31 January The Treasury Langton Crescent PARKES ACT Online submission:

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1 31 January 2018 The Treasury Langton Crescent PARKES ACT 2600 Online submission: CPA Australia Ltd ABN Level 20, 28 Freshwater Place Southbank VIC 3006 Australia GPO Box 2820 Melbourne VIC 3001 Australia Phone Outside Aust Website cpaaustralia.com.au Dear Sir/ Madam Pre-budget submission CPA Australia represents the diverse interests of more than 160,000 members in 118 countries. Our vision is to make CPA Australia the global accountancy designation for strategic business leaders. Against this background and in the public interest, we provide our organisation s recommendations for the Federal budget process in the accompanying Attachment. If you have any queries do not hesitate to contact us. Yours sincerely Stuart Dignam General Manager Policy & Corporate Affairs

2 Attachment CPA Australia - Federal Budget s 1. Income tax and work-related expenses (WREs) It is important that Australia s income tax system functions effectively, with all taxpayers paying their fair share. In this regard CPA Australia maintains its strong support for an equitable income tax system where all taxpayers - regardless of type - are able to claim tax deductions for qualifying expenses they have incurred in the derivation of their income. There have been several inquiries in recent years into worker s rights to claim deductions for work-related travel, uniforms, protective clothing and tools, amongst other things. And notwithstanding our ongoing support for work related expense (WRE) deductions, WREs have recently been identified as an area of the law that may be subject to widespread abuse and requiring further scrutiny, education and even policy change. If the evidence shows the need for policy reform in this area it is important that any changes do not abrogate the right of all taxpayers to make any claims for WREs at all. Certainly, the current WRE substantiation caps that date from the Hawke/ Keating government - and were described at the time by the Hon. Paul Keating as rules that will provide some limited scope for claiming deductions without substantiation but are designed so as not to open up an avenue for abuse - may need reviewing. However, suggestions of a standard deduction for all taxpayers, regardless of vocation, should be considered very carefully - as such a move would not take into consideration the very significant differences that exist across different occupations. Such a move may deliver administrative simplicity, but it would fall short in terms of fairness, and may indeed have other negative impacts to the budget bottom line. Any changes to ensure the integrity of the tax system and work-related expense claims must be evidencebased, and not abrogate the right of all taxpayers to make any claims for WREs at all. 2. Public funding of ASICs regulatory costs As stated in our submission in response to the most recent consultation paper on ASICs industry funding model on 15 December 2017, CPA Australia cannot support the full cost recovery model as proposed and recommend that the government instead explore a partial cost recovery model. The reasons for this position are primarily due to: The proposed fees in several areas in the November 2017 consultation paper, especially the application fee for self-managed superannuation fund (SMSF) auditors, are in no way appropriate. The proposed fees may have repercussions for those working in, or aspiring to work in those areas, as well as consumer choice. The government has failed to adequately explain the link between the incidence of fees and levies and the cost of regulating the relevant activity - a requirement stipulated in the 2014 final report of the Financial System Inquiry (FSI). The full cost recovery funding model takes a narrow view regarding those that create the need for regulation, and therefore regulated entities carry a disproportionate cost burden. A well-functioning, efficient capital market that operates with integrity, encourages competition and is accessible to the vast majority of people is a public good and funding of ASIC should reflect this. The full cost recovery funding model may create a perception that ASIC is reliant for funding on those they regulate. This risk of ASIC being perceived to be captured by the sector may undermine the community s trust and confidence in ASIC. 2

