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Sydney
Justin Cherrington
John Edstein
Peter Green
Betsy-Ann Howe
John King
Michelle Levy
Ken Lord
Richard Snowden
Judy Sullivan
Melbourne
Frank Brody
Andrew Clements
Michael Clough
Phillip Davies
Peter Fogarty
David Wood
Perth
The 2009 - 2010 Budget was released by the Treasurer this evening, Tuesday 12 May 2009. As expected there were a number of major revenue and expenditure measures which will have a significant impact on business.
General
The Budget Deficit is expected to be $57.6 billion and total government spending will exceed $338.2 billion. The Government has forecast tax receipts to be reduced by reason of economic conditions by $210 billion over the next four years.
Spending areas include climate change ($4.5bn), education ($5.3bn), infrastructure ($22bn) and communications (initially $4.7bn as the first stage of the $43bn broadband network) as well as road, rail and ports development ($8.5bn).
Superannuation
Henry Tax Review report on the retirement income system
This report was completed ahead of the broader Henry Tax Review to enable the Government to consider the findings of the Harmer Pension Review (see below) in the context of the overall retirement income system.
The Henry Panel’s key finding is that the three-pillar architecture of Australia’s retirement income system - consisting of the means tested Age Pension, compulsory saving through the superannuation guarantee and voluntary saving for retirement - should be retained.
The retirement income system is facing increasing challenges as the 21st century unfolds, which will test the sustainability, adequacy, acceptability and coherence of the system. The three-pillar architecture is well suited for a balanced and flexible response to these challenges.
However, there is a need for some adaptive change to calibrate the three pillars so the system serves its purposes and retains its strengths.
The Panel recommends:
- maintaining the superannuation guarantee at 9 per cent, not extending the superannuation guarantee to the self employed and retaining the $450 per month threshold
- gradually increasing the Age Pension age to 67 years
- gradually aligning the age at which people can access their superannuation savings (the preservation age) with the increased Age Pension age
- improving the fairness and coherence of the pension means tests, possibly through a single test, and improve incentives to work beyond retirement age
- reducing the complexities resulting from the interactions between the tax-transfer system and the aged care sector
- maintaining tax assistance to superannuation but improving the fairness of concessions for contributions, including by broadening access to them, and considering whether the current cap on concessions is appropriate
- improving the ability of people to use their superannuation to manage longevity risk, and
- improving the awareness and engagement of individuals with the retirement income system.
Key findings of the Harmer Pension Review addressed through pension reform
- Single full rate pensioners should be a priority for reform. The existing single rate of pension does not adequately recognise the costs for those wholly reliant on the pension to support themselves.
- The relativity of the rate of pension for singles to that of couples is too low and should be in the range of 64 to 67 per cent.
- The payment of existing supplements and allowances could be simplified by integrating them into either a pension supplement or the base rate.
- Pension payments should be tied to changes in the actual cost of living faced by pensioners.
- There is scope to target pension increases more to those who have little or no private means.
Consistent with international developments, Harmer found that there is a strong case for increasing the Age Pension age to reflect improvements in life expectancy, and the increased length of time that Australians can expect to spend in healthy retirement.
The Government has responded to this last point by announcing a move to age 67 for the pension starting age.
Concessional contributions cap cut to $25,000 from 2009-10
The concessional contributions cap will be cut to $25,000 pa (indexed) from the 2009-10 financial year.
The transitional concessional contributions cap for those aged 50 and over (applicable for the 2009-10, 2010-11 and 2011-12 financial years) will be cut to $50,000 pa (not indexed). From 1 July 2012, the ordinary cap will apply to those aged 50 and over.
There will be "grandfathering" arrangements for certain members with defined benefit interests as at 12 May 2009 whose notional taxed contributions would otherwise exceed the reduced cap. This is similar to the arrangements applied when the concessional contributions cap was first introduced.
The non-concessional contributions cap is $150,000 pa for the 2008-09 financial year and will remain at that level in 2009-10. Beyond then, the cap will be calculated as six times the $25,000 pa (indexed) concessional contributions cap.
Temporarily reducing the Government super co-contribution
The matching rate and maximum co-contribution that is payable on an individual’s eligible personal non-concessional superannuation contributions will be temporarily reduced from 1 July 2009.
Under this measure, the matching rate will be:
- 100 per cent for 2009-10, 2010-11 and 2011-12, with a maximum co-contribution of $1,000, reduced by 3.333 cents for each dollar by which the person’s total income exceeds the shade out threshold for receiving the full co-contribution
- 125 per cent for 2012-13 and 2013-14, with a maximum co-contribution of $1,250, reduced by 4.167 cents for each dollar of total income above the shade out threshold, and
- 150 per cent from 2014-15 onwards, with a maximum co-contribution of $1,500, reduced by 5 cents for each dollar of total income above the shade out threshold.
