Lawyers Weekly follows the money to see what the 2018–19 federal budget allocation means for Australia’s justice system, the courts and taxation.
Last night’s budget reveal had implications for a number of groups across Australia. The budget deficit for the 2017–18 financial year sits at $18.2 billion, less than half of what it was two years ago, Treasurer Scott Morrison said in the delivery of his speech.
"This will be the best budget outcome since the Howard government's last budget a decade ago," the Treasurer said.
"The deficit will fall again to $14.5 billion in 2018–19.
"The Budget is forecast to return to a modest balance of $2.2 billion in 2019–20 and increase to projected surpluses of $11.0 billion in 2020–21 and $16.6 billion in 2021–22."
According to ANU historian Professor Frank Bongiorno, this budget — the Turnbull government’s last one before the next federal election — was helped by a healthier revenue flow compared to other recent governments.
Writing for The Conversation, he took the view that the immediate policy concern for the government was that a short term improvement in revenue may give rise to budget promises, which were unsustainable and likely to become a future “burden”.
Professor Bongiorno also suggested that it was perhaps too late in the government’s tenure to succeed in a grand image re-fashioning that would make it seem more appealing.
“That said, even the most battered, jaded, drug-addled rock star can make a comeback and play a few of the old hits for the entertainment of an ageing fan base.
“Whether that comeback is worth the price of admission is, of course, another matter entirely,” he said.
Ultimately there were five priorities outlined in the Treasurer's budget speech last night — five things he said the government must do to "further strengthen our economy to guarantee the essentials Australians rely on.
- Provide tax relief to encourage and reward working Australians and reduce cost pressures on households, including lowering electricity prices,
- Keep backing business to invest and create more jobs, especially small and medium sized businesses,
- Guarantee the essential services that Australians rely on, like Medicare, hospitals, schools and caring for older Australians,
- Keep Australians safe, with new investments to secure our borders, and, as always,
- Ensure that the government lives within its means, keeping spending and taxes under control."
"A stronger economy. More jobs. Guaranteeing essential services. The government living within its means. That is what this budget is about," Mr Morrison reiterated.
Some of the most prominent voices in Australia’s legal community used the eve of the federal government’s third budget to call for an urgent funding boost for legal aid and the courts. Tax experts also predicted that personal income tax cuts will take centre stage.
While some of these ended up taking a prominent position in the 2018–19 federal budget allocation, others were left neglected.
Legal assistance and the courts
Morry Bailes (pictured), president of the Law Council of Australia (LCA), told Lawyers Weekly ahead of the budget reveal on Tuesday that he hoped the government would move to address the “funding crisis” that the justice system was in the grips of.
“We need the federal budget to address the funding crisis in the justice system,” Mr Bailes said.
“The Law Council has been calling on government to plug the funding gap in the federal court system and the legal assistance sector for a number of years.”
He said that addressing the crisis would require the government to specifically deliver long-term investment in the legal assistance sector.
“The preventative, everyday role of timely legal assistance stops simple problems from escalating into more serious matters at great cost to the taxpayer and community,” Mr Bailes said.
“It’s time this was recognised and funded adequately.”
Mr Bailes added that a long-term investment in the courts was also imperative. He insisted that the waiting times for parties, especially in Australia’s federal and family courts, were currently unacceptable.
“In some cases families are facing a wait of three-years before final hearing,” Mr Bailes said.
“The delays in the courts [with] the underfunding of legal aid are causing untold pain and hardship on the lives of everyday Australians and their families.”
Mr Bailes noted that the Senate had overwhelmingly passed a motion calling for urgent action to address what he described as a justice system crisis at the last sitting fortnight before the 2018–19 budget.
The motion passed 39 to 27 in March, with the Upper House acknowledging the inadequate funding of Federal Circuit Court and the Family Court, as well as the significant social and economic flow-on effects of a court system under pressure. One of the key features of the motion was the acceptance for the need of a clear plan for the future.
“While the Law Council recognises the importance of the current review of the family law system, we would urge the government not to cite it as a reason to delay increasing funding,” Mr Bailes said.
“We are grateful the Senate has recognised the justice crisis and that it has expressed its collective view so powerfully.
“The upcoming budget is a chance for the Australian government to recognise the crisis in our courts and take steps to ensure Australians have timely access to justice,” he said.
