Client Information Bulletin May 2010
As we have forewarned in our April newsletter, on 2 May the Australian Government released the Henry tax review and the Government’s initial response to the review. Several recommendations were accepted immediately and a few more were saved for the Federal Budget announcement on 11 May.
While the Henry review contains 138 recommendations, the Government has only addressed a select few, with the status of the majority of recommendations remaining uncertain at this point. We have highlighted here the changes accepted by the Government at this time as well as the more significant Henry review recommendations that may be considered at a future date.
Recommendations accepted initially
One of the most significant and highly publicised changes was the reduction in the company income tax rate from 30% to 29% in the 2013-14 income year with a further reduction to 28% in the 2014-15 income year and onwards. With the Henry review having recommended adoption of a company tax rate of 25%, it is possible that we ay see further corporate rate cuts in the future.
A number of concessional changes were introduced for small businesses, i.e. entities carrying on business activities with turnover under $2m. Eligible small business companies will move to a 28% tax rate from 1 July 2012. Unfortunately, small businesses that are not companies will not benefit from this rate cut.
All small businesses however, will be able to immediately write off assets costing under $5,000 from 1 July 2012. This represents a significant increase from the current threshold of $1,000.
Additionally, small businesses will be able to write off all other assets except buildings in a single depreciation pool at a rate of 30% from 1 July 2012. This change represents simplification of the current requirement to allocate assets between two depreciation pools depending on the estimated effective life of the asset. These changes will be most beneficial to the small businesses considering undertaking capital investments in the 2013 income year and beyond.
Superannuation was a key focus area for the Government with a number of changes to be put into effect over the next several years.
Most significantly, the Superannuation Guarantee rate will increase from 9% to 12% in increments of 0.25% in the first two income years from 1 July 2013, followed by 0.5% increase every year thereafter until the 2019-20 income year, as follows:
- 2013-14 - 9.25%
- 2014-15 - 9.5%
- 2015-16 - 10%
- 2016-17 - 10.5%
- 2017-18 - 11%
- 2018-19 - 11.5%
- 2019-20 - 12%
The phased-in rate increase is designed to provide employers with sufficient time to plan for increased superannuation expenditure for their employees.
The Superannuation Guarantee age limit is to be raised from 70 to 75 from 1 July 2013. This will mean that employees aged 70 to 74 will now receive employer superannuation contributions paid into a complying superannuation fund.
The Government has announced that from 1 July 2012, it will provide an annual superannuation contribution of up to $500 to individuals with an adjustable taxable income up to $37,000. The measure is expected to help boost superannuation balances of low income earners who may not generally make additional contributions to their super.
Currently, all workers aged 50 and over are able to contribute up to $50,000 in concessional (i.e. after-tax) contributions, however this is a transitional measure that will end on 1July 2012. From that date, only workers aged 50 and over with superannuation balances below $500,000 will be able to continue contributing up to $50,000 in concessional contributions per year. All others will be subject to an annual limit of $25,000 for concessional contributions.
Many of the proposed measures will, to a certain degree, depend on the successful enactment of the Resource Super Profits Tax (RSPT) for funding. The RSPT of 40% will tax profits derived from non-renewable resource projects. The RSPT is intended to apply from 1 July 2012 and will have considerable implications for the mining and exploration sector of the economy.
The Resource Exploration Rebate will also apply for exploration expenditure in Australia incurred from 1 July 2011 onwards.
Given the extent of controversy over the RSPT and the opposition from the resources sector, it is possible that the RSPT will undergo some changes if it is ultimately implemented.
Recommendations adopted as part of the 2011 Federal Budget
The Budget speech reiterated the Government’s commitment to the above changes arising out of the Henry review and announced several additional changes to personal taxation.
The low income tax offset will increase from the maximum of $1,350 to $1,500. This increase will effectively raise the tax-free threshold from $15,000 to $16,000 from 1July 2010 and will allow individuals to earn income up to the threshold and not have to pay income tax.
Interest income received by individuals will be taxed concessionally via an introduction of a tax discount of 50% on up to $1,000 of interest income. In practice, this means that for a person earning an average pre-tax interest rate of 6%, the discount would apply on all interest earned on individual savings balances of just over $16,500.
In order to make compliance easier for individual taxpayers, an optional standard deduction of $500 in lieu of claiming work-related expenses and the cost of managing tax affairs will be introduced from 1 July 2012 and will increase to $1,000 from 1 July 2013. Those taxpayers whose deduction for work- and tax affairs-related expenses are higher than the standard deductions, will still be able to claim the actual amount of expense, subject to the usual substantiation requirements.
