Walking the Line
Since winning the last Federal election with a minority outcome, leading the country without a majority was always going to be an interesting journey. The economic road ahead has been a fine line to walk for the Gillard Government, resulting in pressures to balance votes and reform.
So how has leading the country without a majority impacted on the outcome of this year’s Federal Budget?
With the promise of reform being on the agenda now since 2008, the pressure to achieve greater certainty for business is now essential. Although the tax reform debate is set to continue at the October Tax Forum, any resulting outcomes will take some time before they come to fruition. In addition, the unknown impact of carbon tax further dampens business confidence.
Will the 2011 Federal Budget be enough to keep up the momentum?
“We believe this Budget, our tax reforms, and our plans for a carbon price, will set Australia up for the prosperous future all our people deserve.” Wayne Swan 10 May 2011.
- The Federal Budget tries to be all things – fiscally responsible yet supportive of the business community – yet fails to achieve greatness
- The carbon tax is the elephant in the room – until it is properly and transparently defined, no major business in Australia has the certainty it requires
- Business sector will be delighted with efforts to encourage workforce participation and allow skilled migrants to meet demand in regional areas. This is of particular benefit to the mining sector
- SMEs will also benefit through employment and training programs, plus FBT and vehicle changes
- There is little joy in the budget for personal taxpayers, with a number of income tax benefits being removed or modified.
There is little joy in this Budget for personal taxpayers, with a number of income tax benefits being removed or modified.
Removal of Eligibility for Low Income Tax Offset on Unearned Income of Minors
The Government will remove the ability of minors (children under 18 years of age) to access the low income tax offset (LITO) to reduce tax payable on their unearned income, such as dividends, interest, rent, royalties and other income from property, with effect from 1 July 2011. Income earned by minors from work will still be eligible for the full benefit of the LITO. Unearned income of minors who are orphans or disabled, as well as compensation payments and inheritances received by minors, will not be affected by this measure.
As foreshadowed, this measure significantly reduces the potential income tax benefit of parents investing in their children’s names, and of making family trust distributions to minors. Given that many small and family businesses are operated within a trust structure, this measure could be expected to adversely affect such businesses by effectively increasing tax payable on business profits.
Phase-out of Dependent Spouse Tax Offset
The Government will phase out the dependent spouse tax offset (DSTO) for taxpayers with a dependent spouse born on or after 1 July 1971. Taxpayers with an invalid or permanently disabled spouse, supporting a carer, or people who are eligible for the zone, overseas forces and overseas civilian tax offsets will not be affected by this change.
Removal of the DSTO was a recommendation of the Henry Tax Report and is explained in the Budget papers as “removing a barrier to participation” for taxpayers with a non-working spouse and no children.
Low Income Tax Offset Payments Brought Forward
Effective from 1 July 2011, the Government will increase the amount of the low income tax offset (LITO) that is delivered to low and middle income earners through their regular pay during the year from 50 per cent to 70 per cent of their total entitlements. The remaining 30 per cent of their LITO benefit will still be paid as a lump sum on assessment of income tax returns.
Disallow Deductions Against Government Assistance Payments
The Government will amend the tax law to prevent deductions being claimed against all government assistance payments with effect from 1 July 2011. For each of the years 2006/07 to 2009/10, the Commissioner of Taxation has determined that he will administer the law to allow eligible taxpayers to receive an automatic deduction of $550 or make potentially higher claims if expenses can be substantiated.
This measure is in response to the 2010 High Court decision in Commissioner of Taxation v Anstis, the effect of which allowed Youth Allowance recipients in full-time study to claim a deduction for education expenses. The Assistant Treasurer had previously stated that the Government would not seek to amend the tax law retrospectively, hence its prospective application from 1 July 2011.
Medicare levy low-income thresholds
The Government will increase the Medicare low-income thresholds to $18,839 for individuals and $31,789 for families, with effect from 1 July 2010. The additional amount of threshold for each dependent child or student will also increase to $2,919. These increases are in line with movements in the Consumer Price Index.
The Government will also increase the Medicare levy threshold for single pensioners below Age Pension age to $30,439, with effect from 1 July 2010. This increase will ensure that pensioners below Age Pension age do not pay the Medicare levy when they do not have an income tax liability.
Reduction in GDP Adjustment Factor for PAYG Instalment Taxpayers
The Government will reduce the GDP adjustment factor for PAYG instalment taxpayers who use the GDP adjustment method, from 8 per cent (which is the rate that would apply for the 2011/12 income year under the current law) to 4 per cent for the 2011/12 income year.
This measure should provide a cash-flow benefit to individuals and small businesses by reducing the amounts of tax instalments payable during the financial year, however the measure will not alter the total tax payable for any year, meaning that taxpayers will need to keep sufficient cash aside to meet a higher income tax assessment following the lower instalment payments.
Temporary flood and cyclone reconstruction levy
The Government will also introduce a temporary flood and cyclone reconstruction levy from 1 July 2011 to contribute towards the cost of rebuilding flood and cyclone affected regions. This measure will apply only for the 2011/12 income year as follows:
- Taxpayers with a taxable income in 2011/12 of $50,000 or less will not pay the levy
- Taxpayers with taxable income between $50,001 and $100,000 will pay 0.5 per cent of their taxable income above $50,000
- Taxpayers with taxable income over $100,000 will pay 0.5 per cent of their taxable income between $50,001 and $100,000 and 1.0 per cent of their taxable income over $100,000.
