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Federal Budget 2010-11
Tuesday 11 May, 2010
The Government appears to have delivered in spades on their promise of a ‘no frills' Budget. The Treasurer has foreshadowed a sooner than expected return to a budget surplus position, however that will be very much dependent on the introduction of the Resource Super Profits Tax.
A small number of the previously ignored Henry Review recommendations have been included in the Budget announcements, including:
- A 50% discount on interest earned by individuals up to $1,000 (the Henry Review had recommended 40%), and
- The introduction of a standard deduction for work related expenses of $500 (in 2012-13) increasing to $1,000 (in 2013-14).
Whilst the optional standard deduction is designed to reduce the compliance burden, the amount of $500 is likely to be unattractive to many taxpayers given that the report of the Henry Review concluded that the mean work-related car expense claimed by a taxpayer with a taxable income of $40,000 in the 2006-07 year was approximately $2,000.
It is disappointing to note that the Budget contains few measures designed to deliver reforms which would ease the compliance burden on small business.
Individuals and family tax measures
Income tax treatment of instalment warrants
Individuals and family tax measures
Simpler tax returns
In order to ease the cost of compliance and minimise the time spent on preparing individual tax returns, the Government will provide taxpayers with the option of a $500 standard deduction to replace itemised deductions for their ‘work-related expenses' and ‘cost of managing tax affairs' from 2012-13. This will increase to $1,000 from 2013-14. Those not taking the standard deduction option will itemise specific deductions.
When fully implemented, the Government believes that 6.4 million Australians will opt for the standard deduction. It is unclear how this estimate was arrived at.
Interest discount
The Government has announced a 50% discount on up to $1,000 of interest
income earned by taxpayers from 1 July 2011. The discount will apply to
interest earned on deposits, bonds, debentures and annuity products.
According to the Government, this measure will be of particular benefit
to small savers, including low and middle income earners, who are more
likely to put their non-super savings into interest-earning deposits.
The Government expects that approximately 5.7 million taxpayers will
benefit from the 50% discount, three quarters of whom will have
annual income below $80,000.
At this stage, the Government appears more likely to implement the
interest discount in a manner similar to the 50% CGT concession. As a
result, only $500 (50% of $1,000) of interest earned will be subject to
tax. For example, a taxpayer on the 30% marginal tax rate will have a
tax saving of $150 (i.e. $1,000 x 30% – $1,000 x 50% x 30%) excluding the
Medicare levy.
NOTE: The discount will be available for interest income earned
directly as well as indirectly, such as via a trust or managed
investment scheme.
Increasing the Medical expenses tax offset threshold
The net medical expenses tax offset currently allows taxpayers to
receive a tax offset equal to 20 per cent of net unreimbursed eligible
medical expenses above $1,500. The claim threshold is not currently
indexed and was last increased in the 2002-03 income year.
The Government intends to increase the threshold for taxpayers claiming
the net medical expenses tax offset from $1,500 to $2,000 and commence
annually indexing the threshold to the Consumer Price Index, with
effect from 1 July 2010.
NOTE: The first indexation adjustment to the threshold will take place on 1 July 2011.
Amendment to the senior Australians tax offset regulations
As part of the Budget measures, the Government will amend the senior
Australians tax offset regulations affecting the calculation of the
rebate threshold, with effect from 1 July 2010.
Currently, the formula specified in the regulations for calculating the
rebate threshold fails to reflect the fact that the low income tax
offset (LITO) is reduced when taxable income exceeds $30,000. This
measure will ensure that in situations where the rebate threshold
exceeds $30,000, the calculation of the rebate threshold incorporates
the reduction in the LITO.
Increasing the Medicare levy low-income thresholds
The Government will increase the Medicare low-income thresholds to
$18,488 for individuals and $31,196 for families, with effect from 1
July 2009. The additional amount of threshold for each dependent child
or student will also increase to $2,865.
The table below* shows the income exemption thresholds, the shading-in range and the shading-in limit:
WARNING!
The figures in the table below are calculated by using certain formulas
on the assumption that these formulas will still be applied for the
2009-10 income year.
| Medicare levy low income threshold amounts and shading-in ranges 2009-10 | |||
| Category of taxpayer | Income threshold for Medicare levy exemption | Reduced levy in shading-in range (inclusive) | Normal 1.5% levy payable above shading-in limit |
| Individual taxpayer | $18,488 | $18,489-$21,750 | $21,751 |
| families with the following children and/or students | family income | family income | family income |
| 0 | $31,196 | $31,196-$36,700 | $36,701 |
| 1 | $34,061 | $34,062-$40,070 | $40,071 |
| 2 | $36,926 | $36,927-$43,440 | $43,441 |
| 3 | $39,7911 | $39,792-$46,810 | $46,8112 |
| 1. Where there are more than 3 dependent children or students, add $2,865 for each extra child or student. 2. Where there are more than 3 dependent children or students, add $3,370 for each extra child or student. |
|||
The Government will also increase the Medicare levy threshold for single pensioners below Age Pension age to $27,697, with effect from 1 July 2009. This increase will ensure that pensioners below Age Pension age do not pay the Medicare levy when they do not have an income tax liability.
