On balance the 2011 Federal Budget did not fundamentally change the government’s current fiscal policy settings.
Since last year’s announcements the budget has taken a significant blow and loss in revenue from the combination of a lower mining tax take (as depreciation deductions mute taxable profits), carry forward losses from the GFC, a multi-speed (or patchwork) economy and the cost of natural disasters. As a result we have seen a moderate tightening in the fiscal stance that will be most notable in 2012-13.
Key focus points of the Budget are summarised as follows:
* The need to deal with the challenges thrown up by the mining boom. Initiatives that reflect this include new training programs with a particular focus on apprentices, increased skilled migration and welfare-to-work measures.
* Improving mental health.
* Businesses will receive some benefits via low indexation of Pay As You Go (PAYG) instalments and accelerated depreciation on motor vehicles from 2013-14.
* Increased spending in regional areas via health and education.
Offsetting these are sharp cuts to defence spending and efforts to increase operational efficiency in the public service.
Other already announced measures include the natural disaster spends ($1.2b this year), the flood levy (raising $1.5b in 2012-13), the early start to the lower company tax rate for small businesses and the mining tax (expected to raise $4b per annum in net terms – i.e. post company tax cuts). That said, total net new policy spends are only $2b in 2012-13 and $1.3b in 2013-14.
The Budget is generally favourable for small businesses, especially from 2012-13 onwards due to reductions in the tax rate and accelerated motor vehicle depreciation provisions. There are some short term benefits from reduced PAYG instalments. Although it will be reversed in 2012-13, the front loading of cash flow benefits will generally be welcome.
The most significant benefit may emerge from the increased skills funding which should help small businesses address the recurrent problems of finding appropriately skilled employees. The impacts of this will be felt over the medium to long term.
The key initiatives can be summarised as follows:
* Lower PAYG instalments for 2011-12 for small businesses using the GDP adjustment method. Businesses will be paying PAYG payments based on the previous year’s taxable income multiplied by the GDP figure, set at 4% – instead of the 8% it would have been had the Budget measures not been announced. This is expected to reverse in the following year.
* From 2012-13, small businesses will be allowed to have enhanced depreciation allowances for motor vehicles, including vans. They will be able to claim up to $5,000 as an immediate deduction. For the first year, they can also claim 15% of the remainder (i.e. the cost less the initial $5,000 claimed already). For subsequent years, the 30% depreciation rate is maintained.
* Small businesses can claim an instant write-off for assets less than $5,000 from 2012-13.
* Small businesses will be able to access a reduced 29% tax rate in 2012-13.
* Tightening of tax enforcement for certain businesses in the building and construction industry will require them to report to the ATO annually on payments made to contractors along with the contractor’s ABN and will take effect from 1 July 2012. Small operators in these sectors will likely be most impacted.
* The $34.4m ‘Buy Australian at Home and Abroad package’ to enable Australian manufactures to benefit from the mining boom.
The resultant impacts of these are likely to be:
* The lower tax rate from 2012-13 allow small businesses to boost retained earnings, which can be used for other purposes such as business development.
* Reduced PAYG instalments will benefit a majority of small businesses, providing an additional $700m of additional cash flows in 2011-12. This will benefit approximately 2.7m small businesses. While it will be reversed in 2012-13, the front loading of cash flow benefits will generally be welcomed, particularly with the reduction in the tax burden in 2012-13.
* The enhanced deduction for motor vehicles – a key asset for most small businesses – will lead to lower taxable incomes, and thereby a reduced tax impost for small businesses. While this applies to the 2012-13 year, businesses will be unable to claim the benefits until 2013-14.
* The above program will also be accompanied by a phase out of the unwieldy Entrepreneurs Tax Offset, which offers a 25% discount on payable tax for businesses with revenue under $50,000.
* Increased support for small businesses through the ‘Small Business Support Line’ will be particularly beneficial to newly launched small businesses, and those in regional areas.
* Industry training initiatives should help small businesses address the recurrent problems of finding appropriately skilled employees. The impacts of this will be felt over the medium to long term.
* Small businesses in manufacturing will be able to tap into global supply chain networks through the Enterprise Connect Centres.