Government has also provided some specific exemptions from the levy to anyone who:
- Received an Australian Government Disaster Recovery Payment (AGDRP) for a disaster event in 2010/11;
- Is directly affected by a National Disaster Recovery and Relief Arrangements (NDRRA) declared disaster in 2010/11 and would have met the AGDRP criteria or
- Is a New Zealand non protected special category visa holder who received an ex gratia payment from the Australian Government in relation to a disaster that occurred in 2010/11.
Tax losses from Infrastructure Projects
The government has announced that there will be special tax rules to encourage private sector participation in infrastructure projects that have national significance. The changes will apply to exempt tax losses from such projects from the continuity of ownership test and the same business test and also provide for an ‘uplift’ to the value of these losses at the government bond rate.
The 2011 Budget contains details of significant proposed national infrastructure works that will need to be undertaken. Projects include $1.02b as a further contribution towards the duplication of the Pacific Highway, $132m rail infrastructure project in Queensland and natural disaster rebuilding in Queensland and Victoria.
Historically, of particular concern to the industry has been the fact that investors may wait for several years until an infrastructure project starts generating income before early stage tax losses (typically generated from tax depreciation and financing costs) could be utilised.
If there is a change in ownership of an infrastructure project and change in business, this could mean that owners will not be able to access substantial start up losses due to the operation of tax loss recoupment rules. The Budget proposes to enact measures to repeal these rules for certain infrastructure projects to improve certainty for investors.
As infrastructure projects suffer from long lead times between incurring of expenditure and derivation of income there is an erosion of the real value of the tax loss over time. The Budget provides for an uplift to the value of these losses at the government bond rate.
There will be an industry consultation phase before the rules are finalised and any change will apply from the date of assent of the enabling legislation.
There is wide acceptance that Australia requires substantial investment in infrastructure over the short, medium and long term. The Government currently has approximately $450 billion worth of infrastructure projects in the pipeline. These projects range from M4 upgrades in New South Wales to the natural disaster rebuilding required in Queensland and Victoria and to national projects like the National Broadband Network.
Consequently, any tax incentive which encourages private investment in such projects is a positive step as presently there are no special tax rules in Australia to promote such investment.
Whilst the proposed changes are a welcome step in the right direction, it is disappointing that Government has not addressed the vexed issue of specific anti-avoidance provisions within the Australian tax legislation which operate in relation to infrastructure financing.
It is often the case that infrastructure investment is affected by the application of these anti-avoidance rules which were enacted for other purposes. These rules are contained in Division 250 of the Income Tax Assessment 1997 and were designed to prevent tax avoidance by the use of leasing arrangements between taxpayers and tax exempt entities. As Government has not made any announcement in relation to these provisions they will continue to create uncertainty for taxpayers involved in infrastructure projects with tax exempt entities.
If the proposed tax rules achieve their desired aim of attracting greater private sector investment, careful consideration will need to be paid to these rules as there are some traps for the unwary within the current tax rules for public private partnerships.
Improvements to the company loss recoupment rules
A company can deduct prior year losses if it satisfies the continuity of ownership test or the same business test. This measure will modify the continuity of ownership test so that ownership does not need to be traced through certain superannuation entities. It will also remove technical deficiencies in the modified rules for widely held entities where:
- An entity is interposed between certain stakeholders and the loss company in certain circumstances
- An interposed entity demerges
- An interposed foreign entity issues bearer depository receipts
- A corporate change arising from the issue of new shares happens.
This measure will also ensure that all membership interests held in an entity are treated as a single asset for the purpose of applying the low value asset exclusions under the loss integrity rules.
Debt/equity tax rules
The Government will amend the debt/equity tax rules to restrict the application of an integrity provision that deems an interest from an arrangement that funds a return through connected entities to be an equity interest under certain circumstances. The changes will ensure that this provision will only apply to arrangements where both the purpose and effect is that the ultimate investor has, in substance, an equity interest in the issuer company. Additionally, the integrity provision will not apply where the Commissioner considers that it would be unreasonable for the provision to apply. The amendments will apply from the commencement of the debt/equity tax rules (generally 1 July 2001).
The Government has also extended the debt/equity transitional period for Upper Tier 2 capital instruments to 1 July 2011, with effect from the date of Royal Assent of the enabling legislation. The extension will give issuers of relevant financial instruments, mainly Authorised Deposit-Taking Institutions, the opportunity to amend relevant instruments to come within the terms of regulations which were not made on 10 March 2011. The new regulations ensure that certain Upper Tier 2 perpetual subordinated notes are not precluded from being a debt interest under the debt/equity rules. The measure will apply to Upper Tier 2 instruments issued before 1 July 2001.
Taxation of Financial Arrangements (“TOFA”)
The TOFA legislation prescribes a time frame for the making of certain elections in relation to the applicability of TOFA. The time frame for the making of the TOFA transitional election will be extended.
Elections when transitioning into TOFA
By making a TOFA transitional election, taxpayers could choose to apply TOFA provisions to their existing financial arrangements. The election should have been made within a certain time frame as prescribed in tax law.
To ensure that taxpayers are not prevented from obtaining the intended compliance benefits of this transitional election by having inadvertently failed to notify by the due date, it is proposed that the tax law be amended to allow some flexibility in relation to the notification date.
The Assistant Treasurer's Press Release of 29 November 2010 indicated that the Commissioner will be able to extend the time for the election for the transitional election in either of the following circumstances:
The election is unable to be notified by the due date because of circumstances beyond the taxpayer’s control, and they have taken reasonable steps to mitigate the effects of those circumstances.
