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2006 Federal Budget - Personal Tax Cuts
The release of the 2005/06 federal budget has brought further substantial personal tax cuts to Australian taxpayers. From 1 July 2006, taxpayers will enjoy tax breaks to personal tax worth $36.7 billion over the next 4 years. The new tax rates and thresholds are as follows:
Current tax thresholds (2005/06) |
Tax Rate |
New tax thresholds from 1 July 2006 |
Tax Rate |
|
|
Income range ($) |
% |
Income range ($) |
% |
|
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|
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|
|
0 - 6,000 |
0 |
0 - 6,000 |
0 |
|
6,001 - 21,600 |
15 |
6,001 - 25,000 |
15 |
|
21,601 - 63,000 |
30 |
25,001 - 75,000 |
30 |
|
63,001 - 95,000 |
42 |
75,001 - 150,000 |
40 |
|
95,001 + |
47 |
150,001 + |
45 |
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The 30% threshold will be increased from $21,601 to $25,001 with the 42% marginal tax rate being cut to 40% and the threshold being increased from $63,001 to $75,001. The top marginal tax rate will be cut to 45% with the threshold rising from $95,001 to $150,001, rather than a rise to $125,001 as advised in the 2005 Budget. (The Medicare levy remains at 1.5% across the board.)
These changes will bring the higher marginal tax rates closer to the Organisation for Economic Co-operation and Development (OECD) averages, following an intensive study by the Board of Taxation. The changes also bring the gap between the corporate tax rate and the highest marginal personal tax rate down to 16.5 %, slightly below comparative countries.
In addition to these personal tax cuts, the Low Income Tax Offset (LITO) has increased from $235 to $600 and will begin to phase out at $25,000 rather than the previous $21,600. As a result of these changes, the income limit from which part of the LITO may be claimed has increased to $40,000 and taxpayers eligible for the entire LITO will not be in a tax payable position until their annual income exceeds $10,000.
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2006 Federal Budget - Simple Super
The tax on superannuation will almost be entirely abolished under the governments proposed superannuation reforms. Australians aged 60 and over who have already paid tax on their superannuation contributions will not be liable to pay tax on any benefits received after 1 July 2007. Investors in some public sector funds will still have to pay tax, but at a lower rate than currently. The government’s aims are to make the superannuation system easier to understand and more flexible and estimates this reform will increase an average weekly retirement income of $1,000 by $170. The government hopes to encourage people to stay in work longer, as they draw down on their superannuation as less tax would be payable on their work income.
The government plans to eliminate Reasonable Benefit Limits altogether. In addition, the current contribution tax treatment whereby aged based limits apply would be replaced with a more simplified set of rules. Deductible contributions when received by a superannuation fund will be taxed at a concessional rate of 15% up to a maximum amount of $50,000 per person and then the top marginal rate thereafter. These contributions would be 100% deductible to an employer or self employed person.
For people aged 50 and over at 1 July 2007, the government is proposing some transitional measures, allowing these individuals a $100,000 cap per annum until 2011-2012 so as not to disadvantage older workers planning to make larger contributions as they approach retirement. There would also be a cap on contributions made between 9 May 2006 and 1 July 2007 if the plan is implemented. There are plans to limit the amount of post tax contributions an individual can make to $150,000 per annum, although the government is also assessing whether an option to average the cap over three years in order to accommodate once off large super contributions. The ability to make deductible superannuation contributions would also be extended to people aged 75.
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2006 Federal Budget - Business Relief
Business has won substantial depreciation concessions with the Government increasing the diminishing value rate for determining depreciation deductions for 150% to 200% for assets purchased on or after 10 May 2006. This increased rate of depreciation should allow business to write off fixed assets approximately one third faster. The government has implemented this concession in order to increase incentives for Australian business to undertake investment in plant and equipment that will be necessary for them to remain competitive and keep pace with new technology.
Fringe Benefits Tax has also been brought into line with the personal tax cuts, with the tax rate on perks dropping from 48.5% to 46.5%. This will be backdated to have effect from 1 April 2006 and is estimated to cost the government $870 million over the next four years.
There has also been an increase on the in house FBT free threshold from $500 to $1,000, helping to reduce compliance and record keeping costs for business as well as extending the FBT concessions for remote areas. The definition of remote has been broadened when the shortest practicable route is over water and recognises that it is generally more difficult and inconvenient to travel over water than land.
