At this stage there is no indication that the current Victorian Government is considering such a radical change and there is nothing in the Budget to suggest that such a change is being considered. As the chart below shows, payroll tax, motor vehicle related duties and registration fees, gambling taxes and insurance taxes make up the majority of the balance of Victoria s tax base. This excludes Victoria s allocation of GST revenue and money collected from fines, dividends, and other revenue sources. While it is positive to see that the state government has pledged to apply the surplus revenue from property related taxes to infrastructure, health and education, which in turn will help grow the Victorian economy and middle market businesses, it is disappointing that the government has again opted not to put tax reform on the agenda. Instead, the current government s reliance on property related taxes has intensified, with the increase in the rates of foreign purchaser additional duty and absentee owner land tax surcharge, which puts Victorian businesses at a competitive disadvantage compared to businesses in other states and territories. On this basis, and due to the fact that historically state taxes such as stamp duty and payroll tax are prone to fluctuations in economic activity, we believe that taxation reform should be a higher priority for the Andrews Government tax revenue Property based taxes Gambling Motor Vehicle Insurance Payroll Miscellaneous 26% 6% 42% 6% 11% 9%

5 Increase in foreign investor stamp duty and land tax surcharges 4 The Budget confirms last week s announcement that the Andrews Government intends to dramatically increase the stamp duty and land tax surcharges imposed on foreign investors. The stamp duty surcharge applicable to foreign purchasers of residential property will more than double from 3% to 7%, and the land tax surcharge applicable to absentee owners of all taxable property in Victoria will triple from 0.5% to 1.5%. The increase in the stamp duty surcharge will result in the stamp duty cost for a foreign purchaser of a $650,000 offthe-plan apartment in Melbourne increasing significantly to approximately $50,000. By contrast, if the same apartment is purchased by someone who is not a foreign purchaser their stamp duty cost will be approximately $5,000. We believe that targeting foreign investors with higher stamp duty and land tax charges will, over time, reduce the level of investment into Victoria. Victoria s economy has seen significant inbound flows of property development investment over the last 2-3 years, and it remains to be seen how this investment will be affected by these additional surcharges. But we are already starting to see some foreign investors withdrawing from Victoria s property market. Melbourne s population is projected to overtake Sydney s by As we continue to experience significant population growth across the state, it s critical to have stamp duty and land tax policy settings right to ensure that we can meet the housing supply challenges the future will hold. The state government introduced land tax and stamp duty surcharges on foreign investors in the previous Budget, on the basis that targeting this category of investors should increase the supply of housing stock available to Victorians, thus lowering prices. But Victoria s housing affordability problem is rooted in a lack of supply, which is only set to worsen as our population continues to grow. In this context, these policies seem counterproductive: they could quite potentially make Victoria a less attractive investment destination for foreign capital. Neither New South Wales nor Queensland has an equivalent surcharge regime and with the increases in Victoria s surcharges, the investment opportunities in those other states could start to look a whole lot more enticing than in Victoria. Over time, decreased development activity would reduce the level of available stock and ultimately increase prices and decrease housing affordability. The Treasurer s assertion that No Victorians will pay these surcharges is incorrect. Although Victorians are not directly liable for the surcharges, some Victorians are already starting to bear the costs. A number of the commercial buildings within Melbourne s CBD have foreign owners who are now subject to the 1.5% land tax surcharge. The surcharge has become an additional holding cost which those landlords are seeking to pass on to their tenants through increased rents. Many of those tenants are small and medium businesses owned by Victorians. Furthermore, a number of Victorian-owned property developers are in joint ventures with foreign investors, who will be subject to the 7% stamp duty surcharge with respect to acquisitions of residential development sites. The cost of the duty surcharge becomes a project cost that impacts the local joint venture partner as well as the foreign joint venture partner investing in the development. We thoroughly support the state government s continued commitment to infrastructure investment in this year s Budget. It s clear that the Andrews Government recognises Victoria s growth potential. However, we remain concerned that while the government says it is committed to attracting offshore investment into Victoria and is investing more than $200m in this Budget into programs that target that investment, the foreign investor surcharges could drive the very same offshore investors elsewhere.

