Federal Budget 2012-13

On 8 May 2012 the Treasurer, Mr Wayne Swan handed down his fifth Federal Budget. A fiscally tight Budget designed aiming to give rise to that oft-mentioned surplus for 2012-13 it contained anticipated tax changes, but also had a raft of other tax measures including changes to previously announced measures and significant changes to the tax loss measures. Previously announced measures the government decided not to proceed with included the standard tax deduction and the interest discount.

Treasurer Wayne Swan said the budget would deliver a small ($1.5bn) surplus in the year to 30 June 2013, thanks largely to cuts in spending on defence and foreign aid and abandoning planned tax cuts for companies and savers.

We encourage you to contact your Walker Wayland advisor if you wish to discuss any aspects of the Budget further


 

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Individuals and families

The government will not proceed with:

  • the standard deduction for work-related expenses; or
  • the 50% tax discount for interest income.

The Government did not make any changes to the currently legislated tax rates for residents that are to apply from 1 July 2012. These were legislated in the package of carbon tax Bills that were passed and received Royal Assent in 2011.

The personal income tax rates and thresholds are summarised for resident taxpayers in the table below:

2011 - 12

2012 - 13

2015 -16

Threshold

Rate

Threshold

Rate

Threshold

Rate

$6,001

15.0%

$18,201

19.0%

$19,401

19.0%

$37,001

30.0%

$37,001

32.5%

$37,001

33.0%

$80,001

37.0%

$80,001

37.0%

$80,001

37.0%

$180,001

45.0%

$180,001

45.0%

$180,001

45.0%

 

The Medicare levy low income thresholds will be increased to $19,404 for individuals and $32,743 for families for the 2011/12 income year.

The additional amount of threshold for each dependent child or student will also increase to $3,007. The Medicare levy threshold for single pensioners below Age Pension age will be increased to $30,451 for the 2012/13 income year to ensure pensioners below Age Pension age do not pay the Medicare levy when they do not have an income tax liability.

From 1 July 2012, the low-income threshold for this group will be fixed at the level applicable to seniors entitled to the Senior Australians Tax Offset.

A means test will be introduced for the net medical expenses tax offset (NMETO) from 1 July 2012.

The threshold above which a taxpayer may claim NMETO will be increased to $5,000 (indexed annually thereafter) for people with adjusted taxable income above the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for couples or families in 2012/13). Also, the rate of reimbursement will be reduced to 10% for eligible out of pocket expenses incurred.

The education expenses tax offset will be replaced with a new Schoolkids Bonus from 1 January 2013.

The bonus will be $410 per annum for each primary school student and $820 per annum for each secondary school student, and will be paid to eligible families in two equal instalments in January and July each year.

As a transitional arrangement for 2011/12, the education expenses tax offset will be paid out in full to eligible families in June 2012.

From 1 July 2012, the eight dependency tax offsets will be consolidated into a single, streamlined and non-refundable offset.

The offsets to be consolidated are the:

  • Invalid spouse and carer spouse offsets
  • Housekeeper (with or without child) offset
  • Child-housekeeper (with or without child) offset
  • Invalid relative offset
  • Parent/parent-in-law offset.

The offset will be available only to taxpayers who maintain a dependant who is genuinely unable to work due to carer obligation or disability. The offset will be based on the highest rate of the existing offsets it replaces, resulting in an increased entitlement for many of those eligible for this measure. Taxpayers who are currently eligible to claim more than one offset amount in respect of multiple dependants who are genuinely unable to work will still be able to do so.

From 1 July 2012, the mature age worker tax offset (MAWTO) will be phased out for taxpayers born on or after 1 July 1957.

This will not affect any person who currently receives MAWTO and access to the MAWTO will be maintained for taxpayers who are aged 55 years or older in 2011/12.

Exemptions for the temporary flood and cyclone reconstruction levy will be extended to individuals who were eligible for an Australian Government Disaster Recovery Payment in 2010/11 as well as certain individuals affected by a natural disaster in 2011/12.

The exemptions will apply even if they did not apply for and receive the payment, as required under the existing exemptions.

The classes of individuals to whom the extension apply are those who, in 2011/12:

  • are eligible for an AGDRP for a disaster event
  • are directly affected by a Natural Disaster Relief and Recovery Arrangements (NDRRA) declared disaster and would have met the AGDRP criteria, or
  • are a New Zealand non-protected special category visa holder who received an ex gratia payment from the Australian Government in relation to a disaster that occurred.

