Budget 2015 Brief

Contents Executive summary ....................................................... 1

Economic and fiscal analysis ......................................... 2

Economic assumptions .................................................. 3

Personal tax ................................................................... 4

Business tax ................................................................... 5

Tax integrity measures .................................................. 6

Small business ............................................................... 8

Tax reform ...................................................................... 9

Infrastructure ............................................................... 10

R&D and grants............................................................ 11

Environment ................................................................. 11

Government overview ................................................. 12

Competition policy ....................................................... 13

Health and ageing ........................................................ 14

Human services ........................................................... 15

Education ..................................................................... 16

Defence ....................................................................... 17

Overview of changes ................................................... 18

CFO / Head of Tax checklist ........................................ 19

Contact us .................................................................... 20

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Executive summary A focus on confidence levels and integrity measures The 2015 Federal Budget is set against the back drop of a previous tough first term budget, historically low interest rates, lower exchange rates and a government belief that green shoots are now evident in the economy.

Households have mostly been spared any further pain. In addition, the government is seeking to support business and consumer confidence rather than embark on further Budget deficit remedial action. Thus, rather than directing expenditure savings towards offsetting declining revenues and delivering faster reductions in projected fiscal deficits, the government has decided to spend most of the savings on job creation measures.

A strong focus in this Budget is providing small businesses with incentives to employ more staff and for the second income earner in families to be encouraged to look for more work. There is also a focus on integrity measures looking to address fiscal risks and fairness concerns in both the taxation and welfare systems.

Key decisions in the Budget include:

A small business package that includes reductions in tax rates for small businesses as well as accelerated tax write-offs for a fixed period.

Streamlining and extending existing child care arrangements, but restricting the ability to access both government and employer-provided parental leave entitlements.

Large business tax integrity measures directed towards increasing both the types of activities that are brought within the Australian tax base and tax disclosures.

What does this mean for business? Whilst a few of the Budget proposals may still be subject to Senate negotiations, and thus some businesses may be tempted to take a wait and see approach, there appears to be much less controversy surrounding the details of this Budget.

Thus, if you run a small business, you will be focussing on your year-end tax position, next years tax payment profile and your projected capital expenditure over the medium term.

For some large businesses, consideration needs to be given to the opportunities associated with the infrastructure and free trade initiatives as well as assessing the ramifications of the child care and parental leave reforms.

For others (particularly some large businesses that to date, have been outside the Australian tax net) understanding the Australian tax integrity measures will be your immediate focus. For all large businesses, however, this is by no means the end of the base erosion and profit shifting story. Still to come is the Senate Inquirys report on Corporate Tax Avoidance in June 2015, the OECDs final recommendations in October 2015, the Tax Reform green paper by the end of the year, and the ever increasing global compliance activities of multiple tax authorities.

Gary Wingrove

Chief Executive Officer

KPMG | 1

2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

Economic and fiscal analysisBelow trend growth in Australia's major trading partners, particularly China and Japan, and subdued business investment activities has resulted in a moderating of our short term economic outlook.

As activity in the non-resource sectors of the economy is picking up more gradually than expected, the risk of managing a transition from the investment boom to broader based growth appears to be slowly growing over the near term.

While Australias fiscal position stays reasonably well placed compared with its advanced economy peers, tougher budget repair measures on both revenue and expenditure sides would be needed to continue back on the path back to a surplus. That being said, the running of deficits in the forward estimates period where our economic certainty is less than we have recently enjoyed, is reasonable and appropriate.

KPMGs forecasts broadly concur with those of the Treasury, although we are less optimistic that the underlying cash balance will trend down as quickly as predicted due to possibly softer tax receipts. That is, implied tax revenue elasticities calculated against nominal GDP for the period 2014-15 to 2018-19 are more than 40 percent stronger than average tax revenue elasticities over the period 2000-01 to 2013-14. Should the forecast growth rates in tax revenues be less than anticipated, the underlying cash position for the government will be worse over the forward estimates, assuming there is no corresponding adjustment in government expenditure.

The key challenge to maintaining Australias living standard remains to be boosting productivity. The fiscal policies targeted to increase productive potential are particularly helpful at the time when there appears to be a heavy reliance on monetary policy to support the adjustment of the economy.

With the new tax and spending measures, the deficit is now expected to narrow from $41.1 billion (2.6 per cent of GDP) in 2014-15 to $6.9 billion (0.4 per cent of GDP) in 2018-19. The overall fiscal position remains comparatively healthy among advanced countries.

Government Net Debt

Underlying cash balance

A sound macro economy

Source: Federal Budget papers and IMF publications

Key insights Softer economic conditions, particularly due to declining business investment in the mining sector, warrant

the running of budget deficits in the forward estimate period. KPMG broadly concur with Treasury economic forecasts, although we are less optimistic that tax receipts

will be as strong as anticipated, particularly taxation revenue generated from individuals and companies.

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Economic assumptions When interpreting the Budget estimates, the likelihood of volatility in economic fundamentals is an important consideration. Key risks for macro indicators are presented below.

Real GDP growth continuing trend growth

2014 2015 2016 2017 2018

GDP (Real) 2.50% 2.25% 2.75% 3.25% 3.50%

Growth in real GDP 2015

United States 3.1%

Canada 2.2%

United Kingdom 2.7%

Japan 1.0%

China 6.8%

The resource sector continues to transit from an investment phase to a production phase, with iron ore exports growing faster. Higher resource exports will make the economy more sensitive to terms of trade shocks, and the floating exchange rate will be an important buffer.

Unemployment rate recovering very slowly

2014 2015 2016 2017 2018

Unemployment 5.90% 6.25% 6.50% 6.25% 6.00%

Unemployment rate 2015

United States 5.2%

Canada 7.0%

United Kingdom 5.4%

Japan 3.7%

China 4.1%

Spare capacity in the economy has continued to increase, with the unemployment rate increasing, consistent with the below trend economic growth. Labour market conditions are expected to recover very gradually, with the unemployment rate declining once economic growth reaches an above trend pace.

