The Federal Budget contained no surprises beyond the previously announced Henry Review responses but continued the incremental changes of the tax system. The changes were mostly positive and aimed at simplification and competitiveness. A noted increase in Treasury funding for work on the Henry Review suggests we haven't yet seen the end of the many recommendations.
The major Budget announcements were:Individuals
- Lower tax on savings
50% tax discount on up to $1,000 of interest income (including interest income earned directly on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products, and indirectly via a trust or managed investment scheme) from 1 July 2011.
- Optional standard deduction for work-related expenses and
the cost of managing tax affairs
This has been set at $500 from 1 July 2012 (increasing to $1,000 from 1 July 2013) to simplify tax return preparation.
- Increase in Medicare levy low-income thresholds
From 2009-10, this will be increased to $18,488 for singles and $31,196 for families. The additional amount of threshold for each dependent child or student will also increase to $2,865. The Medicare levy low-income threshold for single pensioners below Age Pension age will be increased to $27,697 from 1 July 2009. This increase will ensure that pensioners below Age Pension age do not pay the Medicare levy while they do not have an income tax liability.
- Increase in medical expenses rebate threshold
From 1 July 2010, it will increase from $1,500 to $2,000 and will be indexed annually. The offset currently permits taxpayers to claim a 20% rebate of net unreimbursed eligible medical expenses above $1,500.
- Amendment to calculation of rebate threshold for Senior
Australians Tax Offset (SATO)
The threshold will be amended to include the effect of the low income tax offset and will take effect from 1 July 2010. Currently, the formula for calculating the rebate threshold fails to reflect the fact that the low income tax offset is reduced when taxable income exceeds $30,000.
- Amendments to First Home Savers Account (FHSA)
The proposed changes allow FHSA monies to be paid into an approved mortgage before the end of the four (4) year period (but after the end of a minimum qualifying period), rather than requiring it to be paid to a superannuation account. Currently, FHSA holders must keep their savings in an FHSA for four (4) financial years before they are able to use those savings to buy a home. If an account holder buys a home before the end of that four (4) year period, the balance of their FHSA must be transferred to their superannuation.
- Proposed capital protected borrowings amendments
The benchmark interest rate on capital protected borrowings will be the Reserve Bank of Australia (RBA) indicator rate for standard variable housing loans plus 100 basis points (instead of the RBA indicator rate for standard variable housing loans previously announced in last year's Budget). The measure will apply to capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008. The transitional arrangements for capital protected borrowings entered into at or before 7:30 pm (AEST) 13 May 2008 from the previously announced date of 13 May 2013 to 30 June 2013 will be extended.
- Cuts in personal tax rates and increase in low income tax
offset for 2010-11 year
There were no changes announced to those already legislated. The low income tax offset will be increased from $1,350 to $1,500 and the resident tax rates for the 2010-11 year are as follows:
|Taxable income ($)||Tax payable ($)|
|0 – 6,000||Nil|
|6,001 – 37,000||Nil + 15% of excess over 6,000|
|37,001 – 80,000||4,650 + 30% of excess over 37,000|
|80,001 – 180,000||17,550 + 37% of excess over 80,000|
|180,001 +||54,550 + 45% of excess over 180,000|
- The co-contribution matching rate has been permanently reduced to 100%. The previously announced increases in the matching rate to 125% for 2012-13 and 2013-14 (and 150% for 2014-15 and later years) will not proceed.
- The income threshold at which the maximum superannuation co-contribution begins to phase out will be frozen at $31,920 for the 2011 and 2012 income years.
- A deduction will be available for funds paying terminal medical condition benefits. This measure will be back dated to be effective from 16 February 2008.
Companies and trusts
- Capital gains tax (CGT) – look-through treatment
for earnout arrangements
All payments under a qualifying earn-out arrangement to be treated as relating to the underlying business asset. The measure will have effect from the date of Royal Assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007. Currently, an earn-out right is treated as a separate CGT asset. This measure provides welcome relief although the extent of the relief will not be known until the detailed provisions are provided.
- CGT - other
Proposed to apply to CGT events happening after 7.30 pm (AEST) on 11 May 2010:
- Rollover relief for certain business restructures – improving the ability of businesses to restructure.
- Extend the CGT rollover for the conversion of a body to an incorporated company - CGT rollover to apply to Indigenous incorporated bodies converting to a company incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act).
- Make the share sale facility exclusion more broadly available for CGT rollovers - Australian interest holders will be able to access a broader range of CGT rollovers where an entity restructures using a share or interest sale facility for foreign interest holders.
- Allow CGT demerger relief for certain demerger groups that currently cannot access the relief.
- Non-commercial loan rules
From 1 July 2009, where a private company provides a dwelling that it acquired prior to 1 July 2009 to the shareholder of the private company or their associate, for use as their main residence, a deemed dividend will not arise under the non-commercial loan rules.
