Now that the dust has settled on the initial flurry of Budget round-ups, special counsel Justin Byrne and senior associate Rosalie Cattermole highlight below the salient points of the Federal Budget which was handed down on Tuesday.
Charities and not-for-profits
The Government has confirmed the delay of the start date for a previously announced Budget measure to tighten the tax concessions available to not-for-profit organisations. The effect of the reforms is that tax concessions provided to not-for-profit organisations must be targeted only at furthering an organisation's purpose, being the purpose that is the basis for the organisation's income tax-exempt status.
Furthermore, the unrelated commercial activity test that underpins the reforms, will not apply to small scale activities of $250,000.00 or less recounting income revenue.
For unrelated commercial activities commencing after 7.30pm (AEST) on 10 May 2011 (the initial budget announcement), the measure will apply to activities from 1 July 2014 onwards.
For unrelated commercial activities commencing prior to 10 May 2011, the transitional arrangements will cease on 1 July 2015, meaning the measures will apply to activities from 1 July 2015 onwards.
Importantly, not-for-profit and charitable entities will now have further time in which to restructure their affairs in order to comply with the new measures. Furthermore, smaller not-for-profits and charities having commercial activities under the $250,000.00 threshold will not be affected by the changes.
The Government has also pushed back the starting date of the new definition of "charity" from 1 July 2013 to 1 July 2014. Again, this will allow further industry consultation with the Government to occur in relation to the definition.
Further to measures that are currently before Parliament aimed at avoiding the uncertainty regarding the income tax treatment of native title rights and benefits, the Government has confirmed the clarification of the law in relation to the capital gains tax treatment of native title rights. The Government has stated that the law will clarify that there are no CGT implications resulting from the transfer of native title rights (or a right to a native title benefit to an indigenous person), or from a creation of a trust that is an indigenous entity over such rights.
The measures are retrospective and will apply to CGT events happening on or after 1 July 2008.
The proposed changes will be welcomed by indigenous groups and will provide clarity in relation to their tax position. Where indigenous groups have taken the position that CGT was payable in relation to native title rights or benefits, an amendment to income tax returns may be required. Note that generally, however, the taxpayer only has four years in which to amend such returns. As a result, time will be of the essence if an amendment to a 2008 tax return is required.
Monthly PAYG instalments
The Government has announced that it will extend the monthly PAYG income tax instalment system to include all large entities in the PAYG system, including now not only companies but also trusts, super funds and individuals.
The larger the turnover of the entity, the sooner the monthly PAYG instalment system will apply. For example, all entities in the PAYG instalment system with turnover of $1 billion or more will move to monthly PAYG instalments from 1 January 2016.
Otherwise, entities with a turnover of $20 million or more will move to monthly PAYG instalments from 1 January 2017.
Entities that have a turnover of less than $100 million and report GST on a quarterly or annual basis will not be required to pay PAYG instalments monthly.
Increase in the Medicare levy rate
In order to fund the Government's DisabilityCare Australia regime, the Government is increasing the Medicare levy from 1.5 percent to 2 percent. The change in Medicare rate also affects a number of other taxes, most notably the fringe benefits tax rate, which will now move from 46.5 percent to 47 percent on and from 1 July 2014. A number of other withholding payments will also require withholding at the new 47 percent rate, for example trustees assessed to tax on undistributed income, withholding where no ABN has been quoted by the payee, and employment termination payments.
Changes affecting individual taxpayers
The tax deductions for net medical expenses incurred by an individual that exceeds $2,000.00 for the income year, will be phased out. Those who claimed the deduction in the FY 13 year will be able to claim in the FY 14 income year. Those who claimed the deduction in the FY 14 year will also continue to be eligible to claim in the FY 15 year.
Self-education expenses and expenses related to conferences will now be limited to a deduction of $2,000.00 in total in an income year. However, this only applies where the individual taxpayer has incurred the expense, rather than the employer of the employee. There does not appear to be a limit on the amount of training that an employer can provide by way of conferences and self education expenses where the expenses are incurred by the employer. Furthermore, the rule cannot be circumvented by the employee salary sacrificing the conference expenses.
There has been vehement objection to this proposed measure and industry representative bodies, many of whom see this as a step in the wrong direction for skills training, will be lobbying the Government hard to stop this measure being introduced.
