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Budget Overview 2008

Tuesday 13 May, 2008

Summary of major initiatives announced as part of 2008/09 Federal budget.

Tax measures

Tax cuts

Previously announced election cuts to personal income tax rates and increases in thresholds as follows:

From 1 July 2008:

The 30 per cent threshold will be raised from $30,001 to $34,001
The low income tax offset (LITO) will be increased from $750 to $1,200

The 40 per cent threshold will increase from $75,001 to $80,001
The 45 per cent threshold will increase from $150,001 to $180,001.

From 1 July 2009:

The 30 per cent threshold will be raised to $35,001

The LITO will be increased to $1,350
The 40 per cent tax rate will be reduced to 38 per cent.

From 1 July 2010:

The 30 per cent threshold will be raised to $37,001
The LITO will be increased to $1,500
The 38 per cent rate will be reduced to 37 per cent.

The increase in the LITO creates an effective tax-free threshold for low-income earners of $14,000 in 2008-09, $15,000 in 2009-10 and $16,000 in 2010-11.

From 1 July 2008, senior Australians eligible for the senior Australians tax offset will pay no tax on their annual income up to $28,867 for singles and $24,680 for each member of a couple.

By 1 July 2010, these thresholds will rise to $30,685 for singles and $26,680 for each member of a couple.

Note: The Government's goal is that by 2013-14 the number of personal income tax rates will be reduced to three (15 per cent, 30 per cent and 40 per cent) and the LITO will be further increased.

Medicare Levy & Medicare Levy Surcharge

From 1 July 2008, singles with an income up to $100,000 and families with an income up to $150,000 will no longer be subject to the surcharge.

The Medicare Levy low-income threshold for pensioners below pension age will increase from $21,637 to $22,922 for the 2007/2008 income year.

The Medicare Levy low-income thresholds have increased from $16,740 to $17,309 for singles and from $28,247 to $29,207 for members of a family.

Family Trust Elections

Government intends to reverse two of the family trust changes introduced by the previous Government in Tax Laws Amendment (2007 Measures No 4) Act 2007.

The Government will change the definition of family in the family trust election rules to limit lineal descendants to children or grandchildren of the test individual or of the test individual's spouse. This change will have effect from 1 July 2008.

The Government will also prevent family trusts from making a once off variation to the test individual specified in a family trust election (other than in relation to a marriage breakdown). This change will have effect from the 2007-08 income year.

Both of these changes reduce the scope for family trusts to utilise tax losses to lower income tax. The Government recognises that some of the amendments introduced in Tax Laws Amendment (2007 Measures No 4) Act 2007 were technical improvements to the Family Trust Election system that enhanced the flexibility of family trusts and addressed problems with the operation of the system. For example, two of the amendments allow variations in the family group that may arise as a consequence of death or marriage breakdown and two other amendments allow family trust elections to be revoked in circumstances where the original elections were not actually required. The Government will therefore retain these amendments made to family trusts in 2007.

Education Tax Refund

From 1 July 2008 the Government will introduce a new 50 per cent Education Tax Refund in the form of a tax refund. Parents entitled to Family Tax Benefit part A, or whose school children receive Youth Allowance or similar payment, will be able to claim:

A 50 percent tax refund up to $750 in eligible educational expenses for each child undertaking primary school studies which represents a maximum refundable tax offset of $375 per child.
A 50% per cent tax refund of up to $1,500 in eligible education expenses for each student undertaking secondary school studies which represents a maximum refundable tax offset of $750 per child

Parents may claim a 50% refund for eligible education expenses incurred when they complete their 2008/09 income tax return, such as:

Laptops
Home computer and associated costs
Home internet connection
Printers and paper
Education software
School textbooks materials
Prescribed trade tools

Fringe Benefits Tax

With effect from 7.30 pm 13 May 2008, the exemptions under the Fringe Benefit Tax (FBT) law for eligible work-related items and property consumed on an employer's premises will be tightened:

The FBT exemption for eligible work-related items will only be available if they are primarily used for work-related purposes and will be limited to one item of each type per employee per year. Affected items include: laptop computers, personal digital assistants, briefcases, and tools of trade. In a related measure, the Government will also disallow employees from claiming a deduction for depreciation of such items ending a double benefit previously available. For items purchased before 13 May 2008, employees will be denied depreciation deductions for the 2008/09 and later income years
The FBT exemption for property consumed on an employer's premises will be amended to remove ‘meal card arrangements' from the exemption. Existing balances on meal cards as at 13 May 2008 will remain eligible for the exemption if used by 31 March 2009.

