COMMENTARY 

The Treasurer handed down his third budget and was, no doubt, able to reflect that twelve months is a long time in politics and is also along time in terms of the state of the economy. 

The headline statistics illustrate an improving economy, with the forecast deficit for 2010/11 at $40.8 billion being $16.3 billion less than the forecast from last year’s budget, but the biggest deficit since the War! 

Mr Swan has forecast a return to budget surplus by 2013 which is three years ahead of schedule.  Real GDP growth of 3.25% has been forecast for 2010/11 with 4% forecast for 2011/12.  The anticipated unemployment rate is 5.3% over the next twelve months and 4.75% in 2011/12. 

From a tax perspective, this year’s budget is probably most noticeable for the lack of tax nasties than it is for announcing any significant tax measures.  The key tax measures had previously been announced at least in concept, in the Government’s response to the Henry Report issues last week. 

Overall, there is very little in the Budget for the average business.  Apart from the resources super profits tax, the key measure for business is the reduction in the corporate tax rate from 30% to 28%.  However, it is worth bearing in mind that this does not phase in until the 2013 financial year for small businesses and 2014 for other businesses. 

In terms of expenditure matters, the Government has gone to great lengths to be regarded as fiscally responsible and Wayne Swan said that this was not a big spending budget.  The key expenditure measures relate to health, the development of infrastructure and renewable energy.  The Government has committed $2.2 billion to various health initiatives, $6.52 million to a Renewable Energy Future Fund and $1 billion to rail infrastructure.  This latter amount is in addition to amounts to be allocated to infrastructure from the resources super profit tax. 

The Government’s commitment to tax reform is still in question.  We have already commented on the lack of response to most of the Henry recommendations.  The Government has now announced it will provide $65 million over four years to Treasury to develop and implement the Government’s response to the Henry recommendations. 

In summary, lots of hidden numbers and assumptions about China’s growth and, given the Liberal Opposition’s stated response re not allowing the “Resources Tax” through the Senate, it must be said the whole Budget must be in question. 

BUSINESS TAXATION 

Capital Gains Tax 

CGT roll-over for share sale facilities

A range of CGT roll-overs will be made available to Australian resident shareholders.  This is specifically for situations where an entity undertakes a restructure in order to deal with its foreign shareholders via a share or interest sale facility.  Currently, such events, where roll-over relief is not available, may constitute a deemed sale with a resulting capital gain to the Australian resident shareholder. 

These changes will ensure the Australian resident is intended to remove a current defect in the CGT legislation that has prevented groups from accessing CGT demerger relief.  The proposed measures will allow access to demerger relief where the head entity of a demerged group is a corporation sole or a complying superannuation entity. 

Water entitlements

This measure will defer any CGT consequences arising from replacement of water entitlements with one or more different water entitlements.  The aim is to ensure CGT is not a barrier to any alterations to water entitlements. 

This measure will apply retrospectively from the 2005-2006 income year with transitional provisions applying until the date of Royal Assent. 

Limited roll-over for fixed trusts

Roll-over relief was proposed in last year’s Budget for transfers between trusts with fixed entitlements where the trusts have the same beneficiaries.  The Government has refined this further to ensure the integrity of that measure with effect from 1 November 2008. 

Scrip for scrip – alignment with Corporations Act 2001

This measure removes an inconsistency between the requirements for the roll-over as specified in the CGT legislation to that set out in the Corporations Act 2001.  Specifically, it proposes an alignment of the member participation requirements where there is a takeover or merger. 

The above measures will take effect from 6 January 2010. 

Extension of rollover for conversion of a body to an incorporated company

The Government will amend the CGT rollover rules to allow indigenous incorporated bodies to convert to a company incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (“CATSI Act”) without immediate CGT consequences.  Also indigenous companies will be able to move between the Corporations Act 2001 and the CATSI Act without CGT consequences. 

PHILANTHROPY 

The Government announced a welcome extension of the deductible gift recipient (DGR) regime to volunteer fire brigades and other volunteer based and state recognised emergency services entities, as well as to all state government bodies that co-ordinate volunteer fire brigades and state emergency services.  This will mean that donations to such organizations will become tax deductible.  This change will take effect from the date of Royal Assent of the relevant legislation. 

