Victorian State Budget 2015-16 Tuesday 5 May 2015
Contents Commentary 1 Victorian State Budget 2015-16 Highlights 2 Tax split and reliance on property taxes 3 Stamp duty surcharge on foreign buyers of residential property 4 Relief for small businesses and apprentices 6 Payroll Tax 8 The Andrews Government s first Budget promises significant spending in the areas of education, health, job creation and social services as well as $22 billion of funds earmarked for major infrastructure projects, including public transport.
1 Commentary Victorian Treasurer Tim Pallas handed down the Andrews Government s first Budget earlier this afternoon. It is a safe first-term Budget which focuses on delivery of the promises made by Labor in the lead-up to last year s state election. There is significant spending in the areas of education, health, job creation and social services as well as $22 billion of funds earmarked for major infrastructure projects, including public transport. The Government is projecting an operating surplus of $1.2 billion for 2015-16, with total surpluses of $5.8 billion over the forward estimates period. This represents quite a material reduction from the surpluses that were forecast in last year s Budget by the former Coalition Government. The main reason for this decrease appears to relate to the projected increase in Government spending as opposed to a fall in the State s revenue base. Taxation revenue is forecast to be $19 billion in 2015-16, rising to $21.3 billion in 2018-19. Once again, revenue from property taxes continues to prop up the Government s financial position, representing in excess of 40% of the State s tax revenue base. Economic growth is projected to run at 2.5% over the next 12 months, which is consistent with the growth rate achieved by the former Government. Unemployment is expected to reduce from the current rate of 6.5% to 6.25%. Pleasingly, the Government is investing $500 million into new job creation funds both for city and regional areas, which it says will create 100,000 new jobs for Victoria. However, with the significant increase in Government spending projected over the forward estimates period, business will be keeping a watchful eye on the State s bottom line, particularly in light of the expected increase in public sector wage growth. For small and medium businesses, there is little relief in the Budget from the relatively high cost of doing business in the State. Payroll Tax continues to be the largest State taxes cost incurred by Victorian businesses and while the tax-free threshold stays at its historical low level, those businesses continue to be at a disadvantage when compared to their counterparts in other parts of Australia. A targeted Payroll Tax rebate has been provided to businesses that employ certain young, retrenched or longterm unemployed people, but that rebate will be limited to a small number of employers and it is unclear at this stage whether the benefit of the rebate might be outweighed by the cost of the administration required in order to claim it. The Budget also contains minor stamp duty relief for some businesses that acquire motor vehicles classified as mobile plant. The total relief projected from this measure over the forward estimates period is a modest $11 million. Despite Labor s pledge prior to the election that it would not introduce any new taxes to fund its spending promises, foreign buyers of residential property in Victoria will soon be hit with a new 3% stamp duty surcharge and, in some circumstances, an additional 0.5% land tax surcharge. The stamp duty surcharge is likely to have the biggest impact on the apartment market. Apartments purchased off-the-plan by foreign buyers are currently entitled to a concession which significantly reduces the amount of stamp duty payable. Once the 3% surcharge comes into effect on 1 July 2015, the total amount of stamp duty payable by the purchaser will increase in some cases by more than 500%. The most disappointing aspect of this measure is that foreign developers could react by withdrawing their investment from Victoria and re-directing it to other parts of Australia or elsewhere. To date Victoria has been the main beneficiary of investment from foreign developers resident in Malaysia, Singapore and China. Foreign Investment Review Board data shows that foreigners poured about $14 billion into the state s property market last year, up from $2 billion five years ago. This investment has created jobs in the construction and related industries for Victorian workers and it would be very disappointing if those jobs were to disappear from Victoria and move to other States which represent a more inviting place to invest.
