About Stephen Cribb

Stephen is a Director of Prosperity Advisers and one of Australia's leading Growth and Taxation Advisers.

Over his career, Stephen has managed an array of large corporate transactions, held a number of senior tax roles within the ‘Big 4’ accounting firms, and guided the growth of many many businesses.

Stephen has the expert ability to analyse and understand the complex taxation needs of his clients and design and deliver development programs that achieve the required business improvements. Stephen’s approach is to break down and simplify complex business and tax issues to frameworks that clients can understand and implement.

“Have-a-Go” (…and don’t sack Joe)

2015 Federal Budget Overview

The Federal Treasurer wants mums and dads, small business owners, farmers and the young to “get out there and have a go” in a budget targeted at stimulating activity at the grass roots.  It is a carrot and stick affair, incentivising people in the heartland but penalising the “dirty thirty” multinationals at the “top end of town” who the Government does not believe are playing the tax game fairly.  This budget is not a sequel to last year’s budget.  This is a completely new plot with a new script. Families, particularly on lower incomes, were already winners with pre-budget expansions of childcare concessions examined below.

But the heartland should celebrate the fact that – finally! – we have a budget that provides targeted measures and incentives for micro and small businesses.  Small businesses with a turnover of less than $2 million benefit from a range of measures.  The company tax rate will drop to 28.5% (but the franking rate will remain at 30%!)  There is also the “hire a hubbie” 5% tax discount for unincorporated small businesses that get a tax discount of up to $1,000.  But the signature measure must be the immediate deduction for fixed asset purchases of less than $20,000.

The Treasurer wants to trigger a 2015 year end small business spend-a-thon as SME’s lower their tax this year by upgrading their businesses before year end.  This is the only measure to commence from budget night.  You can commence the spending frenzy from now (subject to Senate approval).

Also on offer is tax free rollover relief for a change of business structure – removing obstacles for selecting the most appropriate operating structure for business.  Next FBT year go crazy with FBT free gadgets.  You can have as many tax free iPhones as you like in a year (– look after mum, dad and the kids). Whereas your mates at the top end of town can only have 1 gadget with a distinct function per year (their kids will have to put up with hand-me-downs!).

Start ups will be able to write off professional fees related to commencing business as an outright tax deduction in the year incurred.  This reverses a manifest injustice which required such costs to be written off over 5 years when the cash outflow occurred in year 1.

Health and PBI organisations will need to rethink salary packages with a new FBT exempt meal entertainment expenditure cap of $5,000 to apply from 1 April 2016 (doctors, you have just under 1 year to hammer that credit card hard).

From 1 July, start up businesses will enjoy the improvement of tax rules for employee share schemes – extending access to the CGT discount where share options are converted to shares and the total ownership period is 12 months.  Previously, the acquisition date was argued by the ATO to “reset” when the options converted to shares creating perverse outcomes.  Farmers get a 3 year write-off for drought proofing measures for fodder and grain storage.

The 30-odd multinationals that have displeased the Government by not paying enough tax get a punch kick approach with a significant tightening of tax avoidance rules while at the same time raising the standard of documentation that must be maintained to substantiate transfer prices that shift profits out of the country.  The most practical effect of this targeted approach on the rest of us is the so called “netflix” tax that will impose GST on supplies of digital content by 1 July 2017.  Fly-in/ Fly-out workers are also penalised with the zone tax rebate being removed where the worker does not genuinely live in a remote area but flies to the remote area for work and then returns to their inner city apartment at Barangaroo.

Alas, the next generation of working holiday seekers will not be able to claim the tax free threshold from 1 July 2016 by extending their visa to spend more than 1/2 the year in Australia, thereby “tipping” themselves into local “tax residency”.  The Government is going to hunt down and recover HELP debt repayments for debtors residing overseas. KaPOW – take that foreign baddies.