There were a raft of modifications to correct technical deficiencies and improve and simplify the tax consolidations regime.
- Debt/equity taxation provisions
Regulations have been registered to treat certain term subordinated notes as debt interests and not equity interests. Also, the debt/equity transitional provisions for Upper tier 2 capital instruments will be extended to 1 July 2010.
- Reduction in Interest Withholding Tax (IWT) rate
This will apply to borrowings of local subsidiaries from overseas parents and will be reduced from 10% to 7.5% in 2013-14 and to 5% in 2014-15. The IWT rate for borrowings by any bank branch from its overseas head office will be reduced from 5% to 2.5% in 2013-14 and to zero in 2014-15.
- Qualifying instalment warrants
Amendments will be introduced to provide certainty for investors by treating them as the owner of the underlying asset for income tax purposes, with effect from 1 July 2007.
- The ATO are to be given further funding to fund additional activities to promote voluntary GST compliance. This measure will significantly impact small business who should review their current compliance levels.
- The financial supply provisions will be reformed to clarify their operation and reduce compliance costs. The changes, to apply from 1 July 2012 include:
- The financial acquisition threshold input tax credit will be increased from $50,000 to $100,000. More small business will now be able to avoid the provisions.
- Hire purchase agreements will now be treated as one supply and the full supply will be taxable. Transactions will no longer have to be broken up in to taxable and input taxed parts.
- Those expenses for which a reduced input tax credit are available will be expanded.
- The margin scheme will be reformed to clarify and simplify its application. The provisions will be restructured to clarify the main principles and objects.
- The GST provisions relating to Australian taxes, fees and charges will be replaced with a principle based exemption. It is proposed that the changes will provide greater certainty for taxpayers and Government agencies.
- Various recommendations from the Board of Taxation regarding the administration of GST, previously announced as applying from 1 July 2010, will now apply from 1 July 2011.
- The ATO are to be given further funding to fund additional activities to promote voluntary GST compliance.
- The period in which a recreational boat can be used in Australia GST free before it must be exported has been increased from 60 days to 12 months.
- The Government will implement from 1 July 2012 all of the recommendations of the Board of Taxation from its Review of the application of GST to cross-border transactions. The recommendations significantly reduce the number of non-residents drawn into the Australian GST system. Parts of the package will require State and Territory agreement as they will change the GST base.
Australia as a financial services centre
- The Government has responded to the Report of the Australian Financial Centre Forum entitled Australia as a financial centre: Building on our strengths. Also known as the 'Johnson' Report, it was released in November 2009. The Government has provided in-principle or direct report for nearly all 19 recommendations. The intention is to position Australia as a financial services centre, and the phasing down of the IWT is one measure aimed at achieving this objective.
Business name registration to be nationalised
- The Government will establish a national business name register. Administration will be transferred from the States to the Australian Securities and Investments Commission (ASIC).
A simplified system for businesses borrowing from retail investors
- ASIC will now allow listed entities meeting certain criteria to issue bonds to retail investors using a simplified process. This will involve a shorter prospectus which provides relevant information without unnecessary detail which may confuse investors.
Henry is not dead
The Government has provided $65m over four (4) years for Treasury to develop and implement the Government's response to the Henry Report. $38.5m will be provided over two (2) years to inform the community of the Government's tax reform agenda.
Henry tax review measures announced in the Budget
A number of the measures announced as part of the Government's response to the Henry Review were confirmed in the Budget:
- The 40% resources super profits tax (RSPT) will apply to the profits of non-renewable resource projects, after allowing for extraction costs and recoupment of capital investment. Mining companies will not pay RSPT until after they provide shareholders with a normal return on capital investments. Mining companies can reduce their RSPT liability by claiming a credit for mining royalties paid to State and Territory governments. This new tax will apply from 1 July 2012.
- A refundable resource exploration rebate will be provided to companies, set at the prevailing company tax rate, for exploration expenditure carried out in Australia from 2011-12.
- The company tax rate will be reduced from 30% to 28% - small companies will benefit from 1 July 2012 while other companies will access the 28% rate gradually (29% from 1 July 2013 and 28% from 1 July 2014). Companies should consider the impact this change will have on franking credit balances. In the past changes to the tax rates resulted in reductions in effective franking credit balances so companies with low tax rate shareholders should consider their dividend policy and potential share buy backs.
- From 1 July 2012, small businesses will be able to claim an immediate deduction for assets valued at under $5,000.
- The super guarantee rate will be gradually increased to 12% by 2019-20.
- Super guarantee extended to workers aged between 70 and 75.
- Government co-contribution of $500 for workers earning up to $37,000 from 1 July 2012.
- Workers aged 50 and over with super balances below $500,000 to be allowed to double concessional superannuation contributions to $50,000 from 1 July 2012.
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