Consumer price index within band 2014 2015 2016 2017 2018

CPI 3.00% 1.75% 2.50% 2.50% 2.50%

CPI 2015

United States 0.1%

Canada 0.9%

United Kingdom 0.1%

Japan 1.0%

China 1.2%

Inflation is expected to come in below the target band, reflecting the fall in oil prices and weaker performance for the economy and labour market. Expectations of a depreciating Australian dollar are expected to pose upward pressure on inflation over the projection period.

Public net debt as a percentage of GDP

2014 2015 2016 2017 2018

Public net debt 15.6% 17.3% 18.0% 17.6% 16.8%

Debt as a percentage of GDP

2015

United States 80.4%

Canada 38.3%

United Kingdom 82.6%

Japan 129.6%

China n/a

Net government debt as a percentage of GDP a key measure of fiscal sustainability remains low by international standards, and is expected to remain less than 20 percent into the medium term.

Source: IMF

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Personal tax Fringe benefits tax (FBT) A $5,000 grossed-up cap on salary sacrificed meal entertainment and entertainment facility leasing expenses for employees of not-for-profit organisations, public hospitals and public ambulance services has been introduced from 1 April 2016.

The current FBT exemption for work-related electronic devices will be expanded for small businesses with aggregated annual turnover of less than $2 million, so that the exemption will apply to more than one work-related portable electronic device. There is not a requirement for the devices to perform substantially different functions.

Income Tax From 1 July 2015, unincorporated small businesses (e.g. sole traders) with aggregated annual turnover less than $2 million will be eligible for a 5 percent tax discount on the income tax payable on the business income, capped at $1,000 per individual for each income year.

From 1 July 2015, the zone tax offset will exclude fly-in fly-out and drive-in drive-out workers where their usual place of residence is not within the zone.

Employee Share Schemes Budget announcements made reference to the legislation currently before parliament to change the employee share scheme provisions.

Overall the drafted changes realign Australias tax treatment of employee share schemes with international practice, and are welcomed.

The new rules, to apply to grants from 1 July 2015, will benefit all employers, in particular by shifting the taxing point of rights to acquire shares, including options, from vest to exercise. This means the taxing point will coincide with the economic benefit received at exercise and revives the effectiveness of options.

As expected, there are no significant taxation changes in this years budget and an attempt to better target welfare measures. Individual income tax thresholds are not automatically adjusted for inflation, which over time pushes individuals into the higher taxing brackets (bracket creep) adding further strain to the relationship between effort and reward. This Budget has not sought to address this.

Other measures Other measures announced include: Tightening access to pension payments as a

result of the announced decreases in the assets test.

Changes to work-related car expense deductions, as follows: Abolition of the 12 percent of original value

method and one-third of actual expenses method for claiming income tax deductions for work related use of cars.

Introduction of an average rate (regardless of size of car) when using the cents per kilometre method.

Income tax deduction for work related use of cars

Engine capacity (litre) Current cents per km rate

Proposed cents per km rate

Ordinary Car

Rotary engine car

1.6 or less 0.8 or less 65 cents

66 cents 1.6 2.6 0.8 1.3 76 cents

2.6 and over

1.3 and over

77 cents

Increase in Medicare Levy low-income thresholds to take account of movements in CPI and ensure that low-income earners continue to be exempted from paying the Medicare Levy.

Changes to tax residency rules from 1 July 2016 in relation to people temporarily residing in Australia for a working holiday so that they do not benefit from the tax-free threshold (currently $18,200).

Key insights The introduction of the cap for salary sacrificed meal entertainment and entertainment facility leasing

expenses follows recommendations from the 2010 Productivity Commission inquiry and the 2013 Labor Governments inquiry into the not-for-profit sector. The changes should provide a more even playing field for employers in the private sector in comparison to those in the not-for-profit sector.

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Business tax Five main changes

1 Multinational anti-avoidance measures The government has released draft legislation expanding the operation of the anti-avoidance provisions in Part IVA to multinational enterprises who structure to avoid having a taxable presence in Australia. The changes are targeted measures aimed at approximately 30 companies who deal through related parties where profits from Australian sales are booked overseas and subject to low or no global tax.

The measures will apply to tax benefits for both new and existing schemes from 1 January 2016. The application of these measures is limited to companies with global revenues of $1 billion or more.

Administrative penalties will be doubled from 1 July 2015 for companies who enter into tax avoidance or profit shifting schemes.

2 New transfer pricing documentation standards The government will implement the Organisation for Economic Cooperation and Developments (OECDs) new transfer pricing documentation standards. Under the new standards, the Australian Tax Office will receive the following information:

A country-by-country report disclosing information on the global activities of the multinational, including where its income is located and where its taxes are paid.

A master file containing an overview of the multinationals global business and transfer pricing policies.

A local file providing detailed information about the local taxpayers intra-group transactions.

The measures will apply from 1 January 2016 and will be limited to companies with global revenue of $1 billion or more.

3 Statutory remedial power for the Commissioner of Taxation The Commissioner of Taxation will be granted the power to make a legislative instrument to

modify the operation of the tax law to ensure the purpose or object of that law is achieved. This change will apply from the date of Royal Assent.

This is a budget with two clear areas of focus concessions to drive growth for small businesses and integrity measures for large multinational companies structuring to flow profits outside the Australian tax net. Outside of these two areas, there are limited changes for business.

The operation of this statutory remedial power will be limited to where a negligible budget impact arises and provided it has a beneficial outcome for affected taxpayers. Legislative instruments will be subject to consultation and may be overridden by Parliament.

This is a significant broadening of the power given to the Australian Taxation Office to administer the law. The new approach will hopefully lead to greater certainty for taxpayers without the significant delay that can arise when waiting for legislative amendments through Parliament.

