Author: Jamie Towers
On Tuesday 14 May 2013, the Federal Treasurer Mr Wayne Swan handed down the 2013-2014 Federal Government Budget.
After failing to deliver on promises made years earlier, to bring the Budget back into surplus by 2013 (now an estimated deficit of $19.4 Billion in 2012-2013), the Government has now mapped out a long term plan on how it intends to bring the Budget back into balance within three years followed by a surplus in 2016-2017. The forecast deficit for 2013–2014 is $18 Billion.
Promised low income tax cuts due in 2015-2016 will be pushed back as part of 'balancing the books' to achieve the surplus.
Far from a traditional election year budget which usually consists of large spending, or promised tax cuts, the Government are trying to appear more fiscally responsible. As part of this fiscal responsibility, the Government have outlined long term investment funding plans including how they plan to fund large scale infrastructure investment beyond 2019 and forward planning for a decade for funding their much publicised electoral platforms, the Gonski Education Overhaul and the National Disability Insurance Scheme.
Unfortunately, while most information had already been leaked to the media, there was not much to excite either individuals or the business community in this budget.
This report summarises the key aspects of the Budget that we expect will affect Hanrick Curran's client base primarily comprising small to medium enterprises and associated individual taxpayers. It has been prepared based on our understanding of the budget papers and associated press releases. Please note that the announced measures are not law and cannot be relied upon until enacted.
Should you have any queries in relation to how the Budget announcements will affect you or your business, please contact Jamie Towers, Chris Campbell or your usual Hanrick Curran advisor on 07 3218 3900. Alternatively, further details can be found on the Government's Budget website: www.budget.gov.au
INDIVIDUALS & FAMILIES
Income Tax Rate Cuts Deferred
Following the introduction of the Carbon Tax, it was announced that the personal income tax rates would change by altering the rates and the low income tax offset to create a higher effective tax-free threshold.
The planned increase in the tax free threshold in 2015-16 has been deferred until the Carbon Price exceeds $25.40 per tonne. Given the current estimate at that time will be $12.10 per tonne, these tax cuts are deferred indefinitely.
Australian Resident Rates
|Tax||Current until 2014/15||2015/16 (Previous)||2015/16 (Planned)|
|Low Income Tax Offset (LITO)||$445||#1.5% above $37,000||$300||#1% above $37,000||$300||#1% above $37,000|
|Effective tax free threshold||20,542||20,979||19,779|
|# Rate at which LITO reduced above threshold|
|Tax||Current until 2014/15||2015/16|
Medicare Levy Increase to 2% from 1 July 2014
The Medicare Levy will be increased from 1.5% to 2% of taxable income as part of the funding of the National Disability Insurance Scheme. This measure has bipartisan support although the Federal opposition have advised that the increased levy should be removed once the budget returns to strong surplus.
The Medicare Levy low income threshold for individuals will be increased to $20,542.
Net Medical Expenses Tax Offset to be Phased Out
The net medical expenses tax offset allows individuals who have net medical expenses in excess of $5,000 to claim 20% of the excess as a tax offset.
The Government has announced it will phase out this measure on a 'use it or lose it basis'. For those that are eligible and claim the offset in 2013 will continue to be eligible in 2014. If there is no claim, then they lose the entitlement in the following year and the offset is stopped altogether from 2019.
Accordingly, taxpayers may wish to consider bringing forward any planned medical expenditure to the 2013 financial year to ensure they remain above the limit and keep the offset available for the future.
Baby Bonus – Scrapped
The 'Baby Bonus' will be scrapped and replaced with an increase in benefits provided to families eligible for 'Family Tax benefit Part A' (FTBA). Eligible families will instead receive $2,000 for the first child and $1,000 for each additional child in the year following birth. This measure will apply from 1 March 2014.
Promised general increases (from 2012 Budget) in the FTBA have been cancelled.
Up Front Discounts on University Fees Abolished
Those taxpayers with HECS or HELP debts currently receive a 10% discount for making up front payments or 5% for making voluntary payments from their HECS or HELP loans. This measure will be abandoned from 1 January 2014.
Self Education Tax Deductions Capped at $2,000
As previously announced, the Government will cap the amount an individual can claim as 'self education expenses' at $2,000 from 1 July 2014. This will affect many professionals where seminar fees alone can exceed that figure. Where such expenses are paid by an employer, they will not be subject to fringe benefits tax unless specifically salary sacrificed. This measure is subject to further consultation, but will create many opportunities in the remuneration planning and structuring field. We will keep our clients abreast of the changes as they are enacted.