The election is not notified by the due date because of the taxpayer or their agent’s honest mistake or inadvertent omission.
The maximum period that the Commissioner can extend the due date for notification will be 3 months.
The Government will also make regulations to allow taxpayers additional time to comply with certain tax hedging documentation requirements. Affected taxpayers will be given until 30 June 2011 to comply with tax hedging documentation requirements relating to the tax allocation of gains and losses.
These amendments are a welcome relief for taxpayers who have not had sufficient time to determine if these elections should be made due to the complexity of the underlying rules.
Taxation of Financial Arrangements (TOFA) – Hedging rules
There will be a minor amendment to the TOFA tax hedging rules to ensure that the rules operate as intended and to provide further certainty and reduce compliance costs for affected taxpayers.
The amendments will ensure that for taxpayers who have elected to apply both the TOFA tax hedging rules and the TOFA reliance on financial reports tax timing method, there will not be an overlap between the two elections.
Furthermore, the amendments will also clarify that gains and losses from hedging financial arrangements that hedge a risk or risks in relation to a firm commitment (as defined in the accounting standards) are brought to account for tax purposes when gains, losses or other amounts in relation to the assets or liabilities arising out of the cessation of the firm commitment are recognised for tax purposes.
These amendments will provide a welcome relief for taxpayers affected by the uncertainty surrounding these provisions at the present time.
Functional currency rules – extending the range of entities that can use a functional currency
The Government will allow certain trusts and partnerships that keep their accounts solely or predominantly in a particular foreign currency to calculate their net income by reference to that currency. This measure will take effect from the date of Royal Assent of the amending legislation.
CGT – Minor Tweaking & Tuning
The Government will provide for some minor changes to the CGT rules for the purposes of improving the regime, including broadening some integrity measures. Further, the Government is also providing incentives with respect to capital investment in green technologies and renewable resources.
Scrip for scrip rollover relief and small business concessions amendments
The Government, with effect from 7.30PM (AEST) on 10 May 2011 will amend the scrip for scrip roll-over integrity provisions that apply to individuals and companies to ensure that they also apply appropriately to trusts, superannuation funds and life insurance companies.
Under current law, the scrip for scrip roll-over integrity provisions apply to transactions where stakeholders in the target and acquiring entities have the potential to influence both entities. However, some trusts, superannuation funds and life insurance companies consider the integrity provisions do not apply to them because as the stakeholders, they own the interests for the benefit of others (that is the beneficiaries), rather than for their own benefit. This was not the intention of the provisions and therefore the Government will amend them to broaden their scope.
Similarly, the Government will also ensure that the provisions which limit access to a range of small business tax concessions are fully effective. This will be done by negating the ability for trusts to be able to avoid being treated as connected entities for the purpose of testing eligibility for the concessions, on the basis that trusts do not own assets for their own benefit. These changes will also ensure that some small businesses will be able to access the small business CGT concessions because the changes will make their business assets ‘active’.
Exemption for incentives related to renewable resources and environmental preservation benefits
With effect for income tax assessments for the 2006/07 and later income years, the Government will exempt from CGT any gains or losses arising from a right to a financial incentive granted to taxpayers under an Australian government (Commonwealth, State or Territory) scheme that encourages them to acquire renewable resource assets (for example, photovoltaic solar cells or solar hot water systems) or for their agreeing to preserve a part of Australia’s environmental amenity (for example, refraining from removing remnant vegetation). This measure will also turn off the income tax recoupment rules in relation to any underlying assets (for example, a solar hot water system) to ensure that the incentive keeps its full financial value.
Extensions to the main residence exemption in relation to special disability trusts
With respect to income tax assessments for the 2006/07 and later income years, the Government will extend the 2009/10 Budget measure that provides a CGT main residence exemption to special disability trusts (SDTs).
In particular, this measure backdates the CGT main residence exemption for SDTs and provides equivalent taxation treatment amongst SDTs established under different Acts including the Veterans’ Entitlements Act 1986 and Social Security Act 1991. It also provides a CGT exemption for assets transferred into a SDT for no consideration and gives a market value cost base for testamentary transfers. In addition the measures will provide a CGT exemption, in the event of the death of the principal beneficiary, for the intended recipient of the principal beneficiary’s main residence, if the recipient disposes of the dwelling within two years of the principal beneficiary’s death. Note that a partial exemption may be available to the trustee of the SDT if the dwelling was used to produce assessable income before the principal beneficiary’s death.
Limiting the trading stock exception for super funds
With effect from 7.30 PM (AEST) on 10 May 2011 the Government will remove the trading stock exception to the CGT primary code rule for complying superannuation entities for specified assets.
This measure will ensure gains or losses on specified assets (primarily shares, units in a trust and land) are subject to CGT, consistent with CGT being the primary code for taxing gains and losses of complying superannuation funds. A small number of complying superannuation funds are seeking to treat shares as trading stock, so as to deduct losses on their shares against income other than capital gains.
This measure also provides transitional rules to ensure that assets held or accounted for as trading stock before the time of announcement are unaffected.
Minor amendments ensuring the proper functioning of the CGT provisions
The Government will make a series of minor amendments to the income tax law to ensure the proper functioning of the capital gains tax (CGT) and associated provisions.
The changes made by these measures include:
With effect from 7.30 PM (AEST) on 10 May 2011 ensuring that the roll over for the exchange of shares in one company for shares in another company operates properly, so that there is deferral of a profit or loss where the original shares are held on revenue account at the time of the exchange.
