Federal Budget 2013-14

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• Individuals and families
• Companies
• Capital Gains Tax (CGT)
• Superannuation
• Tax Administration
• Other Measures

Individuals and Families

2015 tax-free threshold increase deferred

As previously announced, income tax cuts that had been already legislated (by way of increasing the tax-free threshold from $18,201 to $19,400) and due to commence on 1 July 2015 will be deferred. The deferral of the so-called Clean Energy Future personal tax cuts came about due to lower than anticipated carbon price after 1 July 2015 [the Government had budgeted on $29 a tonne in 2015-2016]. The carbon price is projected to fall from $25.40 in 2014/15 to $12.10 in 2015/16.

Net medical expenses tax offset to be phased out

The net medical expenses tax offset (NME tax offset) will be phased out with transitional arrangements applying to those who currently claim the offset.

From 1 July 2013, those taxpayers who claimed the NME tax offset in the 2012/13 income year will continue to be eligible for the offset in the 2013/14 income year if they have eligible out-of-pocket medical expenses above the relevant thresholds. Similarly, those who claim the NME tax offset in the 2013/14 income year will continue to be eligible for the offset in the 2014/15 income year.

However, the NME tax offset will continue to be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care expenses until 1 July 2019 when DisabilityCare Australia becomes fully operational and aged care reforms have been in place for several years.

2012/13 Medicare levy low income thresholds

The Budget paper confirmed the Medicare levy would be increased by 0.5% to 2% with effect from 1 July 2015. Consequently, the effective top marginal tax rate would become 47%.Mr Abbott has indicated his party supports the increase, saying the Coalition are “prepared to consider providing support for the Government’s proposed increase to the Medicare levy”.

The Medicare levy low income threshold for the 2012/13 income year will increase to $20,542 for individuals, and $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset.

The Medicare levy low income threshold for families for the 2012/13 income year will increase to $33,693, and the additional family threshold amount for each dependent child or student will increase to $3,094.

These measures apply from 1 July 2012.

Confirmation that self education expenses to be capped

The Budget Papers also confirmed the announcement to introduce a $2,000 cap on tax deduction claims for work-related self education expenses per person from 1 July 2014.

Taxpayers will be able to claim a tax deduction of up to $2,000 of education expense in an income year. Deductible education expenses are costs incurred in undertaking a course of study or other education activity, such as conferences and workshops, trade journals and text books.

Replacing the Baby Bonus with new family payment arrangements

The Baby Bonus introduced by the Howard Government will be replaced by a new Family Payment Arrangement which will only benefit families who are eligible for the Family Tax Benefit Type A and do not take up the governments Paid Parental Leave. This Family Payment Arrangement will be no be paid in a lump sum but will consist of fortnightly payments:

• The baby bonus of $5,000 will be scrapped from 1 March 2014
• Supplement payment of $2,000 payable to recipients of Family Tax Benefit Type A to be paid in the year following the birth of adoption of a first child (or each child in multiple births).
• Supplement payment of $1,000 for each subsequent child in the year following that birth.
• Payments are to be made as an initial payment of $500, with the remainder paid in 7 fortnightly instalments thereafter.
• Parents who take up the governments Paid Parental Leave (PPL) payments will not be eligible for the additional FTB Part A component.

Paid Parental Leave (PPL)

Parents who take up PPL will be able to count the time while receiving PPL toward the work test period for any subsequent child (to meet the work test you must have worked at least 10 months out of the last 13 month period prior to birth or adoption).

HECS-HELP discount and voluntary HELP repayment bonus: discounts to end

The following discounts relating to the Higher Education Loan Program will be removed:

• the 10% discount available to students electing to pay their student contribution up-front, and
• the 5% bonus on voluntary payments made to the Tax Office of $500 or more.

This measure will apply from 1 January 2014.

Exempting certain disaster payments from income tax

Disaster Income Recovery Subsidy (DIRS) payments provided between 3 January 2013 and 30 September 2013 are to be exempted from income tax. The DIRS provides financial assistance to employees, small business persons and farmers who experience a loss of income as a direct consequence of a natural disaster occurring in Australia.

