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Budget 2011

1.   Overview

The first budget by the new Prime Minister has delivered some conservative measures with the aim of bringing the budget back to a $3.5 billion surplus by 2012-2013.

The Government’s stated “core” focus of the budget is broadly:

  • a more productive workforce, which includes a $3 billion training package;
  • improved schools, hospital and health care with $4 billion for health services (particularly mental and regional health); and
  • cost of living relief for families and assistance for small business.

The Government’s belief is that despite recent natural disasters the economic outlook remains strong with continued growth expected over the next two years. There is a significant investment in infrastructure of $36 billion in roads, rail and ports. The Government has also identified $22 billion in savings over the forward estimates including changes to family payments, public sector efficiency, reduction in car fringe benefits, phasing out the dependent spouse tax offset and removing the Low Income Tax Offset for unearned income of minors.

Tax measures are wide ranging but directed more at clarification and “tweaking” of existing provisions. A number of measures have the effect of limiting deductions and the ability to access losses arising from the GFC which the Government has noted is affecting its ability to return to surplus.

2. Measures

Company

  •   Amendments to the scrip for scrip roll-over and small business concessions

The Government will amend the scrip for scrip roll-over integrity provisions to ensure that they apply to trusts, superannuation funds and life insurance companies in a similar way to individuals and companies. These amendments are designed to prevent certain trusts, superannuation funds and life insurance companies from taking the view that the integrity provisions do not apply to them (e.g. because as the stakeholders, they own the interests for the benefit of others (i.e. the beneficiaries) rather than for their own benefit).

The integrity provisions generally apply to transactions where stakeholders in the target and acquiring entities have the potential to influence both entities (e.g. by limiting cost base etc).

A related amendment will be made for the purposes of ensuring that trusts are treated as connected entities in order to ensure that eligible small business are able to access the small business CGT concessions.

This measure will have effect for the scrip for scrip roll-over and small business CGT concessions for CGT events happening after 7:30pm (AEST) on 10 May 2011.

  • Other amendments to the CGT provisions

The Government will make a series of amendments to the income tax law to ensure the proper functioning of the CGT and associated provisions, including the following:

  • Ensuring that the roll-over for the exchange of shares in one company for the shares in another company operates properly, so that there is deferral of a profit or loss where the original shares are held on revenue account. This change will have effect from 7:30pm (AEST) on 10 May 2011.
  • Amending the roll-over for certain disposals of assets by a trust to allow roll-over relief to apply where a transferee company or trust holds rights, just before the disposal or transfer time, associated with a deed or similar document that is designed to facilitate the transfer of assets into the company or trust. These changes to the roll-over for the disposal of assets by a trust to a company will have effect for CGT events happening after 7:30pm AEST on 10 May 2011 and the changes to the roll-over for the transfer of assets between certain trusts will have effect for CGT events happening on or after 1 November 2008.
  • Ensuring that gains or losses arising from life insurance policies that are generally exempted from CGT are not then taxed under the ordinary income tax provisions by removing the exception to the ‘CGT primary code’ rule for such gains and losses. These changes will apply to CGT events happening in the 2005-2006 income year and later income years.
  • Provide the Commissioner with a discretion to extend the two-year ownership period in which the trustee of a deceased estate or beneficiary of such an estate must dispose of their interest in the deceased’s dwelling to access a full CGT main residence exemption (or a more generous partial exemption). The Commissioner currently has no discretion to extend this period.
 
  • Debt / Equity Rules

Government will amend the debt / equity rules 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 interests. The provision will only apply where the purpose and effect is that the investor has an equity interest in the issuer company. There will also be a discretion for the Commissioner to exclude arrangements where reasonable to do so.

The Government has also extended the debt/equity transitional rules for Upper Tier 2 capital instruments (eg perpetual subordinated notes) to 1 July 2011 to allow ADIs to amend instruments to come within the 10 March 2011 regulations.

  •  Company Loss Recoupment

The rules that require tracing of interests to ensure the Continuity of Ownership test is satisfied will be modified such that companies need not trace through superannuation entities.

For widely held entities the following will not affect ownership:

- the insertion of an entity between stakeholders and the loss company

- the de-merger of an interposed entity

- an interposed foreign entity issues bearer depository receipts

- the issue of new (replacement) shares occurs.

