Swan promises and renigs

Wayne Swan has given tax relief to SMEs with one hand and taken it with the other.
The SME community should feel pretty special. In a Federal Budget that contains relatively few spending initiatives for the 2012-13 year, the Treasurer has put Government support for small business firmly in the spotlight by formally announcing the loss carry-back tax break for companies 90% of which it estimates will go to businesses earning under $2 million.
It's a policy the tax experts and industry advocates are broadly supportive of. While businesses have long been able to carry tax losses forward and offset them against future profits, the ability to carry tax losses back and claim refunds against tax paid on profit in the past is just as important as it provides relief to businesses when they need it most.
"Our multi-speed economy is putting pressure on businesses that aren't in the fast lanes," Swan said in his Budget speech.
"Our $714 million loss carry-back scheme will support businesses in need, to help them compete. We'll encourage companies to invest and innovate by offsetting a current year tax loss of up to $1 million against tax paid in previous years; a refund of up to $300,000."
It's a good measure, but the devil is very much in the detail when you look closely at the ledger of new spending and saving measures for 2012-13.
The measure will cost the Government just $6.7 million next financial year – close enough to nothing in the context of the Budget – and most eligible companies won't be able to access the tax break until 2014.
And then there's the little matter of paying for the loss carry-back tax break.
In order to fund this initiative, the Government has decided to dump the long-promised company tax cuts (30% down to 29%) that were supposed to start kicking in from July for companies with under $2 million in turnover.
That's very disappointing, given the fact that these company tax cuts have been sold for the best part of two years as the business community's dividend from the mining tax.
Scrapping the tax cuts means that $316 million in relief that would have gone to small business in 2012-13 is gone (remember, small business got a one-year head start on the cut).
But the loss carry-back will deliver just $6.7 million in relief.
In terms of new measures announced in this Budget, that's a $310 million turnaround for small business in terms.
True, small businesses will from July be able to access a $6,500 immediate asset write-off and a special $5,000 immediate deduction on the purchase of motor vehicles. These measures, which were announced well before today's Budget, are worth around $1 billion in 2012-13, according to Treasury.
But they will only be benefit businesses that have ready money available to buy assets and make investments. How many SMEs will be in a position to access these benefits remains to be seen.
Of course, in a Budget with $32.6 billion of cuts over the next four years, it was inevitable that SMEs would be required to shoulder some of the burden. And the fact that the small business community has at least got something in return – the loss carry-back initiative – is welcome.
But the decision to axe the tax cuts does represent something of a broken promise for the small business community.
While it is true that the Government has struggled to get the company tax cut past the Opposition and the Greens, it is also true that the Greens were prepared to support the cut for small business and even enlarge it to cover SMEs with up to $5 million in turnover.
Swan could have done a deal, but in the end he's decided that Labor's surplus was much more important.
The loss carry-back tax break is good policy, even if it has its limitations. The tax write-offs and immediate asset deductions are welcome.
But Swan and his small business ministers have spruiked the company tax cuts for the best part of two years – and now they are gone.

RBA

The Reserve Bank of Australia (RBA) has dropped the official cash rate by 50 basis points at its Board meeting today, from 4.25 per cent to 3.75 per cent.

This decision was based on information suggesting that economic conditions have been somewhat weaker than expected, while inflation has moderated.

In the Residex release of its March housing market statistics and commentary last Friday, Residex CEO John Edwards predicted today’s outcome.

“The interest rate reduction is going to provide the much needed consumer confidence boost. Without some form of stimulus, we would have been likely to continue seeing housing values decrease across much of Australia. Today’s RBA decision should stop the heavy adjustment process which would have otherwise been inevitable in the Melbourne market, and it will help push all markets which were passed the bottom of the correction phase”.

Mr. Edwards went on to say, “Depending on the content of the upcoming Federal Budget and its assessed impact, a further 25 basis point adjustment could come in June”.

Residex does not expect the rate adjustment to cause significant house price rises in most markets due to unaffordability issues which will still remain.