Dividend 'Washing' Scheme Loophole to be Closed
Broadly speaking, a dividend washing scheme operates such that shares are sold ex-dividend and another set of shares are purchased with the dividend attached to try to avail the taxpayer of double franking credits.
The ATO in the past have highlighted schemes where shares are sold and immediately bought back as having the potential for tax avoidance. Accordingly, we have previously cautioned clients to be very careful as this 'dividend washing' scheme could come under the ATO's radar.
The Government will take steps to close the perceived loophole in the law that allows this to occur from 1 July 2013. Further details on what constitutes dividend washing is addressed within the Superannuation section of this brief.
R & D Tax Incentive
The R & D tax incentive will be removed for companies with revenue of over $20 Billion, leaving it better targeted to smaller businesses.
Going forward, businesses with less than $20 Million turnover who are entitled to a tax offset will be able to apply for quarterly credits from 1 January 2014.
We can assist clients to claim the R & D Tax Offset www.hanrickcurran.com.au/r&d and encourage clients to get their 2013 claim in early so that they may be eligible to claim the credits quarterly from 2014.
Monthly PAYG Instalments
The Government has announced that large companies (> $1 Billion turnover) will pay income tax by monthly PAYG Instalments from 1 July 2014 (currently quarterly). This measure will be phased in to apply to all entities with more than $20 Million turnover (although not applying until 1 January 2016). While there is no general increase in the tax rate, the measure will bring forward the cash flows of paying tax.
Mining Exploration Deduction Tightened
The immediate deduction for the cost of mining rights and information in relation to mining exploration expenditure will be changed for mining rights and information acquired after Budget night.
Going forward, only mining rights and information acquired from Governments, costs incurred directly by the taxpayer and mining information acquired by a 'firm' under a joint venture arrangement will be allowed as an immediate deduction.
Other costs, such as purchasing mining information or mining rights 'second hand' from another party will be subject to a deduction over the lesser of 15 years or the life of the asset.
$67.9 Million Provided to ATO to Target Trusts
Additional funding has been provided to the ATO to target tax avoidance using trust structures. In particular the exploitation of trusts to mischaracterise and conceal income and reduce tax will be targeted. Promoters with a reputation for tax schemes will be particularly targeted.
Hanrick Curran has strongly emphasised to our clients over the last few years the importance of using their trusts correctly and making correct distributions that are tax effective. We will again contact trust clients in June to ensure they are using their trusts effectively and within the law.
A further $77.8 Million has been provided to the ATO to expand their data matching system.
General Tax Law Clarification
The Government have announced that generally the tax laws will be reviewed and tightened to operate how they were intended. There has been a response to the Board of Taxation's review into tax consolidation with many recommendations adopted and others being considered. Further, the Government will continue to review international profit shifting and will consider further measures once an OECD paper on base erosion and profit shifting has been issued.
The Government will provide concessional loans to assist farmers with refinancing and productivity enhancements from 1 July 2013. These loans will be administered by the States and will be for a maximum of $650,000 per eligible primary production business for a maximum period of 20 years with a concessional interest only period of 5 years.
Further, the non-primary production income threshold for Farm Management Deposits has been lifted from $65,000 to $100,000.
INTERNATIONAL TAX & BUSINESS
The following measures may apply to our non-resident clients, Australian subsidiaries of multinational corporations and our domestic clients investing and expanding their business offshore.
The Thin Capitalisation rules act to deny interest deductions once debt exceeds a certain proportion of equity. These rules will be amended from 1 July 2014 to tighten the measures to discourage debt financing by multinationals. The 'safe harbour' debt to equity limit will be halved from 3:1 down to 1.5:1. Any borrowings in excess of these limits will result in a denial of tax deductions.
A real positive for small companies is that the $250,000 debt deduction 'dominium' exemption will be expanded to $2 Million. This means that companies with less than $2 Million of interest expense should not be affected by the Thin Capitalisation rules. This is very good news for our affected clients who will not only regain tax deductions, but will also not have to deal with the complexities of these measures.
Indirect Holding of Foreign Company Shares Qualifies for Non-Portfolio Dividend
Australian Companies investing in more than 10% of the equity in Foreign Companies receive tax exempt 'non-portfolio' dividends. The laws will be changed such that the shares in the foreign company can be held indirectly through a trust and still qualify for the non-portfolio dividend status.