Changes to the First Home Saver Account (FHSA)
Under the current rules, an FHSA holder is required to keep their
savings in an FHS account for four financial years before they are able
to use it to buy their first home. If they buy a house before the four
years, the balance must be transferred to their superannuation fund so that
it remains in a concessionally taxed environment.
Under the proposed amendment, the FHSA holders will be allowed to
transfer FHSA monies into an approved mortgage where the FHSA holder
acquires a home before the end of the four-year period.
Change to benchmark interest rate for capital protected borrowings
The benchmark interest rate on capital protected borrowings will be adjusted to the Reserve Bank indicator rate for standard variable housing loans plus 100 basis points instead of the RBA indicator rate for standard variable housing loans as announced in the 2008-09 Budget. The measure will apply to capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008. According to the Government, the adjusted benchmark interest rate will better reflect the additional credit risk borne by lenders for the cost of capital protection that is paid on a deferred basis.
Moreover, the Government will also extend 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. This extension is intended to reduce compliance costs for affected taxpayers in the 2012-13 income year.
Previously announced tax cuts
The Government has confirmed it will deliver its third round of tax cuts. Under these previously announced cuts, from 1 July 2010:
- The Low Income Tax Offset will increase from $1,350 to $1,500 (This will allow Australians to earn up to $16,000 and not pay income tax)
- The 30 per cent rate threshold will increase from $35,000 to $37,000
- The 38 per cent marginal tax rate will decrease to 37 per cent, and
- The amount of income a senior Australian eligible for the Senior Australian Tax Offset (SATO) can earn before they pay income tax or the Medicare Levy will increase from $29,867 to $30,685 for singles, and from $25,680 to $26,680 for each member of a couple.
Superannuation measures
Superannuation co-contribution - permanent reduction to the superannuation co-contribution matching rate and maximum payable
The Government will permanently retain the matching rate for the superannuation co-contribution at 100% and the maximum co-contribution that it will make is payable on an individual's eligible personal non-concessional superannuation contributions at $1,000. The 2009-10 Budget foreshadowed a trend back to 150% in line with the previous regime which will now not be implemented.
Low-income earners will benefit from the better targeted new low-income earners contribution as part of the current tax reform package.
Superannuation co-contribution - pause to the indexation of the income threshold for two years
The Government will freeze for 2010-11 and 2011-12 the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down together with the income threshold at which the co-contribution cuts out. The measure will freeze these thresholds at $31,920 and $61,920 respectively for two years and is expected to lead to a savings of $295 million over four years.
Superannuation co-contribution - enhancing administration
The Government will provide $16 million over five years to the Tax Office to enhance the administration of the existing eligibility requirements for the superannuation co-contribution program which is expected to result in superannuation co-contribution claims being reduced by $195 million over five years.
Extending the range of benefits that are deductible to funds to include terminal medical condition benefits
The Government will extend the range of benefits that are deductible by complying superannuation funds and retirement savings account (RSA) providers to include terminal medical condition (TMC) benefits. The measure will have effect from 16 February 2008, the date the TMC condition of release was introduced into the superannuation legislation.
This proposal addresses an anomaly in the taxation law regarding deductibility by superannuation funds and RSA providers of the costs of providing certain benefits to members/holders. Currently deductions are allowable for the cost of providing benefits relating to the death, permanent incapacity and temporary incapacity conditions of release, but not those relating to the TMC condition of release.
Extending loss relief for merging superannuation funds involving a new complying superannuation entity
The Government has extended the loss relief for superannuation funds that merge to arrangements where existing funds merge into a new fund, with effect from 24 December 2008.
The loss relief for superannuation funds that merge is a temporary measure which removes certain income tax impediments to fund mergers until 30 June 2011. The extension of the loss relief to mergers into new funds increases the flexibility of the measure for eligible taxpayers. The change will enable funds to merge into a new fund, which they may wish to do for a variety of reasons, for example, to adopt an updated trust deed.
Facilitating the transfer of State and Territory unclaimed superannuation to the Commonwealth
The Government will improve the administration of superannuation by facilitating the transfer of any unclaimed superannuation monies held by the States and Territories to the Tax Office. The measure will have effect from the date of Royal Assent of the enabling legislation.
