Federal Budget 2010 - 2011
Wed May 19 2010The Federal Treasurer, the Hon Wayne Swan MP, handed down the Rudd Government’s first pre-election Budget, announcing a return to surplus three years ahead of previous estimates and forecasts, capitalising on the strong position of the Australian economy, especially relative to other OECD nations, a “position of strength from which we will build a modern tax and retirement incomes system, invest in renewable energy, and deliver historic health and hospital reform”.
The Treasurer has announced a forecast underlying cash deficit for 2010-11 of $40.8bn (2.9% of GDP). This is $5.9bn less than the forecast in the Mid-Year Economic and Fiscal Outlook, and $16.3bn less than that expected 1 year ago, which at the time would have been the biggest ever deficit in Australian history. Forward estimates for 2012 maintain the expected deficit at $13.0bn, or 0.9% of GDP, then returning to surplus in 2013, 3 years earlier than last November’s official forecasts. The estimated surplus for 2013 is $1bn and $5.4bn the following year.
In what was widely expected to be a “no frills” budget, focusing on the Government credentials to be economically responsible, the Government delivered on this underlying expectation. Many of the benefits for taxpayers in the Budget had already been announced a week earlier in the response to the Henry Review of Taxation Report, whilst many of the other “new” measures announced in the Budget speech do not commence until the 2012 financial year, paid for by mainly by the mining sector as the Government further emphasised the introduction of the 40% Resource Super Profits Tax (RSPT).
In response to the Henry Review of Taxation released on 2 May 2010, the Federal Government announced a reduction to corporate taxation, increases to the Superannuation Contributions Guarantee requirements of employers, the introduction of a 40% RSPT, and some minor concessions to small business taxation. These measures were again the focal point of the taxation reforms arising from the Budget, together with additional measures that would attempt to make Australia a financial services centre, assisted by the reduction of interest withholding taxes paid by financial institutions.
In an election year, the Rudd Government may not want to be reminded of too many back flips or broken promises, however policy makers may wish to examine the definition of “temporary” before leading into the forthcoming election. In last year’s Budget, Mr Swan indicated that superannuation co-contributions would be “temporarily” reduced to $1, from the then current $1.50. Temporarily has now become “temporarily forever”,with the announced measure to permanently set the matching rate for the superannuation co-contribution at 100% and the maximum co-contribution that is payable on an individual’s eligible personal non-concessional superannuation contributions at $1,000. Let’s hope our “temporary” Budget deficits do not suffer the same fate.
Additional Henry Review recommendations also made their way into the Budget, although not to the extent as had been recommended. Whilst the Henry Review recommended a savings income discount of 40%, reducing the amount assessable to taxation for the non-business net income of individuals, the Budget measures increased this to 50%, but limited the saving to the first $1,000 of net non-business interest income only, saving a taxpayer on the highest marginal rate $232.50 in taxation. This measure will be implemented from 1 July 2011 for the 2012 financial year. Small claims for personal income tax returns, another Henry Review recommendation, also found the light of day in this year’s Budget. From 1 July 2012, individuals will be able to claim a standard deduction of $500 when preparing their income tax returns, rising to $1,000 from 1 July 2013.
The Treasurer extended the commitments to infrastructure announced in last year’s Budget by providing $5.6 billion for a new infrastructure fund and $1 billion to renew rail networks and $661 million for the Skills for Sustainable Growth strategy.
Health and the environment also received additional boosts, with total new investment of $7.3 billion over five years, and $23 billion over the rest of the decade on the National Health and Hospitals Network, representing around $2.2bn in new spending on health on top of the $5bn programme agreed between Mr Rudd and state governments on hospital funding. $652 million has also been allocated to a new Renewable Energy Future Fund promoting renewable and energy efficiency.
Some of the major taxation changes emanating from the Budget are outlined below:
Personal Income Tax
The Budget did not announce any changes to the legislated personal income tax rates for the 2011 income
year.
