Federal Budget Update 2010/11

No Frills and No Thrills

In this election year, Drug companies, Cigarette (tobacco product) makers and Mining companies (“the DCM’s”) have been targeted to deliver the revenue measures contained in the 2010/11 Federal Budget.  Drug companies face changes to the Pharmaceutical Benefits Scheme aimed at reducing the cost of drugs, Tobacco Product manufacturers face a hike in the Tobacco Excise and Mining Companies face the prospect of the introduction of the Resource Super Profits Tax. 

The good news is that other possible “horror scenarios” commentators speculated could emerge as Budget measures from the heavily publicised and recently released Henry Review have not emerged (yet!).  Provided that you are not in an industry affected by the government’s DCM target range, there are actually some strong cues that indicate the government’s support of superannuation, investment and savings.  This includes a favourable expansion of some existing measures. 

Small business is also a key winner in this Budget.  However, as with many of the measures in the Budget, the operative date from which the small business concessions commence is 1 July 2012 – many announcements are really a 2011/12 measure!  Given the timing of commencement of many measures is post the Federal Election, there should be some entertaining moments in the election lead-up as the Government introduces these measures to a hostile Senate.

Checklist

ü       Ensure that you price the improved tax treatment of earn-outs into any sale of a business asset – there should be more after tax money in your pocket post sale.

ü       Accelerate personal income tax deductions (for example through prepayments) to maximise the tax benefit of the deduction before personal tax rates drop from 1 July 2010.

ü       Accelerate out of pocket medical expenses to prior to 1 July 2010 to obtain the benefit of the lower $1,500 threshold ($2,000 from 1 July) for the 20% rebate.

ü       Consider investment in term deposits across family members maturing after 30 June 2011 to obtain the 50% tax discount on the first $1,000 of interest.

ü       Reassess “capital protected” products that now benefit from an “additional” tax deductible interest component.

ü       Reassess Managed Investment Trusts, new rules should reduce compliance cost and streamline distributions.

ü       Reassess geared “instalment warrant” and “debt instalment” arrangements where the Government has strengthened its commitment by improving the long term tax effects of the rules.

ü       Consider timing of elements of your CAPEX program – small business investments in plant to a value of $5,000 qualifies for immediate write-off from 1 July 2012.

ü       Ramp up your planned superannuation contributions - the tax deductible annual $50,000 threshold for people over age 50 will continue (and not drop to $25,000 from 1 July 2012) for those people with superannuation balances under $500,000.

ü       Review “cash” sales – the government is allocating $107.9 million to target the cash economy which will come under significant scrutiny over the next 4 years.  $337.5 million is allocated to GST fraud.  The prospect of scrutiny has increased.

ü       Get ready for a lower company tax rate (but not too quickly!) for small business from 1 July 2012.  The tax rate on company earnings will reduce to 28% (29% for other companies, followed by 28% from 1 July 2013).

ü       Factor SGC contribution increases into your forward budget planning (from 9% prior to 1 July 2013 to 12% from 1 July 2019 funded for people up to age 75).

ü       Reconsider financing arrangements with your offshore parent.  Interest withholding tax on borrowings will be reduced from 10% to 7.5% in 2013/14 and to 5% in 2014/15. The Government may ultimately reduce this rate to zero.

ü       Consider making an investment under the “first home saver scheme”.  Under revised rules you don’t have to lock the money in for four years to retain the concession.

Tax rates

The Government has confirmed that promised tax rates will be delivered for the 2010/11 financial year.  Revised rate schedules are shown below:

Individuals and Families

Tax relief for interest income

Following the recently released Henry Review, the government will reduce the tax paid on savings, with a 50 per cent cut on the tax charged for up to $1,000 earned from savings accounts, bonds, debentures and annuity products.  The discount will be available for interest income earned directly as well as indirectly, such as via a trust or managed investment scheme.

Simpler tax returns

From 2012, taxpayers will be able to avoid traditional tax returns, opting instead for a $500 “standard deduction” to cover work-related expenses.  The standard deduction will increase to $1,000 the following year.  According to the Treasurer, the simplified “no tax returns” system will be available to 6.4 million taxpayers saving them an average $192 each year.

However, taxpayers with expenses above the standard deduction will be able to continue to claim those expenses when lodging their tax return under the existing rules.

Tightening the medical expenses rebate

The medical expenses tax offset threshold will be increased from $1,500 to $2,000 with effect from 1 July 2010.  The threshold will also be indexed annually, with effect from 1 July 2011.  The offset currently allows taxpayers to receive a tax offset equal to 20% of net unreimbursed eligible medical expenses above the relevant threshold.