4 Managed Investment Trusts revised start date The recently released draft legislation introducing a new attribution tax system for qualifying Managed Investment Trusts included a start date of 1 July 2015. As anticipated by industry, the government has announced the measures will instead apply from 1 July 2016, with the option to early elect into the regime from 1 July 2015. No announcement has been made on the substantial number of submission points raised in recent consultation on the draft legislation.

5 Company tax and paid parental leave levy The 1.5 percent paid parental leave levy and company tax cut announced in last years Budget will no longer apply to medium and large corporations.

However, the corporate tax rate for small businesses (turnover of less than $2 million) will be cut to 28.5 percent from 1 July 2015.

The franking credit rate will remain unchanged at 30 per cent for all companies.

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Tax integrity measures Multinational (MNE) anti-avoidance provision Background

There is a concern that a number of MNEs particularly, but not solely, in the digital economy, put in place structures where the main sales activity of the MNE does not give rise to a taxable presence in Australia. This is because our tax treaties allocate taxing rights to the treaty partner and not Australia for profits on the sales contract.

In many cases a related Australian marketing company employs people to undertake substantial activities prior to the formal conclusion of the contract and is paid a service fee, but not a share of the profits referable to the sale. The G20-OECD Action Plan recognises this problem and is considering amendments to the concept of permanent establishment in treaties generally. However, the United Kingdom, acting ahead of the G20-OECD process, has introduced a new tax, called a Diverted Profits Tax. It operates outside the scope of the tax treaty network because it is not a corporate income tax. Australia has chosen a different path. Australia has sought to modify its existing anti-avoidance provisions to deal with this issue rather than create a new tax. Australias tax treaties are incorporated into Australias domestic legislation which allows Australias anti-avoidance provisions to override the treaties.

Conditions

There are four gateways for this provision to apply:

1. Size - The foreign resident must have global turnover in excess of AUD$1 billion in any year in which they obtain the tax benefit or reduce the relevant taxpayers liabilities. 2. Customer relationship - The foreign resident derives income from a supply of goods or services to Australian customers, with another entity in Australia supporting that supply. 3. Nil or low tax condition - This condition will be satisfied where the foreign resident is connected to a nil or low tax jurisdiction unless the non-resident demonstrates that either:

a) none of the activities carried on in the nil or low tax jurisdiction are connected with Australia; or b) those activities represent substantial economic activity.

Because the so-called digital economy cuts across multiple sectors, the impact of the proposed changes to the GST treatment of imported digital products and services is not limited to any one sector, although the technology sector and those using innovative ways to sell products cross border are likely to be most impacted.

4. Principal purpose of tax avoidance - A principal purpose (being less than a sole or dominant purpose) of the structure must be to obtain a tax benefit or both a tax benefit and a reduction in foreign tax.

Reconstruction and penalties

If the above four conditions are met, then the Commissioner has the power under existing general anti-avoidance provisions to assess tax (including withholding tax) as if there was an Australian taxable presence.

If the MNE anti-avoidance provision were to apply, then the Commissioner will have the power to impose a fine of 100 percent of the unpaid tax plus interest.

Commencement

The provisions are to commence from 1 January 2016. This will give companies an opportunity to reorganise their affairs. There is, however, no other grandfathering of existing arrangements.

Treasury will consult on the Exposure Drafts until 9 June 2015.

Key insights This is a targeted measure that only deals with

inbound supplies directly to Australian customers (i.e. excludes buy-sell arrangements and outbound marketing hubs) and where there are connected activities undertaken in Australia by associated or commercially dependent entities.

No definition of low rate of corporate income tax raises uncertainty of scope of application.

Not limited to MNEs with operations in pure tax havens but also captures jurisdictions offering tax holidays and other concessions.

Adopts a lower "purpose" threshold than existing general anti-avoidance measures.

Existence of entities in nil or low tax jurisdiction creates a rebuttable presumption of potential application and burden of proof rests with MNE to establish exemption.

No grandfathering and application date from 1 January 2016 means limited time for action.

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Tax integrity measures (continued) GST on digital products and services by offshore suppliers Background

There has been significant public discussion in the last 5 years concerning the perceived competitive disadvantage faced by domestic suppliers of goods and services who are required to charge 10 percent GST as against offshore suppliers who can make sales without imposing GST.

The proposed Budget measure partially deals with this problem, by seeking to charge GST on all imported intangibles and services consumed by Australian resident end users.

These measures will apply to intangibles such as digital supplies (e.g. movie downloads, games and e-books), as well as services such as consultancy and professional services, but not to physical goods ordered on-line.

In some circumstances, the liability for the GST obligation on electronic supplies made by non-residents will fall to the operator of a digital marketplace or platform.

A simplified registration framework is proposed for non-residents with a GST obligation under these amendments.

Commencement

The GST changes are to commence on 1 July 2017.

Consultation

The changes will require the unanimous agreement of the States and Territories. The closing date for submissions commenting on the draft legislation is 7 July 2015.

Anticipated revenue

The revenue to be collected from this proposal is expected to be $350 million over the next 4 years.

Key insights Not limited to digital supplies as was

anticipated. Instead will capture all imported services and intangibles supplied to end consumers.

Differs in some respects from legislation proposed or enacted in other jurisdictions.

Presents challenges for non-resident suppliers to determine status of consumers, particularly for marketplace operators. Will capture more transactions than if applied at individual supplier level.

Would have been preferable to use the opportunity to align the treatment of imported goods and services - now an imbalance between electronic versions of physical goods, e.g. e-books v books.

Needs to be accompanied by streamlined ATO GST registration processes and systems.

Further clarification, such as additional transitional provisions, may be required.

GST compliance program- 3 year extension

The government expects that the ATO will collect an additional $2.5 billion from a 3 year extension to the GST compliance programme, $1.8 billion of which will flow to the States and Territories.

Additional revenue in 2016-17 is estimated at $717.8 million.

Key insights The estimate of additional revenue in 2016-17

represents an increase of slightly over 40 percent from the 2013-14 ATO Annual Report figures.