The Government have also announced they will remove the interest deduction associated with investments that derive exempt foreign income.
10% Withholding Tax for Non-Residents Disposing of 'Taxable Australian Assets'
Currently, capital gains tax only applies to non-residents in relation to disposals of their 'taxable Australian assets' (direct and indirect interests in real estate).
From 1 July 2016 a non-final 10% withholding tax will apply to disposals of real estate by non-residents (excluding residential real estate under $2.5 Million).
In addition, from Budget night, mining quarrying and prospecting information and goodwill will be taken into account in determining the total value of mining rights for the purpose of a non-resident disposing of those mining rights, potentially resulting in larger capital gains.
The Government has announced a delayed start date to the 2011-12 Budget measure Not-for-profit sector reforms - better targeting of not-for-profit tax concessions until 1 July 2014. These measures aim to tax the commercial activities of exempt organisations where the profits are not directly invested back into the charitable operations.
Also announced is a small-scale exemption threshold of $250,000 of annual accounting revenue. Unrelated commercial activities of charities under this threshold would be exempt from income tax under the measure.
For activities with income above this threshold that commenced before 10 May 2011, the transitional rules will delay the application of the rules until 1 July 2015.
FEDERAL BUDGET SUPERANNUATION BRIEF
Author: Chris Campbell
As promised, there were no further changes to superannuation in the Federal Budget.
The Government announced its intended changes to superannuation before the Budget on 5 April 2013 to end the damaging uncertainty that was being caused by speculation around whether superannuation tax concessions would be cut.
However, some general taxation changes, integrity measures and social security changes were announced in the Budget that will effect superannuation funds, including Self Managed Superannuation Funds (SMSFs), and be of interest to retirees or those planning for retirement.
Dividend "Washing" Loophole to be Closed
The Government said it will seek to tighten franking credit entitlement rules for investors engaging in in "dividend washing", also known as dividend "double-dipping".
Taxpayers and their advisers exploiting this loophole would sell listed shares ex-dividend, then immediately buying an equivalent number of shares which still carry the right to a dividend (known as cum-dividend shares) available through a delayed foreign settlement market.
SMSF's in pension phase that pay no tax on investment earnings stood to benefit substantially from this scheme by doubling the amount of franking credits refundable to them, while effectively holding only the same quantity of shares.
We have cautioned our clients about this loophole in the past as it was already at risk of existing taxation anti-avoidance laws and was being targeted by the ATO.
Thankfully, it appears there will be no retrospective penalties or recovery action taken against taxpayers involved in such schemes to date.
The Government plans to ensure that these taxpayers will only be entitled to claim one set of franking credits. The changes will be targeted to the 2-day period after a share goes ex-dividend.
Specifically, the Government said it intends to close this "loophole" as follows:
- Making changes to the holding period rules, which generally require stakeholders to hold a share at risk for 45 days in order to gain access to franking credits attached to dividends paid on the share.
- By modifying the "last-in-first-out" rules, to ensure that shares bought in the above circumstances are treated as one parcel of shares. "The amendments will be targeted at the identified abuse", the Assistant Treasurer said.
The proposed changes would only apply to investors that have franking credit tax offset entitlements in excess of $5,000.
The Government also indicated that it was "open to alternative approaches" to prevent dividend washing and would consult with business to ensure "that the best legislative response" was implemented.
Treasury will release a discussion paper in late May 2013 on the proposed changes.
Reduction of Higher Tax Concessions for Contributions of High Income Earners – Technical Amendments
The Government has made minor amendments to the 2012-13 Budget measure which reduces the tax concession for concessional contributions for those earning over $300,000 (discussed below) by exempting certain contributions for federal judges and state higher level office holders, using a similar definition of income as used for Medicare levy surcharge purposes and refunding former temporary residents tax paid under the measure.
30% Contributions Tax for Individuals Earning over $300,000.
You may recall this change from last year's Federal Budget which has still not been legislated. We understand that legislation is likely to be introduced in the current sittings of Parliament and will continue to apply from 1 July 2012 for the current financial year ending on 30 June 2013.
To recap, from 1 July 2012, individuals with income greater than $300,000 will pay 30% contributions tax on their concessional contributions comprised of:
- 15% contributions tax paid by superannuation funds on deducted contributions; &
- an additional 15% to be assessed by the ATO based on a high income earner's personal tax return, then levied against their superannuation fund.
