Last night Federal Treasurer Wayne Swan announced the 2011-12 Budget.

There are a significant number of changes to tax law ranging over a number of areas. The purpose of this email is to provide you with a snapshot of what is happening plus we will focus in on a couple of areas which may impact you more specifically (please read these if you do not have time to go through the Summary of Changes as there are some significant changes).

Summary of Changes:

Individuals and families
• The rebate for dependent spouses aged less than 40 will be phased out to help encourage more Australians into paid employment.
• The amount of the low income tax offset that is delivered to low and middle income earners through their regular pay during the year will be increased from 50% to 70% of their total entitlements.
• The government will limit the ability of minors (children under 18 years of age) to access the low income tax offset to reduce tax payable on their unearned income, such as dividends, interest, rent, royalties and other income from property, with effect from 1 July 2011.
• From 1 July 2011, self-education expenses will no longer be deductible against all government assistance payments.
• From 1 January 2012, the discount available to students electing to pay their HECS student contribution up-front will be reduced from 20% to 10%, and the bonus on voluntary payments to the Tax Office of $500 or more will be reduced from 10% to 5%.
• From 1 July 2011, families in receipt of Family Tax Benefit Part A will be eligible for an advance of up to 7.5%, up to a maximum of $1,000, of their annual Family Tax Benefit Part A entitlement.
• Indexation of the Family Tax Benefit (FTB) Part A and B supplements will be suspended for 3 years. Indexation of family payment higher income thresholds and limits will also be paused at their current level until 1 July 2014 (rather than being CPI-indexed).
• From 1 January 2012, the eligibility for Family Tax Benefit Part A will be limited to children up to the age of 21 years.

Companies
• The company loss recoupment rules will be amended, making it easier for companies to satisfy the continuity of ownership test rules.

Capital Gains Tax
• The rules governing access to the small business CGT concessions will be tightened for trusts and broadened for some small businesses.
• Gains or losses from renewable resource assets or preserving environmental amenity will be CGT exempt.
• Scrip for scrip rollover integrity provisions are to apply to trusts, superannuation funds and life insurance companies.
• Minor amendments will be made to the tax laws to ensure the CGT provisions operate as intended.
• Various concessions will apply to special disability trusts to make them more beneficial to families.

Fringe Benefits Tax
• A flat rate of 20% will replace the scale of statutory rates currently used to calculate the taxable value of a car fringe benefit under the “statutory formula” method.

Financial arrangements
• The TOFA rules relating to hedging will be amended to ensure they operate as intended.
• The debt/equity rules will be amended to restrict the application of an integrity provision that deems an interest from an arrangement that funds a return through connected entities to be an equity interest under certain circumstances.
• For certain situations, the tax rules for securities lending arrangements will be amended to ensure that the lender under a securities lending arrangement is treated as not having disposed of the lent securities.

Not-for-profit sector
• The government has announced a range of reforms to the not-for-profit (NFP) sector, including a statutory definition of “charity”, a new Charities and Not-for-profits Commissioner and reforms to ensure that the concessions are targeted only at those activities that directly further a NFP’s altruistic purpose.

International tax
• Interim Investment Manager Regime arrangements will be extended to the 2010/11 year.
• The list of countries reported in the Taxation Administration Regulations 1976 whose residents are eligible to access a reduced rate of withholding tax on certain distributions from Australian managed investment trusts will be updated.

Tax administration
• A technical deficiency in the transitional rules imposing general interest charge and shortfall interest charge liabilities will be corrected to ensure their continuous operation.
• The GDP adjustment factor for PAYG instalment taxpayers who use the GDP adjustment method will be reduced from 8% (which is the rate that would apply for the 2011/12 income year under the current law) to 4% for the 2011/12 income year.
• Various measures to improve tax compliance will be introduced including increasing company directors' personal liabilities for company debts and increasing Tax Office resources.

Superannuation
• Eligible individuals will have the option of having excess concessional superannuation contributions assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.
• A higher concessional contributions cap will apply for the over 50s with superannuation balances under $500,000 from 1 July 2012.
• Superannuation fund trustees will be able to make greater use of tax file numbers to locate member accounts.
• Employees will receive information on their payslips about the amount of superannuation paid into their accounts.
• Superannuation funds will no longer be able to treat certain assets as trading stock.
• The pension drawdown relief that has been provided over the last three years will be phased out.
• The freeze to the indexation of the income threshold for superannuation co-contribution purposes will be extended for an additional year to 2012/13.

GST
• The GST treatment of property in possession of a mortgagee will be amended from 1 July 2012.
• Certain supplies to health insurers will be GST–free from 1 July 2000.
• Small businesses in a net refund position will be allowed access to the GST instalment system.
• The start date for certain GST reform measures recommended by the Board of Taxation is to be delayed.