As an additional integrity measure, the Government will amend the FBT law to ensure that FBT applies appropriately to employee arrangements involving jointly held investment assets. This will overcome the Federal Court's decision in National Australia Bank Ltd v Federal Commissioner of Taxation 93 ATC 4919 that resulted in an anomaly in the FBT law which also gave rise to salary sacrifice opportunities in relation to jointly held investment properties. Employees who have already entered into salary sacrifice agreements with their employer will be able to utilize existing arrangements until 31 March 2009.

Capital Allowances - Depreciation period for computer software

Extending the useful life of depreciating captial expenditure on computer software over four years on a similar basis as hardware.

The Government will increase the depreciation period for expenditure on ‘in-house computer software' which is capital in nature from 2.5 years to 4 years.

This measure will apply to expenditure on ‘in-house computer software' incurred on or after 7.30 pm (AEST) on 13 May 2008.

Expenditure on ‘in-house computer software' is expenditure by the taxpayer on acquiring, developing or having someone else develop computer software which is mainly used by the taxpayer. Expenditure on ‘in-house computer software' will continue to be depreciated on a straight line basis.

A 4 year depreciation period for expenditure on ‘in-house computer software' is the same period as the Commissioner for Taxation's ‘safe harbour' effective life for computer hardware.

Capital Protected Borrowings

Government will amend the rules dealing with the taxation of capital protected borrowings. This amendment will apply to capital protected borrowing arrangements entered into after 7.30 pm (AEST) on 13 May 2008.

A typical capital protected borrowing is a limited recourse loan facility to fund the purchase of listed shares. The investor is protected from a fall in the price of the shares by a capital protection feature. This feature gives the investor the right to transfer the shares back to the lender for the amount outstanding on the loan if the value of the shares falls below that amount.

The benchmark interest rate in the capital protected borrowing rules will be changed to the Reserve Bank of Australia's indicator variable rate for standard housing loans. Interest expense on a capital protected borrowing in excess of this level will be treated as the cost of capital protection and not deductible if on capital account.

The amendment will provide a more appropriate basis for apportioning the expense in capital protected borrowings between interest on a borrowing without capital protection and the cost of capital protection.

The current law, which applies the Reserve Bank of Australia's indicator variable rate for personal unsecured loans to determine the cost of capital protection, will continue to apply to existing capital protected borrowing arrangements for a period of five years or the life of the product, whichever is the shorter.

Employee share schemes

The Government will make two legislative changes to the taxation treatment of shares or rights acquired under an employee share scheme (ESS).

The first change is to the election requirements to access one of two tax concessions available to taxpayers who acquire qualifying shares or rights under an ESS. This change will improve the integrity of the law by ensuring taxpayers appropriately report income in their tax returns.

The second change is to remove double taxation that arises in relation to certain ESS that use an employee share trust. This change will improve flexibility in the manner shares or rights can be provided to employees under an ESS.

Luxury car tax

The Government will increase the luxury car tax rate from 25 per cent to 33 per cent from 1 July 2008. There will be no changes to the luxury car tax threshold (currently $57,123).

The tax change will result in a car with a current price of $100,000 (inclusive of goods and services tax and luxury car tax) being subject to an additional $2,541 in luxury car tax.

Scrip for scrip CGT roll-over provisions

The scrip for scrip capital gains tax (CGT) roll-over provisions for corporate restructures will be mofified.

This measure will replace the former Government's announced changes to the consolidation rules following certain CGT roll-overs. Under the current provisions, the acquiring entity obtains a market value cost base for the shares it acquires in the target entity. This can result in significant unintended tax benefits if they restructure.

Entrepeneurs' Tax Offset

The Government will apply a income test to the eligibility criteria for the Entrepreneurs' Tax Offset (ETO) to more appropriately target the offset towards genuine small, micro and home-based businesses.

Currently, the ETO is claimed by many taxpayers for whom business is not a primary source of income and who have other, more significant, forms of income. The family income test will restrict access to the ETO for businesses with high alternative sources of household income.

The ETO provides a 25 per cent tax offset on the income tax liability of small businesses that have an annual turnover of $75,000 or less, phasing out from a turnover of $50,000. The family income test will further limit access to the ETO by restricting eligibility for singles from $70,000 and families from $120,000 adjusted taxable income per year.