The table below outlines the current and future personal tax rates and thresholds for resident individuals
(excluding the 1.5% Medicare levy), with legislated changes highlighted in bold:
| Residents: Personal tax rates and thresholds | |||
| Current | From 1 July 2010 | ||
| Taxable income | Rate | Taxable income | Rate |
| ($) | (%) | ($) | (%) |
| 0 - 6,000 | 0 | 0 - 6,000 | 0 |
| 6,001 - 35,000 | 15 | 6,0001 - 37,000 | 15 |
| 35,0001 - 80,000 | 30 | 37,001 - 80,000 | 30 |
| 80,001 - 180,000 | 38 | 80,001 - 180,000 | 37 |
| 180,000 + | 45 | 180,000 + | 45 |
| Low Income tax offset | |||
| 1,350 | 1,500 | ||
Low Income Tax Offset
As with the tax rates for 2011, the low income rebate has also not changed. Taxpayers will be entitled to some part of the low income tax offset if their taxable income is less than $63,750 for the 2010 financial year and $67,500 in 2011. Those eligible for the full low income tax offset will have an effective tax-free threshold of $15,000 in the 2010 financial year and $16,000 in the 2011 financial year.
The low income tax offset will continue to phase out from $30,000 at a rate of 4 cents in the dollar for every dollar of income over $30,000 in each of the 2010 and 2011 financial years.
Medicare Levy
The Medicare levy low-income thresholds will also be increased for the 2010 financial year for singles to $18,488 (up from $17,794) and to $31,196 for those who are members of a family (up from $30,025). The additional amount of threshold for each dependent child or student will also be increased to $2,865 (up from $2,757).
The Medicare levy low-income threshold for pensioners below Age Pension age will also be increased from 1 July 2009 to $27,697 (up from $25,299). This increase will ensure that pensioners below Age Pension age do not pay the Medicare levy while they do not have an income tax liability.
50% savings discount for interest income
Partly in response to the Henry Review’s recommendations, the Government will provide individuals with a 50% tax discount on up to $1,000 of interest earned, including interest on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products. The discount will be available for interest income earned both directly and indirectly, such as via a trust. The measure will apply for the 2012 financial year.
Standard deduction for work-related expenses
The Government will phase in a standard deduction for individual taxpayers commencing from 1 July 2012. For the 2013 financial year, taxpayers will be entitled to claim $500 for work-related expenses and the cost of managing tax affairs, increasing to $1,000 for the 2014 financial year.
Taxpayers will still be able to make claims for deductible expenses greater than the standard deduction amount in lieu of claiming the standard deduction amount, but will be subject to normal substantiation requirements.
Capital Protected Borrowings
The Government will adjust the benchmark interest rate that applies to capital protected borrowings to the Reserve Bank of Australia (RBA) indicator rate for standard variable housing loans plus 100 basis points, instead of the RBA indicator rate for standard variable housing loans as announced in the 2008-09 Budget.
The Government will also extend the transitional arrangements for capital protected borrowings from the previously announced 13 May 2013 to 30 June 2013.
The Assistant Treasurer has indicated that “Lifting the benchmark interest rate by 100 basis points will allow borrowers to allocate a smaller proportion of the expenses on the borrowings on costs for capital protection, which is not deductible if on a capital account.” These measures will apply to capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008.
Medical expenses rebate threshold raised
The medical expenses rebate threshold will increase from $1,500 to $2,000 for the 2011 financial year and will be indexed annually to the Consumer Price Index from the 2012 financial year.
Reduction in company tax rate
Although not technically a Budget measure, having being announced as part of the Government’s response to the Henry Review, the company tax rate will be reduced to 28%. The reduction in company tax rate is to be done in two stages, commencing from the 2014 financial year.
| Income Year | Corporate Tax (%) |
| 2013 - 2014 | 29 |
| 2014 - 2015 | 28 |
Eligible small business companies will be eligible to move straight to the 28% rate with effect from the 2013 financial year, without the phase-in as applicable for other companies.
Small business asset write-off
Also announced as part of the Government’s response to the Henry Review, the existing capital allowance concessions available for small businesses will be expanded by:
• Increasing the limit where a small business can immediate write-off an asset from $1,000 to $5,000; and
• Allowing small businesses to write-off all other assets (except buildings) in a single depreciation pool at a rate of 30%.