  •  Taxation Of Financial Arrangements

TOFA amendments will ensure in relation to hedging arrangements;

- for taxpayers that have elected both the TOFA tax hedging and TOFA financial reports method, only the effective portion of the gains and losses from hedging financial arrangements will be subject to the tax hedging rules;

- gains and losses from hedging financial arrangements that hedge a risk in relation to a firm commitment (as defined for accounting purposes) will be brought to account when the cessation of the firm commitment are recognised for tax purposes.

The Government will also allow further time for the election to apply the TOFA stages 3 & 4 to existing financial arrangements.

  •  Look-though treatment for instalment warrants and similar arrangements
 

The Government will extend the look-through treatment of instalment warrants for income tax purposes (i.e. treating the investor as the owner of the security), with effect for income tax assessments for the 2007-08 income year and later income years, beyond just single exchange traded securities to each of the following:

  • instalment warrants and receipts over direct and indirect interests in listed securities; and
  • instalment warrants and receipts over unlisted securities in widely held entities and bundles of all these assets.

This is consistent with the announcement made by the Assistant Treasurer in the press release of 17 January 2011.

  •  Mineral Resource Rent Tax - adoption of recommendations of the Policy Transition Group

The Government will adopt the recommendations of the Policy Transition Group (“PTG”) as the basis of the detailed design for Australia’s new resource tax arrangements. The recommendations cover issues regarding:

  • taxing point;
  • starting base and starting base losses;
  • deductions and test for deductibility;
  • a phased extension of the $50 million threshold; and
  • transferability of expenditure and project losses.

Natural Disaster Recovery and Rebuilding

A number of measures have or will be adopted in relating to the natural disaster recovery and rebuilding arrangements, including:

  • The Government will proceed to introduce a temporary flood and cyclone reconstruction levy from 1 July 2011 to contribute towards the cost of rebuilding flood and cyclone affected regions. This measure will only apply for the 2011-12 income year and will apply as follows:
    - Taxable income over $100,000 - 0.5% of taxable income between $50,001 and $100,000, plus 1% of taxable income over $100,000;
    - Taxable income between $50,001 and $100,000 - 0.5% of taxable income above $50,000.
    - Taxable income of $50,000 or less - no levy
  • The Government has made the Disaster Income Recovery Subsidy payment for the recent floods in Australia and for Cyclone Yasi exempt from income tax;
  • The Government will provide an income tax exemption for certain Category C clean up and recovery grants paid to small businesses and primary producers under the Natural Disaster Relief and Recovery Arrangements.

Infrastructure

The Government has proposed a package of reforms impacting infrastructure of national significance including;

- increase of Infrastructure Australia funding by 40% to $36M, together with a revamp of the Council;

- losses generated by designated infrastructure projects will be exempt from the COT and Same Business Tests and will be uplifted by the government bond rate. This is to address concerns that losses were not generally usable due to later changes in ownership.

International

  • Investment Manager Regime - FIN 48

The Government will extend the existing exemption for foreign funds trading in Australian portfolio securities (announced on 17 December 2010) and that applied to the 2010 year to the current 2011 year. This will allow further time for the proposed Investment Manager Regime (“IMR”) currently under review by the Board of Taxation to be considered and implemented.

The concession will apply provided the foreign fund has not previously lodged tax returns.

The Government has also requested the Board of Taxation to report by the end of the third quarter on the exemption as it will continue under the IMR (i.e. earlier than expected) and report on the remaining IMR provisions by 31 December 2011.

  • Additions  to Qualifying Countries for Reduced Withholding Tax

Foreign investors in Australian Managed Investment Trusts can access reduced tax rates (generally 7.5%) where they reside in a country with which Australia has a Tax Information Exchange Agreement (TIEA). A number of countries have been added to the list including Belize; the Cayman Islands; Bahamas; Monaco; Republic of San Mariono; Singapore; St Christopher and Nevis; and St Vincent and the Grenadines.

The addition of Singapore in particular has been long awaited and will provide significant relief for investors from this major financial centre.

  • Functional Currency

The Government will allow certain trusts and partnerships that keep their accounts in a foreign currency to use that currency to calculate their net income. The measure will apply from the date of Royal Assent of the Amending legislation.