Ex-gratia payments to New Zealand non-protected Special Category Visa holders affected by natural disasters that occurred in 2012/13 will also be exempted from income tax. These ex-gratia payments are equivalent to the tax-exempt Australian Government Disaster Recovery Payment (AGDRP) and assist New Zealanders who would otherwise have been eligible for the AGDRP if it were not for their visa status.

Senior Australian Home Owners

Senior Australian Homeowners who have owned their family home for at least 25 years and make the decision to downsize will be able invest surplus funds from the sale of their family home (capped at $200,000) into an interest earning account which is exempt from the age pension means test for 10 years.

DisabiltyCare Australia Payments will be exempt from income tax

The Government will exempt payments and benefits provided by DisabilityCare Australia (whether directly or otherwise) to participants from income tax. The Government will also amend the GST law to make GST-free certain supports delivered under the National Disability Insurance Scheme Act 2013. This will mirror the existing GST treatment of services to people with disability and is estimated to have a negligible impact on GST payments to the States and Territories over the forward estimates period. These arrangements will commence on 1 July 2013.

Companies

Prevention of profit shifting using Australian debt

Various measures will be introduced to prevent multinational enterprises from shifting profits through the disproportionate allocation of debt to Australia by tightening and improving the integrity of several aspects of Australia’s international tax arrangements, with effect for income years commencing on or after 1 July 2014.

Thin Capitalisation Rules

The Thin Capitalisation rules apply to prevent entities from claiming excessive debt deductions against their Australian income. In order to prevent multinationals shifting profits offshore the Government has announced a tightening of all safe harbor limits as follows:

• For general entities, the limit will be reduced from 3:1 to 1.5:1 on a debt equity basis, or 75% to 60% on a debt to total asset basis
• For non-bank financial entities the limit will be reduced from 20:1 to 15:1 1 on a debt equity basis, or 95.24% to 93.75% on a debt to total asset basis
• For banks, the capital limit will be increased from 4% to 6% of their risk weighted assets of their Australian operations
• For outbound investors, the worldwide gearing ratio will be reduced from 120% to 100% (with an equivalent change to the worldwide capital ratio for banks

The Government has also announced an increase to the debt deduction de minimis threshold from $250,000 to $2 million. Where an entity’s debt deductions do not exceed $2 million, the Thin Capitalisation rules will not apply. This is good new for small to medium businesses, as it represents a reduction in their compliance costs.

The Board of Taxation will also consider ways to improve the operation of the arm’s length test.

Foreign non-portfolio equity interests

This measure will tighten the dividend exemption available for Australian companies with non-portfolio interests in foreign companies (i.e. holdings of greater than 10% of the foreign company’s voting interests). The changes will ensure the exemption is not available for returns on interests that would be treated as ‘debt’ under the debt/equity rules, or interests that are truly portfolio in nature.

The exemption will also be extended to ensure it is available for Australian companies that hold non-portfolio interests in foreign companies through interposed trusts or partnerships, bringing the exemption in-line with the foreign branch profits exemption. These measures were initially announced in the 2009-2010 budget.

Interest incurred in deriving foreign exempt income

The deduction available for interest expenses incurred in deriving certain exempt foreign income will be scrapped. This will impact Australian entities that have chosen to use debt to finance their foreign subsidiary operations

CFC rules

The reforms to the controlled foreign company (CFC) rules and foreign source income attribution rules announced in the 2009/10 Budget will be reconsidered after the Organisation of Economic Co-operation and Development (OECD) completes its analysis on base erosion and profit shifting.

The measures will apply to income years commencing on or after 1 July 2014.

Removing “dividend washing” opportunities

Measures will be introduced to ensure that sophisticated investors will not be able to engage in “dividend washing” to, in effect, trade franking credits and allowing them to claim two sets of franking credits on effectively the same parcel of shares.

An investor selling shares ex-dividend and then immediately buying equivalent shares which carry a right to a dividend (cum-dividend) will only be entitled to claim one set of franking credits. To achieve this, changes are proposed to the required holding period of 45 days to gain access to franking credits attached to dividends paid on a share. Changes to the “last-in first-out” rules will also be considered. This measures will only apply to investors with franking credit tax offset entitlements of more than $5,000 for income years commencing on or after 1 July 2013.

The government will consult with business to ensure the best legislative response is implemented.