2 Victorian State Budget 2015-16 Highlights Taxation Revenue Breakdown 6%3% 2015-16 12% Property related Payroll tax Gambling Motor vehicle Insurance Misc 41% 10% Stamp Duty Surcharge for Foreign Investors 28% $ $ Forecast Unemployment Rate INFRASTRUCTURE $ $ 6.50% 6.25% $ 6% 5.75% 2015-2016- 2017-20182016 2017 2018 2019 $5.8b worth of surpluses over the next 4 years $1.5b initial spending on Metro Rail $1.3b for new trains, upgrades and maintenance MAJOR INITIATIVES $688m to build new schools and modernise and regenerate school facilities $300m TAFE Rescue Fund $150m to support people with disabilities, their families and carers $148m for new custody offices at police stations $100m to upgrade Flinders $200m for a new $250m for child protection and $445m for new E-Class trams Street Station family service system Western Women s & Children s hospital
3 Tax split and reliance on property taxes Property based taxes continue to be the main source of revenue for the State government and there is no sign that this reliance will change any time soon. Property based taxes are set to contribute more than 41% of the State s tax revenue base in 2015-16 and over the forward estimates period. This includes stamp duty, land tax, fire levies, congestion levy, the Growth Areas Infrastructure Contribution and a myriad of other levies. The revenue from some of these taxes, such as the fire levy, is earmarked for specific purposes, nevertheless their imposition is related to property holdings. The 2015-2016 year also sees the commencement from 1 July 2015 of the Metropolitan Planning Levy. This measure was introduced by the previous government. That property based taxes continue to provide a mainstay of the tax base is not surprising. It provides a sound taxing base that is easy to track. While the reform of the tax system continues to be a topical issue, there is little doubt that property based taxes are here to stay. Rather the reform arguments tend to focus on how to more fairly spread the tax burden across more property rather than the removal of property based taxes altogether. The introduction of a broad based land tax that captures the family home has been mooted in some circles. The Australian Capital Territory Government is the only State or Territory government that has taken steps to gradually implement such a tax. There is no indication at this stage that the current Victorian government is considering such a radical change and certainly there was nothing in the budget to suggest that a change is even being considered. However, the current white paper review of the tax system provides an opportunity for the Victorian Government to take a hard look at the State s tax regime in an attempt to find ways to reduce the burden of inefficient property taxes borne by business. As the graph below shows, Payroll Tax, motor vehicle related duties and registration fees, gambling taxes and insurance taxes make up the balance of the majority of the State s tax base. This excludes Victoria s allocation of GST revenue or money collected from fines, dividends, and other revenue sources. 2015-16 Revenue (budgeted) millions Property based taxes $7,822.1 Payroll Tax $5,407.5 Motor vehicle $2,202.2 Gambling $1,861.3 Insurance $1,156.2 Miscellaneous $575.2 The forward estimates typically assume the revenue trends for these taxes will continue to grow. This does rely on no major upheavals taking place in the economy. History tell us that State taxes such as stamp duty and Payroll Tax are prone to fluctuations in economic activity. Today s State budget comes on the same day that the Reserve Bank reduced interest rates by a further 25 basis points. Perhaps it is an omen of further prosperity and consistent revenue streams. Still, the challenge remains to consolidate a revenue base that is consistent and sustainable for the long term. On this basis, we believe that taxation reform should continue to be a high priority for the State Government.
4 Stamp duty surcharge on foreign buyers of residential property The Victorian Government has announced that it will impose a 3% stamp duty surcharge on foreign buyers purchasing Victorian residential property. The surcharge will be in addition to the current stamp duty that all purchasers pay on the transfer of Victorian properties. For properties with a dutiable value exceeding $960,000, the introduction of the surcharge effectively means an increase in the rate of duty from 5.5% to 8.5% for foreign buyers. To work out the extra duty payable under the foreign buyers surcharge regime, we understand that the 3% surcharge will be applied to the higher of the consideration (purchase price) and the unencumbered market value of the property as at the date of the contract of sale. 500% increase in duty payable With respect to residential apartments that are currently subject to the off-the-plan duty concession, we understand that the 3% surcharge will not be based on the dutiable value of the apartments after application of the concession. Instead, the 3% surcharge will be applied to the full purchase price of the apartment as at the date of the contract. For example, under the off-the-plan concession an apartment in a high rise building (four storeys and above) with a purchase price of $500,000 could be subject to a stamp duty deduction of approximately 90%. That is, the duty payable under the concession is reduced from $25,070 (otherwise payable on $500,000) to $2,750. However, following the commencement of the foreign buyers surcharge regime, the stamp duty payable will increase to $17,750 (i.e. $2,750 + $15,000), which represents an increase of 545% when compared to the amount of duty payable now. In addition to applying to acquisitions of residential premises, we understand that the stamp duty surcharge will also apply to vacant land that is zoned for residential use, as well as potentially to vacant land