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John Edstein
Richard Snowden
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Richard Snowden
The 2008 - 2009 Budget by the new Labor Government was released this evening Tuesday 13 May 2008.
As expected there were a number of major revenue and expenditure measures which will have a significant impact on business. These include:
Tax Reform
As previously announced, there will be a major “root and branch” review of the tax system which will be undertaken by a small team of experts headed by Dr Ken Henry (Treasury Secretary). He will be assisted by Professor John Piggott from the University of New South Wales, Heather Ridout from the Australian Industry Group, Mr Greg Smith, who has been a previous officer in the Tax Department, and Mr Jeff Harmer from the Families Department.
The review will be one of the first to look at the tax system as a whole and the fundamental principles applying. It will include a review of personal taxation, corporate taxation and the interaction of state and federal taxes. The Treasurer has ruled out any broadening of the GST base or any increase in the GST rate.
The Review will report progressively from July 2008 and will be completed by the end of 2009.
Personal income tax cuts
The Government has also set an aspirational tax goal over six years for a personal income tax system which reduces the number of rates from four to three with a personal income tax scale of 15%, 30% and 40%.
Final Withholding Tax for Managed Funds
The Government will replace the existing 30 per cent non-final withholding tax applying to distributions of Australian source net income (other than dividends, interest and royalties) of Australian managed investment trusts to foreign residents with a final withholding tax regime.
The measure will have effect for fund payments made in relation to the first income year after the date of Royal Assent of the enabling legislation, intended to be the 2008-09 income year.
Non- residents of jurisdictions with which Australia has effective exchange of information arrangements, to be specified by regulation, will be subject to a non-final withholding tax at the rate of 22.5 per cent for the first income year (intended to be 2008-09); a final withholding tax of 15 per cent for the second income year (intended to be 2009-10); and a final withholding tax of 7.5 per cent for the third (intended to be 2010-11) and later income years.
For the first income year, as an interim measure, non-residents will be eligible to claim deductions for expenses relating to their fund payments. These non-residents will be taxed at a new rate of 22.5 per cent on an amount net of any deductions. Non-residents of other jurisdictions will be subject to a 30 per cent final withholding tax.
The new withholding tax regime is meant to enhance Australia as a financial services centre in the Asia-Pacific region.
Property Funds - Division 6C Changes
As previously announced by the Assistant Treasurer the Government will modify the eligible investment business rules to reduce compliance costs and uncertainty for managed funds, especially property trusts. The measure will have effect from the date of Royal Assent of the amending legislation.
Under the eligible investment rules (Division 6C), managed funds that limit their activities to certain investments, such as investing in land primarily for rent, retain trust taxation treatment rather than being taxed like companies.
The measure will clarify the scope and meaning of investment in land for the purpose of deriving rent, introduce a 25 per cent allowance for non-rental income from investments in land (excluding capital gains), and expand the range of financial instruments that a managed fund may invest in.
Taxation of Financial Arrangements (TOFA)
The Government will extend the debt/equity transitional arrangements to 1 July 2008 to ensure that the income tax law preceding the debt/equity tax rules continues to apply to Upper Tier 2 instruments.
The Government will also amend and reintroduce the Taxation of Financial Arrangements Stages 3 and 4 measures, with effect from 1 July 2009. The measures lapsed when Parliament was prorogued in October 2007.
Capital Protected Borrowings
The Government will adjust the benchmark interest rate that applies to capital protected borrowing arrangements to increase the capital component of the overall expense, for arrangements entered into from 7.30 pm (AEST) on 13 May 2008.
Under a typical capital protected borrowing arrangement, the investor uses borrowed funds to buy listed shares but is protected from a fall in their price by a capital protection feature. The benchmark interest rate is used to determine how much of the interest on the borrowing is attributable to the cost of this capital protection.
The new benchmark interest rate will be 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 current law will continue to apply to existing arrangements for five years or the life of the product, whichever is the shorter.
Employee share schemes
Integrity measures will be introduced to ensure income from employee share schemes is correctly reported by taxpayers.
With effect from Budget night, the potential double taxation effect in relation to employee share trusts will be removed.
First Home Saver Accounts
The Government will provide $1.2 billion over five years to implement First Home Saver Accounts. Eligible individuals will be able to make post-tax contributions into a First Home Saver Account. A Government contribution of 17 per cent will be paid on the first $5,000 (indexed). Personal contributions will be able to be made to the account until the balance reaches $75,000 (indexed). Earnings on the account will be concessionally taxed at 15 per cent. Tax free withdrawals from the account to purchase or build a first home in which to live can only be made after contributions of at least $1,000 has been made in at least four separate financial years.
Superannuation-access to tax free lump sums for the terminally ill
The Government will back-date the commencement of the previously announced measure to make superannuation lump sum benefits tax free for people with a terminal medical condition to 1 July 2007.
Luxury Car Tax
As previously foreshadowed the Government will impose a further tax on luxury cars by increasing the rate from 25% to 33% with effect from 1 July 2008. The threshold will continue to be $57,123.