An expanded definition of "income" is used for this purpose which will be the sum of the following:
- Assessable income +
- concessional (deductible) superannuation contributions +
- reportable fringe benefits +
- add back of investment losses e.g. negative gearing
If an individual's income excluding their concessional contributions is less than the $300,000, but the inclusion of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to that part of the contributions that is in excess of the threshold.
The 30% tax rate will not apply to any portion of a concessional contribution which exceeds the member's concessional contribution cap. Excess contributions are effectively taxed at the top marginal tax rate and therefore do not receive a tax concession.
Extending Normal Deeming Rules to Superannuation Account Based Income Streams
The Government has proposed to extend the normal deeming rules to superannuation account-based income streams for the purposes of the aged pension income test. The Government said this was to ensure all financial investments are assessed fairly and under the same rules.
From 1 January 2015 the standard pension deeming arrangements will apply to new superannuation account-based income streams assessed under the pension income test rules.
All products held by pensioners before 1 January 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product so no current pensioner will be affected, unless they choose to change products.
Extending Concessional Tax Treatment to Deferred Lifetime Annuities
The Government will provide the same concessional tax treatment that superannuation assets supporting superannuation income streams receive for deferred lifetime annuities. This will apply from 1 July 2014.
Changes to the Arrangements for Lost Superannuation
The Government will further increase the account balance threshold for lost superannuation to be held by the Australian Taxation Office to $2,500 from 31 December 2015, and to $3,000 from 31 December 2016.
Supporting Seniors who Downsize their Home
The Government is investing $112.4 million over four years in a trial program that supports Age Pensioners and other pensioners over pension age who want to downsize their home without it immediately affecting their pension.
Eligible pensioners who have lived in their home for at least 25 years and want to downsize will need to put a minimum of 80% of excess sale proceeds from the sale of their former home into a special account, up to a maximum of $200,000. The funds in the special account will not be counted under the pension income and asset test for up to ten years or until a withdrawal is made from the account.
This measure is a positive step in allowing seniors more flexibility in best utilising their assets to fund their retirement.
PRE-BUDGET SUPERANNUATION CHANGES
The following changes to superannuation policy were announced by Superannuation Minister Bill Shorten on the 5th of April 2013. Here is a summary of those proposed changes.
1. Increasing the Concessional Contribution Cap
Increases to the concessional (tax deductible) contribution cap have been proposed, to give older Australians with less superannuation the opportunity to make catch up contributions.
|When?||Age 60 & over||Age 50 to 59||Under age 50|
|From 1 July 2013||$35,000||$25,000||$25,000|
|From 1 July 2014||$35,000||$35,000||$25,000|
The increase to the concessional contribution cap was announced in last year's Budget, but was only to apply to those members aged 50 or more with superannuation balances under $500,000. That asset test has now been abandoned however the promised $50,000 cap increase has been reduced to $35,000.
Draft legislation has recently been released and proposes to determine eligibility for the higher cap from 1 July 2013 by reference to an individual's age as at 30 June in the financial year preceding the relevant financial year in which the higher cap applies.
That is, the proposed $35,000 concessional cap for the 2013-14 financial year will apply to taxpayers who are 59 years or over on 30 June 2013. From 2014-15, the proposed $35,000 cap will apply to taxpayers who are 49 years or over on 30 June of the previous financial year.
Previously, eligibility for the higher concessional cap (up to the 2011-12 financial year) applied where the individual turned 50 years old in the relevant financial year (ie eligibility was based on an individual's age as at 30 June in the relevant financial year). However, if an individual died before their 50th birthday, they did not qualify for the higher cap and their estate could be issued with an excess contributions tax assessment which would not have been the case had they reached 50 years.
Once this legislation is finalised, taxpayers aged 59 on 30 June 2013 should consider reviewing their salary sacrificing arrangements, deductions for personal contributions and transition to retirement income streams (pensions) to take into account the proposed higher oncessional cap of $35,000 for 2013-14.
2. Tax on Pension Fund Investment Earnings
The Government will target the tax exemption for earnings on superannuation assets supporting superannuation pensions and income streams. It will cap the exemption to the first $100,000 of future earnings for each individual pension member of a superannuation fund.
Under current arrangements, all investment earnings such as dividends, interest and realised capital gains on the assets of a superannuation fund paying pensions and income streams are tax free.