Recommendations not addressed at this point
The Government has not yet commented on the vast majority of recommendations in the Henry report. It is expected that a consultative process will take place in respect of some of these and that more guidance will be provided by the Government in the near future. A number of these recommendations are worth highlighting at this stage for consideration.
- A high tax-free threshold with a constant marginal rate for most people instead of a number of tax brackets currently in places;
Proposed indicative personal income tax rates scale:
- Income support and supplementary payments to be tax-exempt;
- Structural tax offsets such as the low income, senior Australians, pensioner and beneficiary tax offsets, should be removed as separate components and should instead be incorporated into the personal income tax rate scale;
- Medicare Levy to be calculated as a proportion of net tax payable rather than as a proportion of taxable income;
- Existing dependency offsets to be replaced by a single dependant offset where the dependant is unable to work due to disability or carer responsibilities OR either the taxpayer or the dependant has reached Age Pension age;
- The mature age worker, employment termination payment, overseas civilian, entrepreneurs', and notional tax offsets should be removed;
- The Education Tax Refund should be replaced as part of the single family payment, as a "back-to-school" lump sum amount;
- Remove the medical expenses tax offset following the review of health safety net arrangements. We note however, that following the 2011 Budget announcement, the Government will increase the threshold above which a taxpayer may claim the net medical expenses tax offset from $1,500 to $2,000 from 1 July 2010. From 1 July 2011 the threshold will be annually indexed to the Consumer Price Index. The tax offset is equal to 20% of net unreimbursed eligible medical expenses above the threshold.
- The Medicare levy surcharge and assistance for private health insurance should also be reviewed;
- All forms of salary and wages should be taxed on an equivalent basis and without exemptions, e.g. private education payments provided in respect of employment and other employment-related payments should be assessed as income at personal tax rates;
- Fringe benefits that are readily valued and attributable to individual employees to be taxed in the hands of employees through the PAYG system;
- Introduce a tighter nexus between the deductibility of the expense and its role in producing income. This would narrow down the scope of deductible expenses;
- Introduction of a 40% savings income discount to apply to residential rent income and capital gains (instead of the current 50% discount applicable to most capital gains);
- Increase the capital gains tax (CGT) exemption threshold for collectable items and extend exemption to all personal use assets;
- Employer superannuation contributions should be treated as income in the hands of individuals; taxed at marginal tax rates and receive a flat-rate refundable tax offset. A new tax offset to replace the government co contribution and spouse super contribution tax offset;
- A client account should be developed which would include details of income earned from all sources, taxes withheld, tax liabilities incurred, transfers received and relevant information from third parties, including complete information from past periods.
Similar to the currently available pre-filling report, information would be collected from third parties such as employers, government agencies, financial institutions and share and property registries.
This client account would facilitate generation of prefilled personal tax returns that would be provided to most personal taxpayers as a default method of settling their tax affairs each year. It is anticipated that this change will make it easier and cheaper for individual to comply with their lodgement obligations.
Such a system would also facilitate information sharing between various government agencies.
- Rate of tax on superannuation fund earnings to be halved to 7.5% and the tax exemption for funds paying pensions to be abolished;
- Capital gains to be taxed at 7.5%, but without the 33% discount currently available to super funds;
- Annual cap of $25,000 will continue to apply to employer contributions but it ought to be doubled for people over 50. This has been partially implemented by introducing the $50,000 concessional contributions cap for people over 50 with superannuation balances under $500,000.
- Changes to the small business CGT concessions by removal of the active asset 50% reduction and the 15 year exemption but an increase in the lifetime limit of the retirement exemption;
- Allowing tax payers who sell a share in a company or an interest in a trust to access the small business CGT concessions via a turnover test;
- Allowing low-value assets costing less than $1,000 to be immediately written off in the year of purchase (currently only available to small business entities);
- The small business entity turnover threshold should be increased from $2 million to $5 million;
- Adjustments to the $6 million net asset eligibility test for the small business CGT concessions would also be considered;
- Companies to be allowed to carry back tax losses to offset against prior year's taxable income;
- The current trust rules to be updated and rewritten to reduce complexity and uncertainty.
Quite obvious from the above is that the Federal Government has chosen to defer the bulk of the Henry report for further consultation. We do however have an indication of the direction taxation policy may take in the next few years and a confirmation that some elements of the Henry review are to be shelved by the current government.
We will work with you to ensure the proactive steps are taken to mitigate the effect of legislation and policy enacted or being considered. Please call us if you have particular concerns regarding your circumstances.