3 Given these factors, CPA Australia is of the view that the government should move away from the full cost recovery funding model for ASIC s regulatory fees and instead implement a partial cost recovery model. This will require the government to reinstate some funding previously cut from ASIC s budget. The government not pursue its full cost recovery model for funding ASICs regulatory activities. Instead, the government should introduce a partial cost recovery model and therefore reinstate some funding previously cut from ASIC s budget. 3. Funding for the Tax Practitioners Board and implementing recommendations of the Black Economy Taskforce If the role of the Tax Practitioners Board (TPB) is to be expanded to take a more active role in the monitoring and investigating tax agents that may be facilitating questionable behaviour as has been suggested by the Black Economy Taskforce, it is important that the TPB receive an appropriate and ongoing increase in their funding to enable it to undertake such an expanded role. The responsibilities of the TPB and the number of entities it regulates has grown substantially in recent years yet funding for its operations has not. While the TPB continues to be an effective regulator, CPA Australia is concerned about whether it can remain as such, which may in turn have other negative consequences for consumers. For example, it may impact community trust in both the tax and accounting profession and the tax system more broadly given the key role the tax and accounting profession plays in the community s compliance with tax laws in a tax system that is based on voluntary compliance. In requesting a boost to the funding of the TPB, CPA Australia is not advocating for the introduction of a user-pays/ cost recovery model of funding for the TPB. The government increase the funding of the Tax Practitioners Board to ensure it remains an effective regulator and to assist with implementing the recommendations of the Black Economy Taskforce. 4. Blockchain, digital currencies and the black economy The rise and rise of digital currencies, blockchain technology and other emerging technologies bring an evolving threat of serious financial crime and significant tax avoidance and evasion opportunities. With their decentralised basis and underlying protocols which do not require user identification, virtual currencies can bypass regulated financial institutions and exchanges and present significant challenges for regulators. The recent legislative changes in Australia to bring digital currency exchange providers under the AML/CTF regulatory regime enables this area to be more closely examined by authorities, helping to not only identify owners of digital currency accounts but to also better monitor their respective trading activities. These changes will help ensure digital currencies and blockchain do not become an area of major tax revenue leakage. However, the work for government agencies, including international collaboration to bring a consistent, multi-jurisdictional approach to regulation, must now begin in earnest. The government ensure the relevant government agencies including AUSTRAC, AFP and the ATO have sufficient resources to undertake the investigative work that will be required to ensure digital currencies and blockchain do not become an area of major tax revenue leakage. 5. Cybersecurity risk and educating business and the public With more transactions occurring digitally, and businesses and governments being better able to exploit the data they hold, protecting systems from cyberattack is becoming increasingly important both for business and the community more broadly. 3

4 The government and its agencies have acknowledged the increasing risk of cyberattacks to business and the community and a number of initiatives have been implemented, including publishing guides to small business on the types of actions they should consider to protect their systems. While this work is valuable, there is potentially more the government could do to raise awareness in the community and small business of the risks of a cyberattack, the steps they could take to reduce those risks and what to do if they have suffered a cyberattack. The government fund a comprehensive awareness campaign on cyber risks and the action business should take to reduce those risks. 6. Improving confidence in government IT systems CPA Australia s engagement with members throughout 2017 showed that the ATO systems outages in December 2016 and February 2017 had a large impact on confidence in government systems and the rollout of new projects such as Standard Business Reporting (SBR) and Single Touch Payroll (STP). Member feedback has been that it is difficult to access compensation under either the Commonwealth s scheme for Compensation for Detriment caused by Defective Administration (the CDDA Scheme) or the act of grace payment scheme - for the losses and distress caused by these outages. This has, amongst other things, compounded a fall in confidence in technology, and this needs to be addressed to improve community support for the government s digital agenda. The government fund a review of the Commonwealth s scheme for Compensation for Detriment caused by Defective Administration (the CDDA Scheme), and consider setting aside increased funding for the CDDA Scheme to support future digital rollouts. 7. Encouraging saving and investment Australia s income tax system penalises taxpayers on income derived from savings outside the superannuation system, thus discouraging non-superannuation savings and investment. Superannuation s tax-preferred status has enabled it to become the primary savings vehicle for most Australians. This has been very beneficial for retirement savings, but it fails to recognise the necessity for individuals to save income outside of super to afford, amongst other things, major capital purchases during a person s working life. If income derived from savings was taxed at a rate that was lower than an individual s marginal personal tax rate, this would encourage greater savings and investment outside of the super regime. It may also encourage investment in assets other than only the family home or residential property more broadly. Australia s Future Tax System report proposed a 40 per cent savings income discount available to individuals for non-business related net interest income, net residential rental income (including related interest expenses), capital gains (and losses), and interest expenses related to listed shares held by individuals as non-business investments. Such a recommendation may make investments outside of residential property (that is not the family home) and super more attractive. The government introduce a 40 per cent savings income discount for individuals for non-business related net interest income, and net residential rental income. 4