We can expect continued focus on the Integrity of Business Systems for GST purposes and perhaps a more rigorous enforcement of the penalty regime January 2016 means limited time for action

KPMG | 7



Small business Reduction in corporate tax rate and a small business discount The government has followed through with its announced cut in the company tax rate for small businesses reducing the tax rate to almost a 50 year low of 28.5 percent with effect from 1 July 2015.

Unincorporated small businesses will also receive a 5 percent discount on income tax payable on business income up to a $1,000 cap per individual.

Immediate write-off on assets costing less than $20,000 The Treasurer has gone back to the tried and tested accelerated depreciation on assets acquired by small businesses.

Immediate write-off for each asset costing less than $20,000.

Measures apply to assets acquired and installed from now to 30 June 2017.

Assets costing $20,000 or more can be pooled and depreciated at 15 percent in the first year and 30 per cent thereafter (with an immediate deduction when the balance falls below $20,000).

Is the small business turnover threshold too low? Classification as a small business enables an entity to access not only these new measures but also a number of existing targeted concessions.

Given this importance we would be keen for the current $2 million threshold to be revisited and ideally indexed.

Gap growing between personal and company tax rates The reduction in the corporate tax rate continues to widen the gap between this and the top personal marginal tax rate.

The engine room of the economy is getting a tune-up. Targeted tax and other measures should have a meaningful impact on entrepreneurs and early-stage businesses.

This will continue to encourage individuals to access company profits in a manner other than a dividend with the risk of instead having a deemed unfranked dividend.

However Australia is not unique in having such a significant gap with a major difference being the imputation system reducing the ultimate impact.

From 1 April 2015 Corporate tax rate

Top personal marginal tax rate

United States 40.0%* 39.6%

Canada** 26.5% 46.4%

United Kingdom 20.0% 45.0%

China 25.0% 45.0%

New Zealand 28.0% 33.0%

Notes:

All tax rates are rounded to one decimal point

* Assumed 5% state and local government taxes

** Assumed company or individual in Ontario

Change of business structure without incurring a CGT liability With effect from 1 July 2016 there will be CGT roll-over relief if a small business entity wants to change its structure.

Businesses will still need to be cautious of other taxes such as stamp duty and GST.

Other measures Costs of starting a new business can now be

deducted in the year of commencement.

Reduction of red tape when registering a business.

Key insights The Budget has focused on small business to kick-start the economy. Whilst dual corporate tax rates will introduce complexity this is the practical cost of having a targeted

measure seeking to maximise every dollar being spent. The significant immediate write-off of assets costing less than $20,000 should impact broader spending in

the economy with all businesses ultimately benefitting.

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Tax reform In the Budget Reply speech in May 2013, the now Prime Minister announced a White Paper process in relation to tax reform if elected.

On 30 March 2015 a discussion document was released titled Re:Think Tax Discussion Paper which sets the scene rather than provide tentative solutions and trade-offs. Potential solutions will be dealt with in a Green Paper to be released in the second half of 2015, which will be followed by a White Paper to be taken to the next Federal election.

There is a very short 2 month consultation period on Re:Think which ends on 1 June 2015, although the government has indicated that it will receive input after that time and consultation is being undertaken by the Board of Taxation in July.

Tax reform is clearly very difficult. The government has indicated that it will not seek to widen the base or change the rate of GST without consent of all the states. Australias company tax rate is particularly high for a medium sized economy reliant on foreign investment for capital deepening and therefore productivity improvement.

On personal income tax, bracket creep and high effective marginal rates arising from the loss of transfer payments for those on lower incomes seeking additional hours of work are problematic features. We have a plethora of inefficient state taxes. There are few levers, particularly if changes to the taxation of consumption are excluded.

It is important for us all to understand how different stakeholders are potentially impacted by tax reform. From that knowledge one can develop an educated intuition about the changes that are required.

It is not a matter of leaving it to taxation technicians. The deep and valuable thinking in tax policy starts when one understands substantially all the arguments and provides an intuitive, but not-self-serving, weight to each. Uninformed intuition generally ideologically driven can be counterproductive.

That said, the debate is a particularly important one and may set the direction for change in the long term. KPMG has produced a thought leadership piece on tax reform and will continue to produce short pieces on individual components of the tax system.

We welcome your input. Download our latest thinking on Tax Reform.

Tax reform: A national challenge... join the conversation

KPMG | 9



Infrastructure Announcements Infrastructures presence in this years Budget is somewhat subdued when compared to last years cornerstone infrastructure Budget.

The announced infrastructure funding focused on regional initiatives such as the $5 billion concessional loan facility to increase private sector investment in infrastructure in northern Australia, the $100 million road upgrade for improving northern cattle supply chains and $50 million to fund local infrastructure projects from the Stronger Communities Programme. An additional $499 million for road infrastructure has also been allocated to Western Australia. These announcements combined with existing announced funding commitments provide a robust pipeline.

The following table details a selection of announced federally funded infrastructure projects:

Announced Federally Funded Infrastructure Projects Project Value ($m) New South Wales 11,792 Western Sydney Infrastructure 2,900 Pacific Highway Duplication 5,600 Westconnex 1,500 Other 1,742 Queensland 10,150 Bruce Highway 6,700 Toowoomba Second Range Crossing 1,285 Gateway Motorway North 930 Other 1,235 Victoria 1,247 Western Highway Ballarat to Stawell 501 Princes Highway East Traralgon to Sale 210 Other 536 Western Australia 3,335 Perth Freight Link 925 Gateway WA Perth Airport 675 Northlink WA Swan Valley Bypass 615 Other road funding 1,121 South Australia 1,029 North South Corridor Darlington 496 North South Corridor Torrens Rd 448 Other 85 Tasmania 485 Australian Capital Territory 111

Funding is also allocated to developing a northern Australia infrastructure projects pipeline and the World Bank Global Infrastructure Facility.