Private sector superannuation funds currently pay unclaimed money to the Tax Office, whereas unclaimed superannuation from state and territory public sector funds is instead held by the relevant state or territory authority. States and Territories also may currently hold some older private sector unclaimed superannuation. This measure will allow the States and Territories to transfer unclaimed superannuation to the Tax Office.
Individuals will still be able to claim back their money from the Tax Office at any time.
This measure will facilitate the uniform treatment of unclaimed money in both the private and public sectors and assist in the central administration of unclaimed monies.
Sustaining the Superannuation Complaints Tribunal's capabilities
A further $5.9 million over four years will be made available to cover the rising workload and complexity of complaints handled by the Superannuation Complaints Tribunal (SCT) on issues such as disclosure and the timing and calculation of payments and rollovers.
Superannuation governance and administration reform
Further reforms are proposed to improve the administration arrangements of Australian Government superannuation schemes including outsourcing the administration of the Public Sector Superannuation Accumulation Plan and initiatives to improve member superannuation data, ComSuper's IT infrastructure and defined benefits administration systems.
Minor superannuation amendments
The Government will make a number of minor amendments to improve the operation of the superannuation legislation, with intended effect from the 2010-11 income year.
The amendments will include:
- permanently allowing a claim for a deduction for eligible contributions to be made to successor superannuation funds
- increasing the time-limit for deductible employer contributions made for former employees
- clarifying the due date of the shortfall interest charge for the purposes of excess contributions tax
- allowing the Tax Office to exercise discretion for the purposes of excess contributions tax before an assessment is issued, and
- providing new arrangements for public sector defined benefit schemes which fund benefits through ‘last minute contributions'.
- increase in superannuation guarantee rate from 9% to 12% in seven increments (to 2019-20 year)
- superannuation guarantee age limit to be increased to 75 years
- concessional contribution cap of $50,000 for individuals aged 50 and over to be extended beyond 30 June 2012, and
- government contribution of up to $500 for low income workers.
Business measures
Company tax rate
- For small businesses, the company tax rate will be reduced to 28% and be implemented from 2012-13 (as noted in the Government response to the Henry Review), with a stepped reduction for other companies (29% in 2013-14 and 28% in 2014-15).
Tax Consolidation
The Government intends to improve the calculation and collection of income tax liabilities for tax consolidated groups and multiple entry consolidated (MEC) group as follows:- PAYG liabilities can be recovered under the liability for payment rules in the income tax law, with effect from 11 May 2010, and
- an entity which pays its contribution amount under a tax sharing agreement can leave a consolidated group clear of any further liability, with effect from 2004-05.
- the liability for payment rules apply to those groups, with effect from 11 May 2010, and
- where there is a change in the provisional head company during an income year, any PAYG instalments paid by the former provisional head company on behalf of the group are attributed to the group, with effect from 1 July 2002.
- simplifying the approach to making various consolidation choices, with effect from 1 July 2002 - in particular, modifications will be made to ensure that a choice to form a consolidated group remains effective despite a defect in the notice to advise the Commissioner of Taxation of the choice
- allowing a company that was a member of a multiple entry consolidated group (MEC group) since formation to be eligible to be appointed as the provisional head company of the group, with effect from 1 July 2002
- allowing, as a transitional rule, consolidated groups to make a choice to preserve the capital gains tax treatment of a gain or loss that arises prior to 23 August 2006 when an amount received in payment of a foreign currency trade receivable exceeds its tax cost setting amount, with effect from 1 July 2002
- correcting the formula for working out the adjustment for inherited deductions under the tax cost setting rules that apply when an entity leaves a consolidated group (referred to as the allocable cost amount "exit calculations"), with effect from 10 February 2010, and
- amendments are proposed, so that non-membership equity interests issued by an entity that joins or leaves a consolidated group are taken into account under the tax cost setting rules (ie. the allocable cost amount calculations) with effect from 10 February 2010.
This will ensure that tax values of underlying assets are not overstated upon a subsidiary's entry into a consolidated group.
GST
The Government intends to improve certain aspects of the GST margin scheme, with effect from 1 July 2012, as follows:- the margin scheme provisions will be restructured to clarify and simplify the current provisions by giving prominence to the main principles and inserting objects clauses, and
- the Government will also make a minor technical amendment to ensure that a valuation can be obtained for the purposes of using the margin scheme for subdivided land.
- an increase in the financial acquisition threshold above which businesses need to interact with the financial supply provisions from $50,000 to $150,000 of input tax credits. This should reduce compliance costs for small business.