6 5 Increase in the payroll tax threshold The Andrews Government has announced that the payroll tax threshold will be increased from 1 July 2016 by $25,000 per annum over the next four years, representing an overall increase of $100,000 from 1 July At the current rate of payroll tax of 4.85%, this represents an overall saving of up to $4,850 per business group in Victoria. But while the increase in the payroll tax threshold is welcome, the proposed increase in the threshold will only translate into a modest saving of $1,200 per annum for those businesses that still find themselves above the threshold. And Victoria still ranks as having the lowest payroll tax threshold in the country. Even if we were to take into account the full increase over the next four years, Victoria s payroll tax threshold will still rank behind NSW s threshold of $750,000, and it will still be significantly less than the current national average of $1,050,000. While Victoria has the second lowest payroll tax rate in the country, the most significant savings factor for small and medium businesses, i.e. businesses with lower payroll expenditure, is the payroll tax threshold. As an example, for a business group paying $25,000 above the payroll tax threshold in taxable wages, a 0.5% decrease in the payroll tax rate represents an annual saving of only $ To put this in perspective, it means that only businesses paying more than $2.975m in taxable wages would benefit more from a 0.5% decrease in the payroll tax rate (to 4.80%) as opposed to the $25,000 increase in the payroll tax threshold. Accordingly, while we support the state government in its move to increase the payroll tax threshold, if the government wants to make Victoria a more attractive place for SMEs to do business in comparison to other states and territories, they would need to increase the payroll tax threshold at least up to the national average. If the government is concerned about a decreasing payroll tax revenue base, an alternative option may be to adopt a decreasing payroll tax threshold system similar to Queensland, Western Australia and the Northern Territory. Under this system, the payroll tax exemption threshold decreases for each dollar of payroll taxable wages paid by a business above the payroll tax exemption threshold. In Western Australian, businesses that pay less than $800,000 in wages are exempt from payroll tax, and businesses that pay wages less than $7.5m in wages receive a diminished payroll tax exemption of approximately 12c for each dollar above the threshold. In this way, the savings provided to small and medium businesses could be offset by the reduced threshold for larger businesses. Displaced trainees or apprentices From 1 July 2016, there will be a payroll exemption available for wages paid to displaced apprentices or trainees. This appears to be in addition to the existing payroll tax rebate of up to $5,000 available for employers who hire apprentices and trainees under the Victorian Government s Back to Work scheme. This measure represents a significant incentive for employers to hire apprentices and trainees in Victoria.

7 Extension of the land tax primary production exemption 6 The Andrews Government has announced it will extend the scope of the land tax primary production exemption to urban land owned by certain family superannuation funds. Currently, where land in an urban zone is owned by a trust, the land must be used solely or primarily for a business of primary production, and the principal business of the trust must be primary production. The result is that superannuation funds are not technically eligible for the exemption because their sole purpose must be to provide retirement benefits for their members. We understand the proposed change aims to overcome this technicality, so that, going forward, a farmer conducting a primary production business through a superannuation fund will be eligible for a land tax exemption for urban land. The revenue impact of the extended exemption will be relatively minimal, with an anticipated $3m in revenue forgone in We see this as a positive step from the state government, although there is still further scope for improvement such as by extending the primary production land exemption for urban land to land owned by any entity as long as it is used for the business of primary production. Brown coal royalty rate to rise The Andrews Government has announced that it will triple the brown coal royalty rate from 7.6c to 22.8c per gigajoule of energy produced. This brings Victoria s brown coal royalty rate into line with the New South Wales and Queensland regimes. The royalty is levied on production from Victoria s four brown coal mines. The government anticipates that it will reap an additional $252m in revenue over the next four years. The measure is designed to support the transition to cleaner energy sources and ensure that Victoria receives fair value for its endowment of natural resources.