From 1 July 2012 the marginal tax rate for non-resident individuals participating in the Seasonal Labour Mobility Program will be reduced to 15%, administered as a final withholding tax.

Participants will be taxed on all eligible income at a flat rate of 15%, and will no longer be required to pay the Medicare levy.

This measure replaces the arrangements for the Pacific Seasonal Worker Pilot Scheme, which concludes on 30 June 2012. It is expected to significantly reduce compliance costs for seasonal workers participating in the program and simplify administration for the Tax Office by removing the requirement to lodge a tax return.

Companies and Finance

The government will not proceed with:

  • the proposed measure to lower the company tax rate from 2013/14 and from 2012/13 for small businesses; or
  • the Tax Breaks for Green Buildings program.

The Treasurer has announced that the proposed reduction in the company tax rate to 29% will not proceed. The reason given by the Treasurer was that it had become clear that the proposed tax rate cut would not be approved by Parliament.

From 1 July 2012, companies and entities that are taxed like companies will be allowed to carry back tax losses in 2012/13 to offset against tax paid in 2011/12 to get a refund against the tax previously paid.

Only tax losses of up to $1m can be carried back each year, indicating a maximum refund of up to $300,000. The relief is only applicable to revenue losses and is limited to a company's franking account balance.

From 2013/14, tax losses can be carried back and offset against tax paid up to two years earlier. Mr Swan said the proposed changes would "allow businesses to 'carry back' their losses, to offset past profits and get a refund of tax previously paid on that profit".

The write off of bad debts owing from related parties will not be deductible with effect from 7:30pm (AEST) 8 May 2012.

The Government will ensure a more consistent tax treatment for bad debts between related parties irrespective of whether they are members of a tax consolidated group. This will be achieved by denying a tax deduction for a bad debt written off where the debtor is a related party not in the same tax consolidated group. The corresponding gain to the debtor will also not be taxed.

The tax concession for LAFHA and benefits will be limited to employees living away from a home maintained in Australia and will only be available for a maximum period of 12 months in respect of an individual for any particular work location. The changes will apply from 1 July 2012 for arrangements entered into after 7:30pm (AEST) on 8 May 2012, and from 1 July 2014 for arrangements entered into prior to such time.

Access to the concession will be limited:

  • to employees who maintain a home for their own use in Australia which they are living away from for work purposes (as previously announced), and
  • for a maximum period of 12 months in respect of an individual employee for any particular work location.

The 12-month limit will not affect the tax concession for “fly-in fly-out” arrangements. The treatment of travel and meal allowances given to employees travelling for short periods of up to 21 days will also not be affected by the changes.

The Government believes these further reforms "will stop employers from being able to give the tax concession to employees who aren't maintaining a second home, or are maintaining two homes indefinitely".

The definition of limited recourse debt will be extended to include arrangements where the creditor’s right to recover the debt is effectively limited to the financed asset or security provided.

Certain Tier 2 capital instruments issued by ADIs can be treated as debt for income tax purposes on commencement of the Basel III capital reforms on 1 January 2013.

This will also apply to such capital instruments issued by certain other related entities regulated by the Australian Prudential Regulation Authority (APRA). Under the Basel III capital reforms, such instruments will have to be written off or converted into ordinary shares if APRA decides that the ADI would otherwise become non-viable. This measure ensures that the funding costs of such instruments will be deductible.

The taxable value of airline transport fringe benefits provided after 7:30pm (AEST) on 8 May 2012 will be changed from the stand-by value to the market value.

An airline transport fringe benefit may arise when an employee of an airline or travel agent is provided with free or discounted travel on a stand-by basis. The current method to determine the taxable value, which was developed when stand-by travel was a feature of commercial airline pricing, is no longer relevant as airlines now use discounted pricing to optimise passenger levels.

The Clean Energy Finance Corporation will be exempt from income tax from 1 July 2013.

This extension of the tax exemption is intended to enhance its ability to finance investments in the commercialisation and deployment of renewable energy and enabling technologies, energy efficiency and low-emissions technologies.

Capital Gains Tax (CGT)

Changes will be made to the application of the scrip-for-scrip roll-over and small business concessions to trusts, super funds and life insurance companies. The changes will apply at the option of taxpayers from 2008/09 and automatically from when the amending legislation receives assent.

Changes to the 2011/12 Budget measure are intended to provide greater consistency in applying the scrip-for-scrip roll-over and small business concessions to trusts, superannuation funds and life insurance companies.