5 8. Small business simplified depreciation rules The $20,000 instant asset write-off for eligible small businesses that was extended in the last federal budget for a further twelve months was welcomed by small business as it has provided an important boost for SME capital investment, business optimism and jobs, and it has a positive flow-on effect for many Australian retailers. Given the stimulatory impact of the initiative, we encourage the government to make it a permanent feature of the tax system. The government make the $20,000 instant asset write-off a permanent feature of the tax system. 9. A new entity for start-up businesses To further encourage Australia business start-ups, the government should introduce a new simplified business entity for SMEs. Under the current tax law, a typical ordinary commercial family business structure involves the establishment of a corporate trustee, a discretionary trust, and defining trust beneficiaries including a corporate beneficiary, to provide asset protection as well as enable business access to the various SME-focussed tax concessions. This type of complexity acts as a disincentive to people establishing a business in Australia. The introduction of a new entity for start-ups which provides the critical features of the current structure - including providing limited liability, allows income streaming and allows income retention in the entity that is taxed at the prevailing company tax rate - would potentially eliminate the need for three entities, three tax file numbers, and three GST registrations. Instead, the business would have one entity, one TFN and one GST registration. Such a taxpayer would therefore also only lodge only one tax return and one BAS. The government should introduce a new simplified entity for SMEs that incorporates limited liability, allows income streaming and allows income retention in the entity. 10. Real property and investment CPA Australia acknowledges the government s suite of policy initiatives announced as part of its budget on housing affordability. We encourage the government to undertake a post implementation review to determine the impact of these measures when taken collectively in future years. In the meantime, it is important that investor confidence is not further eroded by additional policy changes in this space. s To help preserve investor s wealth and thus reducing future pressure on the public purse, and to ensure investor confidence is not further eroded, CPA Australia recommends: No winding back or removal of the ability of investors to negatively gear investments No reduction in the capital gains tax (CGT) general discount No change in tax laws applying to pre-cgt assets, and No change to the tax-exempt status of the family home. 5

6 11. Innovation and the digital economy Access to a cost-effective, widely available, fast and reliable broadband network is critical to innovation and the digital economy. This will help ensure that all Australians, no matter where they live, can overcome the tyranny of distance and have reliable access to services and markets (domestic and international). As befits a key nation building infrastructure project, it is essential the government remains committed to completing an effective national broadband network rollout as soon as possible. As CPA Australia s Asia-Pacific small business surveys show, small businesses that are using social media, selling online, innovating and exporting are significantly more likely to be growing and creating jobs than those that do not. Unfortunately, the survey results also show that Australian small businesses are significantly less likely to be undertaking these drivers of growth than small businesses from Asia. If Australian small businesses are to remain the engine room of the economy, then more must be done to increase their digital capabilities as well as their knowledge of overseas markets. Another policy the government should continue pursuing to support innovation is improving public access to more of the data it holds. With data analytical tools becoming better and more accessible, there is potential significant community and commercial benefits of opening more of the data the government collects to the public. s The government re-states in the Budget its commitment to completing an effective national broadband network rollout as soon as possible. The government fund the development of tools and resources to improve the skills, knowledge and capabilities of small business owners and managers, with a particular focus on improving knowledge of Asian markets and improving understanding of digital technologies and how to best deploy those technologies. The government fund programs that encourage those new to business to seek professional advice. Options include the government giving new businesses a voucher that can be redeemed for professional advice from, for example, a registered tax agent. The government fund programs to promote the broader benefits of digital technologies to encourage more small businesses to invest in such technologies. The government continue to improve public access to the data it holds through its open data web site Education Continued investment in high quality education is a prerequisite for Australia s future economic success. Labour market needs are changing faster than ever before and we must update and integrate our policy approach to education across all levels if we are to keep pace with and take advantage of these changes. Simply put, it is vital that we provide Australia s current and future workforce, its human capital, with the knowledge and skills they need to succeed in an ever-changing, globally connected environment. The recent Gonski reforms and the ongoing benchmarking and implementation work associated with them are appropriate first steps towards an Australian education system optimised for the 21 st century. CPA Australia, however, encourages the government to take a more holistic, integrated approach to educational reform across all levels. Post-secondary education as a whole - which must include more access to life-long learning, re-training and skills development for adults - requires a serious rethink if we are to develop the kind of knowledge economy Australia needs in the digital age. Education is also a key component to enhancing equality and opportunity for all Australians as well as being our third largest export industry. Strong investment and an integrated policy approach designed for the medium and long-term across the education, skills and training sectors is an imperative. 6