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2006 Federal Budget - Small Business Measures
There are some crucial changes to simplify and reduce compliance costs for small businesses from the 2006/09 income year:
- The simplified tax system (STS) and GST cash accounting average annual turnover threshold has been increased from $1 million to $2 million.
- Removal of the $3 million depreciating assets test to relax STS eligibility requirements.
- Extending the depreciating assets rollover relief to include STS taxpayers. This will help allow business restructures without triggering a taxing point.
- An increase in net assets threshold for the CGT small business concessions from $5 million to $6 million and allowing STS taxpayers to be eligible for the concessions without having to satisfy the net assets threshold.
- Allowing STS taxpayers to pay quarterly PAYG instalments on the basis of GDP notionally adjusted tax.
- Other changes to the CGT small business concessions and their application to partnerships.
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Outcome of Review of Self Assessment
The Treasurer announced in December the Government’s response to the Inspector-General of Taxation’s Report on Aspects of Income Tax Self Assessment, adopting all 54 recommendations of the review. The review includes improvements introducing ways of making Tax Office advice more accessible and binding in a wider range of cases, reducing the periods for increasing assessments, reducing interest and penalty consequences of errors and improving the Rulings system.
Significant recommendations in the report are:
- Reduction of the amendment period for increasing the tax liability of individuals and small businesses from four to two years.
- Reduction of the amendment period where the general anti-avoidance provisions apply from six to four years.
- Establishment of a limited amendment period for nil liability returns for both individuals and other taxpayers.
- Reduction of the General Interest Charge to reflect the benchmark rate of interest where tax becomes payable as a result of an amended assessment.
- Application of normal amendment limits for the substantiation and car expenses provisions, replacing unlimited amendment periods.
The Government proposes that the legislative changes will generally apply to assessments from the 2004-05 year with legislation to be introduced in 2005.
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Some Relief for Private Company Loans
The provisions treating loans by private companies to shareholders or their associates as unfranked dividends have always been difficult to deal with. This is principally because, unless the requirements are met at the time the loan is made, the dividend is deemed to have been paid with no scope for subsequent rectification.
In the last sitting of Parliament before the Christmas 2004 break, legislation was introduced that will allow private companies until the time for lodgement of the tax return for the year in which the loan was made to comply with the requirements for the loan not to be treated as a dividend (the requirements are, in summary, that the loan is either repaid or the subject of a complying loan agreement).
Although the amendments will not eliminate the issue, they will allow time for compliance and should overcome inadvertent non-compliance. The amendments will not become law until the legislation receives Royal Assent or following approval by Parliament in 2005 (assuming that occurs).
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Employee Benefit Trusts
Following a number of successes in Court, the Commissioner of Taxation has continued to pursue employee benefit performance trust arrangements. These were introduced five or so years ago and promoted to private business operators.
The Tax Office takes the view that deductions for contributions to the trust are not allowable, and has pursued fringe benefits tax as an alternative weapon. (The Commissioner has said he will not seek to enforce both, raising an interesting legal issue if both outcomes do apply).
To alleviate the burden on taxpayers faced with adverse assessments, the Commissioner has agreed to limit the amount of General Interest Charge on amended assessment. This offer is only for assessments issued up to a certain date and is on the basis that either the Tax Office has already initiated action against the arrangement or the taxpayer made voluntary disclosure.
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ATO Targeting Personal Services Income
In an interview published in the Australian on 27 February 2004, the Commissioner of Taxation warned of a crackdown on the use of companies and trusts for personal services businesses.
This issue was widely discussed and debated in the business community in 2000 when the personal services income legislation was passed. However, the ATO obviously thinks that the legislation does not go far enough and said as much in its practice statement released in August 2003. In the interview, the Commissioner of Taxation reinforced the ATO position that it is going to take a series of test cases using the general anti-avoidance provisions in the Tax Act. The outcome, if the ATO is successful, will be that using companies or trusts as an income splitting vehicle for small personal services businesses will not be an option.
Businesses that are organised this way need to recognize this development, although until further cases are decided (which could take up to 2 years) it will be difficult to determine what action to take.
