With a myriad of fine print in this year's Federal Budget, and many measures set to have a delayed introduction, it can be difficult to identify the key points. Below we run through some of the major tax issues arising from the changes announced in the Budget.
Employee Share Schemes Over And Out?
Employees in receipt of shares or options under qualifying employee share and option plans (ESOPs) have until now been able to access one of two tax concessions – the ability to defer the tax payable until disposal of the share, or exercise of the option, or a $1,000 free kick if the tax was paid up front on acquisition of the shares, or options. On Budget night, the Government announced that any share or option acquired under an ESOP after 7.30pm AEST on 12 May 2009 would no longer have this choice available. Instead:
- the discount (difference between market value of the share or option and any consideration provided for that share or option) will be assessed in the income year in which the share or option is acquired. This means that employees acquiring shares or options under a qualifying ESOP will no longer be able to defer payment of the tax on the discount until a later time. Employees will have to pay the tax in the income year in which the share or option is acquired even if they cannot sell the shares or options to fund the tax payment; and
- the $1,000 concession will be limited to those employees with a taxable income of less than $60,000 after adjustments for fringe benefits, salary sacrifice and negative gearing losses.
The announcement saw many companies freeze their employee share schemes. Sustained pressure from a variety of affected groups has forced the Government to reconsider the breadth of these proposals. The Government has now announced that consultation will be undertaken to discuss the following four issues:
- reporting requirements for employee share schemes to address the risk of tax avoidance;
- whether $60,000 is an appropriate income threshold for accessing the $1,000 tax exemption for upfront taxation;
- whether there are circumstances under which deferral of taxation is appropriate for employee share schemes, what those circumstances are, and what the period of deferral should be; and
- whether the valuation methods for discounted and deferred shares or rights are appropriate or result in undervaluation.
R & D New Tax Credit System
Changes announced by the Rudd Government to the R & D tax incentive system will see small companies receive a tax refund of 45 percent of their R & D spending when they file their tax return. The change is to commence in the 2010-2011 tax year. A refundable tax credit equal to 45% of expenditure on R & D will be available to companies with an annual turnover of less than $20 million. This is the equivalent of a 150% R & D tax concession under the existing system and effectively doubles the existing level of tax concessions. For companies which exceed the $20 million turnover threshold a tax credit equal to 40% of expenditure on R & D will be available. This is the equivalent of a 133% R & D tax concession under the existing system. The 40% tax credit will also apply to companies undertaking R & D in Australia where the intellectual property is held offshore.
Superannuation Caps Reduced
From 1 July 2009 the concessional contributions cap for those under 50 years of age will be reduced by more than half. Reductions also apply to the transitional concessional contributions cap applicable to those over the age of 50. The government co-contribution for those earning less than $50,000 will also be temporarily reduced.
For those planning on investing more money in superannuation, care should be taken to ensure the new limits on concessionally taxed contributions are not inadvertently exceeded.
Clamp Down On Non-Commercial Losses And Loans
The Government has announced that it will remove the ability for individuals earning over $250,000 per year (after adjustments) to deduct losses from unprofitable business activities against their own income from 1 July 2009. The current non-commercial loss rules will continue to apply to those on lower incomes.
In addition, the non-commercial loan rules (or Division 7A rules) will be extended so that a company that allows a shareholder to use real estate or other company assets for free or at a discounted rate will be deemed to have paid a dividend to that shareholder. The government states that this brings the treatment of benefits to shareholders into line with the treatment of fringe benefits for employees.
Small Business And General Business Tax Break
The Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 announced by the Federal Treasurer on 3 February 2009 is now law. See our previous legal update on this tax break.
As part of the budget, the Government announced an increase in the Tax Break for small businesses to 50% where a small business "acquires" an "eligible asset" between 13 December 2008 and 31 December 2009, and the asset is installed or ready for use by 31 December 2010.
Other taxpayers who "acquire" an "eligible asset" (or incur new expenditure on an existing eligible asset) after 12 December 2008 and before 30 June 2009, and have the asset installed ready for use by 30 June 2010, will be entitled to a bonus tax deduction of 30% of the cost of the asset.
Taxpayers who are not small business entities and who do not qualify for the 30% bonus tax deduction, but acquire an "eligible asset" (or incur new expenditure on an existing eligible asset) before 31 December 2009 and have the asset installed ready for use by 31 December 2010, will be entitled to a lesser bonus tax deduction of 10%.
Foreign Income Earners No Longer Tax Exempt In Australia
Australian residents engaged in foreign service for over 90 consecutive days are eligible for a general exemption from income tax in Australia on the foreign employment income. The government has announced that this rule will be changed so that, subject to exceptions for government and recognised non-government aid and charitable workers, and specified government employees, foreign employment income will be subject to Australian income tax. To avoid Australians paying double-taxation, a tax offset will be available for any foreign tax paid on the foreign employment income.
Private Health Insurance Rebate – Less Carrot And More Stick!
From 1 July 2010 there will be 3 income tiers to determine the level of private health insurance rebate singles and couples can receive, and to determine the level of the taxation surcharge for those who fail to take out private health insurance. The private health insurance rebate will cut out entirely for singles earning over $120,000 per year. A rebate of 10% will apply for those earning over $90,000 and 20% for those earning over $75,000. The existing 30, 35 and 40% rebates will continue to apply to lower income earners. The surcharge for avoiding private cover will be 1% for those earning more than $75,000, 1.25% for those earning more than $90,000 and 1.5% for those earning over $120,000.
This is one measure where the opposition has announced its intention to oppose the changes.
Paid Parental Leave Introduced
The much talked about paid parental leave scheme is set for a 1 January 2011 start date. The scheme will involve up to 18 weeks pay at the adult federal minimum wage (currently $543.78 per week) for those that earned less than $150,000 in the last full financial year prior to birth.
How Can Deacons Help?
The Deacons tax team can provide further information regarding any of the budget announcements and how they will impact you or your business. Although it is expected that the majority of the budget announcements will be implemented with co-operation from the opposition and minor parties, the government may have to compromise in some areas. Deacons can keep you up to date with changes to any of the announced reforms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.