It is intended provisions concerning absolutely entitled beneficiaries, bankrupt individuals, security providers and companies in liquidation will interact appropriately with the CGT provisions and with the connected entity test in the small business entity provisions.

This measure also ensures that consequential impacts on the Wine Equalisation Tax Act 1999 (WET Act) through the operation of the changes to the connected entity test will also apply to wine producers.

The revenue asset and trading stock roll-overs that apply to the exchange of interests in a company or unit trust for shares in another company will be broadened with effect from 7:30pm (AEST) on 8 May 2012.

The roll-overs will be made available to all interests that qualify for the general conditions of each of the roll-overs, rather than only shares in consolidated groups. The measure will also require the replacement shares in the interposed company to maintain the character of the original revenue asset or trading stock asset that was exchanged.

The CGT scrip-for-scrip roll-over integrity provisions will be strengthened with effect from 7:30pm (AEST) on 8 May 2012.

The measures will:

  • ensure that taxpayers cannot get around the integrity provisions by holding interests to acquire ownership rights, such as convertible preference shares, rather than the underlying shares
  • defer indefinitely the CGT liability that would have otherwise arisen under the integrity provisions for the on-sale of the target entity by the acquiring entity
  • broaden the scope of the rules that apply to intra group debt to cover debts owed to group entities other than the head entity, and remove the CGT exemption for the repayment of such debts, and
  • ensure that the integrity provisions apply appropriately to trusts.

Temporary CGT loss relief will be made available to facilitate super reforms.

The amendments will ensure income tax considerations do not prevent mergers of superannuation funds or transfers of existing default members’ balances and relevant assets in the transition to Stronger Super and MySuper.

Temporary optional loss relief will be available from 1 June 2012 to 1 July 2017 for mergers of complying superannuation funds on the same terms and conditions as the former temporary loss relief that applied from 24 December 2008 to 30 September 2011. There will however be some exceptions, including an optional roll over for capital gains and appropriate integrity provisions

Temporary optional roll-over and loss relief will also be made available in the period 1 July 2013 to 1 July 2017 for capital gains and losses on mandatory transfers of default members’ balances and relevant assets to a MySuper product in another complying superannuation fund.

Minor extensions will be made to the CGT exemptions for certain compensation payments and insurance policies with effect from 2005/06.

CGT consequences will be disregarded where a taxpayer receives compensation, damages or certain insurance proceeds indirectly through a trust. This is intended to ensure the taxpayer has the same CGT outcome as a taxpayer who receives such proceeds directly. It will also ensure that insurance policies owned by superannuation funds that were treated as being CGT exempt prior to the 2011/12 Budget changes to compensation payments and insurance policies continue to be exempt from CGT.

Minor measures will be made to the previously announced measure that provides CGT relief for taxpayers affected by natural disasters with effect from 1 July 2011.

Taxpayers eligible for an automatic CGT exemption (such as the main residence exemption) will not be prevented from choosing the same CGT treatment available to other taxpayers under the announced relief measure. It also allows taxpayers that participate in an eligible land swap program for natural disasters in relation to their main residence to treat the replacement land they receive under the program as their main residence.

Minor amendments will be made to the 2011/12 Budget measure to ensure the proper functioning of the CGT provisions relating to deceased estates, with effect from the date of assent of the legislation.

The changes:

  • ensure that the deceased’s tax return does not need to be amended as the taxing point will be recognised by the entity transferring the asset
  • modify application dates for two of the minor changes announced in the 2011/12 Budget to ensure that taxpayers are not disadvantaged, and
  • broaden the scope of the integrity provisions to also apply to assets passing via survivorship.

International

The personal income tax rates and thresholds that apply to non-residents’ Australian income will be adjusted.

These changes will ensure that they better align with the rates and thresholds that will apply to residents over the forward estimates.

Date of effect

From 1 July 2012, the first two marginal tax rate thresholds (currently 29% and 30%) will be merged into a single threshold. The marginal rate for this threshold will align with the second marginal tax rate for residents (32.5%) and will apply to all taxable income below $80,000.

From 1 July 2015, the same marginal rate will be increased from 32.5% to 33%.

The 50% CGT discount for non-residents will be abolished for capital gains accrued after 7:30pm (AEST) on 8 May 2012.

The CGT discount will remain available for capital gains accrued prior to this time where non-residents choose to obtain a market valuation of assets as at 8 May 2012.

The managed investment trust final withholding tax rate will be increased from 7.5% to 15% with effect from 1 July 2012.