First home saver account (FHSA) changes

The first home savers accounts rules have been tweaked to allow FHSA monies to be placed into an approved mortgage where the FHSA holder acquires a home before the end of the four-year period. Previously, FHSA holders who bought a house within 4 years of opening a FHSA lost the concessional treatment of their FHSA money unless they transferred their money to their superannuation.

Capital protected borrowings

The benchmark interest rate on capital protected borrowings will be increased by 100 basis points.  This measure will apply from 13 May 2008 and will take the benchmark rate to the Reserve Bank indicator rate for standard variable housing loans plus 100 basis points.  This measure will decrease non deductible interest component by $1,000 for every $100,000 of borrowings where those borrowings have a capital protection feature.

Superannuation

Tax treatment of instalment warrants

Superannuation funds that invest in instalment warrants will not suffer adverse consequences under the Capital Gains Tax (CGT) rules as the fund will be treated as the effective owner of the underlying asset for tax purposes.  This measure will apply from1 July 2007 and will provide added certainty in relation to these investments.

Superannuation co-contribution scheme reduction

The superannuation co-contribution reduction will be permanent for all workers from the 2012/13 income year. The co-contribution decline and cut-out low thresholds will also be frozen for the next two years at their present levels of $31,920 and $61,920.  

Business

Reduced interest withholding tax rate

The interest withholding tax rate on borrowings of local subsidiaries from their overseas parents will be reduced from 10% to 7.5% in 2013/14 and to 5% in 2014/15.  In addition, the Government is “favourably disposed” to reducing this rate to zero, subject to its medium-term fiscal objectives.

Private companies and the provision of houses to shareholders

The government has watered down its recent crackdown on private companies providing assets to shareholders for their personal use.  The change allows private companies to continue to provide a house to a shareholder provided the shareholder occupies the property as his or her main residence.  The exemption will apply to the use of a house where the private company acquired the house before 1 July 2009 and the private company continues to meet a modified continuity of ownership test.

Look-through treatment for earnout arrangements

In a welcome change of view all payments under a qualifying earnout arrangement will be treated as relating to the underlying business asset, rather than the right to receive future income.  Currently, an earnout right is treated as a separate (non business) CGT asset which can prevent the accessing of the CGT small business concessions. This measure will ensure that the CGT treatment of earnout arrangements does not create an impediment to the efficient market for the sale of businesses or business assets.

Tax Administration

Increased funding for crackdown on the cash economy

The government will provide $107.9m over four years to the Tax Office to address unfair competitive advantages that arise when some small business operators avoid their taxation obligations by conducting some or all of their business in the cash economy.

Henry Tax Review Measures

A large number of measures announced in the Budget were released last week in the Government's response to the Australia's Future Tax System report (Henry Review).  The significant ones are listed below.

Resource Super Profits Tax (RSPT)

A RSPT will be introduced on 1 July 2012 at a rate of 40% on profits made from the exploitation of Australia’s non-renewable resources.

Decease in the company tax rate to 28%

This measure will see the company tax rate will be reduced to 29% from 2013/14, and to 28% from 2014/15.  The decrease will be accelerated for small business with the company tax rate for “eligible small business companies” reduced to 28% from 2012/13.

Immediate write-off for small business assets

The immediate write-off for assets of small businesses will be extended to assets valued at less than $5,000 from 1 July 2012.  The current threshold for immediate write-off is $1,000.

Increase in superannuation guarantee

The superannuation guarantee will be increased by annual increments until it reaches the plateau level of 12% by 2019/20.  The current level is 9% and is based on an employee’s ordinary times earnings. 

Increase in superannuation guarantee maximum age threshold

The entitlement to the superannuation guarantee will be broadened by lifting the maximum age threshold from 70 to 75 years of age.

Increase in concessional contributions cap for certain workers

The concessional contributions cap will be raised to $50,000 per year for workers who are 50 and over and who have superannuation balances of under $500,000.

New government superannuation contribution

A new government superannuation contribution will be created which will pay up to $500 for workers with adjusted taxable incomes of up to $37,000.

If you would like to discuss how these matters will effect your personal circumstances, please contact your Prosperity Adviser.

Sydney:                02 9261 2288

Newcastle:          02 4907 7222

Brisbane:             07 3839 1755

To download pdf version of this analysis, please click here