Author: Jamie Towers
On Tuesday 13 May 2014, the Federal Treasurer Mr Joe Hockey handed down the 2014-2015 Federal Government Budget.
Being the new Government's first budget, the Treasurer was under scrutiny as to how he would handle the balancing act of the key election promise of 'no new taxes' against the political reality of burgeoning Government debt and a huge deficit. Fiscal reality won the day with the Government electing to break promises in favour of 'fixing the deficit'.
Due to the harsh fiscal realities, Mr Hockey 'calls on every Australian to make a contribution now to build the workforce, economy and opportunities we need for the future.'
The Government plans to raise revenue in the form of an 'it's not a tax, it's a temporary budget repair levy', various tax offsets being reduced or removed and savage cuts to Government spending, breaking further election promises not to touch certain sectors.
The Treasurer and the Prime Minister previously highlighted an end of 'the age of entitlement' signalling changes to the welfare transfer system and this has certainly occurred with certain entitlement payments being frozen, removed or deferred.
Some of the cuts are balanced with infrastructure spending on roads, airports and other significant assets designed to create jobs and stimulate the economy.
While the budget is fiscally responsible, many would argue it is ill targeted. It is also sadly lacking in real tax reform, although the Government plans to release a 'tax white paper' in the future.
The official estimate is for a deficit of $29.8 Billion for the 2014/15 year. This is forecast to trend downwards until reaching a balanced budget in 2018/19.
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.
There will no doubt be positive and negative ramifications for you and your business from this budget. We encourage you to contact your usual Hanrick Curran adviser, Jamie Towers or Chris Campbell for specific advice on the impacts on 07 3218 3900. Alternatively further details can be found on the Government's Budget website.
INDIVIDUALS & FAMILIES
Income Tax Rates Unchanged, but new 'Levies'
A key Government pledge during last year's election was no increase in income tax. Headline income tax rates may remain unchanged, but levies have increased.
The previous Government announced a 0.5% levy to help pay for the National Disability Insurance Scheme. This will be tacked onto the Medicare Levy creating a 2% Levy to apply from 1 July 2014.
The Government have announced a 'temporary' (3 year) 2% Temporary Budget Repair levy (commonly known as the budget deficit tax). This will only apply to individuals with personal incomes exceeding $180,000 and will only apply to the excess above $180,000. This is due to cease on 30 June 2017.
This creates an effective top marginal tax rate of 49% (including Medicare levy).
The previous Government as part of its Carbon Tax reform had announced various changes to the tax free threshold with the final change due to occur in 2015/16 year. This final increase was announced to be cancelled; however, the legislation cancelling the change has not been passed, so the tax rates as enacted are as follows:
|2014/2015||2015/16||2015/16 Announced but not enacted|
|Low Income Tax Offset (LITO)||445||#1.5% above 37,000||300||#1% above 37,000||300||#1% above 37,000|
|Effective tax free
|# Rate at which LITO reduced above threshold|
|* Includes 2% Budget Deficit Levy only above $180,000** All above rates are exclusive of the 2% Medicare LevyBold text indicates changes|
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.
The Medicare Levy low income threshold for individuals will remain at $20,542. The 'family' threshold increases to $34,367.
Fringe Benefits Tax (FBT) Rate increases in line with Levies
For those taxpayers who choose to salary package various benefits, the FBT Rate for the 2014/15 year has already been increased to 47% (previously 46.5%) to capture the change in the Medicare Levy from 1 July 2014. The rate will be further increased (temporarily) to 49% from 1 April 2015 for the 2015/16 and 2016/17 FBT years in line with the effective top marginal tax rate plus levies.
This creates a temporary tax arbitrage through salary packaging due to the 2% difference in tax rates for those with incomes above $180,000, but only until 31 March 2015.
From 1 April 2015, those individuals salary packaging whose salary is less than $180,000 would be wise to make after tax reimbursements back to their employer to reduce the taxable value of any benefits received to avoid having to pay the 2% levy. We recommend that any salary packages be reviewed immediately to consider how these changes will affect the amount of take home pay.
The FBT caps for certain not for profit entities, charities and Public Benevolent Institutions will be increased to reduce the effect of this levy.
Tax Offsets Abolished
The Dependent Spouse Tax Offset will be abolished from 1 July 2014 as will the Mature Age Worker Tax Offset.
HELP (HECS) Repayment Threshold Lowered
The income threshold at which students commence repayment of their Higher Education Loan Programme (HELP) debts will be reduced to $50,638 from 1 July 2016. A new minimum repayment rate of 2% will apply.
Currently, the HELP Debts are indexed in line with inflation. This indexation will be replaced with interest equivalent to the Australian Government 10 year bond rate capped at 6%.
National Rental Affordability Scheme (NRAS)
The fifth round of the NRAS will no longer proceed, nor will any funding for uncontracted housing from earlier rounds. All funding for contracted NRAS properties will remain.
Key Welfare Changes
Pension Age Change
The age pension qualifying age will increase by six months every two years until it reaches a qualifying age of 70 on 1 July 2035.
A 48 year old in 2014 will need to wait until they are 70 to qualify for the age pension.
Family Tax Benefits (FTB)
Various changes to the Family Tax benefits system include:
FTB Part B primary income earner limit will be reduced from $150,000 to $100,000. The Part B payment will also be limited to families whose youngest child is younger than six years old.
The Part A Large Family Supplement will be limited to families with four or more children and only be paid in relation to the fourth and subsequent children.
End of year supplements will be revised back to their original values ($600 per FTB Part A child and $300 per family for each family eligible for Part B).
These measures will all apply from 1 July 2014.