Generally, an entity is unable to claim input tax credits on acquisitions related to the making of a financial supply. However, there is an exception if the entity does not exceed the financial acquisitions threshold. Currently, entities may claim input tax credits if the credits with respect to their financial acquisitions do not exceed $50,000
- protecting the GST base by reducing opportunities for businesses to inappropriately take advantage of the reduced input tax credit concessions by bundling services, and
- allowing small businesses accounting for GST on a cash basis to claim input tax credits up front in relation to hire purchase arrangements. This change will assist those businesses that have been forced into higher cost chattel mortgages following the introduction of the GST.
Non-commercial loans - Division 7A
- As previously announced, the Government has proposed changes to Division 7A such that use of a private company's assets by a shareholder (or associate) without an arm's length charge being paid would be deemed a "payment" and consequently, a deemed unfranked dividend to that shareholder.
- The measure will clarify that, where a private company provides a dwelling to the shareholder (or an associate) of the private company for use as their main residence, a payment will not arise where the private company acquired the dwelling before 1 July 2009 and the private company continues to meet a modified continuity of ownership test.
Earnout arrangements
- The Government intends to allow all payments under a qualifying earnout arrangement to be treated as relating to the underlying business asset.
Under an earnout arrangement, an earnout right may entitle the buyer or seller to additional payments depending on the subsequent performance of the business. Currently, an earnout right is treated as a separate capital gains tax (CGT) asset. This was outlined in Draft Ruling TR 2007/D10.
The treatment required by the ruling can result in anomalous outcomes for taxpayers where the actual payments under the earnout right differ from the amounts estimated at the start of the arrangement, such as by reducing access to the CGT small business concessions. This will enable the efficient transfer to businesses without impediment.
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.
Capital gains tax
- CGT demerger provisions will be amended to exclude a corporation sole or a complying superannuation fund from being a member of a demerger group
Currently, a demerger group of which the head entity is a corporation sole or a complying super fund is ineligible for CGT roll-over relief in respect of a demerger. This proposal will allow another entity to be the head entity which should avail the CGT concession to a wider range of groups and allow greater flexibility for restructures.
- The CGT roll-over for the conversion of a body to an incorporated company will be extended
This measure will be beneficial where a body is wound up and reincorporated under a different corporations law as roll-over relief will be available in respect of capital gains arising from the winding up and shareholders of the new company will be able to receive shares that reflect the interests and rights they held in the former body.
- Resident shareholders in a company which uses a share or interest sale facility in a restructure involving foreign shareholders will be able to access a range of CGT roll-overs previously denied to them
This proposal should ensure fairer CGT treatment for resident shareholders as an entity's use of such facilities for foreign administrative purposes currently carves the residents out of CGT roll-overs due to technical breaches of the roll-over requirements.
Non-resident withholding tax
- Interest withholding tax (IWT) on interest paid by financial institutions to non-resident lenders will be incrementally reduced to 5% in 2014-15, with a possible reduction to nil. IWT on interest paid by local branches of a foreign bank to its foreign head office will be incrementally reduced to nil in 2014-15
This measure should benefit Australian financial institutions which would have a greater choice of international funding sources through the more competitive IWT rates. In turn, local business and household borrowers would welcome their banks passing on any resultant saving in the cost of funding.
- The definition of a managed investment trust (MIT) for withholding tax purposes will be amended
The definition of a MIT will now include certain wholesale managed investment schemes and widely held pooled superannuation trusts and will exclude trusts that are carrying on a trading business, are closely held or are managed outside Australia. The amendments will expand the scope of the MIT withholding tax regime and should be considered in conjunction with the recently announced changes to the taxation of resident MIT interest holders.
Debt/equity
- New regulations will allow certain term subordinated notes to be classified as debt for tax purposes notwithstanding that the instruments may not otherwise satisfy the debt test in the tax law. The debt/equity transitional measures to enable Upper Tier 2 subordinated notes to be classified as debt will be extended
These measures ensure that interest payments on such instruments will be tax-deductible. The Assistant Treasurer, in announcing these proposals on 20 April 2010, signalled the Government's intent that the Australian tax treatment of these instruments is internationally comparable and competitive. Local borrowers would be hopeful that financial institutions will pass on some of the gains arising from these amendments.
Income tax treatment of instalment warrants
- The Government will amend the income tax treatment of qualifying instalment warrants 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 measure will also ensure that the opportunity for non-recourse borrowing by trustees of superannuation funds permitted under prudential regulations is not undermined by its tax treatment.
- Currently, a technical interpretation of the law raised as a mere possibility does not support the accepted practice that the investor is at all times the beneficial owner of the asset.
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