or existing commercial premises that is not currently zoned for residential use, but which the purchaser intends to develop into residential premises. It is unclear at this stage how the Government intends to police such acquisitions by foreign buyers. As well as direct property purchases, the 3% surcharge could also apply to indirect property investments by foreigners that are made through the acquisition of shares or units in Victorian land holding companies or trusts. In Victoria, certain indirect property investments are subject to duty under the Victorian landholder duty regime. That is, the acquisition of certain interests (e.g. 50% or more in a private company) in a company or unit trust that holds land in Victoria with an unencumbered market value of $1 million or more is subject to duty at the relevant transfer duty rates. If landholder duty applies and the relevant land falls within one of the categories that are caught by the new regime, we understand the 3% surcharge will be imposed in addition to the standard duty that would otherwise be payable under the landholder duty rules. The surcharge is set to apply to contracts entered into on or after 1 July 2015. Absentee landowner land tax surcharge As well as the stamp duty surcharge, some foreign property buyers will also be faced with an extra 0.5% land tax surcharge. The Victorian Government has announced that a landowner who does not ordinarily reside in Australia will be liable for an absentee landowner surcharge of 0.5% in addition to any other land tax payable. The absentee owner surcharge will apply from the 2016 land tax year onwards. At this point the government has not published any details as to the type of land that the surcharge will apply to (e.g. residential land or commercial land) or the meaning of a landowner who does not ordinarily reside in Australia. Therefore, it is not clear whether the surcharge will be limited to foreign buyers or whether it might also apply to Australian land holding citizens who spend the majority of their time overseas. It is also unclear whether it could apply to land held by trusts or companies that are controlled by non-residents.
5 Impact of these surcharges on our clients Overseas based clients as well as local clients who are entering into property development activities with overseas partners should pay close attention to these stamp duty and land tax changes as they could represent a significant additional cost to a project. As we have not yet seen any legislation to implement the proposed surcharges, the views expressed on the opposite page will need to be confirmed once the legislation is released and we have further details on how the State Revenue Office will administer the new provisions.
6 Relief for small businesses and apprentices Duty exemption for mobile plant From 1 July 2015 small businesses will be exempt from stamp duty on the registration or transfer of certain work-related vehicles. This concession appears to be targeted at small businesses only but no applicable threshold details have been released. The exemption is applicable to vehicles described as mobile plant and plant-based special purpose vehicles. Mobile plant refers to vehicles that are not designed solely for carrying passengers or goods. These vehicle categories include body types such as backhoes, excavators, bulldozers, headers, scrapers, tractors, forklifts and mobile cranes. Often such vehicles are registered for the sole purpose of enabling them to travel on public roads which is typically incidental to their main function for off-road purposes. This initiative is expected to save businesses upwards of $2.7 million each year. Mobile plant is used in a variety of industries and this concession would seem to be of particular benefit to businesses in the construction, manufacturing and primary production industries, by reducing their costs. Trade apprentice registration fee cuts Trade apprentices will receive a 50% reduction in their motor vehicle registration fees and Transport Accident Charge commencing from 1 January 2016. The discount will apply to vehicles where their employers can demonstrate that the use of the vehicle is an essential part of their work. While the full details of how the scheme will operate are yet to be released, it appears the onus will be on the employer to support the basis of the exemption for the trade apprentice. Eligible apprentices paying standard registration fees on a light vehicle in metropolitan Melbourne will save $378.85 per year. This is a welcome measure of support for trade apprentices.
From 1 July 2015 small businesses will be exempt from stamp duty on the registration or transfer of certain work-related vehicles. This initiative is expected to save businesses upwards of $2.7 million each year. 7
8 Targeted Payroll Tax rebate but no general relief for business In keeping with its election promise, the Government will provide a rebate to companies that hire young people, retrenched workers or the long-term unemployed. While accessible to most Pitcher Partners clients, the Back to Work (BTW) rebate provides only limited targeted relief and requires some administrative work in order to identify eligible employees, collect appropriate evidence and make a claim. Disappointingly, there are no further changes to the payroll tax rate which was reduced in the 2014-15 budget from 4.9% to 4.85%, and there has been no change to the tax-free threshold which remains set at $550,000. We will continue to lobby the Government to raise this threshold which would provide immediate and substantial relief for a significant number of our clients. Payroll Tax remains the most significant state taxes cost incurred by small and medium businesses and Victoria s low tax-free threshold puts those businesses at a competitive disadvantage as compared to equivalent businesses operating elsewhere in Australia.