Superannuation Measures (arising from Henry Review response)
The Government’s response to the Henry Review outlined some major changes to superannuation. Although not Budget measures, the changes are of significant importance to taxpayers and businesses alike. The major changes are as follows.
Superannuation Guarantee
The superannuation guarantee rate will increase from 9% to 12%, phasing in from 1 July 2013. There will be increments of 0.25% in the first 2 years and 0.5% thereafter. The rates applicable to each financial year are outlined in the table below.
| Commencing Super | Guarantee Rate (%) |
| 2013 - 2014 | 9.25 |
| 2014 - 2015 | 9.5 |
| 2015 - 2016 | 10 |
| 2016 - 2017 | 10.5 |
| 2017 - 2018 | 11 |
| 2018 - 2019 | 11.5 |
| 2019 - 2020 | 12 |
The Superannuation Guarantee age limit will also be raised from 70 to 75, with effect from 1 July 2013. Currently, the Superannuation Guarantee only applies to people aged to 70. However, employers can make deducible super contributions for employees aged under 75, while self-employed people can make deductible contributions until they turn 75.
Concessional contributions caps for over 50s
The Government’s current doubling of the concessional contributions threshold for individuals aged 50 and over will continue beyond the 2012 financial year provided the individual’s total superannuation balances is below $500,000. The current $50,000 superannuation concessional contributions cap for individuals aged 50 or over was to be removed from 1 July 2012. However, under the Government’s measure, the $50,000 cap will be extended permanently for individuals aged 50 or over with total superannuation balances of less than $500,000.
Eligible individuals under the age of 75 will still be able to make non-concessional contributions to superannuation up to $150,000 per year. Those who are under 65 can also bring forward 2 years worth of non-concessional contributions, allowing them to contribute up to $450,000 of non-concessional contributions in any 3-year period.
Government superannuation contributions for low-income earners
From 1 July 2012, the Government will provide a contribution of up to $500 for workers with incomes up to $37,000 to ensure that no tax will be paid on super guarantee contributions for those with incomes up to that amount.
Superannuation Measures (arising from Budget)
The 2011 Budget also contained important measures affecting superannuation. The major changes are as follows.
Co-contribution permanently reduced to 100%
The superannuation co-contribution will be permanently set at 100%, and the maximum co-contribution that would be payable on an individual’s eligible personal non-concessional superannuation contributions would be set at $1,000.
The temporary reduction in the co-contribution rate as outlined in last year’s Budget will now become permanent, with the previously legislated reintroduction of the matching rate back up to 150% not proceeding. The Government will also freeze for 2011 and 2012 the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.
Super fund deductions for terminal medical condition benefits
The range of benefits that are deductible by complying superannuation funds and retirement savings account providers will be extended to include terminal medical condition (TMC) benefits. The allowance of the deduction will address an anomaly regarding deductibility by superannuation funds for the costs of providing certain benefits to members. Currently deductions are allowable for the cost of providing benefits relating to the death, permanent incapacity and temporary incapacity conditions of release,but not those relating to the TMC condition of release.
This measure is proposed to have effect from 16 February 2008, the date the TMC condition of release was introduced into the superannuation legislation.
First Home Savers Account (FHSA)
The current rules require that FHSA holders keep their savings in a FHSA for 4 financial years before they are able to use those savings to buy a home. If a home is acquired within the four year period, the balance of their FHSA must be transferred to their superannuation account. The Government will legislate that savings in a FHSA can be paid into an approved mortgage after the end of a minimum qualifying period, rather than requiring it to be paid to a superannuation account.
Child Care Rebate
The Government has announced that it will cap the annual Child Care Rebate to $7,500 per child, the 2009 level. The reduction in the rebate will not however alter the percentage of out-of-pocket expenses reimbursed by the Commonwealth. Furthermore, indexation of the cap would be frozen for 4 years.
Earn Out Arrangements
The Government will legislate to remove the current interpretation provided by the Commissioner of Taxation that earnouts are a separate asset for capital gains tax purposes. The proposed amendments will ensure that all payments under a qualifying earnout arrangement will be treated as relating to the underlying business asset.