Pension drawdown relief extended to 2009-10
The minimum payment amounts for account-based pensions will be halved for 2009-10. This extends the pension drawdown relief already provided for 2008-09. The reduction in the minimum payment amounts applies to account-based, allocated and market-linked (term allocated) pensions and will assist pension account balances to recover from capital losses resulting from recent financial conditions.
Payment of small and insoluble lost accounts to unclaimed monies
Superannuation providers will have to transfer to unclaimed monies lost accounts:
- which have balances less than $200, or
- which have been inactive for five years and for which there are insufficient records to identify the owner of the account.
Former holders of these lost accounts will still be able to reclaim their money from the ATO at any time.
Lost account balances are currently only paid to unclaimed monies when a member reaches age 65 and cannot be found by a fund trustee, or when a member dies and the trustee cannot ensure the benefit is received by the person entitled to receive the benefit.
The measure will assist in rationalising the Lost Members Register and reduce the number of small or inactive accounts that funds are required to administer and apply the costly member protection rules to. It will also improve equity where costs are currently apportioned across other fund members in applying the member protection rules.
Trans-Tasman retirement savings portability scheme
The Government has agreed in principle to the signing of a memorandum of understanding with New Zealand to establish a trans-Tasman retirement savings portability scheme.
Currently, members of Australian superannuation funds may only transfer their retirement savings within the Australian superannuation system. The trans-Tasman portability scheme will permit transfers of superannuation savings between certain Australian superannuation funds and New Zealand KiwiSaver funds.
The scheme will have effect from a date set in accordance with the memorandum of understanding, and the final details of the scheme are currently being settled with New Zealand.
Personal Taxation
Personal tax rates
No changes will be made to the currently legislated personal tax rates for 2009 and 2010.
The personal tax rates and thresholds for resident taxpayers are as follows:
Foreign employment income
Currently, an Australian resident taxpayer engaged in foreign employment for a continuous period of more than 90 days is not liable to pay Australian income tax on their foreign employment income. Subject to certain exclusions, Australian resident taxpayers will now be liable to pay Australian income tax on their foreign employment income. Taxpayers will be entitled to a tax offset for foreign tax that is paid on foreign employment income.
The concession will continue to apply to some aid and charitable workers and certain government employees.
Private health insurance rebate and surcharge changes
The Government will replace the current private health insurance rebate (PHIR) and Medicare surcharge (MS) system with the new "Private Health Insurance Tiers", as follows:
- Tier 1 - for singles earning more than $75,000 (couples $150,001), the PHIR will be between 20% and 30% and the MS remains unchanged at 1%.
- Tier 2 - for singles earning more than $90,001 (couples $180,001), the PHIR will be between 10% and 20% and the MS will increase to 1.25%.
- Tier 2 - for singles earning more than $120,001 (couples $240,001), there will be no PHIR and the MS will increase to 1.5%.
The system remains unchanged for low and middle-income earners.
Trusts
Managed investment trusts - election to allow capital gains tax to be the primary code for disposals
The Government will allow Australian managed investment trusts (MITs), except those that are taxed like companies, to make an irrevocable election to apply the capital gains tax (CGT) regime as the primary code for taxing certain disposals of assets, with effect from the 2008-09 income year.
This measure implements the interim advice of the Board of Taxation review of taxation of MITs. This measure will ensure that the taxation treatment of disposals of assets (primarily shares in a company, units in a unit trust and real property investments) by MITs is consistent with the taxation treatment of disposals of similar investments by complying superannuation funds, subject to appropriate integrity rules including that the investments meet the eligible investment business rules in Division 6C of the Income Tax Assessment Act 1936.
MITs that can elect into the regime will be required to make an irrevocable election to apply the CGT regime to all disposals of eligible investments in the first income year that commences on or after the 2008-09 income year. Currently, gains and losses on disposal of investments by MITs may be on capital or revenue account, depending upon the characterisation of the investment activities concerned.
This measure furthers the Government’s commitment to promote Australia as a financial services hub and will ensure that Australian managed funds remain competitive in global financial markets.
Withholding from distributions by closely held trusts
The Government will extend the tax file number (TFN) withholding arrangements to closely held trusts, including family trusts, with effect from the 2010-11 income year.
This measure has an estimated revenue impact of $150 million over the forward estimates period. The measure forms part of a package of measures to improve fairness and integrity in the tax system.
