2009 Federal Budget Analysis

The tax and superannuation changes announced in the Budget.

In Summary:

Superannuation Concessions

• The annual cap for concessional superannuation contributions has been halved from $50,000 to $25,000 and the transitional contributions cap has been reduced to $50,000 per year from its former annual limit of $100,000 for those people aged 50 or more. These changes apply from 1 July 2009.
• T he superannuation co-contributions scheme will be reduced from 150% to a rate of 100% for contributed amounts for the 2009/2010, 2010/2011, 2011/2012 years, increasing to 125% for the 2012/2013 and 2013/2014 years and returning to 150% for the 2014/2015 year.

Individuals and Families

• From July 2010, the government will introduce three new “Private Health Insurance Tiers” in respect of the Private Health Insurance Rebate. This is to be challenged in the senate as it is a broken election commitment.
• From the 2008/2009 year, the Medicare levy low-income thresholds will be increased to $17,794 for individuals and $30,025 for individuals in families.
• The first home owners boost will be extended for an extra six months.
• The employee share scheme deferral election will not apply to shares and options acquired after 7.30pm on 12 May 2009. This means employees will be assessable in year of issue of shares and options as to there value at date of issue.
• From the 2009/2010 income year, taxpayers with an adjusted taxable income of over $250,000 will have excess deductions quarantined to the business activity under the non-commercial losses rules.
• From 1 July 2009, the foreign employment income exception will only be available for income earned by aid or charitable workers, government aid workers and specified government employees. This applies to Australian resident taxpayers and not to Australians who have relocated to a foreign country.
• From 1 July 2009, Family Tax Benefit Part A (FTB-A) payment rates will be indexed by the Consumer Price Index. The higher income thresholds for family payments (FTB-A, FTB-B and Baby Bonus) will be maintained at their current level until July 2012.
• A paid parental leave scheme will be available to parents for births and adoptions that occur on or after 1 January 2011.

Small Business

• A bonus deduction of 50 per cent will be available to small businesses that acquire an eligible asset between 13 December 2008 and 31 December 2009 and install it ready for use by 31 December 2010. This bonus is only available to eligible small business enterprises (usually an annual turnover below 2 million). The previously announced 30% bonus for eligible assets ordered before 30 June 2009 will apply to all other business enterprises. For assets ordered after 1 July 2009 the bonus reduces to 10%

      Companies and Trusts

• From 2010/2011 the current R&D concession will be replaced by a new R&D tax credit.
• From 1 July 2009, the non-commercial loan rules (Division A) will be extended to payments by way of a license or right to use real property and chattels.
• A limited CGT roll-over will be provided for assets transferred between trusts that have the same beneficiaries with the same entitlements and no material discretionary elements (ie fixed trusts).
• From 1 July 2010, TFN withholding arrangements will apply to closely held trusts.

Tax Administration

• The government will provide $595.2m over four years to help businesses remain viable in the face of the global recession, to tackle emerging revenue risks and promote community confidence in the tax system.

      Other Superannuation and retirement measures

• The age pension age will be gradually increased to 67 years of age but not completely until 2023.
• The minimum drawdown amount for account based superannuation pensions will be halved for the 2009/2010 income year. This is a continuance of the minimum announced for 08/09 year.
• The future tax panel’s review into retirement incomes has released its report, recommending keeping the superannuation guarantee charge at 9%, increasing the age pension age to 67 years and aligning the age pension with the preservation age for superannution.
• Australia and New Zealand have agreed in principle to allow movement of superannuation benefits between Australia and New Zealand superannuation funds.

Indirect Taxes

• The administration of GST is to be streamlined and compliance costs reduced from 1 July 2010

Carbon Pollution Reduction Scheme

• The government will delay the start date of the Carbon Pollution Reductions Scheme by one year to 1 July 2011.

More detail on the measures:

Superannuation Concessions

Concessional contributions caps reduced

The government has made its first rollback of the simpler superannuation reforms, reducing the concessional contributions caps from the start of the 2009/2010 income year. The concessional contributions cap has been halved to $25,000 a year from its current limit of $50,000. The government will introduce special concessions for persons who are defined benefit fund members on 12 May 2009.

A reduction will also apply to the transitional threshold for concessional contributions. The transitional concessional cap will be reduced from its current annual level of $100,000 t $50,000 per year. The transitional concessional cap of $50,000 will apply for the 2009/2010, 2010/2011 and 2011/2012 years of income.