Amending the roll over for certain disposals of assets by a trust to allow roll over relief to apply where a transferee company or trust holds rights, just before the disposal or transfer time, associated with a deed or similar document that is designed to facilitate the transfer of assets into the company or trust. Amendments to the roll-over relief of assets transferred by a trust to a company will have effect for CGT events happening after 7.30 PM AEST on 10 May 2011 and the changes to the roll over for the transfer of assets between certain trusts will have effect for CGT events happening on or after 1 November 2008.
With effect from the 2005/06 income year and later income years, the Government intends to ensure that gains and losses arising from life insurance policies that are generally exempted from CGT are not then taxed under the ordinary income tax provisions by removing the exception to the CGT primary code rule for such gains and losses. This will remove uncertainty in the application of income tax to compensation or damages payments made under life insurance policies.
Legislating the current Tax Office practice of allowing a testamentary trust to distribute an asset of the deceased person without a CGT taxing point occurring. The income tax law in relation to deceased estates will also be rewritten using a principle based format and minor technical issues relating to deceased estates fixed. These changes will apply to CGT events happening on or after the date the legislation receives Royal Assent.
Provide the Commissioner with a discretion to extend the two-year ownership period in which the trustee of a deceased estate or beneficiary of such an estate must dispose of their interest in the deceased’s dwelling to access a full capital gains tax main residence exemption (or a more generous partial exemption).
Ensure that for the purposes of the CGT concession stakeholder test in the small business concessions, taxpayers can have a non-zero direct small business participation percentage where: (a) shares in a company are held jointly by taxpayers; and (b) a discretionary trust has not made a distribution in an income year where the trust had a tax loss or no net income for that year.
The amendments to CGT should broaden the integrity measures, making the regime fairer, and improve its operation. These measures merely provide minor improvements and refinements in areas of the CGT legislation that needed tightening and consistency. As expected there were no real reforms to the CGT regime in the budget, considering that the CGT legislation is quite mature and the impact to the revenue is forecast to be low.
Tax compliance – countering fraudulent phoenix activities by company directors
The Government will strengthen the tax law to counter fraudulent phoenix activity, which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their liability.
With effect from 1 July 2011:
the director penalty regime will be extended to superannuation guarantee amounts, making directors personally liable for their company’s failure to pay employee superannuation;
the Australian Taxation Office (ATO) will be given the power to commence recovery against directors under the director penalty regime, without providing a 21 day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due; and
in certain circumstances directors and associates of directors will be prevented from obtaining credits for withheld amounts in their individual tax returns where the company has failed to pay withheld amounts to the ATO.
Tax compliance – enhanced refund fraud detection and management
The Government will provide $56.4 million over four years to the Australian Taxation Office (ATO) to address fraudulent tax refund claims.
Refund fraud is a compliance risk with the potential to undermine community confidence in the integrity of the tax system. These increased resources will help ensure greater equity and confidence in the tax system.
Tax compliance – reporting Government grants and payments
The Government will provide $43.4 million over four years to the Australian Taxation Office (ATO) to allow it to monitor the accurate accounting of government grants and payments.
The increased funding will enable the ATO to collect payment information from government agencies across all three levels of government, and will provide for sophisticated data-matching techniques to examine compliance by the recipients of such payments. This will help ensure greater equity and tax compliance.
Tax compliance – reporting taxable payments
The Government will require certain businesses to report annually on payments made to contractors in the building and construction industry, with effect from 1 July 2012. The reporting regime will require businesses to report information that they should already collect under existing tax arrangements.
Trust taxation – interim changes to improve the taxation of trust income
The Government will implement the recommendations of the Board of Taxation to take interim steps to improve the trust income tax provisions, with effect from 1 July 2010. These interim steps are necessary to provide certainty while the Government updates and rewrites the trust income tax provisions in Division 6 or Part III of the Income Tax Assessment Act 1936.
To implement the Board’s recommendations, the Government will introduce legislation to:
- Enable the streaming of capital gains and franked distributions
- Target the use of low tax entities, especially exempt entities, to reduce the tax payable on the taxable income of a trust.
The measure will provide increased certainty and will reduce opportunities for taxpayers to manipulate their tax liabilities.
The rewriting of the trust tax provisions is important for all taxpayers who utilise trusts as part of their business operations. The current law is overly complex and lacks clarity in many areas.
Investment Manager Regime
The Board of Taxation is currently examining the design of an investment manager regime (IMR) as part of its review of the tax treatment of collective investment vehicles (CIVs).
As an interim step, the Government will introduce amendments to the income tax laws to prevent the Australian Taxation Office from raising assessments for certain investment income of foreign managed funds for the 2010/2011 income year, where the fund has never lodged an Australian tax return.
These funds are an important source of mobile capital and providing this tax certainty will enable them to comply with US reporting requirements and minimise the risk of them withdrawing from investing in Australia.
This measure extends the arrangements announced on 17 December 2010, which applied to the 2009/10 and prior income years.
The Government will also amend the law to provide that to the extent relevant investment income of a foreign managed fund is taxed only because the fund is taken to have a ‘permanent establishment’ in Australia, such income will be exempt from tax (except for the arm’s length fee for services provided by Australian investment advisors). This will remove an impediment to foreign funds engaging Australian investment advisers to manage primarily offshore assets, and will apply to the 2010/11 and later income years.
The Board of Taxation has been asked to report on an investment manager regime as it relates to foreign managed funds by the end of the third quarter of this year.