Funds 

  •  Deferral of new tax system for MITs

The Government will defer the start date of the new tax system for MITs from 1 July 2011 to 1 July 2012. This is consistent with the Government’s previous announcement to defer this measure.

In addition, the measure will make two minor changes to the proposed new tax system to facilitate the entry of MITs into this system and to reduce compliance costs for MITs and beneficiaries. No further details have been released in relation to these changes as part of this 2011-2012 Budget.

  •  Trust taxation - income averaging and farm management deposits

The Government will amend the income tax law to ensure that trust beneficiaries can continue to use the primary production averaging and farm management deposits provisions in a loss year, with effect from 1 July 2010.

This is consistent with the announcement made by the Assistant Treasurer in the press release of 16 December 2010, and is intended to restore the position in TR 95/29 (where the ATO accepted that a beneficiary could be taken to carry on a primary production business that was actually carried on by the trustee), which was withdrawn following the High Court decision in Bamford.

  • Interim changes to improve the taxation of trust income

The Government will implement the following recommendations of the Board of Taxation, with effect from 1 July 2010:

  • to introduce legislation to enable streaming of capital gains and franked distributions; and
  • to introduce legislation to target the use of low tax entities, especially exempt entities, to reduce the tax payable on the taxable income of a trust.

These interim measures will be adopted whilst the update and rewrite of the trust tax law provisions in Division 6 of the 1936 Act is being undertaken.

This is consistent with the announcement made by the Assistant Treasurer in the press release of 13 April 2011.

  • Update of the list of the countries that have effective EOI arrangement with Australia

As noted above, the Government will update the list of countries reported in the Taxation Administration Regulations 1976 whose residents are eligible to access a reduced rate of withholding tax (of 7.5%) on certain distributions from Australian MITs. This notably includes, the Cayman Islands and Singapore, which should enable a broader range of investors (e.g. fund of funds) to benefit from investing in Australian MITs.

Securities lending arrangements tax rules - extending the scope to address insolvency issues

The Government will amend the tax rules for securities lending arrangements (i.e. under section 26BC of the 1936 Act) to ensure that the lender under a securities lending arrangement is treated as not having disposed of the lent securities where:

  • the borrower does not return the securities, or identical securities, within 12 months due to the borrower’s insolvency; and
  • no later than 30 days after the resulting default (or within such longer period that the Commissioner allows), the lender restores their original position prior to the securities lending arrangement by using the collateral received under the arrangement to purchase identical securities.

The amendments will apply to securities lending arrangements in existence as at 1 July 2008 and those arrangements entered on or after that date.

Superannuation

  • Limited relief for excess concessional contributions

Prior to the Budget, the Government had foreshadowed providing some form of relief for excess concessional superannuation contributions.

Currently, contributions which exceed the concessional contribution cap are subject to additional tax at a rate of 31.5%. When combined with tax within the fund at a rate of 15%, this means excess contributions are effectively taxed at 46.5% (equal to the top marginal rate plus Medicare levy).  If the excess concessional contributions result in the member also exceeding the non-concessional contributions cap, the effective tax rate on excess contributions can be up to 93%.

The Government has announced in the Budget a limited measure to provide relief for members who exceed the concessional contributions cap.

Where excess contributions of up to $10,000 in the 2011-12 or subsequent income years are made, the member can have their excess contributions taken out of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring tax at the potentially higher rate that applies to excess contributions.

This will provide relief for eligible members on marginal tax rates below the top rate.  Even for members on the top marginal rate, the measure may provide some relief, if the excess contribution that is refunded will not count towards the non-concessional contributions cap.

The $10,000 limit is reasonably low and will not be indexed.  It seems that where a member exceeds the cap by more than $10,000, the relief will not apply at all, and excess concessional contributions tax will apply to the whole of the excess contribution.  The relief also applies only for the first income year in which a breach occurs.  Breaches in subsequent years will incur the excess contributions tax.

These restrictions mean that the measure will be of limited use and will not provide any retrospective relief.

The Government has announced that it will consult with the superannuation industry on the implementation of this measure.

  • Limiting the trading stock exception for superannuation funds

The Government will remove the trading stock exception to CGT being the primary code for complying superannuation entities for specified assets (primarily, shares, units in a trust and land), with effect from 7:30pm (AEST) 10 May 2011. This measure is primarily designed to prevent complying superannuation entities from treating those assets as trading stock in order to deduct losses against income, rather than being limited to CGT treatment.