The measure will ensure that assessable distributions to beneficiaries of closely held trusts align with the amounts included by these beneficiaries in their tax returns. It will not apply to income upon which tax is directly payable by the trustee of the trust, such as the income assessable to minors. Individuals who have tax withheld by trustees can claim a credit for that tax in their tax return.
Capital gains tax - extension of capital loss roll-over for complying superannuation fund mergers
The Government has enhanced the optional capital gains tax loss roll-over for complying superannuation fund mergers announced on 23 December 2008 to further remove impediments to fund mergers. These enhancements have an ongoing unquantifiable but small revenue impact.
The roll-over will be extended by one year to 30 June 2011 so that superannuation funds will have more time to use the roll-over. The measure will now also apply to mergers involving pooled superannuation trusts where the continuing entity has at least five members and to mergers involving the complying superannuation business of life insurance companies.
The measure will permit merging superannuation entities in a net capital loss position to elect to roll over assets with accrued capital gains as well as assets with accrued capital losses.
In addition, the roll-over will be expanded to permit the transferring superannuation entity’s previously realised net capital losses to be transferred to the continuing superannuation entity and the roll-over or transfer of revenue losses to the continuing entity.
Precisely how these arrangements will be written into legislation will attract a lot of interest, as the mechanisms for achieving the above could be complex.
Capital gains tax - limited roll-over for fixed trusts
The Government will provide a limited capital gains tax (CGT) roll-over for assets transferred between trusts that have the same beneficiaries with the same entitlements and no material discretionary elements (typically referred to as fixed trusts), with effect from 1 November 2008.
Typically, the transfer of assets from one trust to another would trigger a CGT taxing point. As a result of this measure, trustees of eligible trusts will be able to defer the CGT consequences of the asset transfer until the receiving trust subsequently deals with the asset. This will allow eligible trusts to restructure without immediate CGT consequences. The measure will be accompanied by integrity rules.
The reference to "no material discretionary elements" is an interesting concept and not necessarily in line with the existing definition of "fixed trust". Ideally, the announcement might be heralding a more sensible approach to the "fixed trust" definition.
Charities
Interim response to High Court decision in Word Investments case
In the case of FCT v Word Investments Limited [2008] HCA 55, the High Court held, by a 4:1 majority, that the company in question was entitled to be endorsed as a "charitable institution" despite the fact that it generated funds in connection with normal business activities.
The Court held that the company was established purely for charitable purposes, which was not affected by the manner in which it raised funds. The Court also held that a charity is considered to be pursuing its objectives principally "in Australia" if they pass funds within Australia to another charitable institution which conducts its activities outside Australia.
The Government will amend Division 50 of the Income Tax Assessment Act 1997 to ensure that endorsed charitable institutions do not direct funds overseas (except in limited circumstances). It will do so by amending the "in Australia" requirement.
The Government also announced that it will consider introducing further changes with respect to charitable institutions and the raising of funds via commercial activities. The Government will await the outcome of the Henry Review into Australia's future tax system and the Productivity's Commissioner's inquiry into the contribution of the not-for-profit sector.
Life insurance
Immediate annuity business
The Government will introduce legislation to confirm that the non-assessable non-exempt income of life insurance companies includes income from assets supporting immediate annuity policies that satisfy the pre-July 2000 immediate annuity conditions, with effect from 1 July 2002. The immediate annuity conditions will not apply to immediate annuity policies that are superannuation income streams, with effect from the 2007-08 income year.
This measure will reduce compliance costs for life insurance companies by confirming that the immediate annuity conditions did not change when they were transferred to the Income Tax Assessment Act 1997.
In addition, from the 2007-08 income year, the approved annuity conditions will not apply to immediate annuity policies issued by life insurance companies that are superannuation income streams. This will ensure that all providers of superannuation income streams are taxed consistently.
Uniform Capital Allowances - Technical Amendments
The government has announced a number of technical amendments to the Uniform Capital Allowance (“UCA”) regime in Division 40 of the Income Tax Assessment Act 1997, including, amongst others, amendments to:
- provide a reduction in the cost of a depreciating asset where that cost is not fully paid (eg where the purchase price is payable by instalments or where a discount is provided)
- provide a cost (market value) for a depreciating asset where the asset was acquired as a replacement asset for a depreciating asset that was lost or destroyed
- clarify the interaction between Division 40 and Division 240 (dealing with hire purchase arrangements), and
- ensure that the tax treatment under the CGT regime is taken into account in applying the UCA rules in order to relieve double taxation.