Petroleum Resource Rent Tax
Some technical changes will be made to the Petroleum Resource Rent Tax as a result of the decision in Esso Australia Resources Pty Ltd v Commissioner of Taxation. These changes relate to the ability of a taxpayer to proportion expenditure across a number of different projects while also allowing a taxpayer to claim a deduction for services purchased from third parties.
The Government has announced a number of changes to the thin capitalisation regime, which seeks to limit debt deductions for entities that are broadly funded by way of debt rather than equity, and are either owned by a foreign company or control foreign companies. Currently $3 of debt can be used for every $1 of equity. The proposal is that only $1.50 of debt for every $1 of equity can be used. This may require larger businesses to restructure their debt/equity mix in order to comply with the new rules.
The Government has also announced an increase in the threshold from $250,000.00 to $2 million of debt reductions whereby if the debt deductions are less than this amount then the thin capitalisation rules will not generally apply. This is a welcome change which will alleviate small and medium businesses from these provisions.
It is also noted that the Government will be denying a tax deduction for interest expenses incurred in relation to the derivation of certain exempt foreign income. Therefore, taxpayers that currently derive foreign income should consider whether or not they will be affected by these changes and whether a restructuring of their financing is required.
Capital gains tax (CGT) withholdings for non-residents
These amendments will apply to CGT events occurring after 7.30pm on 14 May 2013, with a new withholding tax system to apply from 1 July 2016. The measures will ensure that indirect Australian real property interests are taxable if they are disposed of by a foreign tax resident. In particular, mining, quarrying and prospecting information and goodwill will be incorporated into the value of mining rights to which they relate. In other words, a CGT exemption can no longer be obtained by separately identifying and valuing such assets.
Further, a 10 percent non-final withholding tax will apply to each disposal by foreign residents of certain taxable Australian property. However, residential property under $2.5 million in value and disposals by Australian tax residents, will be excluded from the proposal. This "carve out" is welcomed, as the extra administration required to ensure compliance with such transactions would be burdensome.
The Government is amending the immediate deduction that is available for the purchase of assets first used for exploration by excluding mining rights and information from that deduction. Instead, the expenditure on mining rights and information will now be depreciated over 15 years or if shorter, the effective life of those assets. The effective life will be determined by the life of the mine that relates to
Importantly, the measure will not apply to:
- mining rights or information from a relevant Government issuing authority; or
- the costs incurred by a taxpayer itself in generating new information or improving the existing information; or
- mining rights acquired by a farmee under a recognised farm in arrangement.
It remains to be seen the exact scope of the above exclusions however junior miners will welcome the fact that rights acquired under a farm in arrangement do not appear to be denied immediate deductibility.
The measures will apply to taxpayers who start to hold mining rights or information after 7.30pm on 14 May 2013, unless the taxpayer has committed to the acquisition of the right or information before that time.
The Government announced a number of changes to the superannuation system including:
- Excess concessional contributions will now be taxed at an individual's marginal tax rate plus an interest charge. Furthermore, individuals can withdraw their excess concessional contributions from the fund.
- The $25,000.00 concessional cap for annual contributions to super will be increased to $35,000.00 for people aged 50 and over (from 1 July 2013) and for those aged 50 and over (from 1 July 2014). All individuals should be able to access the $35,000.00 cap from 1 July 2018 (on the basis that through the indexation mechanism in the legislation, the $25,000.00 is indexed through changes in the CPI to $35,000.00 on or before 1 July 2018.
- Earnings on assets within super will be tax free up to $100,000.00 from 1 July 2014 and earnings above that amount will be taxed at 15 percent. For assets that were purchased by the superannuation fund prior to 5 April 2013, the measure will only apply to capital gains on those assets that accrue after 1 July 2024. Further, any other capital gains that are subject to the tax will receive a 33 percent discount, meaning that they will effectively be taxed at the rate of 10 percent.
Although the $100,000.00 income limit appears to be quite high, if capital assets are sold by the superannuation fund, the $100,000.00 cap will invariably be easily reached, meaning that tax will be payable by the super fund (provided the fund is in pension phase). In other words, it is not just non-capital gains tax income that will be the subject of the $100,000.00 cap.
The ATO is being provided with further funding by which to target the exploitation of trusts that conceal income, mischaracterise transactions, artificially reduce trust income amounts and under pay tax. It is envisaged that this will eventuate into an increase in "reviews" being conducted in relation to taxpayer's use of trusts in general.
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