This new measure will apply from 1 July 2008.

Increase in Child Care Tax Rebate

From 1 July 2008 the Child Care Tax Rebate (CCTR) will increase from 30 per cent to 50 per cent as anticipated. The cap on the expenses claimed will be lifted from the current amount of $4,354 to $7,500 per child.

The CCTR will be paid quarterly from 1 July 2008 with the first quarterly payment by October 2008.

Baby Bonus

On 1 July 2008, the Baby Bonus will be increased to $5,000 and indexed according to the CPI annually.

From 1 January 2009, the Baby Bonus will be:

only available where family income is not greater than $75,000 in the six months from the birth of a child (annualised $150,000), indexed annually
paid in fortnightly instalments over six months for all recipients; and
available to parents who adopt children under 16 years of age.

Family Tax Benefit Part B and Dependency Tax Offsets

Family Tax Benefit part B will be granted to families where the primary earner has an adjusted taxable income of $150k or less (indexed annually).

Similarly, other dependency offsets, such as the dependent spouse, housekeeper, parent of invalid relative offsets, will also be targeted to those on $150k or less.

From 1 July 2009 Family Tax Benefits will be provided through Centrelink and Medicare, and not the ATO.

These changes are designed to reduce workforce participation disincentives that can be associated with the dependency tax offsets and more closely align the eligibility criteria with those applying to family assistance.

First Home Buyer Savings Accounts

The Government will provide $1.2 billion over five years in the Budget to assist first home buyers to save for a home. Enhanced First Home Saver Accounts will provide people saving for a first home with direct contributions into the accounts and only tax earnings in the account at a low rate. The first $5,000 of individual

contributions to these accounts each year will now attract a 17 per cent Government contribution, providing more assistance to average income earners. Earnings will be taxed at a low rate of 15 per cent. Withdrawals from the account will be tax free when used to buy or build a first home.

Income tested benefits

Broadening the definition of income for income-tested benefits to include:

Salary sacrifice super contributions
Net financial losses
Reportable fringe benefits

From 1 July 2009, income tests used to determine eligibility for a range of government financial assistance programs will be tightened to include forms of non-wage remuneration and, where appropriate, losses from discretionary activities.

The changes will mean, for the purpose of means tested benefits, individuals who have access to salary sacrifice to reduce their taxable income will be treated on an equivalent basis to those who do not have access to salary sacrifice arrangements.

Salary sacrifice contributions to superannuation will be assessed as income for all relevant tax and income support payments such as below Age Pension age (as is the case for those of Age Pension age), family assistance, child support and a range of government assistance delivered through the tax system.

Individuals will continue to have access to tax benefits that accrue through salary sacrifice however these benefits will no longer automatically flow through to the assessment of means tested personal benefits and tax offsets.

Reportable fringe benefits will also be assessed as income in those government support programs that do not include them.

Net financial investment losses will be added to income in all applicable tax and transfer programs. Affected programs are family assistance, the Higher Education Loan Program and particular tax offsets. Net rental property losses will also be added to income for those programs where they are not already included

Other measures

Super Clearing House

The Rudd Government will provide funding of $16.1 million over three year to the ATO to set up an optional Superannuation Clearing House (SCH) facility to cut the red tape burden on businesses.

Where employees can choose their own superannuation fund from the many hundreds available, an employer may be required to pay superannuation into a large number of different funds, a process that can be highly onerous.

A SCH will allow an employer to pay their contributions to a single location. The clearing house will then distribute them to the relevant superannuation funds as selected by their employees.

The optional clearing house facility will manage employers' obligations under Superannuation Choice, including the time consuming task of checking details entered on the Choice form and distribution of contributions to the nominated funds.

This facility will be offered free of charge by the Australian Government to small businesses with fewer than 20 employees and on a fee-for-service bases to larger businesses. The facility will be contracted to the private sector.

Businesses that use the clearing house facility will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearing house. The facility will be available from 1 July 2009.

Spending initiatives

The Government is taking a strategic approach to the investment of budget surpluses by creating three new funds. These funds will meet capital shortages in infrastructure, education and health. Initially, the Government will invest $40 billion in these priorities,

largely from the 2007-08 and 2008-09 surpluses. Three new nation building funds:

Building Australia Fund (BAF)
Education investment fund (EIF)
Health and Hospitals Fund (HHF)