Transitional rules will apply to ensure that assets held or accounted for as trading stock before the time of announcement are unaffected.

  • Extending the pause to the indexation of income thresholds for Government superannuation co-contribution eligibility

The Government has announced the continuation of the freeze, for an additional year (2012-13), of the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.  The matching contribution is up to $1,000 for people with incomes of up to $31,920, with the amount of the contribution phasing down and cutting out for those on incomes above $61,920.  These amounts had already been frozen for the 2010-11 and 2011-12 years.

  • Already Announced Changes

The following measures have already been noted by the Government:

• Extension of the temporary loss relief for superannuation funds mergers by three months to 30 September 2011.

• Making permanent the higher $50,000 concessional superannuation contributions cap for superannuation members aged 50 or over who have total superannuation balances below $500,000.

• Greater use of tax file numbers (already legislated).

• Provision of information on payslips about superannuation contributions made by employers and quarterly notification if regular payments cease (to take effect from 1 July 2012).

• Additional funding to relevant government agencies (ASIC, APRA and the ATO) to fund the implementation of various Stronger Super reforms, including MySuper, SMSF reforms, and SuperStream.

• Financial assistance grants to compensate fund members for the failure of Trio are to be funded by levies collected by APRA from superannuation funds.

Small Business

  • Immediate Vehicle Writeoff for small business from 2012-13

An immediate writeoff for the first $5,000 of any motor vehicle purchased by a small business after 1 July 2012 will be allowed with the remainder of the purchase value transferred to the general small business depreciation pool (and depreciated at 15% in the first year and 30% in later years).

  • Writeoff of assets under $5,000 from 2012-13

An immediate writeoff of assets under $5,000 will be allowed from 1 July 2012. All other assets (other than buildings) will be allowed at 30%.

  • Tax Rate for Incorporated Small Business

This will fall to 29% from 1 July 2012.

  • PAYG changes

For the 2011-12 year an adjustment factor for PAYG instalments will be set at 4% (rather than a GDP adjustment).

Personal Tax

  • Medicare &Low Income Offset (LITO)

The medicare levy for low income thresholds have increased. Also from 1 July 2011 the Government will increase the LITO in weekly pay from 50 to 70%.

  • Fringe Benefits Tax

Fly-in-Fly-out arrangements; The Government will extend the FBT exemption for fly-in-fly-out arrangements to cover Australian residents working in remote areas overseas. The measure will apply from 1 July 2009.

Statutory Formula for car fringe benefits;  The statutory formula method for determining the taxable value of car fringe benefits will be replaced with a single rate of 20% that applies regardless of the distance travelled with an aim to remove the incentive for people to further drive salary sacrificed and employer sponsored cars. This will apply from 7.30pm on 10 May 2011. People who use their vehicles for a significant work-related travel will still be able to use the “operating cost” (or log book) method to exclude the business component of the vehicle.

Tax Compliance; A number of compliance measures will be introduced targeting phoenix companies (companies created with the intent of not paying debts); refund fraud; and data-matching compliance with Government Grants and taxable payments.

Goods and Services Tax (“GST”)

  • Treatment of new residential premises

The Government will amend the GST law to ensure that GST applies to the value added to real property by developers constructing new residential premises.

The measure is intended to restore the policy intent of the law following the recent Federal Court decision in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46, which held that the sale by developers of certain newly constructed residential premises to owner-occupiers and investors was input taxed rather than taxable.

The amendments will ensure that:

• from 3 October 2007, new residential premises constructed under development lease arrangements are treated as taxable supplies;

• from 1 July 2000, the granting of individual strata lot leases over newly constructed residential premises is not sufficient by itself to make future supplies of the premises input taxed;

• from 1 July 2000, any change in property title arrangements will not result in the premises once again becoming new residential premises.

Certain transitional arrangements will apply to ensure that taxpayers who entered into arrangements on a basis consistent with the Court’s findings, prior to the issue of the Government’s press release of 27 January 2011, are not disadvantaged.

  • Treatment of property in possession of a mortgagee

The Government will amend the GST law to clarify that Division 105 of the GST Act operates to the exclusion of Division 58 of the GST Act where a mortgagee in possession or control sells the property of a corporation. This measure will allow mortgagees in possession or control of property of corporations to continue to report and account for their GST obligations under a single registration.