Finally, manufacturing small businesses with expertise in the resource sectors will stand to gain from the Government’s initiative to promote Australian manufacturing involvement in the resources sector.
Private investor demand for new major infrastructure projects are to increase. Changes to tax laws should reduce investment uncertainty for privately funded infrastructure projects deemed to be of “national interest”. These are capped at $25b worth of projects by June 2017. In the short term, new funding and accelerated investment (focused primarily on road and rail projects) with particular benefit to NSW.
The Budget does little more than bring the balance sheet of the nation structurally back to neutrality by 2013-14.
One wonders whether it could not have gone further given that (in the Government’s own words) the nation is currently experiencing the largest boom in its terms of trade in 140 years.
As well as preparing Australia to better cope with the strains posed by such a boom (through improving skill and availability of suitable labour and dealing with the multi-speed economy), it would have been more reassuring to have seen some thought given to the adjustment phase when the boom eventually subsides.
Finally, there is nothing in the Budget to change the RBA’s view that tighter monetary policy is required in the current environment. Nevertheless, the imminent hikes in the cash rate will not help the challenges that face some sectors and states in the multi speed economy.
The Budget announcements by category are summarised as follows:
Individuals
Dependent spouse rebate
Will be phased out for dependent spouses aged less than 40 to encourage them to go back to work. The exception is for taxpayers with an invalid or permanently disabled spouse, supporting a carer, or people who are eligible for the zone, overseas forces and overseas civilian tax offsets.
Low income tax offset for low to middle income earners
The low income tax offset that is delivered to low and middle income earners through their regular pay during the year will be increased from 50% to 70% of their total entitlements from 1 July 2011. The remaining 30% will be paid on assessment of the income tax return for the relevant year.
Low income tax offset for minors
The ability for children under 18 years of age to use the low income tax offset for certain income (namely passive income such as interest and dividends) will be limited from 1 July 2011. This would discourage distributions the minor may ordinarily receive from a family trust. Income earned by minors from paid work will continue to be eligible for the low income tax offset.
Self-education expenses
These will no longer be deductible against all government assistance payments from 1 July 2011. This change follows the recent High Court Decision in FC of T v Anstis.
HECS discount
The discount on up-front payments will be reduced from 20% to 10%, and the bonus on voluntary payments to the Tax Office of $500 or more will be reduced from 10% to 5% from 1 January 2012.
Family Tax Benefit and family payments adjustments
Family Tax Benefit Part A
* Families will be eligible for an advance of up to 7.5%, up to a maximum of $1,000 of their annual entitlement from 1 July 2011. This will be repaid over 6 months by reducing future fortnightly Family Tax Benefit payment.
* Will be limited to children up to 21 years of age from 1 January 2012. The child should consider alternative benefits such as Youth Allowance.
Indexation of Family Tax Benefit Part A and B supplements will be suspended for 3 years and indexation of family payment higher income thresholds and limits will also be paused at their current level until 1 July 2014 (rather than being CPI-indexed). This means that income thresholds for Family Tax Benefit Part A and B, dependency tax offsets, the Baby Bonus, Paid Parental Leave should remain largely unchanged.
Companies
Loss recoupment tests
The continuity of ownership test will be amended to make it easier for companies to recoup losses from the 2011-12 income year. The ownership tracing rules through certain superannuation entities and for shareholders of widely held entities (mainly ASX listed companies) will be modified to simplify the requirements and to correct technical deficiencies.
Capital Gains Tax (CGT) measures
Small business CGT concessions
Will be expanded for some small businesses, but continuing the recent targeting of trust structures, will be tightened for trusts from 10 May 2011.
Renewable resources or environmental benefits
Gains or losses from renewable resource assets (e.g. solar hot water systems) or preserving environmental amenity (e.g. vegetation) will be CGT exempt, retrospectively, from the 2007-08 income year.
Scrip for scrip rollover
The scrip for scrip rollover integrity provisions that currently apply to individuals and companies will also apply to trusts, superannuation funds and life insurance companies from 10 May 2011.
Other
* Scrip for scrip rollover relief will be amended to ensure that for the exchange of shares in one company for shares in another company there is a deferral of profit or loss where the original shares are held on revenue account at the time of the exchange. This applies from 10 May 2011.