Managed Investment Trusts
The Government will update the list of countries reported in the Taxation Administration Regulations 1976 whose residents are eligible to access a reduced rate of withholding tax on certain distributions from Australian managed investment trusts.
Of note is Singapore and Cayman Islands.
New tax system for managed investment trusts deferred
The Government announced that it will defer the start date and clarify certain aspects of the new tax system for managed investment trusts (MITs) originally announced on 7 May 2010.
The Government states that the start date of the new regime will be deferred by 12 months to 1 July 2012 in order to provide MITs and other parts of the financial services industry with sufficient time to make any necessary trust deed amendments and systems changes to operate effectively within the new MIT regime.
The Government has also stated that it will introduce amendments to the tax law to prevent any income tax consequences that might arise from a resettlement where a MIT changes its trust deed (or other constituent documents) to meet the ‘clearly defined rights’ requirement under the new MIT tax system.
The Government will also make a minor change to the proposed de-minimis rule allowing MITs to carry forward under and over distributions into the next income year without adverse taxation consequences. This change will replace the alternative test of the de-minimis threshold of a ‘prescribed dollar value per unit’ with a ‘0.4 of 1 per cent of net assets’ test. The primary test of five per cent of the MIT’s taxable income as originally announced will be unchanged.
Although many MITs will no doubt be appreciative of the additional time to work though the issues in getting their constituent documents ready for the new system, a number of MITs will have already spent significant resources preparing for the system anticipating the 1 July 2011 start date. It would have been better for all parties concerned if the Government had announced the 1 July 2012 start date much earlier in the piece.
However, the Government is to be congratulated for agreeing to draft the MIT taxation regime so that changes to an MIT’s constituent documents in order to comply with the new regime will not result in a CGT liability. This is a welcome development as the potential CGT resettlement exposure was especially troubling for MITs.
Natural Disaster Recovery and Rebuilding Measures
Income tax exemption for certain grants
The Government will provide an income tax exemption for certain Category C clean up and recovery grants paid to small businesses and primary producers under the Natural Disaster Relief and Recovery Arrangements. The exemption will apply where the grants relate to flooding that occurred in Australia on or after 29 November 2010, and those small businesses and primary producers affected by Cyclone Yasi.
The payments will be non-assessable non-exempt income.
Small Business Depreciation for Motor Vehicles
The Government will allow small businesses to claim up to $5,000 as an immediate deduction for motor vehicles, with effect for vehicles acquired from the 2012/13 income year. The remainder of the motor vehicle value will be pooled in the general small business pool and (depreciated at 15 per cent in the first year and then 30 per cent).
The Government is also abolishing the Entrepreneurs Tax Offset with effect from the 2012/13 income year.
The Budget included a number of announcements affecting the mining, resources and exploration sector.
Minerals Resource Rent Tax
The Government has confirmed that it will adopt the recommendations of the Policy Transition Group (PTG) as the basis of the detailed design for Australia’s new resource tax arrangements.
The PTG was established to advise on the development of the technical design of the Minerals Resource Rent Tax (MRRT) and the transition of existing petroleum projects to the Petroleum Resource Rent Tax (PRRT) regime. The PTG made 94 recommendations on the new resource tax arrangements relating to the MRRT and the PRRT extension and four additional recommendations on exploration.
With respect to the MRRT, key PTG recommendations cover issues regarding the taxing point, starting base and starting base losses, deductions and test for deductibility, a phased extension of the $50 million threshold and transferability of expenditure and project losses.
Income tax — expanding the definition of exploration to include geothermal energy
The Government has announced that it will incorporate geothermal exploration into the wider definition of exploration, with effect from 1 July 2012.
This measure is consistent with advice on this matter from the Policy Transition Group (PTG). The PTG was established to advise on the development of the technical design of the Minerals Resource Rent Tax and the transition of existing petroleum projects to the Petroleum Resource Rent Tax regime.
Geothermal energy is an emerging energy source with significant potential to provide emissions free energy in Australia. Geothermal exploration requires deep drilling and exploration which involves relatively high capital costs. Currently, geothermal exploration expenditure does not attract the same tax treatment as applies to traditional hydrocarbon energy sources that require exploration and drilling.
Clarifying the taxing point for the petroleum rent resource tax
The Government will amend the tax law to provide greater certainty around how the taxing point is calculated for the purposes of the Petroleum Resource Rent Tax (PRRT), with effect from 1 July 1990. The measure is intended to confirm the existing application of the PRRT in relation to the taxing point (the location of the taxing point within a PRRT project is used in determining PRRT liabilities), which was the central issue considered by the Federal Court in Esso Australia Resources Pty Ltd v Commissioner of Taxation  FCA 360. The amendments are proposed to provide further statutory support for the Court’s judgment.
Crude oil excise technical amendments
The Government also announced that it will make several technical legislative amendments to ensure that condensate production is subject to crude oil excise as announced in the 2008/09 Budget. The amendments include changes to the Excise Tariff Act 1921 to introduce a statutory definition of the production area ‘Rankin Trend’, and to ensure that production from ‘Rankin Trend’ does not represent ‘exempt offshore oil and condensate’. The Petroleum Excise (Prices) Act 1987 will be amended to clarify that determinations of Volume Weighted Average Realised Price, which are integral to the operation of the excise regime, are not invalidated merely by a failure to issue a notice to the producer.
The changes will take effect from midnight (AEST) on 13 May 2008, consistent with the original 2008/09 Budget measure.