Closing loopholes in the tax consolidation regime

The budget will improve the integrity of the corporate tax system by addressing a number of key issues relating to consolidated groups identified by the Board of Taxation. The following measures will be introduced to close loopholes in the tax consolidation regime:

• Non-residents will not be able to buy and sell assets between consolidated groups to allow the same ultimate owner to claim double deductions. The measure limits the application of the tax cost setting rules for membership interests in an entity transferred to a consolidated group which are not taxable Australian property under the non-resident CGT rules. The cost setting rules will only apply if:

1. there has been a change in the underlying majority beneficial ownership of the membership interests in the entity, or
2. there has been no change in the underlying majority beneficial ownership of the membership interests in the entity, but the interests were recently acquired (less than 12 months) by the foreign entity or group.

• Certain deductible liabilities cannot be taken into account twice. Consolidated groups that purchase entities with deductible liabilities will be deemed to have received or paid an amount equal to the value of the joining entity’s non-TOFA deductible liabilities that were taken into account for tax cost setting purposes. That amount will increase or decrease the head company’s assessable income (to the extent the liability will either give rise to a deduction or an assessable amount). The assessable income is brought to account over a 12-month period following the joining time for current liabilities, and over a 48-month period for non-current liabilities.

• Consolidated groups will not be able to access double deductions by shifting the value of assets between member entities. The tax cost setting rules will be amended such that an asset created by transferring the value of an existing asset to a subsidiary is given a cost base that reflects the notional cost of creating the asset, rather than the market value of the newly created asset.

Amendments will be introduced to ensure that when an entity leaves a consolidated group, only net gains and losses are recognised for certain intra-group liabilities and assets (between the leaving entity and remaining members) which become subject to the TOFA regime upon leaving.

A tripartite review team of the Treasury, Tax Office and private tax practitioners will report to the government on the removal of tax advantages available to foreign-owned multiple entry consolidated groups which are not available to Australian-owned consolidated groups.

The measures following the Board’s recommendations will apply to transactions that take place after 14 May 2013. The amendments concerning intra-group liabilities and assets subject to the TOFA regime will only apply to income tax returns and requests for amended assessments lodged from 14 May 2013.

Mining rights and information to be excluded from immediate exploration deduction

The immediate deduction for the cost of assets first used for exploration will be amended to exclude mining rights and information. This change will address situations where the immediate deduction is being claimed for the costs of acquiring an interest in natural resources that have effectively already been discovered.

Under this measure, mining rights and information first used for exploration will be depreciated over 15 years, or their effective lives, whichever is shorter. The effective life of a mining right and associated exploration information will be the life of the mine that it leads to. If the exploration is unsuccessful, the remaining amount will be written off when this is established.

The following will continue to be immediately deductible (i.e. the measure will not apply to):

• the costs of mining rights from a relevant government issuing authority
• the costs of mining information from a relevant government authority
• the costs incurred by a taxpayer itself in generating new information or improving existing information, and
• mining rights acquired by a farmer under a recognised “farm-in, farm-out” arrangement.

The government will consult closely with industry on the design and implementation of the measure.

The measure applies to taxpayers who start to hold the mining right or information after 7.30pm (AEST) on 14 May 2013 unless: the taxpayer has committed to the acquisition of the right or information (either directly or through the acquisition of an entity holding the asset) before that time; or they are taken by tax law to already hold the right or information before that time. Any commitment will need to be objectively verifiable.

Capital Gains Tax

Foreign residents CGT: principal asset test amended and withholding tax introduced

In relation to the foreign residents’ CGT regime, the principal asset test will be amended and a non-final withholding tax will be introduced.

Amendments will be made to the principal asset test to ensure that indirect Australian real interests are taxable if disposed of by a foreign resident. In particular, the amendments are as follows:

• intercompany dealings between entities in the same tax consolidated group will not form part of the principal asset test, ensuring that assets cannot in effect be counted multiple times, thereby diluting the true asset of the group, and
• in determining the value of the Taxable Australian Real Property (TARP) assets of the entity in which the interest is held, intangible assets connected to the rights to mine, quarry or prospect for natural resources (notably mining, quarrying or prospecting information, rights to such information and goodwill) will be treated as part of the rights to which they relate.