* Rollover relief will be extended for certain disposals of assets by a trust to a company (from 10 May 2011) or to another trust (retrospectively from 1 November 2008) in certain situations.
* Amendments to ensure that gains and losses arising from life insurance policies that are generally exempt from CGT are not taxed under another tax provision, will apply retrospectively from the 2005-06 income year.
* Legislating the accepted practice of allowing a testamentary trust to distribute an asset of the deceased without a CGT event happening.
* Various concessions will apply to special disability trusts to make them more beneficial to families.
Fringe Benefits Tax (FBT) measures
Statutory formula for car fringe benefits
The statutory fractions that currently apply will be phased out and will be replaced with a 20% flat rate for new vehicles purchased from 10 May 2011 which will be phased in over 4 years.
The current statutory fractions range from 7% to 26% and the rate that applies is based on the kilometres travelled. The higher the kilometres travelled, the lower the statutory rate, and the lower the FBT. The new rate will apply regardless of kilometres travelled.
Depreciation measures
Small business motor vehicle depreciation
An instant tax write-off of the first $5,000 of any motor vehicle purchased from 1 July 2012. The remainder of the purchase value can be transferred into the general small business depreciation pool, which is depreciated at 15% in the first year and 30% in later years.
Financial arrangements
Hedging
The Taxation of Financial Arrangement rules relating to hedging will be amended to ensure they operate as intended.
Debt/equity rules
Will be amended to limit the application of an integrity provision that deems an interest from an arrangement that funds a return through connected entities to be an equity interest under certain circumstances.
Securities lending arrangements
The tax rules for certain securities lending arrangements will be amended to ensure that the lender under a securities lending arrangement is treated as not having disposed of the lent securities.
GST Measures
While there are three important announcements of changes to GST, the Budget is notable for the announcement that previously announced changes will now be deferred to unannounced start dates linked to when the relevant legislation is passed. The deferred announcements include:
* Adoption of the self assessment regime for indirect taxes
* Reforming the change of use adjustments
* The allowance of adjustments for pre-registration acquisitions
* Simplifying the grouping rules
* Changes to the indirect tax sharing agreement provisions
* The introduction of reverse charges for supplies of going concerns and farmland
* Changes to tax law partnerships
* The treatment of certain business to business supplies as taxable
* The newly announced changes include proposed changes to Div 105 of the GST Act to clarify its operation to mortgage lending.
The changes will clarify that s 10 will operate to the exclusion of other provisions and reduce compliance costs in relation to reporting for entities in the mortgage lending sector.
With effect from 1 July 2000 certain supplies made to health insurers in settling claims for health insurance will be GST-free. This follows the decision in FC of T v Secretary to Department of Transport (Vic) where input tax credits were allowed in relation subsidies paid to taxi cab operators.
The third announcement in relation to GST will allow small businesses that are in a net refund position to access the GST instalment system. By allowing the choice taxpayers will have earlier access to refunds and will reconcile their annual position in their annual return. The measure will commence when the relevant legislation receives royal assent.
International Tax
The Budget did not include any significant new international tax changes but did announce the expansion of the list of countries whose resident are eligible to access reduced withholding rates on certain distributions from Australian managed investments.
Countries now included include Singapore, the Cayman Islands, the Bahamas, Monaco, San Marino and Belize as well as a number of other small jurisdictions.
Infrastructure
Losses for designated infrastructure projects will be uplifted by the government bond rate. The losses will also be exempted from the continuity of ownership test and same business test. The changes will apply from Royal Assent. The measure will improve certainty for investors by ensuring the value of losses over the long period for some projects.
Superannuation
For the first year and only that year, on or after 2011-2012 an eligible individual will be able to elect to have excess concessional contributions to a superannuation fund to be refunded and taxed at their marginal rate. The treatment will only apply for the first $10,000 of excess contributions.
This change will provide a benefit where their marginal rate is lower than the 46.5% (including Medicare levy) rate that would otherwise apply.
As previously announced, eligible individuals aged 50 and over with total superannuation balances of less than $500,000 will have an increased concessional contribution cap of $50,000. This will apply from 1 July 2012.
