Australians will join many other countries in putting a price on carbon. Whether we call this a tax, a levy or simply a contribution to cover the cost of carbon pollution the name is less important. Basically it’s a pricing mechanism that puts a price tag on every tonne of carbon pollution emitted by the large polluters. All sectors of the community will be impacted to some degree, with the lion’s share of the burden being carried by the large emitters.

The Government’s Proposal to Tax Carbon
In July 2011, the Australian Government released details of the Clean Energy Future Plan, a key element of which is a carbon pricing scheme. The scheme will result in a fixed price on carbon in the first three years with an unlimited quantity of permits, progressing to a fixed quantity/flexible price (with floor and ceiling) afterwards. There are currently not planned to be price floors and ceilings after 2018.

The price on carbon for the first three years of the scheme will be fixed at the following levels:

• $23.00 from 1 July 2012
• $24.15 from 1 July 2013
• $25.40 from 1 July 2014

These prices are well above the current international price of carbon as set in the CER market.
From 1 July 2015, the scheme moves to emissions trading with a flexible price. If there is a free flow of permits at current prices observed in Europe, the price may actually fall, as it will be set by the imported permits at the margin. Until June 2018, volatility in the carbon price will be constrained by the following price controls:

• A cap set at $20 above the expected international price for 2015-16, rising at 5 percent per annum after
• A floor set at $15 for 2015-16 rising at 4 percent per annum thereafter.

Since investment decisions are made on the basis of medium-term expectations it makes no sense to assess the effects of a transitional fixed carbon price without taking into account what this price is transitioning to.

Impact on SME’s
Manufacturing SMEs in Australia are trade-exposed: either in competition with imports or by competing for export markets.

SMEs will not be subject to the carbon price (i.e. price on carbon dioxide and equivalent emissions) for their direct emissions, but will face a substantial increase in costs through the effects of the price on the costs of their inputs.
While SMEs are a key driver of the Australian economy, the effects of the carbon tax on the trade-exposed SMEs have been ignored in the policy debate to date.

The starting level of the carbon price is irrelevant: what matters is where the price will increase to, and how the fixed price transitions to an ETS. If the plan to introduce an ETS is credible, and if carbon prices under an ETS will have to reach the levels modelled by Treasury in order to achieve the emission reduction targets, investors will behave on the basis of their rational expectation of the future ETS price, not the starting level of the fixed carbon price.

For capital intensive SMEs with higher debt-to-equity ratios, the expected transition from the fixed carbon price to an ETS carbon price could result in the fall in expected profitability of around 50 percent.
While even for the most affected firms profits, of course, will not be halved immediately on the introduction of the fixed carbon price, rational investors who believe that the Government’s commitments are credible will immediately incorporate expected declines in the profitability of the business into their investment and employment decisions.

Given that the Clean Energy Future Plan will legislate a transition to an ETS within 3 years, with the emission reduction targets no different to the previously proposed CPRS, the effects on the SMEs from the latest plan will be just as significant as they would have been under the CPRS. Hence, a package of measures to shelter trade-exposed SMEs—in the same way as the Government is planning to shelter trade-exposed high emitters—would be considerably more important than decisions about the initial level of the carbon tax or the transitional arrangements over the first three years.

• The likely impact on SMEs will depend on the level of exposure the business has to goods and services from its suppliers, be they local or international, the carbon intensive nature of their own products or services and their ability to pass on costs.
• Energy prices are expected to rise significantly in the near future due mostly to the replacement of tired assets (generation plant, wires, poles and network infrastructure), with a carbon price being modest by comparison.
• SME manufacturers in energy intensive industries are likely to feel the effect more than those that are less reliant on energy and transport or are not exposed to international trade.
• Offset mechanisms will be introduced under the Clean Energy Future Plan to compensate households and small business, albeit less is understood about the exact nature of how it will impact small to medium business.
• Measures by Government to assist SMEs adjust to a carbon price to be outlined as below:
• Personal tax free threshold increase.
• Instant asset write-off.
• $40 million energy efficiency grants.
• $240 million fund to help eligible small businesses reduce energy consumption.
• Support to commercialise emerging low carbon technologies.
• Small business support lines.
• SME’s should view a carbon price as both a risk and an opportunity to their business.