In addition, the Government announced that effective 1 July 2011, Public Ancillary Funds will be subject to a new regulatory regime focusing on the establishment and maintenance of such funds.  The new regime will establish legislative guidelines and provide the Commissioner the power to impose penalties on fund trustees where there are breaches of the guidelines. 

SUPERANNUATION & RETIREMENT INCOMES 

Some minor changes to superannuation and retirement incomes were announced.  These included: 

• Permanently reducing the co-contribution matching rate to 100% (formerly 150% but reduced last year to 100% as a savings measure);

• Allowing the Commissioner to exercise discretion for the purposes of excess contributions tax before an assessment is issued;

• Reviewing whether deductions should be available to superannuation funds providing benefits to a member against a terminal medical condition;

• Introducing technical corrections to allow deductions for contributions made for former employees or where contributions are transferred to a successor fund.

Giving the Commissioner discretion before an excess contributions tax assessment issues is welcome assuming the Commissioner is more readily willing to exercise this power.

PERSONAL TAXATION 

Personal tax rates – no change to already scheduled tax cuts 

The Government did not make any changes to the currently legislated tax rates for 2010-11. 

• From 1 July 2010 the low incomes tax offset will increase from $1,350 to $1,500 thereby increasing the effective tax-free threshold to $16,000 for people earning $30,000 or less.  This increase has also effectively increased the Div 6AA tax-free threshold for “unearned income” of an eligible minor to $3,333 up from $3,000 in 2009-10.

Other personal income tax changes include:

• Senior Australian Tax Offset regulations to be amended to ensure rebate calculated correctly (now factors in the low income tax offset)

• Medical expenses rebate threshold to be raised to $2,000 from 1 July 2010 with adjustments for CPI each year thereafter

• Relaxation of the First Home Saver Account rules concerning saving transfers

• Increase in the Medicare levy threshold for taxpayers that are eligible for the Senior Australian Tax Offset.

 Standard deduction for work-related expenses and the cost of managing tax affairs 

The Government will provide individuals with an optional standard deduction that will be phased in over two years.  From 1 July 2012, individuals will be entitled to claim a standard deduction of $500 for work-related expenses and the cost of managing tax affairs.  From 1 July 2013, the standard deduction will increase to $1,000.  The Government announced that this measure is a key step towards a “tick and flick” system of pre-filled tax returns.

A standard tax deduction for work related expenditure was recommended by the Henry Tax Review.  It is noted that the Review also recommended a general tightening of rules for eligible work related expense deductions.  The government has not suggested adopting such a recommendation.

 Family Tax Benefit (FBT)

 The Government will put in place more flexible arrangements for FBT recipients who do not lodge tax returns.

 The participation requirements to remain eligible for FTB Part A will be further strengthened.

 Child Care Rebate (CCR)

 The cap for the CCR will be reduced to $7,500 per child, with indexation of the cap paused for four years.

 War Widows Pension

 War Widows (or Widowers) will no longer be eligible for the Pension if they enter a de facto relationship following the death of their veteran partner.

 50% Discount for interest income

From 1 July 2011, the Government will provide individuals with a 50% tax discount for the first $1,000 of interest earned.  The discount will be available for interest income earned directly (eg deposits held in banks) and indirectly (eg through a trust).

It is noted that this measure is in response to the Henry Tax Review recommendation to provide a 40% tax discount on interest income.

 Medicare Levy – thresholds increased

 The Medicare levy low-income thresholds have been increased from 1 July 2010 as follows:   

• Singles – from $17,794 to $18,488
• Families – from $30,025 to $31,196
• Pensioners (below Age Pension age) – from $25,299 to $27,696

 Social Security measures

 A number of social security measures were announced in the Budget, importantly the Government will make some changes to the eligibility criteria and allowable uses for Special Disability Trusts.  The changes are designed to make them more accessible and increase uptake (applicable from 1 January 2011).