Superannuation

The tax concession which those with income of greater than $300,000 receive on their concessional contributions will be reduced from 1 July 2012.

From 1 July 2012, individuals with income greater than $300,000 will have the tax concession on their contributions reduced from 30% to 15% (excluding the Medicare levy). This means that the tax rate on concessional contributions will effectively double from 15% to 30% for very high income earners from 1 July 2012.

The definition of "income" for the purpose of this measure will include taxable income, concessional superannuation contributions (e.g. superannuation guarantee contributions and salary sacrificed contributions), adjusted fringe benefits, total net investment loss, target foreign income and tax-free government pensions and benefits, less child support.

If an individual’s income excluding their concessional contributions is less than the $300,000 threshold, but the inclusion of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to the part of the contributions in excess of the threshold. “Concessional contributions” for the purpose of the measure includes notional employer contributions for members of defined benefit funds.

The reduced tax concession will not apply to concessional contributions which exceed the concessional contributions cap and are therefore subject to “excess contributions tax” as these contributions are effectively taxed at the top marginal tax rate and therefore do not receive a tax concession.

The start date of the 2010/11 Budget measure increasing concessional contribution caps for individuals over 50 with low superannuation balances will be deferred by two years, from 1 July 2012 to 1 July 2014.

Under the higher concessional contributions cap measure, individuals aged 50 and over with superannuation balances below $500,000 will be able to make up to $25,000 more in concessional contributions than allowed under the general concessional contributions cap.

However, the two-year deferral means that:

  • for 2012/13 and 2013/14, all individuals will be able to make concessional contributions of up to $25,000 per year as permitted under the general concessional contributions cap; and
  • in 2014/15, the general cap is likely to increase to $30,000 through indexation, and the higher cap would then commence at $55,000.

From 1 July 2012, the government will limit the availability of the employment termination payment (ETP) offset so that only that part of an affected ETP, such as a golden handshake, that takes a person’s total annual taxable income (including the ETP) to no more than $180,000 will receive the ETP tax offset.

Amounts above this whole-of-income cap will be taxed at marginal rates. The whole-of-income cap will complement the existing ETP cap ($175,000 in 2012/13, indexed) which ensures that the tax offset only applies to amounts up to the ETP cap.

The ETP tax offset ensures that ETPs up to the ETP cap are taxed at a maximum tax rate of 15% for those over preservation age and 30% for those under preservation age. Existing arrangements will be retained for certain ETPs relating to genuine redundancy (including to those aged 65 and over), invalidity, compensation due to an employment-related dispute and death.

GST

The government will amend the 2010/11 Budget measure implementing the recommendations of the Board of Taxation from its Review of the application of GST to cross- border transactions.

The package, originally announced to take effect from 1 July 2012, will now have a date of effect from the first quarterly tax period following assent of the enabling legislation. In addition, the government will make a number of other changes to measures previously proposed for the supply of goods by non-residents. The government will also not proceed with changes relating to the non-resident agency provisions.

To ensure the integrity of the originally announced measures, the government will also clarify and narrow the definition of permanent establishment (“PE”) for GST purposes.

The government will revise its 2011/12 Budget measure to amend the GST law in relation to the mortgage lending sector to clarify its operation and reduce compliance costs. This will apply from the first quarterly tax period after assent.

This measure will ensure that the amendments to the GST law will apply to all circumstances where a representative of an incapacitated entity is a creditor of that incapacitated entity, and the representative makes a supply of the incapacitated entity’s property in satisfaction of a debt that the incapacitated entity owes to the representative.

The GST law will be amended with effect from 1 July 2012 to restore access to a reduced input tax credit (RITC) for credit unions who rebrand as “banks”.

This will reinstate the existing concession by allowing a RITC for acquisitions from an entity wholly-owned by credit unions or rebranded credit unions by a credit union or rebranded credit union.

The measure will apply to entities that were approved credit unions by the Australian Prudential Regulation Authority as at 1 July 2011, and subsequently change their branding to include the title “bank”, but otherwise do not change their corporate structure.

The government will further amend its 2011/12 Budget measure to ensure that a health supply by a health care provider paid for by a statutory compensation scheme operator is GST-free if the underlying supply from the health care provider to the individual is also GST-free.

Other measures

The government has provided a “Tax Reform Road Map”.

This provides a summary of a range of previously announced tax reform measures, in particular those proposed in the Henry review, as well as some new measures and is intended to show the direction tax reform will take over the next 10 years.