Back to Work (BTW) Rebate 9 This measure has already been legislated through the Back to Work Act 2015 and comes into operation on 1 July 2015. Payments are available in respect of employees who commence employment on or after 1 April 2015 to 31 March 2017 (inclusive). Employers do not need to provide evidence of the actual costs incurred in hiring and training an eligible employee but they will need to satisfy certain eligibility criteria, and be able to provide documentation to verify a claim if requested. The eligibility criteria has been published in the Government Gazette General Gazette Number G12 on 26 March 2015. In order to receive a BTW payment, you must: be an eligible employer have employed an eligible employee in an eligible job How much is the payment? The payment amount depends on the employee category as follows: Employee Category Long-term unemployed person Young unemployed person Retrenched worker or out of trade apprentice Am I an eligible employer? Payment amount Full-time job All employers are eligible, except for: Part-time job $2,000 $1,500 $1,000 $750 $1,000 $750 Employers with a poor workplace safety record Government bodies (e.g. Government departments and local councils) Eligible employers may include some interstate and overseas employers. Who is an eligible employee? An eligible employee is a person employed by the eligible employer who is a: Long-term unemployed person Young unemployed person Retrenched worker (including an out-of-trade apprentice) There are specified age requirements, unemployment periods and retrenchment requirements which must be satisfied for each employee category. What is an eligible job? An eligible job is a full or part-time ongoing Victorian job offered by an eligible employer with a salary that does not exceed the salary limit. Casual jobs do not qualify. A Victorian job is a job which is considered to be connected to Victoria under WorkSafe legislation, i.e. a job which requires the employer to pay WorkSafe insurance in respect of the person undertaking that job (employers who self-insure are also eligible to claim a BTW payment). Salary Limit The salary limit for a full-time job is 1.5 times the Australian average weekly ordinary time earnings for full-time adults (AWE) as reported by the Australian Bureau of Statistics (ABS) at the time the eligible employee starts their new eligible job. For an eligible employee that starts on 1 April 2015, the AWE reported by the ABS as at November 2014 is $1,476.30. Therefore, the salary limit for a full-time ongoing job that starts on 1 April 2015 is $2,214.45 per week (1.5 x $1,476.30) or $115,151 per year. The salary limit for a part-time job is apportioned based on hours of work as a proportion of 35 hours. How long do I have to make a claim? All claims must be lodged within nine months of the date the eligible employee commenced their new employment. This can be done via an online form which will become available on the State Revenue Office ( SRO ) website. Do I need to verify my claim? You must hold evidence to support your claim for a period of five years. This evidence must be provided to the SRO if requested. Sufficient evidence includes copies of the employee s drivers licence, passport, employment contract, training records, WorkSafe records and a declaration from the employee. The SRO website provides sample/template declarations for each employee category. Penalties may apply where a false claim is made.
Craig Whatman Executive Director +61 3 8610 5617 craig.whatman@pitcher.com.au Peter Quattrocchi Client Director +61 3 8612 9255 peter.quattrocchi@pitcher.com.au Michael Langhammer Executive Director +61 3 8610 5148 michael.langhammer@pitcher.com.au William Zhang Manager +61 3 8612 9252 william.dz.zhang@pitcher.com.au MELBOURNE SYDNEY PERTH PITCHER.COM.AU John Brazzale Managing Partner +61 3 8610 5000 partners@pitcher.com.au Carl Millington Managing Partner +61 2 9221 2099 partners@pitcher-nsw.com.au Bryan Hughes Managing Partner +61 8 9322 2022 partners@pitcher-wa.com.au ADELAIDE Tom Verco Principal +61 8 8179 2800 partners@pitcher-sa.com.au BRISBANE Ross Walker Managing Partner +61 7 3222 8444 partners@pitcherpartners.com.au NEWCASTLE Greg Farrow Managing Partner +61 2 4911 2000 newcastle@pitcher.com.au Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation. 2015_state budget_150505