With effect from Budget night the Government will remove the trading stock CGT exception for specified assets of complying superannuation funds.
The change will mean that the CGT provisions will be the primary code for taxing gains and losses of complying superannuation funds. This will prevent the offset of losses on trading stock against income and not capital gains.
With effect from 1 July 2012 employees will receive more information about their superannuation contributions (on their pay slips) and from their fund where regular contributions cease.
The concession available over the last three years to reduce minimum pension drawdown amounts by halving the minimum amount will be phased out. For the 2011-2012 year the reduction will be 25% and there will be no reduction for 2012-2013.
The current freeze on indexation applied to the income threshold above which the maximum superannuation co-contribution begins will continue for 2012-2013. The thresholds will continue at $31,920 phasing down for incomes up to $61,920.
Director Liability changes
The director penalty regime will be extended to superannuation guarantee amounts making directors personally liable for their companies failure to pay employee superannuation.
Not-for-profit sector
A new independent statutory agency and a Charities and Not-for-profits Commissioner will be introduced together with a statutory definition of ‘charity.’ These reforms are intended to ensure that the concessions are targeted only at those activities that directly further the entities altruistic purpose.
The changes will apply from 1 July 2011 but will initially only apply to new commercial activities commencing after 10 May 2011. The concessions include FBT, GST and deductible gift recipient exemptions and concessions.
For those activities being carried on at 10 May 2011 the Government will consult on the phasing out of the concessions over time. The changes will not apply where the proceeds from the unrelated activities are directed back to the entities altruistic purpose.
Other measures
Amongst a number of other measures the Government has announced:
* Early access within 12 months to farm management deposits for natural disaster victims.
* The roll-out of the National Rental affordability Scheme will be undertaken over a longer period with priority given to flood-affected areas.
* The Commissioner will now have a discretion to extend the two year exemption period where a deceased’s home can be sold CGT free.
* New reporting arrangements for those making payments to building and construction industries and consultation on reporting systems for the commercial cleaning industry
Key tax implications at a Glance
This year’s Budget delivered a mix of taxation and related announcements that will provide some incentives for personal and business taxpayers, while removing some perceived tax benefits for others. These include:
* Australian small businesses with a turnover of less than $2m will be provided with an instant tax write off of the first $5,000 of any motor vehicle purchased from 2012-13 income year.
* The current vehicle fringe benefit tax will change to a flat 20% of the vehicle’s capital value. The new measure will apply to new vehicle contracts entered into after 10 May 2011.
* Removal of the dependent spouse tax offset for a dependent spouse aged less than 40 years old from 1 July 2011.
* Changes to the low income tax offset. This increases the claimable proportion of the Low Income Tax Offset (LITO) through Pay As You Go (PAYG) from 50 to 70%.
* For the first time in nine years, there are no personal tax cuts, while taxpayers will pay more personal tax when the new flood levy applies next year.
* Overall, this was not a tough budget as promised, with most revenue measures being targeted and only a modest revenue impact.
Personal tax issues
* Phasing out the Dependent Spouse Tax Offset (DSTO)
* The Government will phase out the tax offset for a dependent spouse aged less than 40 years old from 1 July 2011.
* The change will not affect taxpayers whose dependent spouse is a carer, an invalid, or permanently unable to work; taxpayers with children that are eligible for Family Tax Benefit B (who receive Family Tax Benefit B instead of the DSTO), or eligible for zone, overseas forces or overseas civilian tax offset.
Changes to Low Income Tax Offset (LITO)
* From 1 July 2011, the proportion of the LITO that can be claimed through PAYG is increased from 50 to 70%.
* LITO delivers a benefit of up to $1,500 and phases out at the rate of 4 cents for every dollar exceeding $30,000 and a complete phase out when the $67,500 threshold is reached.
Changes to Low Income Tax Offset (LITO) for non-work income of minors
* From 1 July 2011, minors will no longer be able to use LITO to reduce income tax payable on their non-work income, such as dividends, interest and/or rent.
Corporate tax issues
* Instant write off of the first $5,000 of any motor vehicle purchased
* The Government will provide an instant tax write off for Australian small businesses that have a turnover of less than $2m for the first $5,000 of any * motor vehicle purchased from 2012-13 income year.