Most of the technical amendments (including those noted above) will commence on 1 July 2009, but some will apply retrospectively from 1 July 2001.
Employee share scheme concessions limited
The Government has announced that it will remove the ability of employees to defer taxation in respect of shares and options acquired under employee share arrangements after 7.30 pm on 12 May 2009.
The Government will also limit access to the $1,000 tax exemption. The $1,000 tax exemption will be limited to those employees with a taxable income of less than $60,000 after adjustment for fringe benefits, salary sacrifice and negative gearing losses. Again, these measures are to apply to shares and options acquired after 7.30 pm on 12 May 2009.
Changes to thin capitalisation regime for ADIs
The Government will change the thin capitalisation regime for approved authorised deposit taking institutions (ADIs). The changes will clarify how treasury shares, the previous insurance asset known as excess market value over net assets and capitalised software costs, will be recognised under the thin capitalisation provisions.
Reform of the Anti-Tax-Deferral Regimes
Following the Board of Taxation's recent review of Australia's anti-tax-deferral (attribution) regimes, the Government has announced some sweeping reforms to have effect for income years beginning on or after Royal Assent to the legislation is received.
The reforms are aimed at reducing the inefficiencies of the relevant regimes identified by the Board and reducing compliance costs for affected businesses.
The Government has announced that it will implement all but one of the Board's recommendations and in doing so will:
- repeal the foreign investment fund (FIF) provisions and replace them with a specific narrowly defined anti-avoidance rule
- modernise the controlled foreign company (CFC) provisions and rewrite them into the Income Tax Assessment Act 1997
- repeal the deemed present entitlement rules, and
- amend the transferor trust rules to enhance their effectiveness and improve their integrity.
The new CFC provisions will contain updated definitions of what constitutes active and passive income and the base company income rules will be removed. The existing exemptions within the CFC rules will be retained, including the listed country and Australian financial institution subsidiary exemptions, and additional exemptions introduced for complying superannuation entities. A choice of attribution methods will apply (the branch equivalent calculation, market value, and deemed rate of return methods) where taxpayers are required to include attributable income in their assessable income.
However, the "listed public company exemption" to the CFC rules will not be included as part of the modernisation of the CFC rules.
Off-market share buy-backs
The Government has agreed to implement the recommendations of the Board of Taxation in relation to the taxation treatment of off-market share buy-backs.
Legislation will be introduced to:
- Establish a self-executing specific provision to debit the franking account of a company that undertakes an off-market share buy-back to cancel the tax benefit of streaming imputation credits from non-resident to resident shareholders (removing reliance on the general streaming and integrity provisions)
- Deny notional losses to shareholders that participate in off-market share buy-backs conducted by listed companies
- Modify the income tax law to specify the basis for determining the capital/dividend split. The Board of Taxation recommended that average capital per share should be specified as the general method to be used by companies, with a discretion available to the Commissioner of Taxation to allow companies to apply another methodology where appropriate to their circumstance
- Confirm that certain integrity rules (section 45A, section 45B and section 177EA(5)(b) of the Income Tax Assessment Act 1936) do not apply to tender style off-market share buy-backs where average capital per share is used to determine the capital/dividend split, and
- Transfer the share buy-back provisions from the Income Tax Assessment Act 1936 to the Income Tax Assessment Act 1997.
The Government also endorses the Board of Taxation's recommendation that the ATO remove the 14 per cent administrative cap on the level of discount for off-market share buy-backs undertaken by listed companies.
The amendments will take effect from the date the amending legislation receives Royal Assent. Legislation reflecting the Board of Taxations ’s recommendations will be introduced as soon as practicable after consultation. Details will be released on the Treasury website by the end of May 2009.
Small Business and General Business Tax Break - Additional Assistance to Small Business & Enhancements
The Government will expand the Small Business and General Business Tax Break announced in February 2009 and currently being debated in the House of Representatives.
The additional assistance to small business will be in the form of an increased 50 per cent bonus deduction for assets acquired between 13 December 2008 and 31 December 2009 and installed ready for use by 31 December 2010. The previously announced 30 per cent and 10 per cent bonuses will continue to apply to all other businesses. Importantly, to qualify for the 30 per cent bonus deduction the asset must still be acquired between 13 December 2008 and 30 June 2009.
A further enhancement to the measures will be introduced allowing taxpayers to aggregate their investment in assets that are substantially identical, or that form a set, for the purposes of meeting the relevant investment thresholds.
New R&D tax credit to replace existing concessions
The Government will replace the existing R&D Tax Concessions with a new R&D Tax Credit with effect from 1 July 2010.
