Federal Budget 2011-12

On 10 May 2011, the Treasurer Mr Swan handed down his fourth budget, the 2011-12 Federal Budget that is focused on getting back to surplus by 2012-13 and getting more people into jobs while addressing a number of tax system shortcomings and revenue leakages from the government’s coffers.

There were therefore a raft of tax changes announced covering specific areas such as superannuation, income tax, CGT, GST, FBT and charities.

 

We would encourage you to contact your Walker Wayland advisor to discuss issues that will impact your business.

Further information on specific areas mentioned in our Budget Newsletter are detailed below.

Individual and family taxation

The rebate for dependent spouses aged less than 40 will be phased out.

The dependent spouse rebate will be phased out for taxpayers with a dependent spouse born on or after 1 July 1971. This reform addresses a barrier to participation by progressively removing the tax concession for taxpayers with a non-working spouse and no children. Taxpayers with an invalid or permanently disabled spouse, supporting a carer, or people who are eligible for the zone, overseas forces and overseas civilian tax offsets will not be affected by this change.

The low income tax offset that is delivered through regular pay during the year will be increased from 50% to 70% of the taxpayer's total entitlements to increase take home pay.

The amount of the low income tax offset (LITO) 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 remaining 30% of their LITO benefit will still be paid as a lump sum on assessment of income tax returns.

The ability of minors to access the low income tax offset to reduce tax payable on their unearned income, such as dividends, interest and rent, will be removed, with effect from 1 July 2011.

The government will limit the ability of minors (children under 18 years of age) to access the low income tax offset (LITO) 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. This measure will discourage income splitting between adults and children.

Income earned by minors from work will still be eligible for the full benefit of the LITO. Unearned income of minors who are orphans or disabled, as well as compensation payments and inheritances received by minors, will not be affected by this measure

From 1 July 2011, self-education expenses will no longer be deductible against all government assistance payments.

The tax law will be amended to disallow self-education expenses against all government assistance payments. The change is being introduced in response to a recent High Court decision. The proposed changes will have effect from 1 July 2011. Thus, individuals who receive Youth Allowance (Student) will be able to claim a deduction for expenses incurred in gaining their payment for the 2010/11 income year. For each of the years 2006/07 to 2009/10, the Commissioner has determined that he will administer the law to allow eligible taxpayers to receive an automatic deduction of $550 or make potentially higher claims if the relevant self-education expenses can be substantiated.

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 discount on voluntary payments to the Tax Office of $500 or more will be reduced from 10% to 5%.

From 1 January 2012, the following discounts applying to HECS payments will be reduced:

  • the discount available to students electing to pay their 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%.

Family Tax Benefit changes

From 1 July 2011, families in receipt of Family Tax Benefit (FTB) Part A will be eligible for an advance of up to 7.5 per cent, up to a maximum of $1,000, of their annual FTB Part A entitlement. Advances will be repaid over six months by reducing future fortnightly FTB payments. Payment of advances will be subject to an assessment of a family's ability to repay the advance without falling into financial hardship. Advances can be taken at any point throughout the year.

From 1 January 2012, the eligibility for FTB Part A will be limited to children up to the age of 21 years, as young people aged 22 and over are considered independent. When a child turns 22 years of age, parents will no longer be able to receive FTB Part A for that child but the child may be eligible to receive Youth Allowance subject to usual means testing and academic progress rules.

Indexation of the FTB Part A and B supplements will be suspended for 3 years. The FTB supplements will be fixed at the current 2010/11 levels of $726.35 per annum per child for FTB Part A and $354.05 per annum for FTB Part B until 1 July 2014 (rather than being CPI-indexed).

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).