The government has ruled out any reduction to the non-concessional caps at this time, stating that they remain at $150,000 (indexed) which will now be six times the amount of the concessional cap for the 2009/2010 income year and beyond.

The three year rule remains unaltered for people less than 65 ie non concessional contributions in a three year period are limited to $450,000.

Superannuation Co-Contribution Decreased

The superannuation co-contribution scheme will e reduced to 100% of eligible contributions for 2009/2010, 2010/2011, 2011/2012 income years, with the rate increasing to 125% of contributions for the 2012/2013 and 2013/2014 years and returning to its former level of 150% for the 2014/2015 year.

Individuals and Families

Private Health Insurance Rebate

From 1 July 2010, the government will introduce three new “Private Health Insurance Tiers” in respect of the Private Health Insurance Rebate as follows:

• Tier 1: for singles earning more than $75,001 (couples $150,001), the Private Health Insurance Rebate will be 20% for those up to 65 years (25% for those over 65, and 30% for those over 70 years). The surcharge for avoiding private health insurance will remain at 1%.
• Tier 2: for singles earning more than $90,001 (couples $180,001), the Private Health Insurance Rebate will be 10%, for those up to 65 years (15% for those over 65, and 20% for those over 70 years). The surcharge for avoiding private health insurance will be increased to 1.25%
• Tier 3: for singles earning more than $120,001 (couples $240,001) no Private Health Insurance Rebate will be provided. The surcharge for avoiding private health insurance will be increased to 1.5%.

Increase in Medicare levy low-income thresholds

From the 2008/2009 year, the Medicare levy low-income thresholds will be increased to $17,794 for individuals and $30,025 for individuals in families. The additional amount of threshold for each dependent child or student will also increase to $2,757.

Further, the government will increase the Medicare levy low-income threshold for pensioners below age pension age to $25,299, with effect from 1 July 2008.

First Home Owners Boost Extended

The First Home Owners Boost (FHOB) will be extended for an extra six months and will be reduce by half for the last three months of the extension period.

For eligible first home buyers entering into contracts between 1 July 2009 and 30 September 2009 (inclusive) the FHOB will continue to provide $7,000 for the purchase of established homes and $14,000 for the purchase of new homes. This means that including the $7,000 First Home Owners Grant, until 30 September, purchasers of new homes will continue to be eligible for $21,000 of assistance, and purchasers of existing homes will continue to be eligible for $14,000 of assistance.

Between 1 October 2009 and 31 December 2009 the FHOB grants will be $3,500 for the purchase of established homes and $7,000 for the purchase of new homes. This means that including the $7,000 First Home Owner’s grant, from 1 October until 31 December purchasers of new homes will be eligible for $14,000 of assistance, and purchasers of existing homes will be eligible for $10,500 of assistance.

Employee Share Schemes

Under the new arrangements, all discounts on shares and options under an employee share scheme, whether qualifying or not, will be assessed in the year in which they are acquired. Therefore employees acquiring shares or options under qualifying share schemes will no longer be able to elect to defer taxation on their discount to a later time.

Further, the $1,000 tax exemption will be limited to those employees with a taxable income of less than $60,000 after adjustment for fringe benefits, salary sacrifice and negative gearing losses.

The measure will apply to shares and options acquired after 7.30pm on 12 May 2009.

Non-commercial Losses Rules

From the 2009/10 income year, taxpayers with an adjusted taxable income of over $250,000 will have excess deductions quarantined to the business activity under the non-commercial losses rules. The existing rules will continue to apply to taxpayers with an adjusted taxable income of $250,000 or less. Taxpayers will still be able to apply for relief from the rules if there are exceptional circumstances or because the nature of the activities means that a taxpayer is temporarily carrying on an un-commercial business.

Foreign employment income exemption changes

Currently, Australians working overseas for over 90 consecutive days are eligible for a general exemption which means they do not pay any Australian income tax on their foreign employment income.

From 1 July 2009, the foreign employment income exemption will only be available for income earned:

• as an aid or charitable worker employed by a recognised non-government organisation; or
• as a government aid worker; or
• as a specified government employee (for example, defence and police force personnel deployed overseas).

Income earned by an individual employed on an overseas project approved by the Minister for Trade as being in the national interest will remain exempt.

A tax offset will be available for any foreign tax paid on the foreign employment income.

Small Business

Small Business Tax Break extended

The Small Business and General Business Tax Break will be expanded to allow a bonus deduction of 50 per cent to small businesses with a turnover of less than $2 million that acquire an eligible asset between 13 December 2008 and 31 December 2009 and install it ready for use by 31 December 2010.