The Federal Governments strong commitment to developing and improving regional and local infrastructure is demonstrated by this Budget. The last year, however, has highlighted the challenges in planning, developing and funding major infrastructure projects within a federated political system.

Building on the scoping studies announced last year, the Budget announced a scoping study to be completed for the Australian Rail Track Corporation.

Review Last years Budget embraced infrastructure as a key mechanism to (i) assist generating economic activity as the economy transitioned from resource investment led growth and (ii) drive long term productivity improvements.

A year on, real progress is being made on a number of the governments key projects. However, some of the government initiatives have been thwarted, highlighting the challenges of planning, developing and funding infrastructure within the federated political system. For example, the government remains committed to the East West Link Project and stated that it will provide $3 billion to the first Victorian Government willing to build the Project.

Also under the Asset Recycling Initiative announced in last years Budget, to encourage state governments to sell or lease assets, the majority of states have now explored the possibility of selling assets with scoping studies. However, Queensland has now decided not to proceed with any transactions, the Western Australian process remains uncertain and Victorias Port of Melbourne transaction has been deferred until 2016. These developments pose a risk that the Asset Recycling Funds could be disproportionately allocated across jurisdictions and/or stranded due to lack of asset transactions.

Key insights New announced infrastructure funding has been modest and is focused on regional infrastructure with a $5

billion concessional loan facility to increase private sector investment in infrastructure in northern Australia, $500 million for roads in Western Australia, and the $100 million road upgrade for improving northern cattle supply chains.

The Federal Government has a significant commitment to infrastructure delivery and this is demonstrated through the strong pipeline of announced projects and its substantial annual funding of infrastructure projects.

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R&D and grants Tax cuts boost R&D benefits for small business The Budget proposes to reduce the corporate tax rate for small business by 1.5 percent where the turnover is less than $2 million. This means that small business will receive additional R&D benefit - the permanent tax benefit will increase from 15 to 16.5 percent. These businesses will still be able to cash out the 45 percent refundable tax offset (where sufficient tax losses exist). There is no impact for larger companies beyond the $100 million expenditure cap enacted earlier this year.

Aggregated Turnover

Corporate Tax Rate

R&D Tax Offset

Net Benefit

>$20 million 30% 40% 10%

$2-20 million 30% 45% 15%

Government overview Digital transformation Flagged in the Coalitions election policy on e-government and the digital economy, the Digital Transformation Agenda has now been funded in this Budget. The measure seeks to promote the application of digital technologies to improve and ease the interaction between individuals, business and government. The agenda will have as its initial focus five key projects and will be administered by the Digital Transformation Office, a new agency within the Communications portfolio. Funding of $254.7 million over 4 years has been allocated.

Key to improving the experience of engaging with government is the $11.5 million allocated to the tell us once service which will see contact information able to be provided, updated and shared with relevant linked agencies. This will be accompanied by a $33.3 million program for a trusted digital identity framework as well as $7.1 million for the development of a secure and seamless whole-of-government digital mailbox solution for messages and documents.

This move to increase governments engagement with the digital sphere will be backed by the Digital Transformation Offices development of mandatory digital service standards. A further key project within the agenda is the project to streamline government grant administration. This will be underpinned by the investment in a common Information Communication and Technology (ICT) platform, a key component within the $106.8 million allocation.

Smaller government This year, the Federal Government expects to return staffing levels within the Commonwealth to below 2006-07 levels. The focus on reducing the size and complexity of government is captured in the smaller government reforms. These address the elimination of duplication and waste, streamlining of services and reducing the cost of government administration.

The Department of Education and Training, and the Department of Health have undergone the first of two pilot functional and efficiency reviews.

With the reality of continuing fiscal constraints, the challenge for government is to seek out more efficient and relevant ways to deliver public services.

Over 5 years, these two reviews are forecast to produce savings of $131.0 million and $113.1 million respectively from 2014-15. Within the Department of Health, $96 million in net savings was found through a focus on contracting, corporate, staffing and property costs.

This program of functional and efficiency reviews will be rolled out more fully in 2015-16 and undertaken in the Departments of Agriculture, the Environment, Foreign Affairs and Trade, Treasury, Attorney-General and Social Services, as well as the Australian Taxation Office and the Australian Bureau of Statistics.

With the Federal Government having made the decision not to sell Defence Housing Australia, $4 million has been allocated to support the review of operations to promote transparency as well as ensure the delivery of quality housing and accommodation services is sustainable.

Divestment of four office accommodation buildings in Canberra is likely if the sale process validates the scoping study findings. These buildings are East Block, West Block, Anzac Park East and Anzac Park West.

Back-office efficiencies The rationalisation of enterprise resource planning systems has been identified as a key area of saving, together with the consolidation and reform of back-office processing and transactions.

Greater co-ordination around the procurement of ICT products and services has also been flagged to reduce the cost and increase efficiency, including software licencing.

Key insights Offering more than simply putting transactions online, digital has the capacity to open up whole new ways

of transacting and engaging that could profoundly change interactions with government. A re-sized public sector geared to reform, innovation and engagement will continue to demand much of its

leaders. This will require leaders who are equipped to collaborate, innovate and articulate outcomes in an environment which is marked by ambiguity and uncertainty.

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Competition policy Productivity remains high on the governments agenda, and is recognised as one of the key outcomes being sought from the $5.5 billion Jobs and Small Business Package and the $4.4 billion Families Package.

Productivity was also key to the Coalition governments 2013 election promise of a root and branch review of Australias competition policy, which has now been completed with the final report of the Harper Review published at the end of March 2015.

There are 56 recommendations contained in the report, with 21 recommendations each in the areas of Competition Policy and Competition Law.

Much of the commentary surrounding the Harper Review has focussed on Recommendation 30, which says section 46 of the Competition and Consumer Act 2010 (CCA) should be re-framed to prohibit a corporation that has a substantial degree of power in a market from engaging in conduct if the proposed conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.

