Federal Budget May 2010

2010 FEDERAL BUDGET AND THE HENRY REVIEW

Last night’s Federal Budget was the culmination of a recent tax reform process that included the release of the Henry Tax Report and the Board of Taxation’s report into Managed Investment Trusts.

The headline news was a reduced Budget deficit of $40.8 billion and a predicted return to surplus in three years.

The economic assumptions and a range of minor tax cuts are underpinned by $9 billion of new tax collections from the controversial resources super profits tax in the 2013-14 year and a billion dollar annual increase in the tobacco excise. Most of the measures discussed below will not be introduced until after this year’s Federal election.

PERSONAL TAX MEASURES

Personal Tax Cuts

The previously announced personal tax cuts will proceed from 1 July. The existing and new rates are as follows:

Current Thresholds	Tax rate %	Thresholds from 1 July 2010 – income range $	Tax rate %
0 – 6,000	0	0 – 6,000	0
6,001 – 35,000	15	6,001 – 37,000	15
35,001 – 80,000	30	37,001 – 80,000	30
80,001 – 180,000	38	80,001 – 180,000	37
Over 180,000	45	Over 180,000	45

The low income tax offset will increase from $1,350 to $1,500. This increases the effective tax free threshold for adults from $15,000 to $16,000. For eligible senior Australians the tax free threshold will be $29,867 for individuals and $25,680 for each member of a couple.

The Medicare low-income thresholds will be $18,488 for individuals and $31,196 for families. The standard Medicare Levy remains at 1.5% of taxable income.

The annual tax savings at different income levels are as follows:

$50,000                                                                                                $450
$100,000                                                                                                $500
$200,000                                                                                             $1,300

Standard Tax Deductions of $500 or $1000

In what is effectively an increase in the tax free threshold, individual taxpayers will be able to claim the following “standard” deductions for work related expenses and the cost of managing their tax affairs:

From 1 July 2012 $500

From 1 July 2013 $1,000

Individuals who wish to claim more than these amounts may do so if they have the appropriate substantiation records.

50% Tax Discount on First $1,000 of Interest Income

From 1 July 2011 individuals will qualify for a 50% tax discount on up to $1,000 on interest earned by them on deposits held in authorised deposit taking institutions, bonds, debentures and annuity products.

The change is potentially worth a maximum of $232.50 to an individual earning over $180,000. The Government is to consult further on the proposal.

Medical Expense Tax Offset Threshold Increased

Currently taxpayers can claim a net medical expenses tax offset of 20% or eligible medical expenses over $1,500. From 1 July 2010 the threshold will rise to $2,000 and will be indexed annually.

Child care rebate reduced/frozen

The child care rebate will be capped at $7,500 per child (a reduction from the current $7,778) and indexation will be frozen for four years from 1 July 2010.

First Home Savers Account (FHSA)

Under the current first home owners’ scheme, account holders must keep their funds in a FHSA for four years. If they buy a home before this time they must transfer the balance to superannuation.

For home purchases after the relevant legislation receives Royal Assent the home owners will be able to transfer their FHSA balance to an eligible mortgage.

Capital Protected Borrowings

From 11 May 2010 the benchmark interest rate that the Tax Office uses to calculate deductible interest payments on a capital protected loan will be the Reserve Bank of Australia’s indicator rate for standard variable housing loans plus a margin of 1% (100 basis points).

SUPERANNUATION MEASURES

Increasing the Superannuation Guarantee Surcharge rate to 12%

The Superannuation Guarantee Charge contribution rate will increase from 9% to 12% of salary or wages as follows:

Year	Rate (%)
2013-14	9.25
2014-15	9.5
2015-16	10
2016-17	10.5
2017-18	11
2018-19	11.5
2019-20	12

Increased Concessional Contributions for Certain Over 50s

From 1 July 2012 individuals aged 50 and over with total superannuation balances below $500,000 will be able to make $50,000 in annual concessional (deductible) superannuation contributions.

Note: the current concessional contributions cap for those over 50 at 30 June is $50,000. This will reduce to $25,000 for those with accumulated superannuation entitlements over $500,000 from 1 July 2012.

Raising the SGC contribution age limit from 70 to 75

From 1 July 2013 the superannuation guarantee age limit will rise from 70 to 75.

Super Contributions Rebate for Low Income Earners

From 1 July 2010 there will be a contributions tax rebate of up to $500 for low income earners (adjusted taxable income of $37,000 or less). This can shelter up to $3,333 of concessional contributions from superannuation contributions tax. This equates to the tax on the current 9% SGC contributions for an individual with a salary or wages of $37,000.