Perhaps this is the best budget one could hope for from a Government so hopelessly blocked by a hostile Senate.  Let us hope common sense prevails and that petty politics does not block a much needed boost to a small business community that has long been ignored by successive Governments.

 

Individuals and Family

The key focus of the Government in relation to individuals and families is two-fold. The first is about saving money where possible, and secondly getting greater numbers of people to participate in the workforce. This involves proposed changes to the child care rules.

 

Child Care Changes and Family Tax Benefit

In a pre-budget announcement the Government has highlighted that it proposes to replace the child care rebate and child care benefit, with a new single means tested child care subsidy. The subsidy would commence on 1 July 2017 and is proposed to work as follows:

  • Families earning up to $65,000 will receive 85 per cent of the childcare cost per child, or a designated benchmark price, whichever is lower. That will reduce to 50 per cent for families with incomes of $165,000 and above.
  • Hourly benchmark prices will be $11.55 (long day care), $10.70 (family day care), $10.10 (out-of-school hours care) and $7.00 (in-home care nanny pilot program due to begin in January 2016).
  • There will be no cap on subsidies for families with an income below $180,000, while those who earn beyond that will receive an increased cap of $10,000 per child, up from $7,500.
  • If the family income is more than $65,000 and both parents are not working, then the child care subsidy will not be available. This will prevent stay at home mothers from accessing the subsidy.

The above changes are very generous for families on lower incomes, and are therefore expected to cost $3.2 billion over 5 years. These changes have therefore been linked by the Government to previously proposed changes to the family tax benefit. These changes will be necessary to pay for this increased cost. These previously proposed changes have been noted below.

 

Family tax benefits (“FTB”) Part B changes

As previously flagged by the Government, from 1 July 2015, the FTB Part B primary earner income limit will be reduced from the current $150,000 p.a. to $100,000 p.a.

Additionally, the income threshold for the Dependent (Invalid and Carer) Tax Offset (“DICTO”) will also be reduced to $100,000. The reduced limits will apply from 1 July 2015.

From 1 July 2015, the FTB Part B payments will be limited to families whose youngest child is younger than six years of age to encourage workforce participation amongst parents. A transitional arrangement will be in place to ensure that families with a youngest child aged six and over on 30 June 2015 will remain eligible for the payments for two years.

In the 2014-15 year the maximum benefit payable under the FTB Part B was $4,274.15.

 

Family tax benefits Part A changes

From 1 July 2015, the FTB Part A per child add-on to the higher income free threshold for each additional child will be removed.

 

GST – ‘NETFLIX TAX’

After many previous attempts, the Government has introduced GST to digital downloads, commonly referred to as the ‘Netflix tax’, which is to apply from 1 July 2017.

Currently, digital products and services imported by customers are not subject to GST. The proposed application of GST however does not have a threshold and GST should apply straight away on all Australian purchases of digital goods from overseas suppliers.

 

Other Changes

Other changes proposed that impact families are as follows:

  • If an employer offers a paid parental leave scheme to employees then those employees will not be able to access the taxpayer funded paid parental leave scheme as well.
  • Pension eligibility rules are to be tightened.
  • The Zone Tax Offset (“ZTO”) is concessional tax offset available to people who reside and work in a specified remote area. Changes will be made to exclude fly-in-fly-out and drive-in-drive-out workers from the concession.
  • Residency rules will be changed to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes irrespective of how long they are in Australia.
  • The Medicare low income thresholds will be increased to $20,896 for singles and $35,261 for couples with no kids.
  • From 1 July 2015, removal of the 12% of cost method and the one third of the actual expenses method for motor vehicle deductions.
  • From 1 July 2015, replace the different cents per KM rates with a single rate of 66 cents per KM.
  • The Government has proposed that from the 2016-17 income year, Higher Education Loan Programme (“HELP”) debtors residing overseas for six months or more will be required to make repayments on their HELP debt if their worldwide income exceeds the minimum repayment threshold at the same repayment rates as debtors in Australia.