Many of initiatives announced in the Budget (including the cut in the company tax rate) are proposed to be funded by the MRRT. This may present difficulties for the Government if revenue from the MRRT does not meet Treasury’s expectations.
The announcement that the definition of exploration will be expanded to include geothermal exploration is good news - BDO have been recommending for the last two years that the definition of exploration and prospecting within the mining tax rules be expanded to include geothermal energy. It is pleasing to note that Government has included this measure, with effect from 1 July 2012, which means that eligible expenditure incurred in geothermal exploration will be allowed as an immediate deduction for tax purposes.
However, not-so-good news is the announcement that the Government will amend the tax law to confirm the taxing point for calculating PRRT liability following the decision in Esso Australia Resources Pty Ltd v Commissioner of Taxation. In that case the Federal Court decided that the taxing point was further along the production process that the taxpayer had calculated. The Federal Court held that the taxpayer was liable to tax on the sales proceeds of processed gas after it left the processing plant. This substantially increased the amount of PRRT payable in that particular project. This change has retrospective effect from 1 July 1990.
Fringe benefits tax – reform of the car fringe benefits rules
The Government will reform the current ‘statutory formula’ method for determining the taxable value of car fringe benefits by replacing the current statutory rates with a single rate of 20 per cent that applies regardless of the distance travelled. This reform will remove the current incentive for people to drive salary sacrificed and employer provided vehicles further to increase their tax concession. This reform will apply to new contracts entered into after 7:30pm (AEST) on 10 May 2011, and will be phased in over four years as shown below:
|Distance travelled during the FBT year (1 April – 31 March)||Statutory rate (multiplied by the cost of the car to determine a person’s car fringe benefit)|
|Existing contracts||New contracts entered into after 7:30pm (AEST) on 10 May 2011|
|From 10 May 2011||From 1 April 2012||From 1 April 2013||From 1 April 2014|
|0 – 15,000 km||
|15,000 – 25,000 km||
|25,000 – 40,000 km||
|More than 40,000 km||
Compared to the current statutory rates, a single rate of 20 per cent will:
- Increase the tax concession provided for vehicles driven less than 15,000 kilometres a year;
- maintain the current tax concession provided for vehicles driven between 15,000 and 25,000 kilometres a year; and
- decrease the tax concession provided for vehicles driven more than 25,000 kilometres a year.
- People who use their vehicle for a significant amount of work-related travel will still be able to use the ‘operating cost’ (or ‘log book’) method to ensure their car fringe benefit excludes any business use of the vehicle.
BDO recognises there are some genuine environmental benefits to reducing the concessions based on the kilometre based concession. However, for those individuals genuinely required by the nature of their job to drive for long distances, they may now be faced with the additional compliance burden of using the operating cost method.
Fringe benefits tax exemption for Australian residents working in remote areas overseas under fly-in, fly-out arrangements
The Government will extend the fringe benefits tax (FBT) exemption for domestic fly in fly out arrangements to cover Australian residents working in remote areas overseas. This measure will apply from 1 July 2009.
Currently, transport from an employee’s usual place of residence to their usual place of employment for employees working in remote areas of Australia under fly in fly out arrangements is exempt from FBT.
In line with the current arrangements, the expanded exemption will only apply where employees cannot live anywhere other than in employer provided accommodation at or near the work site, and no reasonable alternative accommodation is available.
The Government has proposed to introduce a number of minor changes to our indirect taxes regime. These proposed changes aim to clarify and simplify a number of areas in our indirect tax regime, including changes to:
- Goods and Services Tax (GST)
- Luxury Car Tax (LCT)
- Excise and excise-equivalent customs duty.
A number of minor and clarifying changes have been proposed for GST.
GST treatment of new residential premises
In the recent Federal Court decision Commissioner of Taxation v Gloxinia Investments (Trustee)  FCAFC 46, it was held that the sale by developers of certain newly constructed residential premises to owner occupiers and investors was input taxed rather than taxable. This was not the intended policy intent of the GST law. As such, the Government is proposing to amend the GST law to protect the GST revenue base and to ensure the law applies appropriately to supplies of new residential premises by treating such supplies as taxable. This measure restores the policy intent of applying GST to the value added to real property by developers constructing new residential premises.
In particular, the amendments will ensure that:
- From 3 October 2007, new residential premises constructed under development lease arrangements are treated as taxable supplies
- From 1 July 2000, the granting of individual strata lot leases over newly constructed residential premises is not sufficient by itself to make future supplies of the premises input taxed
- From 1 July 2000, any change in property title arrangements will not result in the premises once again becoming new residential premises.
Transitional arrangements will apply to ensure that taxpayers who entered into arrangements on a basis consistent with the Court’s findings, prior to the Government’s announcement on 27 January 2011, are not disadvantaged.
The GST treatment of property in possession of a mortgagee
The Government will amend the GST law to clarify that Division 105 (supplies in satisfaction of debts) operates to the exclusion of Division 58 (representatives of incapacitated entities) where a mortgagee in possession or control sells the property of a corporation. This measure is intended to provide certainty and to reduce compliance costs for entities in the mortgage lending sector by allowing mortgagees in possession or control of property of corporations to continue to report and account for their GST obligations under a single registration.
This measure will apply from 1 July 2012.
The GST treatment of certain supplies made to health insurers
Following the decision of the Full Federal Court in Commissioner of Taxation v Secretary to the Department of Transport (Victoria)  FCAFC 84, the Government will amend the GST law to ensure that certain supplies made to health insurers in the course of settling health insurance claims will be GST free with effect from 1 July 2000. It is not expected that this measure will have any revenue impact as this amendment restores the status quo.