Medicare Levy Thresholds
As previously foreshadowed the Government will also increase the Medicare thresholds. Singles will need to earn $100,000 before they pay the 1 per cent surcharge - up from $50,000. Couples will be able to earn $150,000 - up from $100,000.
Family Trusts
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 will have effect from 1 July 2008.
This measure will also preclude family trusts making a once-off variation to the test individual specified in a family trust election (other than in relation to a marriage breakdown). This will have effect from the 2007-08 income year.
CGT - Cancellation of Interests in Widely Held Entities
The Government will allow taxpayers to calculate their capital gains or losses using the actual proceeds received where shares or units in widely held entities are cancelled or surrendered, with effect from the 2006-07 income year.
The current tax law provides that when shares or units in widely held entities are cancelled, surrendered or similarly brought to an end, a taxpayer is required to calculate any capital gains tax liability using the asset’s market value rather than the proceeds they actually receive.
This measure ensures that for shares or units in widely held entities, any capital gains tax liability will be calculated according to the proceeds that the taxpayer receives, rather than the share or unit’s market value at the time of cancellation.
Scrip for Scrip Rollover for Corporate Restructures
The Government will modify the scrip for scrip capital gains tax roll-over provisions to ensure that, for corporate restructures, the acquiring entity’s cost base of shares in the target entity reflects the tax costs of the target entity’s net assets, with effect from 7.30 pm (AEST) on 13 May 2008. This cost base will also be used in determining the value of the target entity’s assets in consolidation if the target entity subsequently joins the acquiring entity’s consolidated group.
Under the current provisions, the acquiring entity obtains a market value cost base for the shares it acquires in the target entity. This was thought to result in significant unintended tax benefits arising if, for example, the target entity subsequently joins the acquiring entity’s consolidated group.
GST - Sale of Real Property - Stronger Integrity Measures
The Government will introduce changes to ensure that the interactions between a number of provisions in the GST law do not allow real property transactions to be structured to reduce the GST liability. The measure will have effect from the date of Royal Assent of the enabling legislation.
The GST provisions dealing with real property are intended to ensure that GST is payable on the value added to land once it enters the GST system. The margin scheme achieves this outcome by applying GST to the ‘margin’, that is, the difference between the purchase price paid by the seller and the price paid by the buyer. Under this proposal, where the margin scheme is used after a GST free or non-taxable supply, the value added by the registered entity which made that supply is included in determining the GST subsequently payable under the margin scheme. The measure will also strengthen more broadly the GST anti-avoidance provisions.
Indirect Tax - Refund Restrictions and 4 year Amendment Period
The Government will amend the law to ensure that the GST refund provisions apply even if the transaction for which the tax was paid is found not to be a supply. This will have effect from 1 July 2008. The Government will also restore the intended four year time limit on refunds and liabilities for indirect taxes, with effect from 1 July 2008.
Depreciation of computer software
With effect from Budget night, the Government will increase the period over which capital expenditure on in-house computer software is depreciated from 2.5 years to 4 years.
FBT
The Government will:
- tighten the current FBT exemption for certain work-related items (eg laptop computers)
- deny depreciation deductions for FBT exempt items
- amend the FBT law to ensure that the full value of a benefit that has been provided to both an employee and an associate in relation to a jointly held asset is subject to FBT, and
- tighten the exemption that applies to the private use of business property on an employer’s premises by excluding meals under a salary sacrifice arrangement.
Superannuation Clearing House Facility
The Government will provide $16.1 million over three years to the Australian Taxation Office to fund a Superannuation Clearing House Facility from 2009-10, to assist in managing employers’ obligations to provide superannuation choice to employees.
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 basis to larger businesses. The facility will be contracted to the private sector.
Establishment of Infrastructure, Education and Health Funds
Building Fund
The Government will establish the Building Australia Fund (BAF) to provide a financing source for future investment in critical economic infrastructure in transport and communications such as road, rail, port facilities and broadband.
The Government will also close the Communications Fund and transfer its balance to the BAF. The Government will commit funds from the 2007-08 and 2008-09 surpluses, once realised, to the BAF bringing total funding of the BAF to $20.0 billion. A proportion of future surpluses may be allocated to the fund as appropriate. The Fund will be established by 1 January 2009 and be managed by the Future Fund Board of Guardians.
Spending from the fund on specific projects will be subject to evaluation. The Building Australia Fund will be established by 1 January 2009.
Education Fund
The Government will establish the Education Investment Fund (EIF), to provide a financing source for future infrastructure priorities in the higher education and vocational education and training sectors. Key priorities will include capital expenditure and renewal and refurbishment in universities and vocational education institutions, including research facilities and major research institutions.
The Government will commit to over $11.0 billion.
Health Fund
The Government will establish the Health and Hospitals Fund (HHF), to provide a financing source for future health infrastructure priorities. Key priorities will include capital expenditure and renewal and refurbishment of hospitals, major hospital facilities, medical technology equipment, and major medical research facilities and projects. The Government will commit $10.0 billion from the 2007-08 and 2008-09 surpluses.
Climate Change
The Government has committed to a number of wide ranging measures regarding Climate Change.
These include the Government’s election commitments to introduce a domestic emissions trading scheme in 2010, expand the renewable energy target and establish the Department of Climate Change.