Big business has suggested that there is no reason to change the current provisions, while the ACCC has suggested the Panels suggested defence to mitigate over capture for otherwise pro-competitive conduct should not be applied.

While the recommendations surrounding the misuse of market power provisions are important, it is also essential not to lose sight of the underlying driver behind the conduct of the review. It has been more than 20 years since Competition Policy was comprehensively assessed by the Hilmer Review.

The Australian economy benefitted in the final decade of the last century from the productivity dividend achieved through much of the internal reforms emanating from the Hilmer Review, while our economy in the first decade in the current century has been carried forward by external forces, such as the demand for our natural resources to fuel the China Boom.

The Harper Review provides the opportunity for Australia to re-energise the reform process commenced under Hilmer, and move onto those sectors of the economy that remain ripe for improvement, and that also have the real prospects of enhancing productivity

But, Australias period of Great Prosperity appears to be faltering, and relying on external forces alone to continue improving our living standards is too risky. Rather, todays environment of falling terms of trade and declining workforce participation means the prospect of a fall in living standards (as measured by real net disposable income per capita) is more likely than the continuation of the positive trend in growth weve enjoyed over the past 20 years.

The proposed reforms to planning and zoning, retail trading, pharmacy and human services, all have the potential to drive changes that will enable us to help ourselves, rather than relying (too much) on the help of others. Further, the Review also acknowledged that consumer benefits are likely to arise from privatisation of government assets, but that governments should not seek to maximise asset sale proceeds at the expense of competition. This recognition is important in the context of tonights announced potential sale of the Australian Rail Track Corporation and the ASIC Registry.

Key insights The Harper Review was finalized at the end of March 2015, and contains 56 recommendations, with the

two largest sets of reform proposed for Competition Policy and Competition Law. Much of the focus since its release has been on the introduction of an 'effects test' to the misuse of

market power provisions in the CCA. It is important to recognise that Australia needs to re-energise its economic reform agenda started 20 years

ago with Hilmer, particularly given the economic benefits from the commodity boom are starting to wane.

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Health and ageing Health A number of health measures announced in the last Budget have failed to pass the Senate. In particular the Medicare co-payment has been abandoned with the cost associated with the reversal featuring in the Budget. $2.9 billion in expenditure over 5 years is associated with this measure. Despite this, the government has indicated that it will maintain the Medical Research Future Fund which was to be funded through the co-payment.

In the lead up to the Budget, two major reviews have been announced with funding of $34 million: one dealing with the Medical Benefits Schedule and the second concerning Primary Care, both of which are due to report in late 2015.

Major changes A main focus of this Budget has been the Pharmaceutical Benefits Scheme (PBS) with the government providing $1.6 billion over 5 years for the inclusion of new and amended listings on the PBS and the Repatriation Pharmaceutical Benefits Scheme (RPBS). In addition, the government will achieve savings of $252.2 million over 5 years for price amendments for medicines currently on the PBS and the RPBS. These savings will be redirected to fund other health policy priorities or reinvested into the Medical Research Future Fund.

$485 million has been allocated for a new myHealth Record trial and $26 million for incentive payments to doctors to vaccinate children.

Savings of $963 million over 5 years will be achieved through reductions in a number of health programs including the Health Portfolio Flexible Fund, preventative health research along with GP Super Clinics which have not commenced construction.

The government has also recently announced the successful bidders for Primary Health Networks which will replace Medicare Locals from 1 July 2015.

This Budget signals a change of approach for the government in health, engaging doctors in major reviews of the MBS and PBS as platforms for future reform. The investment in eHealth through the myHealth trial has the potential to better leverage the health consumer to drive improvements in health outcomes.

Ageing The biggest significant change in the Budget is the $73.7 million funding over 4 years for home care packages to increase consumer choice. This measure will see the allocation of home care packages to the consumer, via the My Aged Care Gateway, instead of to the provider. This is a significant change, and will require providers to have a robust consumer directed care model.

The introduction of additional short term restorative places into the Aged Care Planning Regions will see a budget saving of $56.2 million. These services are aimed at preventing more permanent admission to residential aged care. However, it is anticipated that this will occur through the replacement of permanent residential places with short term restorative places.

The alignment of aged care means testing arrangements ensures older people who choose to pay for residential aged care either through a periodic payment, or a lump sum are treated in the same manner, ensuring equity for all older people entering residential aged care. There may also be some indirect impact from the changes to the Aged Pension Asset Test. With part pensioners and self-funded retirees expected to contribute more towards their care than full pensioners, there is likely to be an increase in the number of part pensioners and self-funded retirees who may choose to access care and support outside of the aged care system.

Key insights The government has stepped back from controversial measures such as the introduction of a GP

co-payment and instead aims to manage health expenditure by reductions in a number of health programs. The investment in eHealth through the myHealth Trial is an opportunity to re-set the eHealth agenda and

put health consumers in a stronger position to drive improvements in their health and the effectiveness of health providers.

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Human services Families Package - Child Care The government currently assists with child care through the Child Care Benefit, Child Care Rebate, and Jobs, Education, Training Child Care Fee Assistance. The policy objectives for subsidising child care are twofold: to improve workforce participation, and to enhance access to child care for disadvantaged children.

On 20 February 2015, the Productivity Commission Inquiry Report into Child Care and Early Childhood Learning was released. The Budget introduces a single means-tested child care subsidy, tied to a benchmark price, in line with the Productivity Commissions recommendations. Proposed changes to eligibility requirements with the introduction of a work activity test seek to improve workforce participation. The changes to child care payments are the first signal of the governments response to the Productivity Commissions recommendations.

While the new subsidy does, in theory, improve child care affordability, there are challenges associated with tying the subsidy to a benchmark price. High unmet demand means many child care services are likely to charge higher than the benchmark. In addition, the ability of the measure to increase workforce participation and productivity will rely on:

The market ability to address supply and demand; specifically, for the estimated 165,000 parents who would like to work, or work more, to access suitable child care places.

The availability of employment opportunities to enable parents to return to work.