Earnout arrangements are used to structure the sale of a business (or business assets) to manage uncertainty about the value of the business. Under the earnout arrangement, an earnout right may entitle the buyer or seller to additional payments depending on the subsequent performance of the business.
Under current interpretation provided through a draft Tax Office Ruling dating back to 2007, an earnout right is treated as a separate CGT asset. The Budget Papers state that this treatment can result in “anomalous outcomes” for taxpayers where the actual payments under the earnout right differ from the amounts estimated at the start of the arrangement (eg, by reducing access to the CGT small business concessions).
Consolidated groups: calculation and collection of income tax liabilities
The Government will improve the operation of the rules relating to the calculation and collection of income tax liabilities from consolidated groups and multiple entry consolidated groups (MEC groups) by:
• clarifying that the Commissioner of Taxation can recover unpaid PAYG liabilities under the liability for payment rules, with effect from 11 May 2010;
• clarifying that the liability for payment of tax rules applies to MEC groups, with effect from 11 May 2010;
• clarifying that an entity that pays its contribution amount under a tax sharing agreement can leave a consolidated group or MEC group clear from any further liability, with effect from the 2004-05 income year;
• ensuring that, where there is a change in the provisional head company of a MEC group during an income year, any PAYG instalments paid by the former provisional head company on behalf of the group are attributed to the group, with effect from 1 July 2002; and
• clarifying that relevant parts of the income tax law apply to MEC groups in the
• same way as they apply to consolidated groups, with effect from 1 July 2002.
Interest Withholding Tax
The Government will implements a recommendation of the Henry Tax Report to support banking competition
by phasing down the interest withholding tax (IWT) paid by financial institutions on most interest paid on offshore borrowings.
For local subsidiaries of overseas parents, the IWT rate will be reduced on such borrowings from 10% to
7.5% in 2013-14 and to 5% in 2014-15, with a view to further reducing this rate to zero.
Additionally, the IWT rate applying to borrowings by any bank branch from its overseas head office will be reduced from 5% to 2.5% in 2013-14 and to zero in 2014-15.
As an integrity measure, the IWT phase down will not apply to interest paid on non-resident retail deposits held in Australia. It will also not apply to offshore borrowings by entities that are not financial institutions.
The table below shows the current and proposed IWT rates and exemptions for financial institutions.
| Type of Borrowing | Current IWT |
From 2013-14 |
From 2014-15 Proposed |
| Financial institution borrows from a foreign financial institution (if not exempt under a tax treaty) |
10% | 7.5% | 5% * |
| Foreign bank branch borrows from overseas head office |
5% | 2.5% | Exempt |
| Financial institution borrows from offshore retail deposits (proceeds used and traced to Australian operations) |
10% | 7.5% | 5% |
| Financial institution borrows through a publicly offered debenture issue, non-equity share or syndicated loan |
Exempt | Exempt | Exempt |
| Offshore banking unit (borrows and on-lends offshore) |
Exempt | Exempt | Exempt |
| Financial institution borrows from non-resident retail deposits held in Australia |
10% | 10% | 10% |
* Aspirational target of zero.
Managed investment trusts
The definition of a managed investment trust (MIT) for withholding tax purposes is to be amended to include certain wholesale managed investment schemes and certain widely held pooled superannuation trusts.
These changes will broaden the scope of the MIT withholding tax rules. They will also more closely align
those rules with, and have flow-on effects for, the MIT deemed capital account treatment measure.
The definition will also introduce tests to exclude trusts that are carrying on a trading business, are closely held, or are not managed in Australia. The operation of the rules will be clarified to make it clear that they can apply in cases where the trust has only one member and that member is itself a specified widely held entity.
Increased funding to counter cash economy
The Government will again step up its investigations into counter tax avoidance by providing $107.9m over 4 years to the Tax Office to address small business operators who use cash transactions to avoid tax.
Reforms to the GST financial supply provisions
The Government will amend the financial supply provisions of the GST law to clarify the operation of the
legislation and reduce compliance and administrative costs, particularly for small businesses.