8 7 Transport infrastructure For some time now Melbourne s population growth has been higher than Sydney s, and our population is expected to exceed Sydney s by This growth trend is not limited to Melbourne but extends to key regional areas across Victoria. In light of this trending growth in the population, the Andrews Government s focus on improving Victoria s infrastructure is both necessary and welcome. With this in mind, infrastructure spending continues to be a key focus of the government s Budget agenda. The provision of a safe, reliable and efficient transport system is a perennial challenge for the government of the day. And so a key component of the government s infrastructure initiatives is to improve the transport infrastructure of the state. With competing demands for funds and competing transport priorities, making progress on delivering improvements to Victoria s transport system has often been frustrating and slow. Whatever one may think about the merits of particular projects, the current government has made it a priority to fast track and deliver projects for the benefit of Victorians. In the current Budget, the government has earmarked long term transport initiatives for the state spanning forward over the next eight years and valued up to $20bn. The government s decision to proceed with key projects without federal government funding is a welcome initiative. Specifically, the government has announced that it will now fully fund the Metro Rail Tunnel project and the Mernda rail extension. These projects commit to expenditure of more than $1.5bn over the forward estimates. In addition to these commitments, parts of the Hurstbridge line and Ballarat line will be duplicated to increase capacity and efficiency at a cost of approximately $650m. A commitment has also been made to acquire new trains and trams and refurbish existing rolling stock at a cost of over $600m. Road transport projects will also be progressed. Funding for the CityLink-Tullamarine widening, duplication of the Chandler Highway, Western Distributor and Western Ring Road upgrades, and other key road upgrades in both metropolitan and regional areas will amount to approximately $750m. With the impending shutdown of the automotive manufacturing industry in Victoria over the next two years, the government is seeking to shore up and create opportunities for new jobs in Victoria. Victoria already has a strong construction sector and the government s infrastructure announcements are designed to build on the state s construction sector strengths. Middle market businesses in the construction and building industries, as well as in manufacturing, will welcome these announcements as they will provide opportunities for growth and jobs for the Victorian economy. There will also be flow on effects for associated service industries. Our clients should be well-placed to take advantage of the opportunities arising out of these announcements as the effects of the projects flow through the Victorian economy.

9 8 Education, health and the construction industry The construction industry will be a key beneficiary from a state Budget that focuses heavily on infrastructure. The government has identified growing demand for infrastructure and services as a result of Victoria s increasing population, and it will be encouraging continued economic growth in Victoria through infrastructure investment. In addition to significant investment in roads and public transport, the Budget provides for substantial investment in education and health infrastructure. The Andrews Government has announced funding of $287m to acquire land and construct new schools, including in Melbourne s growth areas. As well as constructing new schools, a further $385m has been allocated to upgrading existing school infrastructure. Health will also benefit, with over $980m to be invested in new and upgraded health facilities and associated infrastructure to increase the capacity of hospitals and health networks. This includes $135m for the construction of Australia s first specialist standalone heart hospital, the Victorian Heart Hospital at Monash University in Clayton. This significant investment in infrastructure will benefit not only the education and health sectors but will also provide considerable opportunities across the construction industry. As with investment in transport infrastructure, middle market businesses should look to take advantage of the opportunities arising out of the health and education infrastructure announcements.

10 9 Investment in community safety In a continuation of the Budget s focus on investment in the cornerstones of a strong society hospitals, schools, jobs and transport the Andrews Government has announced additional investment in measures to support Victorian police, emergency services, and children and family services, as well as an overhaul of the system to support victims of family violence. Family violence The Andrews Government s commitment to investing in housing and support services for some of our most vulnerable members of society is to be commended. The government will implement all 227 recommendations put forward by the Royal Commission into Family Violence. This will initially involve $572m in funding over three years towards implementation of the Royal Commission s most urgent recommendations. The consistent theme arising out of those recommendations is a focus on investing in additional housing, shelter and support for victims. Key initiatives include construction of up to 180 units of crisis accommodation, upgrades to existing accommodation, grants to deliver 130 new social housing dwellings, and redevelopment of some communal family violence refuges. While the details of the broader reform package will be released in late 2016, the government s initiative will be welcomed by our clients operating in the care services, social housing and building and construction industries, who should look forward to working with the government to bring the Commission s recommendations to fruition. Community safety The Andrews Government will also focus on investment in police, emergency services and children and family support services, with a primary focus on investment in infrastructure. Victoria Police will benefit from the government s commitment to invest $596m to increase police presence, further develop community crime prevention programs, and replace or refurbish a number of police stations in regional and rural areas. Similarly, the government will invest $228m in emergency services. This will include the repair of six existing training facilities; remediation of the former Fiskville Training College site; building new training facilities in the Central Highlands; upgrades to the Huntly Victorian Emergency Management Training Centre; and the redevelopment of surf lifesaving facilities in Anglesea, Cape Paterson, Edithvale and Portsea. Children and family support services will also benefit from funding to upgrade residential care facilities across the state. The government has also invested in measures to stop the ice epidemic. It has pledged $57.6m to expand the Drug Court of Victoria to the Melbourne CBD; improve selected mental health, alcohol and other drug facilities; develop a drug and alcohol rehabilitation facility in the Grampians region; and further train and support front line workers. The government s ongoing investment in infrastructure to support its law and order and public safety initiatives will continue to sustain jobs for those in the building and construction industry and will, no doubt, be a welcome boost to businesses in the middle market.