The previously announced 30 per cent and 10 per cent bonuses will continue to apply to all other businesses.

Companies and Trusts

New R&D tax credit

From 2010/11, the current R&D concession will be replaced by the R&D Tax Credit. The government will consult further on the eligibility criteria in developing legislation for the new tax credit. A consultation paper will be released in the next few months.

The new R&D tax credit will provide a 45% refundable credit for firms with an annual turnover of less than $20m (ie equivalent to a 150% deduction). The credit will be available to small companies in a loss position, with no limit on the level of R&D expenditure undertaken.

Businesses with a turnover of more than $20m will be entitled to a 40% non-refundable credit (equivalent to a 133% deduction).

Companies undertaking R&D in Australia where the intellectual property is held offshore will also be able to access the 40% non-refundable credit.

As a transitional measure for 2009/10, the R&D expenditure cap for the existing R&D Tax Offset will be lifted from $1m to $2m.

Deemed dividends

From 1 July 2009, the non-commercial loan rules will be extended to payments by way of a licence or right to use real property and chattels. This will reduce the scope for private companies to allow their shareholders or associates to use company assets such as real estate, cars and boats for free or at less than arm's length value. Other technical amendments will be made to Div 7A of ITAA 1936, including to ensure that corporate limited partnerships cannot be used to avoid its operation.

CGT: limited roll-over for fixed trusts

A limited CGT roll-over will be provided for assets transferred between trusts that have the same beneficiaries with the same entitlements and no material discretionary elements (ie fixed trusts), with effect from 1 November 2008. Typically, the transfer of assets from one trust to another would trigger a CGT taxing point.

As a result of this measure, trustees of eligible trusts will be able to defer the CGT consequences of the asset transfer until the receiving trust subsequently deals with the asset. This will allow eligible trusts to restructure without immediate CGT consequences. The measure will be accompanied by appropriate integrity rules.

Tax administration

Tax Office strategic compliance package

The government will provide $595.2m over four years to help businesses remain viable in the face of the global recession, to tackle emerging revenue risks and promote community confidence in the tax system. The measures are estimated to collect additional net revenue of $1,383.6m through enhanced compliance.

The funding will support four key measures:

• $100.1m will be provided over four years to support small businesses and other taxpayers experiencing difficulties meeting their tax liabilities as a result of the global recession
• $122m will be provided over three years starting from 2010/11 to the multi-agency taskforce under Project Wickenby to continue the investigation and prosecution of tax haven abuse
• $302.1m will be provided over four years to the Tax Office to ensure that, as Australia’s economy recovers, wealthy Australians and large and medium sized businesses continue to meet their tax obligations
• $70.9m will be provided over four years to the Tax Office to ensure a level playing field for small business by addressing the cash economy and unfair competitive practices.

Repeal of unlimited amendment periods

There will be more certainty for taxpayers with the repeal of provisions in the income tax laws that provide the Commissioner with an unlimited period in which to amend an item in a taxpayer’s income tax return. This measure will take effect from the date of Royal Assent of the enabling legislation. The government considers that the general amendment period provisions provide the Commissioner with sufficient time to review an assessment.

Pension drawdown relief extended

The minimum drawdown amount for account-based pensions will be halved for the 2009/10 income year. This extends the current concession provided to self-funded retirees for the 2008/09 income year.

The Seniors Supplement payment will also be made available to certain self-funded retirees. Self-funded retirees who are eligible for the Senior's Health Card or the Department of Veteran's Affairs Gold card with Seniors Concession Allowance will be eligible for the annual payment of $790.40 for singles and $1190.80 for couples.

Seniors Health Card Income Test:

The superannuation pension (tax free) received by people aged more than 65 will not be counted as income in determining eligibility for Seniors Health Card This a change in intended change from 1 July 2009.

Retirement incomes report released

Recommendation:

• undertaking further examination into the concessional tax treatment for superannuation contributions and for salary sacrifice arrangements.

The final version of the panel's report will be released in December 2009.

Carbon Pollution Reduction Scheme

Revised implementation

The government will delay the start date of the Carbon Pollution Reduction Scheme by one year, to 1 July 2011, to help Australian businesses manage the impacts of the global recession.

A fixed price of $10 per tonne of CO2-e will apply to emissions in 2011/12. The market will then set the price of Australian Emissions Units dated 2012/13 onwards.

Previously announced industry and household assistance will be delayed until the scheme is introduced in 2011/12.