Additional budget measures include:

$327.7million for a child care safety net to provide more targeted assistance to disadvantaged children and families.

$843 million to continue universal access to preschool for a further 2 years.

$246 million to trial subsidising nannies.

Changes in this Budget Additional expenditure on the streamlined child

care subsidy is projected to be $3.2 billion over the forward estimates.

Welfare Payment Reform An independent reference group chaired by Mr Patrick McClure AO was tasked by the Australian Government in December 2013 to look at Australias welfare system, the broad range of payments and services available and consider whether they support people to work in line with their capacity. In particular, the areas of focus concerned:

providing incentives to work for those who are able to work

adequately supporting those who are genuinely not able to work

supporting social and economic participation through measures that build individual and family capability

being affordable and sustainable both now and in the future and across economic cycles

being accessible, easy to understand, and able to be delivered efficiently and effectively.

While the key focus was on working age payments, the McClure Review also examined issues that impact on payments such as indexation. A New System for Better Employment and Social Outcome, the reference groups final report, was released on 25 February 2015.

While the Budget includes some welfare integrity initiatives, such as upgrading the welfare information technology system, it appears substantive action on the McClure recommendations has been deferred to pursue other initiatives.

Key insights Changes to the child care payments signal the Government's first response to the Productivity

Commission Inquiry into Child Care. The package appears reliant on the Senate passing previously announced changes to the Family Tax

Benefit B.

KPMG | 15



Education Education has received less focus in this years Budget. Total education expenses are expected to decrease by 0.3 percent in real terms between 2014-15 and 2015-16, and increase by 2.5 percent in real terms from 2015-16 to 2018-19, an increase that is driven by increased schools expenditure. Higher education and Vocational Education and Training (VET) funding will fall in nominal terms over the corresponding periods.

The Department of Education and Training (DET) has also been affected by the governments small government agenda.

Higher education The biggest new funding announcement for higher education is for an additional years funding for the National Collaborative Research Infrastructure Strategy, of $150 million. However, this is funded by cuts to the Sustainable Research Excellence Program. $16.9 million has been allocated over 4 years to improve initial teacher education.

The higher education sector will also provide a new contribution towards government revenue, with an estimated revenue recovery of $26 million over 4 years by extending the Higher Education Loan Payment (HELP) repayment framework to debtors residing overseas.

A year on from the last budget, it seems extremely unlikely now that the reduction in overall higher education funds will be offset by deregulated student fees, as first anticipated by this government. The uncertainty faced by the higher education sector is compounded by flagged efficiency dividend allocations currently being withheld by government.

Will the Senate pass the higher education reforms first announced in the 2014 Budget, and if so, in what form? Until this question can be answered, the higher education sector faces uncertainty as to the levers available to them to offset the reduction in higher education funding outlined in this Budget.

VET FEE-HELP VET sector announcements align with the Budgets fairness theme, focusing on facilitating the current regulatory reforms to improve training quality. Specifically, the Budget provides $18.2 million over 4 years from 2015-16 to implement an enhanced compliance regime for VET FEE-HELP.

The future of VET National Partnership Agreements appears uncertain, with no allocated funding in this Budget for the National Partnership on Skills Reform beyond June 2017.

Small government The government will also achieve savings of $131 million over 5 years from 2014-15 by terminating or redesigning a number of programmes administered by DET including redesigning the National Workforce Development Fund.

Key insights This is a relatively quiet budget for the education sector compared to last year. The Budget outlines a funding reduction in nominal terms for both the higher education and VET sectors,

meaning that uncertainty remains for the higher education sector as to the fundings stream available to them to offset these reductions.

KPMG | 16



Defence The defence story in this Budget is twofold:

the continuing commitment by government to the 2 percent of GDP target

the First Principles Review (FPR) which will see root and branch reform within the Department of Defence.

The Federal Government has re-committed to increasing the defence budget to 2 percent of GDP by 2023. Assuming this occurs towards the end of Defences 10-year budget planning envelope, this could mean an additional amount of $14 billion to a portfolio forecasting a total spend of $30.1 billion in FY 2016. But even in the medium term, the government has committed to 7.1 percent real growth. Few portfolios have fared so well.

Budget growth aside, it is the internal reforms that require focus. The FPR Report was completed in April and has entered its implementation phase. Defence has 2 years to complete deep reform to address the cultural and structural issues that have created slow, complicated, inefficient systems and process. Unlike many of the 20 major reviews of the organisation since 2008, the FPR does not place substantial financial targets on the leadership. Rather, Defence is being asked to become outcome orientated, simpler, professional, focused and transparent.

The risk for business is that FPR becomes a 2-year period of introspection, where investment decisions are delayed, and organisational flux makes relationship management challenging. Budgets and investment schedules may be affected.

Noteably there are $1.2 billion of new measures in this years Budget affecting Defence including:

Package Description FY15/16

Military Operations Afghanistan, Iraq and Middle East

$811 million

Intelligence Additional funding $296 million

Online Programs Additional funding $22 million

Telco Storage Additional funding $131 million

Source Budget Papers No1 15/16

Having kept its promises regarding the defence budget, the government is asking for substantial internal reform over the next 2 years. This will be a challenging time, but success offers substantial benefits to the nation.

And there are more major policy announcements to come. In August, we can expect the Defence White Paper which will include a new Force structure and (importantly for Industry), a new investment plan.

Unlike the Defence Capability Plan of years gone by, FPR has tasked the department to develop a more comprehensive Defence Investment Plan. This plan will look beyond major capital spending on aircraft, ships or vehicles, and includes the infrastructure, information technology and other enablers required to deliver defence assets. If done well, this new plan should be warmly welcomed by business.

Hot on the heels of the Defence White Paper will be policy statements concerning defence industry and Australias vexed naval shipbuilding sector. One can expect those documents to follow the lead set by FPR. Simpler program structures, focused government intervention and investment, while balancing national security and economic challenges.