Super Co-Contribution Reductions Extended

The superannuation co-contribution matching rate for non-concessional (ie non-deductible) personal superannuation contributions will be permanently retained at 100% and capped at $1,000. Further, the indexation of the income limits will be frozen for two years – the maximum contribution will apply for incomes up to $31,920.

GENERAL BUSINESS TAX MEASURES

Cuts to the company tax rate cut

The general company tax rate (see below for small companies) will be cut as follows:

From 1 July 2013 29%

From 1 July 2014 28%

Tax Consolidation Changes

A range of proposals will apply to consolidated groups consisting of companies and certain other entities:

Calculation and collection of income tax liabilities
- Clarification of the Tax Office's Ability to recover unpaid Pay As You Go Instalments
- Clarification of the application of various taxation laws to various multiple entry consoliated group
Changes to the applicaion dates of measures announced on 13 May 2008
Refinements to improve the operation of the consolidation regime

Goods and Services Tax (GST)

The Government will implement all of the recommendations from the Board of Taxation’s review of the application of GST to cross-border transactions. These changes will generally reduce the exposure of non-residents to GST administration issues
The start date for various GST administrative amendments announced in last year’s budget will be deferred until 1 July 2011
The margin scheme for property development is to be clarified and simplified with effect from 1 July 2012
From 1 July 2011 certain boats can be sold GST-free providing they are exported within 12 months (currently 60 days)
Additional funding to the Australian Taxation Office of $337.5 million over four years to promote voluntary GST compliance

SMALL BUSINESS TAX MEASURES

In addition to the general business tax measures outlined above:

Early start to the company tax rate cut

The company tax rate for small business companies will fall to 28% from 1 July 2012.

Simplified Depreciation Arrangements

From 1 July 2012 small businesses will be able to write off all depreciable assets costing less than $5,000.

Also from that date most other assets (excluding buildings) will be able to be depreciated in a single pool at a 30% rate.

CAPITAL GAINS TAX (CGT)

The main CGT amendments are as follows:

Simplified treatment of CGT earnout arrangements – to reverse the effects of a draft Tax Office ruling
- Buyers can include payments under a qualifying earnout arrangement in their CGT cost base
- Sellers may be able to access the small business CGT concessions in relation to the earnout payment
Measures to facilitate CGT rollovers in relation to
- Share sale facilities
- Demerger groups including corporations sole
- Conversion of bodies into incorporated companies
- Conversion of bodies into incorporated companies
- Water entitlements converted to statutory licences
- Aligning scrip for scrip rollover relief with the Corporations Act
Integrity measures for rollovers between fixed trusts
Additional CGT exemptions for non-residents with indirect interests in Australian assets

TRUST’S TAXATION

The Government will refine last year’s Budget measure to extend the no tax file number withholding requirements to certain closely held and family trusts. The withholding rules are intended to apply from 1 July 2010 – the changes should simplify the compliance burden.

OTHER TAX MEASURES

A large number of other tax measures have been announced that will affect a relatively small number of taxpayers. These measures include:

Resources super profits tax to apply from 1 July 2012
Resource exploration rebate to apply from 1 July 2011
Increase in the per stick tobacco excise
ATO compliance program – additional resources for dealing with the cash economy
Debt/equity tax rules – various refinements and integrity measures
Additional fuel excise on ethanol
Family tax benefit (FTB) administration refinements – children aged 16 to 20 must remain in full time education or training
International tax – additional tax treaties and information exchange agreements
Managed Investment Trusts (MITs) – Government response to the Board of Taxation’s Review:
- Allow MITs to use an attribution method of taxation
- 5% de minimus rule to allow MITs to carry forward over or under distributions
- Allow unitholders to make cost base adjustments to prevent double taxation
- Allow additional entities to elect to apply capital gains tax (CGT) as their primary tax code
New regulations for public ancillary funds
Private company loan rules – further clarification of the tax treatment of the private use of properties acquired before 1 July 2009
Phasing down interest withholding tax on financial institutions
Superannuation – loss relief on merger of funds

Please contact us if you require more details of these measures or other matters discussed in this newsletter.

Disclaimer

This Budget newsletter is provided as general information only and does not consider your specific objectives, situation or needs. You should not rely on the information in this document without seeking appropriate professional advice. PRT Chartered Accountants accepts no responsibility to you or anyone else regarding this document and we are not responsible to you or anyone else for any loss suffered in connection with the use of this document or any of its content.