David Neal SC, co-chair of the LCA's Access to Justice Committee, published an opinion piece in The Australian last week that underscored how last year the Commonwealth's contribution to legal aid commission funding was the lowest it has ever been in 20 years. A PwC report written for the LCA showed that the forecast for 2019–20 would fall again. Since 1996, federal funding for legal assistance has dropped from $11.55 per person to $8.40.
“PwC calculates that it would take an additional $190 million in this year’s budget to return the commonwealth’s share of funding to the 50 per cent level. That is near enough to doubling the $217 million that the commonwealth currently spends on legal aid commission funding,“ Mr Neal said.
“From a distance, the disintegration of the commonwealth government’s commitment to legal aid funding is hard to understand. Equality before the law is basic to our political framework. But the foundation is shaky.“
Despite the various calls, last night's budget announcement proved neither further legal assistance nor attention given to court delays were an immediate priority.
It is worth noting, however, that last year's budget delivery saw the government set $55.7 million aside for legal assistance services over the next three years.
Of that figure, $39 million was slated to go to Community Legal Centres (CLCs) and $16.7 million to Indigenous Legal Assistance Providers, the 2017–18 budget said.
Taxation — ‘Hamburger and milkshake’ tax cuts predicted
National firm Gilbert + Tobin wrote, in the lead-up to last night’s budget, that personal income tax cuts were expected to take centre stage, while plans to reduce the corporate tax rate had seemingly been placed on hold.
“The increased probability of cuts to personal income tax rates comes off the back of increased tax collections which have already been announced by the Treasurer,” the firm said.
“That is not to say the budget is no longer in deficit; it just means the government has collected more tax than it had forecast in the previous budget, and instead of putting that money away to move faster and closer to a budget surplus, it seems highly probable that it will be given away.“
“Hamburger and milkshake” cuts to personal income tax, therefore, were expected.
“Small personal income tax cuts targeted at middle-income earners (likely, the $37,000 to $87,000 tax bracket) are expected to be announced,” the firm wrote.
“[These] cuts are based on the Coalition’s policy that tax revenue should not be allowed to rise above 23.9 per cent of GDP. Under this policy, tax cuts would be provided whenever tax revenue rises above this threshold.”
During the budget speech, the Treasurer confirmed a seven-year personal tax plan in a bid to make personal income tax "lower, fairer and simpler".
The plan has three parts, Mr Morrison explained.
The first was tax relief for middle and low income earners, he said, explaining that those earning up to $37,000 paying 19 cents in the dollar will have their tax reduced by up to $200 on what they have paid in tax. The average tax paid by Australians in this tax bracket is $1,900 per year, he said.
"For those earning more than $37,000 paying 32.5 cents in the dollar, their tax will be reduced up to a maximum of $530 per year. The average tax paid by Australians in this tax bracket was $10,400 per year in 2015–16.
"4.4 million taxpayers with an income between $48,000 and $90,000 will receive the maximum tax relief of $530."
The second part of the three-part plan ensures that Australians working overtime or those who gain a pay rise are protected from paying higher tax rates.
The Treasurer noted that in the 2016–17 budget, the top threshold for the 32.5 per cent tax bracket was increased from $80,000 to $87,000. However this threshold will now be set at $90,000 as of 1 July 2018, he explained.
The third and final part of the three-part plan aims to make the tax system simpler, with the Treasurer explaining that by 2024–25 the government will simplify the personal tax system by abolishing the 37 per cent tax bracket entirely.
"Australians earning more than $41,000 will only pay 32.5 cents in the dollar all the way up to the top marginal tax rate threshold which will be adjusted to $200,000, to account for inflation and expected wage movements over the next seven years," Mr Morrison said.
"Under the Turnbull government's personal tax plan, most working Australians earning above $41,000 are likely to never face a higher marginal tax rate through their entire working life.
"The plan is affordable and funded. The total revenue impact on the budget and forward estimates is $13.4 billion. The overwhelming majority of this cost commences in 2019–20, the same year the budget is forecast to return to balance."
Backing business and foreign investment
Another legal player speaking out before last night's budget reveal was Arnold Bloch Leibler partner Clint Harding. Mr Harding predicted that the budget would be largely in line with what the voters have come to expect in the lead-up to an election: “inoffensive to most and light on any meaningful tax reform”.