This means that:

  • FTB Part B primary earner income limit will remain at $150,000
  • the income limit for receiving the dependency tax offsets will remain at $150,000
  • the Baby Bonus eligibility limit will remain at $75,000 of family income in the six months following the birth or adoption of a child, equivalent to $150,000 a year
  • the Paid Parental Leave primary carer income limit will remain at $150,000 in the financial year before the birth or adoption of a child, and
  • the higher income-free threshold of FTB Part A will remain at $94,316 of family income, with an additional $3,796 provided for each child after the first.
  • Income limits are the amount a family can earn before they are no longer eligible for family payments, and the higher income-free area for FTB Part A is the income level at which FTB payments begin to reduce.

Companies

The company loss recoupment rules are to be amended to make it easier for companies to satisfy the continuity of ownership tests.

The continuity of ownership test (COT) rules will be amended such that companies need not trace ownership through certain superannuation entities effective from the 2011/12 income year. The amendments will also remove technical deficiencies in the modified rules for widely held entities where:

  • an entity is interposed between certain stakeholders and the loss company in certain circumstances
  • an interposed entity demerges
  • an interposed foreign entity issues bearer depository receipts, or
  • a corporate change arising from the issue of new shares happens.

Under the amendments, membership interests in an entity will be treated as a single asset when applying the low value asset exclusion under the loss integrity rules.

Small Business & CGT

The rules governing access to the small business CGT concessions will be tightened for trusts and broadened for some small businesses.

The Government will amend the small business tax concessions so that trusts will not be able to avoid being treated as connected entities for the purpose of testing eligibility for the concessions on the basis that the trusts do not own assets for their own benefit. These changes will also ensure that some small businesses will be able to access the small business CGT concessions because the changes will make their business assets active.

This measure will have effect for CGT events happening after 7.30pm on 10 May 2011.

The Government will provide Australian small businesses with an instant tax write-off of the first $5,000 of any motor vehicle purchased from 2012-13.

The Government will provide Australian small businesses with an instant tax write-off of the first $5,000 of any motor vehicle purchased from 2012-13. The Treasurer said that, for example, a tradesman on a 30% marginal tax rate, buying a new $33,960 ute would receive an extra tax benefit of $1,275 in the year they purchased the vehicle. The remainder of the purchase value can be transferred into the general small business depreciation pool, which is depreciated at 15% in the first year and 30% in later years.

The Treasurer said this new write-off was in addition to the Government's proposed tax reforms for small businesses to be introduced in 2012-13 that would allow:

  • an immediate write-off of all assets valued at under $5,000 (up from $1,000 presently);
  • a write-off of all other assets (except buildings) in a single depreciation pool at a rate of 30%. Currently, small businesses allocate assets to 2 different depreciation pools, with 2 different depreciation rates (30% and 5%); and
  • a reduction in company tax rate to 29% for incorporated small businesses.

These reforms will be available to all small businesses, including sole traders and businesses operating through trusts, partnerships and companies.

FBT

A transition to 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.

Over the next four years, the existing statutory fractions ranging from 7% to 26% applied when working out the taxable value of a car fringe benefit using the “statutory formula” method will be phased out and replaced by a flat rate of 20%.

Under the “statutory formula” method, the taxable value of a car fringe benefit depends on the relevant statutory fraction applied to the cost of the car. Currently, this statutory fraction decreases as the distance travelled by the vehicle increases. The new flat rate of 20% will apply regardless of the distance travelled during the year, removing the incentive for people to drive more than necessary to access higher tax concessions.

The 20% flat rate will only apply to new vehicle contracts entered into after 7:30 pm on 10 May 2011, and will be phased in over four years as shown in the table below.

Statutory rate (multiplied by the cost of the car to determine a person’s car fringe benefit) applied to new contracts entered into after 7:30pm on 10 May 2011.

Distance travelled during the FBT year (1 April – 31 March)

From 10 May 2011

From 1 April 2012

From 1 April 2013

From 1 April 2014

0 – 15,000 km

0.20

0.20

0.20

0.20

15,000 – 25,000 km

0.20

0.20

0.20

0.20

25,000 – 40,000 km

0.14

0.17

0.20

0.20

More than 40,000 km

0.10

0.13

0.17

0.20

 

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.