The Government has agreed to maintain the current architecture of the financial supply provisions, but it will make the following changes which will clarify the operation of the legislation and reduce compliance and administrative costs, particularly for many small businesses.
1. The financial acquisitions threshold (FAT) input tax credit test will be increased from $50,000 to $150,000, enabling many more small businesses to avoid being caught up in the financial supply regime. This is the first increase in this threshold since the GST was introduced 10 years ago.
2. The treatment of hire purchase agreements will be simplified by removing the need to apply different GST treatments to different parts of the one supply. By treating the whole supply as taxable, taxpayers will no longer have to account for part of the supply as taxable and the other part as input taxed.
3. The attribution rules for hire purchase arrangements will be made the same for both cash and non-cash GST taxpayers. This change should significantly advantage small businesses operating on a cash basis that have been forced into higher cost chattel mortgages following the introduction of the GST.
4. The current special rules for borrowings will be amended to exclude bank deposit accounts.
5. The range of expenses qualifying for a reduced input tax credit (RITC) will be expanded to:
a) include acquisitions related to supplies of life insurance by superannuation funds to their members;
b) clarify that RITCs are available for lenders’ mortgage reinsurance as well as lenders’ mortgage insurance; and
c) add a new item covering transactional fraud monitoring services.
6. The current reduced input tax credit (RITC) rate of 75 per cent will be retained.
7. The provisions allowing a RITC for trustee and responsible entity services will be amended to protect the GST base by preventing these provisions being used to allow RITCs for all acquisitions.
8. A technical amendment will be made to clarify the language and relationship between various concepts
(guarantees and indemnities).
The Government has proposed that the amendments will commence from 1 July 2012.
Reforms to GST margin scheme
The Government will clarify and simplify the margin scheme provisions contained in Div 75 of the GST Act by restructuring the margin scheme provisions to give prominence to the main principles with exceptions set out separately and insert objects clauses for the key provisions so that the intention is clear.
The Government has also stated that it would implement a minor technical amendment, effective from 1 July 2012, to remove an anomaly to allow an approved valuation of the land to be used for the purposes of calculating the margin on subdivided land.
Commencement date of some Board of Taxation’s recommendations revised
The commencement date for the following Board of Taxation’s recommendations for the administration of the
GST will be amended to 1 July 2011:
• adopting the income tax self-assessment regime for indirect taxes;
• refreshing the period of review;
• reforming the change of use adjustments;
• allowing adjustments for pre-registration acquisitions;
• clarifying the GST-treatment of tax law partnerships;
• simplifying the GST grouping membership interest rules and allowing grouping of non-operating holding companies; and
• introducing a reverse charge for supplies of going concerns and farmlands.
The Government initially stated that the majority of the recommendations would apply from 1 July 2010.
GST cross-border transactions
The Government will implement all the recommendations of the Board of Taxation from its Review of the application of GST to cross-border transactions. According to the Government, the package will significantly reduce the number of non-residents who are unnecessarily drawn into Australia’s GST system through:
• limiting the connected with Australia provisions;
• expanding the compulsory reverse charge provision;
• extending the GST-free rules for cross-border supplies; and
• removing the need for some non-residents to register.
The components of the package that will result in changes to the GST base are subject to the unanimous agreement of the States and Territories. The package of GST reform measures will apply from 1 July 2012 if this agreement is obtained.
GST and cross-border transport supplies
The Government will make a number of minor revisions to its 2009-10 Budget measure that reduces GST compliance costs for businesses involved in the domestic transport of exported and imported goods, to ensure that the place of consignment will always be determined by the place of delivery in the principal contract. The measure will also ensure that ancillary services to the international transport of goods receive the same GST treatment as the transport supply that they facilitate.
Summary
Mr Swan commented that the Budget “....was not designed to shift opinion polls, and I doubt that it does,” and that the Budget “...is not about setting the government up for an election.” In an election year, it would not be unexpected however that Mr Swan has left something up his sleeve to deliver to voters later this year.
The above is only a brief summary of some of the more relevant changes from this year’s Budget.
For a more detailed analysis of the Federal Budget and how it may apply to you or your business, please contact us.
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