From 1 July 2014, the investment earnings on assets supporting income streams will be tax free up to $100,000 a year for each individual pension member. Earnings above $100,000 will be taxed at the same concessional rate of 15% that applies to superannuation fund earnings in the accumulation phase.
As stated in the press release, "For superannuation assets earning a rate of return of 5 per cent, this reform will only affect individuals with more than $2 million in assets supporting a pension or income stream".
For a typical self managed superannuation fund SMSF with say two "mum & dad" members, the 15% tax may only affect pension funds with investments of say $4 million, i.e. if balances are already evenly distributed between the members.
How this will affect SMSF's & Capital Gains Tax (CGT)
For SMSF's the change to the taxation of pension fund earnings grandfathers the Capital Gains Tax (CGT) treatment of existing fund investments supporting income streams until 1 July 2014.
This will cause the CGT treatment of fund assets supporting income streams and pensions to have a three tiered structure over the next 10 years, to 2024:
- For SMSF assets that were purchased before 5 April 2013, the reform will only apply to capital gains realised after 1 July 2024;
- For fund assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
- Fund assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.
This is a compromise between the current generous tax-free concession for exempt pension income and the previously suggested harsh measures to cut wealthier Australians' superannuation tax concessions. Our concern is that this could be a very complex and administratively expensive measure to implement for SMSFs.
3. Reform of the Excess Contribution Tax treatment of Excess Concessional Contributions
The Excess Contribution Tax (ECT) regime for concessional contributions will allow taxpayers that have exceeded their concessional contribution cap after 1 July 2013 to withdraw the excess contribution from their superannuation fund with the excess contribution being taxed at the taxpayer's marginal rate. In addition, an interest charge will be levied on the excess contribution to recognise that tax an excess concessional contribution is collected at a later date than normal income tax. The result of these changes is that an excess concessional contribution will be taxed in the same way that a non-concessional contribution would have been taxed.The Excess Contribution Tax (ECT) regime for concessional contributions will allow taxpayers that have exceeded their concessional contribution cap after 1 July 2013 to withdraw the excess contribution from their superannuation fund with the excess contribution being taxed at the taxpayer's marginal rate. In addition, an interest charge will be levied on the excess contribution to recognise that tax an excess concessional contribution is collected at a later date than normal income tax.
The result of these changes is that an excess concessional contribution will be taxed in the same way that a non-concessional contribution would have been taxed.
Under current arrangements, concessional contributions that are in excess of the annual cap are subject to excess contributions tax (ECT) at the rate of 31.5% (plus the 15% contributions tax paid by the fund) and counted towards the taxpayer's non-concessional cap.
Since 1 July 2011, a once-only option has been available so that individuals can elect to have excess concessional contributions up to $10,000 released to the Commissioner and instead assessed as income.
Pending the release of legislation to implement this measure it remains unclear how it will interact with the existing option for individuals to elect to have excess concessional contributions up to $10,000 released and assessed as income.
Taxpayers on the top marginal tax rate may have a slightly higher tax liability (due to the additional interest charge) if they choose to withdraw any excess concessional contributions which would be taxed at the top marginal rate in their hands in any event.
As such, taxpayers on the top marginal tax rate may be better served by leaving the excess contributions in their superannuation fund and simply paying the excess concessional contributions tax of 31.5% (on top of the 15% contributions tax paid by the superannuation fund). The taxpayer can still use a release authority to withdraw an amount from their fund to pay the ECT liability. However, a taxpayer on the top marginal tax rate should consider withdrawing any excess concessional contributions which would otherwise automatically flow through and trigger a breach of the $450,000 bring forward rule for any non-concessional contributions.
In this situation, the proposed withdrawal option may help to prevent a severe ECT penalty with an effective tax rate of up to 93%.
4. Council of Superannuation Custodians
The Government will establish a Council of Superannuation Custodians to ensure that any future changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability.
The Charter will be developed against the principles of certainty, adequacy, fairness and sustainability. The Charter will clearly outline the core objects, values and principles of the Australian superannuation system.
The Council will be charged with assessing future policy against the Charter and providing a report to be tabled in Parliament.
Recently, the appointees to this Council were nominated by the Government. The Federal Opposition has criticised some of the appointments of senior Government public servants of Regulatory bodies in the financial sector, saying that they are already employed to perform many of the proposed Council's tasks. The Opposition also objects to Regulators being involved in setting political strategy that they then must enforce.
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