In addition, a 10% non-final withholding tax will apply to the disposal by foreign residents of certain taxable Australian property. Broadly, where a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold and remit to the Tax Office 10% of the proceeds from the sale. This measure, however, will not apply to residential property transactions under $2.5m or to disposals by Australian residents. A more detailed discussion paper outlining the proposed design of the withholding regime is due to be released by the end of 2013.

The amendments to the principal asset test will apply to CGT events with effect from 7.30pm (AEST) on 14 May 2014. The new withholding system to support the CGT regime will apply from 1 July 2016.

CGT: tax treatment of native title benefits clarified

There will be no CGT implications resulting from the transfer of native title rights (or the right to a native title benefit) to an Indigenous holding entity or Indigenous person, or from the creation of a trust that is an Indigenous holding entity over such rights. In addition, capital gains or losses made from surrendering or cancelling such rights will be disregarded.

This measure augments the measure announced in the Mid-Year Economic and Fiscal Outlook 2012/13 that income tax will not be payable on certain native title benefits.

This measure will apply to CGT events happening on or after 1 July 2008.

Superannuation

Reduction of higher tax concession for superannuation contributions of very high income earners

Minor amendments will be made to the 2012/13 Budget measure to reduce the higher tax concession for superannuation contributions of very high income earners. These minor amendments involve:

• exempting from the measure employer contributions for Federal judges sitting on or after 1 July 2012 who are entitled to a benefit payable under the Judges’ Pension Act 1968, and employer contributions made to constitutionally protected funds for State higher level office holders sitting on or after 1 July 2012 (to mitigate constitutional risks)
• using a similar definition of income for the measure to that used for calculating whether an individual is liable to pay the Medicare levy surcharge, and
• refunding former temporary residents the tax paid under the measure as they effectively do not receive any concessional tax treatment on their contributions to superannuation as a result of the operation of other rules.

This measure will apply from 1 July 2012.

Low income superannuation contribution

The eligibility criteria for the low income superannuation contribution rules (LISC) will be amended to now pay individuals with an entitlement below $20. Previously, the LISC was not paid if it would be less than $20. Entitlements under $10 will be rounded up to $10.

The LISC effectively refunds, up to $500 a year, the tax paid on superannuation concessional contributions for people with incomes up to $37,000.

Additional funding for Superannuation Complaints Tribunal

Additional funding of $2.6m over four years will be provided to support the operations of the Superannuation Complaints Tribunal. The cost of this measure will be offset by an increase in the levy on Australian Prudential Regulation Authority regulated superannuation funds.

Tax Administration

Extension of monthly PAYG instalments to other large entities

All large entities will be required to make monthly Pay As You Go (PAYG) income tax instalments, including trusts, superannuation funds, sole traders and large investors. The measure extends the previously announced proposal to apply the PAYG instalment system to large companies.

In summary, the move to monthly PAYG instalments will apply as follows:

• companies with turnover of more than $1b will still move to monthly PAYG instalments from 1 January 2014
• companies with turnover of $100m or more will still move to monthly PAYG instalments from 1 January 2015
• companies with turnover of $20m or more, and all other entities in the PAYG instalment system with turnover of $1b or more, will move to monthly PAYG instalments from 1 January 2016, and
• all other entities in the PAYG instalment system with turnover of $20m or more will move to monthly PAYG instalments from 1 January 2017.

Entities, other than head companies or provisional head companies, that have a turnover of less than $100m and report GST on a quarterly or annual basis, will not be required to pay PAYG instalments monthly.
In addition, entities in the taxation of financial arrangements (TOFA) regime will assess their entry to monthly instalments using a modified turnover test based on their gross TOFA income, rather than their net TOFA income.

Tax Office trusts taskforce

The government will provide $67.9m over four years to the Tax Office to undertake compliance activity in relation to taxpayers who have been involved in egregious tax avoidance and evasion using trust structures.

This measure is estimated to increase revenue by $379m over the forward estimates period.

The Tax Office will target the exploitation of trusts to:

• conceal income
• mischaracterise transactions
• artificially reduce trust income amounts, and
• underpay tax.

It will undertake compliance activity to target known tax scheme designers, promoters, individuals and businesses who participate in such arrangements.