While pitches on foreign investment will continue to focus on supporting growth and innovation, he doubted there would be an emphasis on presenting Australia as an attractive place for foreign investment.
“Many recent tax measures have sent mixed signals to international investors and have made it more difficult to raise capital in a global market,” he explained.
“On the one hand you have incentives such as the Asia Region Funds Passport and the new Collective Investment Vehicle regimes designed to encourage investment, but then you have more onerous avoidance rules, a diverted profits tax, further tightening of the Managed Investment Trust rules and a slew of other measures sending quite a different signal.”
Further on the theme with overseas considerations, G+T predicted that international tax reform measures would be announced to combat the erosion of the Australian tax base by the business models of global digital and social media companies.
“Following the introduction of the Netflix tax which came into effect on 1 July 2017, it will be interesting to see what form these new measures take,” the firm wrote.
“It is unclear whether these measures will seek to modify existing law or introduce entirely new legal concepts (such as the EU’s recent proposal to introduce the concept of a virtual or digital permanent establishment).”
On the subject of research and development (R&D), Mr Harding expected the budget to include a number of measures designed to more appropriately target tax incentives.
This is especially pertinent, he noted, given the range of integrity concerns about the current R&D regime.
“The heat was only increased by a recent Federal Court decision that handed down a civil penalty of $4.25 million to a company for promoting a tax exploitation scheme which involved the claiming of R&D tax incentives,” he said.
“While I fully support measures designed to ensure the integrity of our R&D regime, to encourage collaboration and reduced complexity, any changes shouldn’t undermine Australia’s capacity to compete in the ‘global innovation race’.”
In addition, oil and gas companies are expected to pay billions more, under changes to the Petroleum Resource Rent Tax.
“The measures are expected to restrict concessions which currently allow oil and gas companies to increase or uplift certain forms of uneducated expenditure from prior income years to reduce their current tax year liability,” G+T explained.
This measure is only thought to apply to new projects, however.
G+T further predicted that we will not see any changes to GST — except to perhaps remove the so-called “tampon tax” — nor would there by amendments to company tax rates, negative gearing or capital gains tax for individuals.
Ultimately, tax revenue is just one part of the larger budget equation, the firm said.
“While some of the tightening measures will no doubt help fund the tax cuts, it will be interesting to see what flow-on effect there is on spending,” it said.
In the latter half of his speech last night, the Treasurer highlighted the Turnbull government's focus on backing business to create more jobs and reiterated its continued support for companies investing in R&D.
“Full implementation of our enterprise tax plan is needed for our businesses to remain internationally competitive, invest, create more jobs, boost wages and increase trade for smaller businesses,” Mr Morrison said.
“For small business we will once again extend the instant asset write off for businesses with a turnover up to $10 million for purchases of up to $20,000. In this budget we are making sure small businesses don't get ripped off by other businesses who deliberately go bust to avoid paying their bills, with tough new anti-phoenixing measures. And we will invest more in our people, providing an additional $250 million for the Skilling Australians Fund to deliver business with the people and skills they need to grow their business.
“Tonight we [also] announce a new 21st century medical industry plan to create more jobs in this fast growing sector of our economy. The health sector represents 7 per cent of our economy and 14 per cent of jobs.
“Our plan will provide more support for medical research projects, new diagnostic tools, clinical trials of new drugs, scientific collaboration, and development of new medical technologies that can be sold overseas...But it's not just science and technology in the medical industry we're supporting.
“The government will invest more than $2.4 billion in Australia's public technology infrastructure. This includes supercomputers, world class satellite imagery, more accurate GPS across Australia, upgrading the Bureau of Meteorology's technology platform, a national space agency and leading research in artificial intelligence.
“...To support companies genuinely investing in R&D we are refocusing the R&D tax incentive to give more support to companies that invest a higher proportion of what they spend in R&D, over and above what others would just do anyway.”
Commenting further on R&D tax incentives, Mr Morrison noted that government will crack down to ensure they are “used for their proper purpose”, installing “enhanced integrity, enforcement and transparency arrangements”, which will ultimately save taxpayers $2 billion over the next four years, he said.