The definition of a beneficiary will be expanded to include people with a disability who can work up to seven hours per week (excluding work in an Australian Disability Enterprise) and the allowable uses for the trust will be expanded to include all medical expenses, including membership costs of private health funds, maintenance expenses of Special Disability Trust property and discretionary spending of up to $10,000 per year.

 GST

 Additional GST compliance funding for the ATO

 The Government will provide $337.5 million to the ATO over 4 years to fund additional activities that target fraudulent GST refunds, under-reporting of GST liabilities, non-lodgement of GST returns and non-payment of GST debts.

 This compliance funding is expected to generate an additional $2.7 billion of revenue over 4 years through increased taxpayer compliance with the GST law.

 The ATO has increased its targeted GST compliance activities in recent years.  The additional funding announced in the Budget will result in a significant number of GST registered businesses being targeted for ATO GST reviews and audits over the next few years.  All GST registered entities would be well advised to ensure that their GST affairs are inn order before the ATO comes knocking.  In addition to the unexpected GST cost, any underpayments of GST can also result in expensive penalty and interest charges, which can impact cash flow and profitability.

 Changes to the financial supplies rules

 The Government has announced changes to the financial supply rules that are designed to reduce compliance and administrative costs for small business.

 The key changes include: 

• Increasing the Financial Acquisitions Threshold from $50,000 to $150,000;

• Treating all elements of a hire purchase transaction as a taxable supply;

• Allowing taxpayers that account for GST on a cash basis to claim input tax credits for hire purchase acquisitions on the same basis as non-cash GST taxpayers;

• Expanding the range of expenses that qualify for reduced input tax credits to include:

1. Acquisitions related to supplies of life insurance by super funds to members;
2. Lenders mortgage re-insurance;
3. Transactional fraud monitoring services;
4. Protecting the revenue base by preventing trustee and responsible entity service acquisitions from being used to claim credits for all acquisitions.

 While these changes are welcome the financial acquisitions threshold is also exceeded where a taxpayer’s financial acquisitions exceed 10% of all acquisitions.  This threshold is more likely to impact small businesses ad it would have been preferable for this threshold to have also been increased.

 Unfortunately, these compliance reduction measures will not take effect until 1 July 2012.

Restructure of the Margin Scheme rules

The Government has released the findings of a Treasury review of the operation of the margin scheme.

The property industry had identified a number of concerns with the margin scheme and had suggested that they could be addressed through further amendments to the existing legislation.

However, the view of the Government is that additional rules within the existing legislative framework would be likely to increase complexity and would add significant additional revenue costs.

Instead the Government has agreed to clarify the existing law by restructuring the margin scheme provisions to give prominence to the main principles, with the exceptions, set out separately and to insert objects clauses for key provisions.  This is not expected to be a complete replacement of the existing provisions with a set of principles, which was an option that was not supported in any of the submissions to Treasury.

GST and cross-border transactions

The Government has accepted all of the recommendations made by the Board of Taxation following its review of cross-border transactions.  The GST legislation will be amended with effect from 1 July 2012 to reduce the number of non-residents who are unnecessarily drawn into the Australian GST system. 

The amendments will: 

• Limit the ‘connected with Australia’ provisions in their application to non-residents;

• Expand the circumstances where a resident entity will have a reverse charge GST liability when dealing with a non-resident;

• Extend the GST-free rules for cross-border supplies; and

• Remove the need for some non-residents to register for GST.

GST exemption for taxes, fees and charges

The Government will amend the current mechanism for exempting from GST Australian taxes, fees and charges imposed by Government agencies.

Currently, in order for taxes, fees and charges to be exempt from GST, they must specifically be included in a determination issued by the Treasurer.  From 1 July 2011, this will be replaced by a principles-based approach.  A detailed list of exempt taxes, fees and charges will no longer be produced.  Rather, a broad set of principles in the legislation will determine which taxes, fees and charges are exempt. 

 The aim of this is to increase certainty for taxpayers and Government agencies in relation to the GST treatment of new taxes, fees and charges.  In our view, the opposite is likely to occur and the adoption of a broad set of principles is likely to result in costly disputes between taxpayers and the ATO around how the principles should be interpreted.