The Assistant Treasurer has asked Treasury to consult with the National Tax Liaison Group’s Trust Consultation Sub-group on the most appropriate way to progress the measure and, in particular, to address integrity concerns arising from the mismatch between trust and tax concepts of income.

Increased compliance checks on offshore marketing hubs and business restructures

The government will provide $109.1m over four years to the Tax Office to increase compliance activity targeted at restructuring that facilitates profit-shifting opportunities. This measure is estimated to increase revenue by $576.5m over the forward estimates period. In underlying cash terms, the estimated increase in receipts is $406m.

Expanding data matching with third party information

The government will provide $77.8m over four years to the Tax Office to improve compliance by expanding data matching with third party information. This measure is estimated to have a gain to revenue of $610.2m over the forward estimates period.

The information provided to the Tax Office will also improve the pre-filling of tax returns.

The measure will establish new and strengthen existing reporting systems for:

• taxable government grants and specified other government payments
• sales of real property, shares (including options and warrants), and units in managed funds
• sales through merchant debit and credit services
• managed investment trust and partnership distributions, company dividend and interest payments, and
• transactions reported to the Tax Office by the Australian Transaction Reports and Analysis Centre.

SBR, ABR and ABN administration enhanced

The government will provide $80.2m over the forward estimates period to the Tax Office and the Department of Finance and Deregulation to strengthen up-front checks for issuing Australian Business Numbers and encourage the use of AUSkey, which is a secure credential for accessing the online services of the Australian Business Register.

This measure will also enhance Standard Business Reporting to continue to reduce compliance costs for business.

Tax agent services licensing regime

The government will provide $1.4m over four years to provide for a single, online registration for financial advisors registered with the Australian Securities and Investments Commission that also need to be registered with the Tax Office as tax advisors from 30 June 2013. This follows the end of the exemption of financial advisors from the tax agent services licensing regime.

The cost of this measure will be offset by fees charged by the Tax Office for registering financial advisors under the Tax Agency Services Act 2009 from 1 July 2015. The proposed fees are $400 for a three year registration for a Category 2 financial advisor who carries on a business as a Category 2 financial advisor; and $200 for a three year registration for a Category 2 financial advisor who does not carry on a business as a Category 2 financial advisor.

Other Measures

Tax information exchange agreement with Uruguay

The government signed a tax information exchange agreement with Uruguay on 10 December 2012. The Agreement allows for the full exchange of information in relation to Australian federal taxes and Uruguayan taxes between tax collection agencies in Australia and Uruguay.

The Agreement enters into force once Australia and Uruguay have completed their respective domestic requirements.

Export of liquids, aerosols and gels sold under the sealed bag scheme

The government will not proceed with the new regulatory arrangement for liquids, aerosols and gels (LAGs) announced in the Mid-Year Economic and Fiscal Outlook 2007/08 measure “Verification measures to support new arrangements concerning liquids, aerosols and gels and the sealed bag scheme”, following consultation with industry.

Instead, the interim arrangement allowing travellers to pack LAGs in their checked luggage announced in that measure will continue.

Continuation of the interim arrangement means that a more intensive LAGs declaration requirement will not be imposed, thus avoiding an administrative burden on the duty-free industry.

Tobacco excise and excise-equivalent customs duty

The indexation of excise and excise-equivalent customs duty for tobacco and tobacco products will be changed to average weekly ordinary time earnings (AWOTE), instead of the Consumer Price Index. The duty rates will be indexed bi-annually, on 1 March and 1 September each year.

This measure will apply from 1 March 2014.

Anzac Centenary Public Fund to be listed as a DGR

As part of the Anzac Centenary Program 2014-18, the Anzac Centenary Public Fund is to be listed as a deductible gift recipient.

Establishment of Tax Studies Institute

The government will establish a Tax Studies Institute (TSI) as a centre for excellence in tax research at the Crawford School of Public Policy at the Australian National University by providing a one-off endowment payment of $3m in 2012/13.

This replaces the Government’s previous announcement in the Mid-Year Economic and Fiscal Outlook 2011/12 to provide seed funding for a TSI of $1m per year for three years from 2012/13.

The TSI will collaborate with leading academics and public policy experts from institutions across Australia and internationally. A new Chair in tax policy will be established, to be taken up by an internationally renowned tax and public finance expert who will direct the new institute.