Government response to the Board of Taxation report
The Government has announced the deferral of a number of measures announced in the 2009/10 Budget which were to implement the Board of Taxation recommendations relating to the administration of GST. The measures were to commence on 1 July 2011. The measures that are to be deferred are:
- Adopting of the income tax self assessment regime for indirect taxes and refresh the period of review
- Reforming the change of use adjustments
- Allowing adjustments for pre-registration acquisitions
- Clarifying the treatment of tax law partnerships
- Simplifying the GST grouping membership rules, including grandfathering of current membership rules, and allowing grouping of non-operating holding companies and trusts
- Amending indirect tax sharing agreement provisions
- Introducing a reverse charge for supplies of going concerns and farmland.
The revised start date will be the first quarterly tax period after Royal Assent, or, where appropriate, a later quarterly tax period after Royal Assent.
In addition, the Government has also announced that it will not proceed at this stage with the 2009/10 Budget measure to provide an option to treat certain business-to-business supplies as taxable, which was scheduled to take effect on 1 July 2010. The deferral is intended to enable more extensive consideration of the possible wider use of reverse charging or GST-free business-to-business transactions.
Instalment system for small businesses
The current legislation does not allow a business that is in a net refund position to pay GST by instalments. As such, the Government will extend the current GST instalment system to allow access for small businesses that are in a net refund position. This measure is intended to allow small businesses in a net refund position to choose to access the GST instalments system, with an instalment amount each quarter of zero. Any refunds or liability due to the taxpayer will be reconciled in their annual GST return.
The Government will amend the luxury car tax legislation to allow eligible entities, such as endorsed public museums and art galleries, to import cars free from the luxury car tax.
This measure is intended to ensure consistent treatment of imports by these entities which are currently able to import works of art or collectors’ pieces free from Customs duty and GST. Allowing imports of museum pieces by these entities to be free of all import taxes will bring Australia fully into line with its international treaty obligations.
Excise and customs changes
The Government has confirmed its January 2011 announcement that it would delay the introduction of excise and excise-equivalent customs duty on alternative fuels until 1 December 2011 in response to representations from industry to allow additional time to implement the tax changes.
The Government has also stated that it will simplify the arrangements by applying transitional tax rates to gaseous fuels and biodiesel at the scheduled effective tax rates during the transition to 2015/16, instead of imposing tax at the final rate and providing offsetting production grants.
The Budget papers also indicate that it will make several other minor changes, including revising the unit of measurement of compressed and liquefied natural gas for taxation purposes from cents per litre to cents per kilogram, consistent with general industry practice.
The Government has proposed to make a number of changes to our indirect taxes regime, with most of these changes impacting GST. BDO welcomes these changes as they aim to clarify and simplify the law. However, BDO feels that these changes are tinkering around the edges of an overly complex indirect taxes regime. If the Government is serious about reforming taxation in Australia, BDO considers that GST has be included in the upcoming National Tax Summit.
The SMSF levy payable to the ATO will increase to $180 for the 2010/2011 financial year (an increase of 20%). The increased levy is designed to assist the government to fund the changes that will be brought about as part of the Stronger Super Review currently being conducted by the government. APRA regulated funds will also be subject to higher levies to fund Stronger Super reforms related to the large fund sector.
From 1 July 2011, excess concessional contributions of up to $10,000 can be refunded to individuals (to be assessed at their marginal tax rates) rather than taxed at excess contribution tax rates. The refund however, is only for ‘first time’ breaches of the concessional contributions cap.
The Government has extended the end date of the temporary loss relief for complying superannuation fund mergers by three months, from 30 June 2011 until 30 September 2011, to provide additional time for mergers in progress to be completed.
The Government will allow superannuation fund trustees and retirement savings account (RSA) providers to make greater use of tax file numbers (TFNs) to locate member accounts and to facilitate the consolidation of multiple member accounts. This measure will improve superannuation industry administration by removing the existing requirement for fund trustees and RSA providers to use other methods of identification to locate accounts before TFNs can be used, with effect from 1 July 2011.
The Government will ensure that employees receive information on their payslips about the amount of superannuation actually paid into their account; and employees and employers will receive quarterly notification from their superannuation fund if regular payments cease, with effect from 1 July 2012.
The Government will set the higher concessional superannuation contributions cap ($50,000) for eligible individuals aged 50 and over with total superannuation balances of less than $500,000, from 1 July 2012. This measure clarifies the operation of the higher cap for the over 50s which was introduced in the 2010/11 Budget.
The Government will continue the co-contribution threshold freeze, for an additional year to 2012/13. Under the superannuation co-contribution scheme, the Government provides a matching contribution for contributions made into superannuation out of after-tax income. The matching contribution is up to $1,000 for people with incomes of up to $31,920 in 2010/11 (with the amount available phasing down for incomes up to $61,920). This measure will continue to freeze these thresholds at $31,920 and $61,920 respectively.
Superannuation escaped the 2011 Federal Government Budget relatively unscathed. There were only a few announcements. Many of the items included in the budget had already been announced in earlier years, or as part of the government’s Stronger Super Initiatives.
The excess concessional contributions relief does not really go far enough, the relief is only a ‘once off’ relief, for the first time it occurs after 1 July 2011. In addition it should not be forgotten that the amount requested to be refunded is still taxed at the individual’s marginal tax rates.