The new R&D Tax Credit will consist of a 40% non-refundable tax credit and a 45% refundable tax credit for firms with a turnover of $20m or less. This means that eligible firms will receive a tax refund of 45% of their R&D expenditure when they file their tax return. Businesses with a turnover of more than $20m will be able to access a 40% non-refundable credit.
Foreign-owned firms who undertake R&D expenditure in Australia will also be eligible for the 40% non-refundable tax credit.
The new refundable tax credit will not be subject to an expenditure cap. However, the definition of R&D that is eligible for the new R&D Tax Credit will be tightened to ensure that only "genuine R&D" is targeted. The Government said it will consult further on the eligibility criteria in developing legislation for the new Tax Credit. A consultation paper will be released in the next few months.
As no expenditure cap will apply to the new R&D Tax Credit, the refundable tax credit will be available to small companies in tax loss, with no limit on the level of R&D expenditure they undertake.
As an interim measure, until the program starts on 1 July 2010, the Government will lift the expenditure cap on eligible R&D that can be claimed under the existing R&D Tax Offset from $1 million to $2 million with effect from 1 July 2009.
The Government also said the R&D Premium Concession and International Premium will be abolished. The Government said that industry feedback indicated that "the unpredictability of the Premium means it provides little or no incentive for companies to invest in new projects, or for multinationals to bring their R&D to Australia".
Enforcement and litigation
Expect a heightened focus by the ATO on enforcement and litigation; the Government is obviously concerned to protect its revenue base.
Government will provide $302.1 million over four years to the ATO to address certain areas for "additional compliance attention". Of particular note is a focus on large and medium businesses which the Government is concerned will "seek to increase market share and profits through tax minimisation as the economy recovers".
In an accompanying Press Release, the Assistant Treasurer indicated that the ATO "will focus on cross-border financial arbitrage, profit shifting and the treatment of gains and losses as well as infrastructure and investment claims." Additionally, Government will provide $122 million over four years to address tax fraud involving the use of offshore tax havens. The measure includes minimal capital funding in 2009-10 to develop information and communication technology capabilities between agencies "to support the strategic intelligence function".
The Government has said that it intends to repeal over 100 provisions that provide unlimited amendment periods to the Commissioner. No specific details are given in the Budget Papers. The Government has said that it "considers that for these provisions, the Commissioner of Taxation has sufficient time under the general amendment period provisions to review an assessment".
The Assistant Treasurer also announced by Press Release that the Government will shortly "release a discussion paper canvassing options to consolidate, streamline and improve the operation of provisions designed to counter tax avoidance". Again, no further details were provided.
Change to definition of "beer and wine" in the Excise Tariff Act
Government intends to alter the excise definitions of beer and wine in the Excise Tariff Act. The measure is expressed to be in response to marketing of beer and wine-based products which attempt to mimic spirit based products (particularly pre-mixed drinks). Under the measure, mimic products "will be taxed as spirit products with effect from 1 July 2009".
Beer will be required to have a certain level of bitterness; the addition of sugar, artificial sweeteners or spirits will likely result in products being taxed as spirit based products. Wine based products with added flavouring will be subject to higher excise.
GST Measures
The Government announced that it will implement most of the recommendations from the Board's recent review of the legal framework for the administration of the GST. The Government said that most of the significant changes will take effect from 1 July 2010.
The Government has now asked the Board to review the cross-border provisions of the GST law with a view to simplifying the law and reducing the number of non-residents that are currently required to register for GST.
Margin Scheme
Treasury will conduct a review into the margin scheme provisions and the financial supply provisions with a view to simplifying the operation of those provisions, whilst at the same time maintaining the intended effect of current policy. Any proposed amendments arising from the review will be subject to unanimous agreement by the States and Territories.
Incapacitated Entities
The Government again confirmed that the GST law will be retrospectively amended, with effect from 1 July 2000, to deal with supplies and acquisitions that are made by "representatives of incapacitated entities" (which includes liquidators, receivers, managers, administrators and bankruptcy trustees).
Compliance Costs
The Government announced that it proposes to amend the GST law to reduce GST compliance costs for businesses involved in the domestic transport of exported goods and imported goods. The amendments are subject to unanimous agreement by the States and Territories.
CPRS
The Government announced that the GST law will amended to clarify the GST treatment of all units recognised under the CPRS, including eligible international units and all Kyoto units. The CPRS units will be classified as personal property rights, and not real property rights, for the purposes of the GST law. The changes will take effect from the introduction of the CPRS.
Click on the following link for the Budget Papers: http://www.budget.gov.au/