Better targeting of concessions

The tax concessions provided to NFP entities will be reformed to ensure they are targeted only at those activities that directly further an NFP’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.

Under this measure, the NFP income tax concessions will only apply to profits generated by unrelated commercial activities that are directed back to an NFP entity to carry out its altruistic work. This means NFP entities will pay income tax on profits from their unrelated commercial activities that are not directed back to their altruistic purpose, i.e. the earnings they retain in their commercial undertaking.

NFP entities, in respect of their unrelated commercial activities, will also not have access to the FBT exemptions or rebate, GST concessions, or deductible gift recipient support in relation to those activities.

Commercial activities that further an NFP entity’s altruistic purposes, and small-scale and low-risk unrelated commercial activities, will not be affected by the reforms. NFP entities with existing unrelated commercial activities will initially be able to continue to use their tax concessions to support these activities. The Government will consult on transitional arrangements for these existing activities, with the intention of phasing these out over time. NFP 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.

Likewise, the 50,000 National Rental Affordability Scheme allocations will be unaffected by the tax changes.

Statutory definition of charity

The government will consult on and introduce a statutory definition of “charity” for all Commonwealth laws to take effect from 1 July 2013. It will be based on the 2001 Report of the Inquiry into the Definition of Charities and Related Organisations, taking account of the findings of recent judicial decisions, such as Aid/Watch Incorporated v FC of T 2010 ATC.

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.

Charities and Not-for-profits Commission

The government will provide $53.6 million over four years for the establishment of a new independent statutory agency, the Australian Charities and Not-for-profits Commission (ACNC), by 1 July 2012 and related structural changes required to the Tax Office.

An implementation taskforce (headed by the expected Commissioner of the ACNC) will also be set up in Treasury from 1 July 2011 to ensure the ACNC is ready for operation by 1 July 2012.

The Commissioner of the ACNC will be appointed by the government and report to parliament through the Assistant Treasurer. The Commissioner will have sole responsibility for determining charitable, public benevolent institution, and other not-for-profit status for all Commonwealth purposes. The ACNC will also initially be responsible for 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.

From 1 July 2011, the Tax Office will structurally separate its role of determining charitable status from its role of administering tax concessions, in preparation for the establishment of the ACNC. The Commissioner of Taxation will retain responsibility for administering tax concessions for the not-for-profit sector. The Tax Office will provide corporate service support to the ACNC in the form of information technology services, human services, financial services and other related functions. The Government will also undertake negotiations 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 coordinated national arrangements.

Tax administration

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.

The GDP adjustment factor for the PAYG instalment taxpayers increases the previous year’s adjusted taxable income by the previous year’s nominal GDP growth, to determine the tax instalments to be paid in the income year. The majority of taxpayers who are required to pay quarterly PAYG instalments use the GDP adjustment method.

Various measures to improve tax compliance will be introduced including increasing company directors' personal liabilities for company debts and increasing Tax Office resources.

The following various measures will be introduced in an effort to improve tax compliance:

  • Tax law to counter fraudulent phoenix activity will be strengthened. With effect from 1 July 2011, the director penalty regime will be expanded, including making company directors personally liable for unpaid employee superannuation and being prevented from using their individual withholding credits if the company has withholding amounts owing to the Tax Office.
  • With effect from 1 July 2012, certain businesses will be required to annually report payments to contractors in the building and construction industry. The Government will also publicly consult on the introduction of a reporting regime for payments to contractors in the commercial cleaning industry.
  • The Tax Office will be provided with additional resources to, among other things, enhance refund fraud detection and monitor accounting of government grants and payments.

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.

Eligible individuals will be provided with the option of having excess concessional contributions taken out of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

The measure will apply where an individual has made excess concessional contributions of up to $10,000 (not indexed) in a particular year and is only available for breaches in respect of 2011/12 or later years, and only for the first year, commencing from 2011/12, in which a breach occurs.