This is in line with the ATO’s published view in ATOID 2010/224.

  • Certain supplies to health insurers

The Government will amend the GST law to ensure that certain supplies made to health insurers in the course of settling health insurance claims will be GST-free with effect from 1 July 2000. This follows the decision of the Full Federal Court in Commissioner of Taxation v Secretary to the Department of Transport (Victoria) [2010] FCAFC 84.

  • Government response to Board of Taxation report

The Government will defer the start date of the following components of the 2009-2010 Budget measures (which were to commence on 1 July 2011):

• adopt the income tax self assessment regime for indirect taxes and refresh the period of review;

• reform the change of use adjustments;

• allow adjustments for pre-registration acquisitions;

• clarify the treatment of tax law partnerships;

• simplify the GST grouping membership rules, including grandfathering of current membership rules, and allowing grouping of non-operating holing companies and trusts;

• amending indirect tax sharing agreement provisions; and

• introduce a reverse charge for supplies of going concerns and farmland.

The revised start date will be a prescribed quarterly period after Royal Assent.

The Government will also not proceed at this stage with the component of the 2009-10 Budget measure to provide an option to treat certain business-to-business supplies as taxable, which was also scheduled to take effect on 1 July 2010.

  • Providing businesses in a net refund position with access to the GST instalment system

The Government will extend the current GST instalment system to allow small businesses in a net refund position (i.e. where input tax credits exceed GST liability on sales) to choose to access this system (which is currently not available).

Not-for-profit sector

  • Establishment of the Australian Charities and Not-for-profits Commission (“ACNC”)

The ACNC will be established from 1 July 2012 as a new independent statutory agency responsible for:

• determining charitable, public benevolent institution, and other not-for-profit status for all Commonwealth purposes;

• providing education and support to the sector;

• implementing a “report-once use-often” general reporting framework for charities; and

• implementing a public information portal by 1 July 2013.

The responsibility for determining charitable status will move from the Commissioner of Taxation to the ACNC effective from 1 July 2012.  The Commissioner will remain responsible for administering tax concessions for the not-for-profit sector.

The Government will also negotiate with the States and Territories on national regulation and a new national regulator for the sector, with the aim of minimising reporting and other regulatory requirements through a national coordinated approach.

  • Changes to not-for-profit tax concessions

The Government proposes changes to tax concessions provided to not-for-profit entities, with the intention of ensuring that the concessions are targeted only at those activities that directly further an entity’s altruistic purposes.  The new arrangements will commence on 1 July 2011 and will initially affect only new unrelated commercial activities that commence after 10 May 2011.

The measure will mean that not-for-profit entities will pay income tax on profits from their unrelated commercial activities that are not directed back to the entity to carry out its altruistic work (i.e., earnings retained in their commercial undertaking).

They will also not have access to certain other concessions in relation to those activities - fringe benefits tax exemptions or rebates, GST concessions, and deductible gift recipient support.

Commercial activities that further a not-for-profit entity’s altruistic purposes, and small-scale and low-risk unrelated commercial activities, will not be affected by the reforms.  The Government gives as examples lamington drive fundraisers, school fetes and leasing out of church halls.

The government will consult on transitional arrangements in relation to existing unrelated commercial activities, with the intention of phasing these out over time.

Not-for-profit entities that have entered into a government service delivery contract as at 10 May 2011 will be allowed to use their tax concessions in support of that contract.  The 50,000 National Rental Affordability Scheme allocations will also be unaffected by the changes.

  • Introduction of a statutory definition of charity

The Government will introduce a statutory definition of “charity” for all Commonwealth laws to take effect from 1 July 2013.  The Government will consult on the definition, but it is proposed that it will be based on the 2001 Report of the Inquiry into the Definition of Charities and Related Organisations.  It will also take into account recent court decisions such as Aid/Watch Incorporated v Commissioner of Taxation, which extended the definition of charity to include certain advocacy-based organisations.

The statutory definition would replace over 400 years of common law jurisprudence on the meaning of “charity”.

The Government will also consult with the States and Territories with the intention of developing and introducing a definition of “charity” that can be adopted by all jurisdictions.

The Budget papers can be found here.

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Who does this affect?

All taxpayers

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