7 s The government undertake a review of post-secondary education with the aim of creating financially sustainable, flexible and adaptive educational pathways that more closely aligns the Vocational Education and Training and Higher Education sectors. That any post-secondary education structural reforms are supported by an ongoing and sustainable funding framework that balances the contributions made by individuals and government with the goal of providing greater certainty for students and the institutions that provide educational services. That the government maintain the usual progressive year indexing of all Higher Education block grant schemes in 2018, 2019 and 2020 including the Commonwealth Grant Scheme. That metrics for performance-based funding in Higher Education form part of the wider review of postsecondary education recommended above. That the government consider ways to more fully fund the indirect costs of research to ensure that fees generated by both domestic and international students are used primarily to support teaching, student services and student-focussed infrastructure rather than cross-subsidising research activity. That there is greater transparency around the sources and expenditure of fee income in higher education. This will ensure that students are receiving value for money and that a more reasonable proportion of the fee income generated by teaching in specific disciplines remains in those disciplines to support both enhanced teaching and research activity. 13. Skilled migration and a simplified visa scheme Skilled migrants play a significant role in shaping Australia s economic fortunes and they must be encouraged to do so into the future if the country is to successfully continue to compete on the world stage. CPA Australia recommends that the government base skilled migration policy around three primary objectives: Counter labour market shortages currently evident or projected to emerge due to demand for particular skills and knowledge outstripping domestic supply Develop the human capital of the nation. Human capital is used here to refer to all the knowledge, talents, skills, abilities, experience, intelligence, training, judgment, and wisdom possessed individually and collectively by individuals in a population. When people rich in these attributes migrate to Australia they develop the human capital of the nation, and thereby bolster its productivity and growth and create jobs, and Facilitate other work-related purposes, such as the undertaking of specialised work by intra company transfers and foreign correspondents, and supporting Australia s third largest export industry by continuing to provide post study work rights. The current skilled migration policy approach is weighted almost exclusively toward the first of these objectives and requires recalibration to incorporate, and in many cases preference, the other two. s The new visa system weighs medium and long-term human capital development considerations more heavily than short-term skills shortage assessments in its skilled migration visas. There is greater differentiation in the approach to short-term technical and largely non-transferrable skills-based migration (e.g. hairdressing, season agricultural labour) and the skilled migration linked to Australia s medium and long-term need for a highly educated, adaptive, innovative and professional workforce. This includes a more realistic timeframe for the review of occupations on the Medium and Long Term Strategic Skills List; CPA Australia suggests a two-year cycle for the MLTSSL with half the list reviewed in any given year. That the design of the future simplified visa system be guided by principles that facilitate clarity, understanding and certainty; that reduce the regulatory burden; and that support Australia s competitiveness and attractiveness as a destination. 7

8 That post study work rights visa be extended to a minimum of three years and that permanent visa applicants earn migration points for work experience only if they have worked three or more years. 14. The Reporting Entity Concept Statutory financial reporting in Australia is predominantly based on Australian Accounting Standards (AAS) issued by the Australian Accounting Standards Board (AASB). International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) form the basis for the AAS developed and issued by the AASB. The AASB also has a statutory obligation to develop a Conceptual Framework that informs its standards development, and since the AAS are based on IFRS, the AASB Conceptual Framework is also based on the IASB Conceptual Framework. The IASB has developed a revised Conceptual Framework that is expected to be published in the first quarter of Following established due process, the AASB is expected to issue the same Conceptual Framework as the basis for AAS, once it has been issued by the IASB. We understand that Chapter 3 of the IASB s new Conceptual Framework will describe the Reporting Entity differently to the Reporting Entity Concept currently established under Statement of Accounting Concept 1 Definition of the Reporting Entity (SAC 1) issued by the AASB. SAC 1 remains effective alongside the AASB Conceptual Framework (the Australian equivalent to the IASB Conceptual Framework). SAC 1 is instrumental in facilitating a differential financial reporting regime under Corporations Act and other legislation. Under this regime, entities that have statutory financial reporting obligations are able to apply the reporting entity concept and prepare general purpose financial reports if they determine that they are reporting entities, and have the option of preparing special purpose financial reports if they determine they are not reporting entities. The operation of the reporting entity concept for Australian financial reporting as described above is likely to be affected as a result of the reporting entity description included in the forthcoming IASB Conceptual Framework, if adopted by the AASB in Australia. It is likely that legislative changes will be required, in addition to changes to the conceptual framework to address the matter. Ensure that Treasury is appropriately resourced to collaborate with the AASB and other stakeholders, to consider the potential conflict in the reporting entity concept and to develop appropriate solutions. 15. Infrastructure Enhancing Australia s infrastructure is not only critical to our competitiveness as a nation, it is also essential to enhancing the competitiveness of local communities and creating jobs in those communities. Improving our infrastructure will not only allow people, goods and data to get to where it needs to be more efficiently, quality infrastructure can help attract people to remain and live in otherwise struggling communities and for businesses to invest in those communities. To attract more private capital to major infrastructure projects we encourage the government to consider providing a 40 or 50 per cent tax discount on income earned from investment in certain infrastructure projects. The government introduce a 40 or 50 per cent tax discount on income earned from certain approved infrastructure projects. About CPA Australia CPA Australia is one of the worlds largest accounting bodies with 22 offices globally and more than 160,000 members in 118 countries. Our history stretches back to 1886, and we have been actively involved in Asia since the early 1950s. 8