The operation of the higher concessional contributions for the over 50’s after 30 June 2012 is still not clear. The government issued a discussion paper in February 2011 and the issues raised in that paper indicated that the calculation of the $500,000 account balance was likely to be complex, potentially requiring balances to be ‘adjusted’ for pensions or benefits already withdrawn from an account balance.
Further Henry Review recommendations adopted
As noted elsewhere throughout this report, the Budget announced the following measures that pick up tax reform opportunities identified by the Henry Review:
Reforming the “statutory formula” method for valuing car fringe benefits to ultimately adopt a 20% rate irrespective of the number of kilometres travelled
- Phasing out the Dependent Spouse Tax Offset to improve participation incentives for spouses without children
- Replacing the Entrepreneurs Tax Offset (ETO) with a small business tax package that includes a $5,000 immediate deduction for motor vehicles
- Allowing infrastructure projects of national significance to carry forward losses with an uplift factor to maintain their value
- Increasing Family Tax Benefit Part A payments for 16 to 19 year olds
- Reducing the overlap between Family Tax Benefit Part A and Youth Allowance
- Establishing the Australian Charities and Not-for-profits Commission to improve regulation and to reduce red tape for the not-for-profit sector
- Introducing a statutory definition of ‘charity’
- Committing to a principles-based approach to tax law design to improve tax system governance
- Allowing the Board of Taxation to initiate its own reviews of how tax policies and laws are operating
- Establishing a new Tax System Advisory Board.
The Government has also noted that it will continue to work methodically through the recommendations of the Henry Review, with the upcoming Tax Forum to provide an important opportunity for both participants and the broader Australian community to have their say about options for further reforming Australia’s tax and transfer system.
It is pleasing that the Government has continued to consider the many recommendations of the Henry Review, especially given the Government’s poor response to the review (accepting only five of the 138 recommendations following its release) in May 2010.
Whilst the Government has acknowledged that the Tax Forum will present an opportunity to further consider options for tax reform, it is disappointing the Government has excluded the GST rate and base from the Tax Forum. We consider that any meaningful tax reform debate must put the GST on the table and we call on the Government to reconsider its planned approach to the tax reform agenda.
Not For Profit (NFP) Sector Reforms
The Government will reform the tax concessions provided to NFP entities to ensure that the NFP income tax concessions will only apply to profits generated by unrelated commercial activities that are directed back to the altruistic work performed by the NFP entity.
Furthermore, NFP entities, in respect of their unrelated commercial activities, will also not have access to the fringe benefits tax exemptions or rebate, goods and services tax concessions, or deductible gift recipient support in relation to those activities.
The new arrangements will commence on 1 July 2011 and will initially affect only new unrelated commercial activities that commence after 10 May 2011.
Definition of a charity
The Government will consult on and introduce a statutory definition of ‘charity’ for all Commonwealth laws to take effect from 1 July 2013. The adoption of a consistent definition across all jurisdictions would considerably assist the sector.
The Government will provide financial assistance to the sector to develop new guidance for the sector, implement system changes, and re assess the charitable status of entities on the basis of the new statutory definition.
These changes aim to reduce red tape and improve transparency. These are key issues which impact the integrity of the NFP sector and the proposed rules will need to be carefully drafted so that they do not add further complexity. The NFP sector will have to manage the transition process very carefully and there will transitional costs for affected entities in relation to the changing their accounting, legal and tax reporting frameworks.
Initiatives to increase migration to regional Australia
The Government will provide $4.8 million over four years to implement initiatives that encourage migration to regional Australia.
The Department of Immigration and Citizenship’s current regional outreach network and information activities will be expanded to include: an information strategy to market visa products to regional employers; a series of expos; and an increase to the existing outreach officer network to enable officers to work closely with State and Territory governments, local councils and regional chambers of commerce and industry.
The Government has also made a number of changes to the Employer Sponsored Program stream of the 2011/12 Migration program to encourage people with relevant skills to migrate to regional Australia. For the first time, the program will specify the number of places allocated to the Regional Sponsored Migration Scheme component, making 16,000 places available under the Employer Sponsored Program.
The Government is also reforming the criteria for the Regional Sponsored Migration Scheme and the Employer Nominated Scheme with a view to streamlining and simplifying the pathway to permanent residency for Temporary Business (Long Stay) (Subclass 457) visa holders.
This measure will also encourage migration to regional areas by allocating the highest priority for processing visas to applications made under the Regional Sponsored Migration Scheme and the Regional (Residence) visa.
The Australian skills shortage is acute within regional Australia. BDO welcomes the recognition of the skills shortages faced by some of the key industries within regional Australia and look forward to further information regarding the administration of the scheme. The question remains whether the measures in this budget go far enough to combat the shortage.
Climate Change and Energy Efficiency
The government has introduced changes to the renewable energy target that will have an impact on householders from 1 July 2011.
Renewable Energy Target
The government has fast tracked the reduction of the solar credits multiplier under the Renewable Energy Target.
From 1 July 2011, the multiplier will decrease to a factor of three.
From 1 July 2012, the multiplier will reduce to a factor of two, and this will reduced to one on 1 July 2013.
Changes to Spending
There are no major surprises with regards to spending on Climate Change.
A modest amount ($20.2 million over four years) has been earmarked for the Department of Climate Change to administer the National Greenhouse and Energy Reporting Act. The reporting under this Act will underpin the future carbon tax and emissions trading scheme, so the government has committed to understanding the current emissions and energy profiles of various companies as part of this process.
The government have, predictably, kept the proposed carbon tax well away from this budget. We will need to wait for another month or two before any information of real substance is provided.