Treasury officials have acknowledged that business bosses might be able to get around the Coalition’s budget repair levy by leaving money in their companies for three years rather than drawing it out as their wages.



Rob Heferen, executive director of the revenue group in Treasury, told Senate estimates it was “perfectly appropriate” if a business chose to retain earnings in its company structure rather than pay it out as wages, as the company would still pay tax.



The company tax rate is 30%, dropping to 28.5% in July 2015, under a Coalition election promise. This compares with a top marginal tax rate of 49% for people earning more than $180,000, taking into account the 1.5% Medicare levy and the 0.5% National Disability Insurance Scheme levy.

“If they retain the earnings in the company, not distribute it out as wages, that is perfectly appropriate and the company will pay the tax on the appropriate amount and when they provide the dividend it will be franked at the appropriate amount,” Heferen said.

“When the difference becomes higher, there may be an incentive at the margin for a small business person to think ‘well, I’ll actually leave that in the company, I won’t distribute it and I’ll wait till 2017 when there is no longer this tax and then I’ll distribute it out’.”

Under the temporary budget repair levy, 2% is paid by those earning above $180,000. For example, someone on $200,000 would pay 2% on $20,000, amounting to a $400 levy.

The levy is expected to raise $3.1bn over four years.



Asked by the Greens senator Peter Whish-Wilson whether Treasury had factored in how many possible income restructures would occur to avoid the temporary levy, Heferen said: “That is factored in as part of the broad elasticity of the increase … I wouldn’t pretend that we go to that sort of precision.”

Whish-Wilson asked the finance minister, Mathias Cormann, whether he understood the frustration of people on lower incomes, who had to sustain permanent cuts through the government’s changes to Newstart and the aged pensions, while high income earners only had temporary pain.

“I reject that,” said Cormann. “Higher income earners are and always do the heavy lifting when it comes to generating revenue for the commonwealth.

“The only way you can put yourself on a sustainable trajectory is with cuts to spending growth … that will inevitably affect the states and payments to individuals who get payments from government.”

Whish-Wilson also asked Cormann for an assurance that the Coalition would not use the revenue from the levy to provide tax cuts as part of a political strategy before the next election.

Cormann said it was “completely unrelated” but went on to defend income tax changes for “bracket creep”, where income earners are pushed into higher tax brackets due to inflation and wage increases.

“If we made no income tax arrangements for bracket creep,” he said, “lower income earners would be taxed.”