* The remainder of the purchase value can then be transferred into the general small businesses depreciation pool, which is depreciated at 15% in the first year and 30% in later years.
* These new measures supplement other measures for small businesses previously announced for 2012-13, including the immediate write off of assets valued at under $5,000, and a single depreciation pool at the rate of 30%.
* An additional tax saving for incorporated small businesses with a fall in the company tax rate for 2012-13 to 29%.
Abolition of Entrepreneur Tax Offset (ETO)
* The Government has abolished the ETO. The ETO is a 25% reduction of the income tax liability and currently available for individuals with an income under $70,000.
* The benefit incrementally declines at $50,000 annual turnover and completely cuts out at $75,000 annual turnover.
Small Business Pay As You Go (PAYG)
* Income tax instalments paid under PAYG will be reduced using the GDP adjustment method for one year (2011-12).
* PAYG instalments in 2011-12 will be set at 4% above a small business’s taxable income for the previous year. This is half the statutory rate that would otherwise apply.
Reportable taxable payments for the building industry
* A proportion of businesses in the building and construction industry will be required to report annually on payments made to contractors.
* The reporting regime will require these businesses to report information that they should already be currently collecting under existing tax arrangements.
* The Government will also consult publicly on options to introduce a similar reporting regime for payments to contractors in the commercial cleaning industry.
Fringe Benefits Tax (FBT) changes for company cars
* The current mileage-based valuation of vehicle fringe benefit will change to a flat 20% of the vehicle’s capital value.
* The new measure will apply to new vehicle contracts entered into after 7:30pm on 10 May 2011 and will be phased in over 4 years. Existing vehicle *contracts will continue to be subject to the previous statutory rates.
* Taxpayers electing to use the statutory method are charged an FBT of the percentage capital value of the vehicle based on the kilometres travelled in a year. This ranges from 26% for fewer than 15,000kms travelled up to 7% for more than 40,000kms travelled.
* This will provide an immediate benefit for employees entering into salary sacrificed motor vehicle arrangements and travelling less than 15,000kms per year as they will gain the benefit of the new rate immediately. Employees travelling more than 25,000kms per year will gradually lose their current FBT advantage over the next 3 years.
Infrastructure tax benefit
* A new tax incentive will be introduced that’s designed to remove hurdles in the current tax system that discourages private investment in infrastructure.
* These new tax provisions will be introduced for designated infrastructure projects that are to be of a national significance. Losses generated by designated infrastructure projects will be exempt from the tax loss integrity measures and will be uplifted at the government bond rate.
* The measure is capped at $25b for approved infrastructure projects until 30 June 2017.
Reform of Superannuation Excess Contribution regime
* Eligible individuals who breach the concessional contributions cap by up to $10,000 will be provided with a one-off option to request any excess contributions to be refunded to them. This new refund option will only apply to first time breaches from 1 July 2011.
* The changes will give individuals the option to take excess concessional contributions out of their superannuation fund to have assessed as income at their marginal tax rate, rather than the excess concessional contributions tax rate of 31.5% (in addition to the 15% contributions tax for the fund).
* Since 2009-10, the concessional contributions cap has been set at $25,000 (or $50,000 for those aged 50-74 years until 30 June 2012). In which, the government has proposed that individuals aged 50 years and over, with less than $500,000 in superannuation can contribute $25,000 more per year than other individuals from 1 July 2012.
Amendments to the company loss recoupment rules
* The company loss recoupment rules will be amended and be effective from the 2011-12 income year for certain circumstances. A modification of the continuity of ownership test will be made so that ownership will not be needed to trace through certain superannuation entities.
* A removal of technical deficiencies in the modified rules for widely held entities where:
* An entity is interposed between certain stakeholders and the loss company in certain circumstances.
* An interposed entity demerges.
* An interposed foreign entity issues ‘bearer depository receipts’.
* A corporate change arises resulting from the issue of new shares.
* This will ensure that all membership interests that are held in an entity are treated as a single asset, for the purpose of applying the low value asset exclusions, under the loss integrity rules.