From 1 July 2014, all payment rates will be frozen for two years and thresholds will be frozen for three years.
There has been very little in the way of changes to the business tax system. The Government has announced it intends to produce a white paper to consider the reform of the Australia taxation system.
The Government has indicated they are still committed to reducing the company tax rate by 1.5% from 1 July 2015, although there was nothing explicit in the Budget about this.
R & D Tax Incentive Rates Reduced
The rates of the refundable and non-refundable tax offsets for the R & D Tax Incentive will be reduced from 1 July 2014 by 1.5% (i.e. from 45% to 43.5% refundable; and from 40% to 38.5% non refundable).
This equates to an equivalent deduction of 145% (down from 150%) for Research and Development expenditure for qualifying companies with turnover of less than $20 Million.
Managed Investment Trusts – Another Deferral
The proposed changes to the taxation of Managed Investment Trusts have been deferred yet again until 1 July 2015.
Superannuation Guarantee Rate Changes – 9.5% from 1 July 2015
The previous Government had legislated that the Superannuation Guarantee Contribution was to rise to 12% over the next few years. The Government had tried to defer these increases as part of removing the Minerals Resource Rent Tax (MRRT), but this Bill did not get passed. Accordingly, businesses should factor in an increase in Superannuation Guarantee Levy to 9.5% commencing 1 July 2014.
The rate is proposed to remain at 9.5% until 30 June 2018 when it will then increase by 0.5% each year until it reaches 12%.
Employer Support for Hiring Older Workers
Replacing the Mature Age Workers Tax Offset is a more targeted 'Restart' Program that provides employers with incentives of up to $10,000 to employ workers aged 50 or older.
Entrepreneurs Infrastructure Program
A new program to support 'commercialisation of good ideas, job creation and lifting the capability of small business' will be run by the Department of Industry. Some $484.2 Million has been committed over five years.
The program also aims to provide market and industry information and facilitate access to business management advice. While the Government should be applauded for supporting innovation and small business, in reality this program is replacing many existing programs and centralising them under one agency.
Various programs that will be replaced from 1 January 2015 include:
Enterprise Connect; and
Innovation Investment Fund
No information is available at this stage about how existing participants in these schemes will be affected in the interim.
Adjustment of Existing Tax Measures
As usual, the Government has announced various measures to tighten inefficient legislation. These include:
Modifying the tax consolidation integrity package announced in the 2013/14 budget.
Modifying changes to the 'principal asset' test for CGT exemptions for foreign residents
Seeking further advice on integrity rules to help prevent profit shifting from thin capitalisation.
Modifying certain Tax Administration measures so they operate as intended.
NOT FOR PROFIT ENTITIES & CHARITIES
The positive news for not-for-profit organisations and charities is that the Government has abandoned the previous Government's 'better targeting of not-for-profit tax concessions' plan to tax the business profits of charities and not-for-profits and reduce concessions accordingly. The Government had previously announced it was seeking alternatives, but have now confirmed that no measures will proceed at this time.
This is a positive result for charities that can get on with the job of supporting the needy and have one less concern around funding and taxation issues.
While there has been no particular focus on regional Queensland, we highlight some of the key changes in Government spending that will affect some of our Regional clients:
The Government will develop a 'Reef 2050 Plan' including the establishment of a $40 Million trust to provide a long term approach to address key threats to the Great Barrier Reef. This will focus on issues such as water quality, crown of thorns starfish cull and a dugong and turtle protection plan.
However, funding to the Great Barrier Reef Marine Park Authority will be reduced over the next four years.
The Government confirmed its prior announcement of $320 Million of funding over four years to support farmers in drought including:
More generous criteria for income support
Concessional loans to drought affected farmers
Assistance to install water infrastructure
Funding has been set aside for road infrastructure including a Bruce Highway upgrade plus a Toowoomba Second Range Crossing.
While the Government's announcement of increasing the fuel excise with indexation will change the headline cost of fuel, the indexation also will apply to fuel tax credits which should mean the net cost of livestock transport should not change.
RECAP ON CERTAIN CHANGES ANNOUNCED LAST YEAR BY THE PREVIOUS GOVERNMENT
Self Education Tax Deductions Capped at $2,000
This measure never got passed by the previous Government and the Government have announced that they do not plan to introduce it.
Dividend 'Washing' Scheme Loophole to be Closed
The Government and ATO have come down hard in relation to the perceived 'Dividend Washing Loophole'. Not only do the ATO see this as tax avoidance, the Treasury have released draft legislation to ensure that no tax benefit can be claimed in the future. Refer to details of the tax determination.
R & D Tax Incentive
The proposal to provide quarterly tax credits for those with R & D Tax Incentive claims has been abolished.
The proposal to change the Thin Capitalisation rules from 1 July 2014 to tighten the measures to discourage debt financing by multinationals has still not been enacted. The proposal was that 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 'de minimis' 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.
These proposals were to be implemented with effect from 1 July 2014, so business is left in limbo once again due to unlegislated Government announcements.
Small Business Instant Asset Write-off
Under the small business concessions, small businesses (<$2 Million turnover) can write off any assets costing less than $6,500 and the first $5,000 of the cost of a motor vehicle. These rules were proposed to be repealed with effect from 1 January 2014 along with the MRRT legislation, but this was not passed. If the rules were repealed, the previous laws would return allowing an instant write-off for assets costing less than $1,000.
Currently, the $6,500 and $5,000 thresholds remain. The Government has announced it will again try to remove the MRRT legislation after the Senate changes on 1 July 2014. Therefore a degree of uncertainty remains as to how assets purchased after 1 January 2014 will be treated.
© Hanrick Curran 2014
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.