In the lead up to the Budget we saw the Federal Government make announcements around additional C-17 heavy lift aircraft. Some additional Defence measures are embedded in the Northern Australia Infrastructure Fund.

Lastly, changes to the military superannuation scheme appear broadly positive for ex-service personnel, with the better of three indexes now to be used.

Key insights The big changes ahead will create opportunities for defence industry, a large, vibrant and diverse Australian

business sector which also services clients in areas such as infrastructure, information technology, and professional services.

As ship building, submarine, land vehicle and other defence programs move forward as part of the government's Budget commitments, suppliers to defence need to ensure they are prepared as opportunities come to market.

KPMG | 17



Overview of changes The main contributors to the changes in Revenue and Expenditure for 2015 2019 as outlined in the Budget papers.

Top 10 Revenue contributors Top 10 Expenditure contributors

$ million 2015-19 $ million 2015-19

Tightened pension access for high asset holders 2,443.6

Growing Jobs and Small Business reduction in small company tax rate and five percent discount for certain small business activity

(3,250.0)

Strengthening the integrity of welfare payments through fraud prevention, debt collection and assessment process enhancement

1,701.5 Families Package introducing improved child care to encourage employment, study or other recognised activities

(3,197.7)

Commonwealth contribution to the East West Link project in Victoria no longer provided

1,400.0 Medicare Benefits Schedule reversal of prior GP rebate proposals (2,809.9)

Removal of Double-Dipping from Parental Leave Pay 967.7

Growing Jobs and Small Businesses Youth Employment Strategy revised waiting period for youth income support

(1,848.0)

Streamline funding across various Health programmes 950.7

Growing Jobs and Small Business immediate tax deduction for assets with cost not exceeding $20,000

(1,750.0)

Personal income tax modernising the methods used for calculating work-related car expense deductions

845.0 Pharmaceutical Benefits Scheme expansion and amendment of approved medication listings

(1,568.2)

Strengthen Australias foreign investment framework via compliance and enforcement, penalties, application fees and transparency for agricultural investments

735.0

Families Package extension of National Partnership Agreement on Universal Access to Early Childhood Education

(843.0)

Personal income tax changes to tax residency rules for temporary working holiday makers

535.4 Developing Northern Australia Attracting private sector investment in infrastructure in Northern Australia

(800.5)

Consolidation of immigration detention centres 514.2

Automotive Transformation Scheme revised implementation (683.4)

No Jab No Pay restriction on certain Government payments where children are not immunised on a timely basis

508.7 Department of Defence: Continued support of Operation Okra in Iraq (415.2)

KPMG | 18



CFO / Head of Tax checklist Detail checklist

1 Changes in tax rates Small business Deferred tax impacts

Dividend franking

2 Fringe benefits changes Remuneration impacts (e.g. meal entertainment)

New opportunities (e.g. work related electronic devices)

3 Multinational Enterprises Targeted anti-avoidance measures Review existing arrangements to identify whether caught

Where affected, evaluate any changes needed before 1 January 2016

4 Transfer pricing Consider additional documentation needed

Evaluate systems readiness for country-by-country reporting

5 GST on digital imports Offshore suppliers Evaluate cross-border sales to identify whether affected

GST registration may be needed

Identify system changes and pricing adjustments as needed

6 Other small business concessions Review capital expenditure to identify eligibility for new concessions

Consider altering structure where CGT roll-over is available

7 New MIT regime Fund managers, A-REITS, Infrastructure and other trusts Commencing planning for broad ranging impacts (legal, systems, accounting, custodian

interactions, member engagement, etc.)

8 Employee share schemes Remuneration packages

9 Tax administration New ATO interpretative power Can existing tax consequences that are unintended and have frustrated

products/structures be overcome?

KPMG | 19



Contact us

kpmg.com/au/budget

KPMG Leadership

Chief Executive Officer Gary Wingrove +61 2 9335 8225 [email protected]

Tax Rosheen Garnon +61 2 9335 7255 [email protected]

Audit Duncan McLennan +61 2 9335 7182 [email protected]

Advisory John Somerville +61 3 9288 5074 [email protected]

Private Enterprise Rob Bazzani +61 3 9288 5594 [email protected]

Tax Leadership

Australian Tax Centre Grant Wardell-Johnson +61 2 9335 7128 [email protected]

Corporate Tax David Linke +61 2 9335 7695 [email protected]

Specialist Tax David Gelb +61 3 9288 6160 [email protected]

Industry Leadership

Corporates Angus Reynolds +61 3 9288 5364 [email protected]

Energy & Natural Resources Alison Kitchen +61 3 9288 5345 [email protected]

Financial Services Adrian Fisk +61 2 9335 7923 [email protected]

Infrastructure, Government & Health Michael Hiller +61 7 3233 3299 [email protected]

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Federal Budget Brief 2015ContentsExecutive summaryA focus on confidence levels and integrity measuresWhat does this mean for business?

Economic and fiscal analysisEconomic assumptionsPersonal taxFringe benefits tax (FBT)Income TaxEmployee Share SchemesOther measures

Business taxFive main changes

Tax integrity measuresMultinational (MNE) anti-avoidance provisionGST on digital products and services by offshore suppliers

Small businessReduction in corporate tax rate and a small business discountImmediate write-off on assets costing less than $20,000Is the small business turnover threshold too low?Gap growing between personal and company tax ratesChange of business structure without incurring a CGT liabilityOther measures

Tax reformInfrastructureAnnouncementsReview

R&D and grantsTax cuts boost R&D benefits for small businessOther Government Incentives

EnvironmentGovernment overviewDigital transformationSmaller governmentBack-office efficiencies

Competition policyHealth and ageingHealthMajor changesAgeing

Human servicesFamilies Package - Child CareChanges in this BudgetWelfare Payment Reform

EducationHigher educationVET FEE-HELPSmall government

DefenceOverview of changesCFO / Head of Tax checklistContact us

Documents

Budget 2015 Brief