There were a large number of tax changes announced covering areas such as superannuation (e.g. measures announced to overcome the excess contributions tax problem), income tax, CGT, GST, FBT and charities. An outline of the major announcements effecting small/medium business is as follows:

Individual Income Taxation

Tax Free Threshold Increasem

On 10 July 2011, the Gillard Government announced that it would increase the tax-free threshold to $18,200 on 1 July 2012 as part of the Clean Energy Future package, while reducing the Low Income Tax Offset to $300.

Temporary Flood and Cyclone Construction Levy
The recent natural disasters, which prompted emergency relief payments in 2010 financial year, the Treasurer announced the Floods and Cyclone Yasi will cost the economy $9bn in lost output and reduce real GDP growth by 1/2 of a percentage point in 2010-11.

In response, the Government has introduced for the 2011-12 year only an additional 0.5% – 1.0% taxation levy. The 0.5% levy will imposed at taxpayers earning more than $50,000 up to $100,000. The 1.0% levy will be imposed on taxpayers earning more than $100,000.

Low Income Tax Offset (LITO) Proposed Start Date: 1st July 2011
LITO is available in full to individuals who earn less than $30,000 and phases out at $67,500. Currently individuals receive 50% of LITO upfront via a reduction in the amount of tax taken out from employers. The remaining portion is received at the end of the financial year. The government has announced that the 50% benefit received during the financial year will be increased to 70%.

The government has also announced that minors will no longer have access to LITO for non-working income. This has been proposed in order to reduce the amount of trust distributions being distributed to minors. Instead of minors being able to receive tax free distributions of $3,333, they will now only be able to receive $416 before the top marginal tax rate is applied.

Changes to Existing Benefits and Levies

• *In effect from 1 July 2010, Medicare levy exemption for low income thresholds would slightly increase for individuals to $18,839 and couples to $31,789
• *In effect from 1 July 2011, removal of low income offset thresholds of $3,300 for minors less than 18 years. This will effect family trust distributions
• *In effect from 1 July 2011, changes to the dependent spouse tax offset for spouses under 40 years old to encourage those able to join the workforce
• *In effect from 1 July 2011, removal of deductions against government assistance payments
• *Changes to dependant age rules under Family Tax Benefit A and also indexation will be frozen until 1 July 2014 on Family Tax Benefit supplements and upper limits and thresholds
• *Reductions by half on discounts for HECs/HELP payments from 1 January 2012. Discount on upfront payments will be reduced down from 20% to 10% and on voluntary payments of $500 or more on HELP debt will be cut down from 10% to 5%.

Small Business Tax Relief

It was proposed to increase the turnover threshold test from $2.0m to $5.0m, the Government is yet to respond to this recommendation. The targeted small business tax measures are not proposed to be introduced until the 2013 financial year. In order to qualify for these benefits a business must meet the small business tests.

• *Immediate tax write-off of $5,000 of the cost base on purchase of a business motor vehicle, creating a tax benefit of $1,275
• *Increase of immediate value of write-off of assets purchased where the value of asset is less than $5,000 (increase from current value of $1,000)
• *Reduction in company tax rates to 29%
• *Changes to the PAYG installments statutory increase rate to 4% on previous year business taxable income, this will assist in lowering the PAYG quarterly installments
• *Changes to CGT small business concession for small business participation test, which will have a positive impact on discretionary family trusts which hold active assets
• *Amendments to ensure trust beneficiaries can continue to use the primary production averaging and farm management deposit provisions in a loss year.

Indirect Taxes

Fringe Benefits Tax
The Government announced a new flat statutory fraction of 20% for new car contracts entered into on or after 10 May 2011. This will likely impact those employees who previously salary packaged a car with a statutory fraction below 20% (i.e. k/m travelled is more than 25,000 p.a.).

The Government also, released further information with respect to FBT exemptions for Australian Tax Residents working in remote areas overseas under fly-in fly-out arrangements.

Goods & Services Tax
Minor reforms were announced with respect to new residential premises, GST free health insurance claims and mortgagee possessions.

Superannuation
There were a number of small announcements in regards to superannuation, just a few include:

• *Effective from 1 July 2011, individuals who have breached the Excess Contributions limit may request a refund of those excess amounts if the cap has been exceed by up to $10,000 and it is the first time the breach has occurred
• *Phase out the reduction to age based minimum pension draw down percentages and return to normal in 2012-2013
• *SMSF reforms in respect to new illegal early release penalties and criminal and civil sanctions to apply to promoters of such schemes and various other measures to reduce risks of benefits being illegally released from the fund, registration of SMSF auditors and monitoring independent audit standards
• *Increase in SMSF lodgement levy to $180 (up from $150) for the 2010/11 year.

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