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Tax Office Clamps Down on Tax Benefits from Share Buybacks
Following recent off-market share buybacks by corporations including Telstra, Fosters and Woolworths, the Tax Office has issued a draft determination which will reduce the capital losses available to shareholders on share buybacks. The determination addresses the recent practice of companies offering shareholders a low capital price for their shares, with the balance of the buy-back price made up of a fully franked dividend. The result is that shareholders have received tax benefits from the resulting capital loss and from the fully franked dividend, which have been particularly attractive to superannuation funds and institutional investors.
The Tax Office’s position hinges on a provision that says that the price of a buy-back for tax purposes must be increased to the amount that would have been the market value of the share at the time of the buy-back if it had not occurred. Up until a few days ago, the ATO had agreed with corporations that a buy-back price produced by a tender process was sufficiently representative of this market value. However, in light of the recent share buybacks by Telstra and Fosters, where the tender process produced buy-back prices at significant discounts to the market price at the time, the Tax Office has ruled that the market price for tax purposes will need to be increased to an amount calculated by a formula which it believes represents the correct market price.
The Tax Office’s position is predictable given that recent buy-back prices have been lower than trading prices. However, the determination introduces uncertainty for shareholders as the Tax Office’s formula prevents the buy-back price for tax purposes from being determined until the day the buy-back closes.
The Tax Office determination, when finalised, will only apply to future share buybacks where a detailed announcement of the buy-back had not been made before the draft determination was released on 14 January 2004. There has been considerable criticism of the proposal in the financial community. |
New Company Tax Loss Measures Finally Passed
The new company tax measures introduced in March 2003 have finally been enacted. The measures give companies (but no other form of taxpayer except those treated as companies) greater flexibility by:
- choosing how much of a previous year’s loss to deduct (there was previously no choice)
- converting current year excess (unused) franking tax offsets to carry forward losses
The changes will assist companies in receipt of franked dividends that also have or incur losses.
The new rules apply to the year ended 30 June 2003 and beyond and will require an election to be made in the tax return each year. Where a 2003 company return has already been lodged it can be amended.
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International Tax - New UK/Australia Double Tax Agreement
Legislation introducing the new UK/Australia Double Tax Agreement has received Royal Assent.
Key features of the new agreement are:
- reduction in dividend withholding tax to nil or 5% on greater than 10% shareholdings, down from 15% for unfranked dividends
- reduction in the general royalty withholding tax rate to 5%, down from 10%
- revised list of taxes covered
- comprehensive provisions on the alienation of property, including a provision that would allow the source country to tax capital gains not otherwise dealt with
- new fringe benefits article ensuring fringe benefits are taxable only in the country with the sole or primary taxing right over that benefit where it is paid as ordinary employment income
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FBT - Entertainment Expenses
The treatment of entertainment expenses is an area in which mistakes are regularly made. The general rule for income tax purposes is that entertainment expenses are non-deductible, unless the entertainment is a fringe benefit (that is, it is provided to an employee or an associate of an employee in respect of the employment of the employee.) An exception to this is for entertainment benefits provided and consumed by staff at the employer’s business premises at any time on a working day. There is also an exception for minor benefits provided such as Christmas gifts.
In relation to meal entertainment expenses, it may be worth reviewing an election to treat meal entertainment under the 50/50 Split Method annually, to ensure it continues to produce a more favourable result than the 12 Week Register Method or the Actual Expenditure Method. |
Dividend Stripping Reborn
It appears that a form of dividend stripping, which was one of the headline paper schemes of the 1970s and 1980s, may have re-emerged.
In a recent Taxpayer Alert, the Australian Taxation Office describes arrangements involving the ‘transfer of retained earnings’ to shareholders or their associates in a ‘non-taxable form’ (instead of a taxable dividend). The new arrangements are apparently being promoted to the taxpayer community.
The Australian Taxation Office has expressed the view that several provisions of the Tax Act might apply to nullify such arrangements. It has pointed in particular to both the specific anti-dividend stripping and general anti avoidance measures in Part IVA of the Tax Act.
Any person considering the use of such arrangements would be well advised to consider carefully the tax law in this area before proceeding.
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DISCLAIMER
The information in Our News is only a summary of the subject covered and is not intended to be comprehensive. You must make your own assessment of the information and any reliance you place on it is entirely at your own risk. You should not act on the basis of any of the information without first obtaining professional advice on your specific circumstances.
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