Excess contributions tax is incurred where an individual exceeds their concessional contributions cap. Concessional contributions include compulsory superannuation guarantee payments, salary sacrifice contributions, and other deductible contributions. Excess concessional contributions are taxed at 31.5 per cent, in addition to 15 per cent tax when contributions are made to the fund.

This measure makes the superannuation system fairer by allowing those who have breached the cap for the first time, by $10,000 or less, the option to have these contributions refunded and taxed at their potentially lower marginal tax rate rather than the 46.5% effective excess contributions tax rate.

A higher concessional contributions cap will apply for the over 50s with superannuation balances under $500,000 from 1 July 2012.

The government will set the higher concessional superannuation contributions cap for eligible individuals aged 50 and over with total superannuation balances of less than $500,000, due to apply from 1 July 2012, to $25,000 above the general concessional cap.

This measure clarifies the operation of the higher cap for the over 50s which was introduced in the 2010/11 Budget, and means those eligible Australians over 50 will be able to contribute $25,000 more per year than other workers.

The general concessional contribution cap is set at $25,000. When it increases due to indexation, the higher cap will increase by the same dollar amount.

Superannuation fund trustees will be able to make greater use of tax file numbers to locate member accounts.

The government will allow superannuation fund trustees and retirement savings account (RSA) providers to make greater use of tax file numbers (TFNs) to locate member accounts and to facilitate the consolidation of multiple member accounts.

This measure will improve superannuation industry administration by removing the existing requirement for fund trustees and RSA providers to use other methods of identification to locate accounts before TFNs can be used, with effect from 1 July 2011. It will also assist fund trustees and RSA providers to carry out more efficient consolidation of multiple member accounts, with effect from 1 January 2012, if not proclaimed earlier.

Employees will receive information on their payslips about the amount of superannuation paid into their accounts.

Employees will receive information on their payslips about the amount of superannuation actually paid into their account; and employees and employers will receive quarterly notification from their superannuation fund if regular payments cease, with effect from 1 July 2012.

Superannuation funds will no longer be able to treat certain assets as trading stock.

The government will remove the trading stock CGT exception for complying superannuation entities for specified assets, with effect from 7.30 pm 10 May 2011. This will ensure gains or losses on those assets (primarily shares, units in a trust and land) are subject to CGT, consistent with CGT being the primary code for taxing gains and losses of complying superannuation entities.

This will prevent complying superannuation entities treating shares as trading stock, so as to deduct losses on their shares against income other than capital gains.

This measure also provides transitional rules to ensure that assets held or accounted for as trading stock before the time of announcement are unaffected.

The pension drawdown relief that has been provided over the last three years will be phased out.

The government will phase out the pension drawdown relief that has been provided over the last three years. Minimum payment amounts for account-based, allocated and market linked (term allocated) pensions will be reduced by 25 per cent for 2011/12 and will return to normal in 2012/13.

Reducing the minimum payment amounts for account-based pensions will assist holders of these products to recoup capital losses incurred as a result of the global financial crisis. The government previously provided pension drawdown relief in the 2008/09, 2009/10 and 2010/11 years by halving the minimum payment amounts.

The freeze to the indexation of the income threshold for superannuation co-contribution purposes will be extended for an additional year to 2012/13.

The government will continue the freeze, for an additional year to 2012/13, of the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.

Under the superannuation co-contribution scheme, the government provides a matching contribution for contributions made into superannuation out of after-tax income. The matching contribution is up to $1,000 for people with incomes of up to $31,920 in 2010/11 (with the amount available phasing down for incomes up to $61,920). This measure will continue to freeze these thresholds at $31,920 and $61,920 respectively.

Other measures

Certain trusts and partnerships keeping accounts in foreign currency can calculate net income using that currency.

Certain trusts and partnerships keeping accounts solely or predominantly in a foreign currency will be able to calculate their net income using that foreign currency. This measure is effective from the date of assent of the amending legislation.