Other measures
• The Government will clarify how the taxing point is calculated for the purposes of the Petroleum Resource Rent Tax, with effect from 1 July 1990.
• The timing difference between the assessability of payments under the Sustainable Rural Water Use and Infrastructure Program and the deductibility of amounts spent under program agreements will be eliminated, with effect from 1 April 2011.
• Primary producers affected by natural disasters can access their farm management deposits within 12 months of making the deposit without losing their concessional tax treatments under the scheme.
• Certain trusts and partnerships keeping accounts in foreign currency can calculate net income using that currency.
• The introduction of excise and excise-equivalent customs duty on alternative fuels will be delayed until 1 December 2011 in response to representations from industry to allow additional time to implement the tax changes.
• There will be no immediate tax consequences for indigenous corporations that amalgamate.
• Luxury car tax will not apply to imports by public museums and art galleries.
• The roll-out of the National Rental Affordability Scheme will be spread over a longer period.
• Eligibility criteria for the film tax offsets will be broadened from 2011/12, and the amount of the offsets will be increased.
• Rollovers will apply to ensure the smooth implementation of State and Territory government reforms relating to water delivery systems.
• Minor amendments will be made to various rules affecting the CGT main residence exemption, small business participation percentage and appointment of a director of a self managed superannuation fund trustee.

 

Specific changes which may impact you personally:
1.      Although the personal tax rates have not changed, the Government has imposed a flood levy (this has been previously announced and will impact tax payers generally who earn more than $50,000 and did not receive compensation during the floods). The Government have also announced changes to how the Low Income Tax Offset will be passed on to employees so for employers we will need to change our withholding tax rates from employees wages from 1 July 2011. Employers will from 1 July 2012 also need to include the amount of any superannuation paid (rather than the current accrual system) on their employees payslip.

2.      With effect from 1 July 2011, minors (children under 18 years of age) will no longer be entitled to the low income tax offset on unearned income such as dividends, interest, rent, royalties and other income from property (presumably this also includes trust distributions). This measure will significantly impact a lot of our clients. In recent years we have been able to distribute $3,000 per child to reduce the tax burden on families. This distribution will now drop back to $416 which is the tax free threshold for minors. Parents, you will really need to look at this if children have bank accounts or shares held in their own name.

3.      Although not officially announced in the Budget, the Government intends to reintroduce legislation to income test the 30% private health insurance rebate. This measure if introduced will put further pressure on family budgets although if passed in a similar format to the previous Bills, it will not kick in until a single earns more than $75,000 and a family at $150,000. The fate of the legislation lies with the Greens and the independents as the composition of the Senate changes on 1 July 2011.

4.      As expected there were no major changes to superannuation. The concessional contribution limit of $25,000 remains for those under age 50 and $50,000 for those 50 and above (these figures are subject to a CPI adjustment but the change must be in increments of $5,000). The Government has confirmed that they intend to reduce the contribution limit from $50,000 to $25,000 from 1 July 2012 for those superannuation members who hold more than $500,000 in their personal super account. The Government have also confirmed that the 50% income stream (pension) drawdown limit which has been reduced by 50% for the last 3 years will only be 25% for the 2011-12 financial year and from 1 July 2012 the usual limits will resume without reduction.

5.      For self managed super funds, the 2011FY supervisory levy will increase from $150 to $180 per fund. Please also note that auditor registration fees will apply from 1 July 2012 as control of auditors will be moving to ASIC. This means that audit costs are likely to increase as a result.

6.      From 1 July 2012, any small business (not defined but presumably means you need to be compliant under the SBE rules) will be able to claim the first $5,000 of any motor vehicle purchase (presumably this is a new or 2^nd hand vehicle so as not to distort the 2^nd hand market again). The remaining value after reducing the cost base by $5,000 will then be able to be depreciated under the general pool depreciation rules. This measure will replace the Entrepreneurs Tax Offset which will be abolished from 1 July 2012. This measure is in addition to the Governments response to the Henry Tax Review where they indicated that small business would receive an immediate tax deduction for all assets valued at or under $5,000 (the current threshold is $1,000).

7.      The Government will strengthen the tax law to counter situations where businesses intentionally accumulate debts to improve cash flow or wealth and then liquidate to avoid paying the debt. The business is then continued in another structure but still controlled by the same people free of the previous debts and liabilities. The proposed changes would include the director penalty regime being extended to superannuation guarantee amounts, employee superannuation and the Tax Office will be able to commence recovery action without providing a 21 day grace period for certain unpaid company liabilities that remain unreported after 3 months of becoming due. This last change is very important as it would seem to allow the ATO to commence proceedings against a director where say for example the BAS is outstanding for more than 3 months. The legislation will be interesting around this measure and how the ATO intend to use this power. There didn’t seem to be any further funding given to the ATO to actively pursue this but we can see this process being abused down the track to force directors to lodge documents on time. Key aspect of this measure, make sure everything is completed and lodged on time.

 

Conclusion:

This concludes our Budget 2011 summary. If you would like further clarification of any of the Budget items, then please do not hesitate to contact us. Please note that the Budget Papers only go so far and the proposed legislation has not been released. It is quite common for the legislation to be slightly different to the Budget so keep an eye out for it in the next couple of months. We will keep you updated where we believe there have been any significant changes with the intent or application of the announcements in the Budget.

 

Regards

 

Peter Rule and Chris Burns
Directors

 

Acknowledgements:
Federal Treasury – Budget Paper No. 2
CCH Australia
Thomson Reuters (Professional) Australia