11 10 Regional Victoria an opportunity for growth Businesses in regional Victoria are set to benefit as the Andrews Government focuses its attention on regional infrastructure, health and jobs. With funding announced across a raft of key areas, middle market businesses looking to grow should seek to take advantage of the investments being made in regional Victoria. In addition to significant expenditure on regional roads and transport infrastructure, the government has allocated $325m to creating jobs in regional Victoria. The funding is intended to boost the number of jobs in growing industries and give individuals the support and skills they need to fill them. The growth of regional jobs will help to reduce the reliance of regional Victoria on Melbourne for jobs and services. Tourism is another sector set to benefit from the focus on developing Victoria s regional towns. Approximately $101m will be spent on supporting tourism in regional towns with the aim of attracting more tourists and generating jobs. Again, businesses should seek to benefit from both the direct and indirect outcomes of investment in tourism. Welcome investment has been announced by the government into regional rail. Of note is a major $518m upgrade of the Ballarat rail line which is intended to fix the reliability issues along the line which runs via Sunshine, Deer Park, Melton and Bacchus Marsh. The investment includes building a second rail track between Deer Park West and Melton, additional train station platforms, pedestrian links, car parking and passing loops. The Budget also allocates $280m for 27 new VLocity carriages, supporting the creation of more services and helping to address overcrowding. Duplication of the Ballarat line has long been an issue and the government s commitment to upgrade the line will be welcomed by the community and businesses alike. Rail upgrades will create additional jobs and increased train capacity, allowing workers to more easily travel to and from regional Victoria each day. Regional roads are also a main target of the Budget s $427m investment to improve safety and reduce death and serious injury on Victorian roads. The investments will include the installation of safety infrastructure such as flexible barriers and tactile edge and centre line treatments. In addition to the Budget s allocation to major regional highway upgrades, the government has also allocated $52m for a package of works for regional roads that locals use every day, including small-scale local road improvements. Future regional roadworks will be funded in Barwon Heads, Phillip Island, Wodonga, Shepparton, Geelong and Castlemaine. Funding will continue for pre-construction works on the Western Highway between Ararat and Stawell, and the Princes Highway East, between Traralgon and Sale. All of these initiatives are positive developments for businesses in regional Victoria. We hope that the targeted spending will support long term growth and investment in the regions. The measures announced in the Budget go some way towards promoting that outcome.

12 Get in touch... Craig Whatman Partner/Executive Director craig.whatman@pitcher.com.au Peter Quattrocchi Client Director peter.quattrocchi@pitcher.com.au William Zhang Senior Manager william.dz.zhang@pitcher.com.au Elisha Herbert Manager elisha.herbert@pitcher.com.au MELBOURNE SYDNEY PERTH PITCHER.COM.AU partners@pitcher.com.au partners@pitcher-nsw.com.au partners@pitcher-wa.com.au ADELAIDE partners@pitcher-sa.com.au BRISBANE partners@pitcherpartners.com.au NEWCASTLE newcastle@pitcher.com.au Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation. 2016_state budget_160427