 

Superannuation

One of the pleasing changes in the budget is that no changes have been made to the superannuation rules. There will however be a root and branch review of superannuation as part of the overall review of the Australian tax system.

 

Small Business

As expected, the Government has released a number of measures which have been tailored towards Small Businesses with a view to innovate, grow, and create jobs.

 

Small business tax cuts

The Government has delivered on its promised 1.5% tax cut for incorporated small businesses reducing the company tax rate from 30% to 28.5% for those with an aggregate annual turnover of less than $2 million. For those above $2 million, the current 30% company tax rate will continue to apply on all their taxable income.

Despite the shift in the company tax rate for some, the current maximum franking credit rate will remain unchanged at 30% for all companies.

To extend the tax cut to unincorporated small businesses such as those operating through partnerships or trusts, the Government has delivered a 5% discount (to be delivered as a tax offset) on income tax payable for those with an aggregate annual turnover of less than $2 million up to a cap of $1,000 per individual for each income year.

These tax cuts will be available from the 2015-16 income year.

 

Increased deductibility 

The Government has made two key changes which are intended to increase business expense deductibility and provide cash flow improvements for businesses.

From the 2015-16 income year, the Government will allow businesses to immediately deduct a range of professional expenses incurred in relation to starting a new business rather than write them off over five years. Expenses include those in relation to professional, legal, and accounting advice.

Furthermore, businesses with an aggregate annual turnover of less than $2 million will broadly be able to immediately deduct assets that cost less than $20,000 and are acquired between 12 May 2015 and 30 June 2017. These rules will revert back from 1 July 2017.

Assets costing more than $20,000 can be placed into small business simplified depreciation pool and depreciated at 15% in the first year and 30% in each following year until the balance is less than $20,000 at which time it can also be immediately deducted

The ‘lock-out’ laws which prevent small businesses from re-entering the simplified depreciation regime will also be suspended until 30 June 2017.

Additionally, small businesses will be able to access accelerated depreciation for the majority of capital asset types with only a small number of assets not eligible.

 

Employee Share Schemes

Following the Employee Share Scheme (“ESS”) Bill introduced to Parliament in March 2015, the Government has announced additional changes to the ESS rules following further consultation.

Minor technical changes that could be made to the Bill include:

  • Excluding eligible venture capital investments from the aggregated turnover test and grouping rules (for the start-up concession);
  • Providing the capital gains tax discount to ESS interests that are subject to the start-up concession where options are converted into shares and the resulting shares are sold within 12 months of exercise; and
  • Allowing the Commissioner to exercise discretion in relation to the minimum three-year holding period where there are circumstances outside the employee’s control that make it impossible for them to meet this criterion.

These changes, along with those announced in March 2015, will make the ESS regime more accessible for all Australian businesses and their employees with an expected effective date from 1 July 2015.

 

Restructure Opportunities

The Government has recognised that new small businesses may choose an initial legal structure that may not suit them at a later more established stage.

Where a small business has an aggregate annual turnover of less than $2 million, the Government will allow a change of legal structure without exposure to a capital gains tax (“CGT”) liability.

This opportunity will be available to small businesses that change their entity type from the 2016-17 income year.

 

FBT Concessions

For FBT exemption will be available to small businesses with an aggregate annual turnover of less than $2 million from 1 April 2016 that provide employees with more than one qualifying work-related portable electronic device (even where the items have substantially similar functions).

Under current rules, the FBT exemption can only apply to more than one portable electronic device used primarily for work purposes where the devices perform substantially different functions.

This measure will remove confusion with respect to whether functions overlap between different devices.

 

Corporates and Business

Unless you’re one of thirty global companies that the Government is seeking to target in a bid to protect its tax revenue, this is a “no news” budget.

 

Fringe Benefits Tax

For hospitals, charities and PBIs an annual grossed up limit of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses for employees (meal entertainment benefits) has been introduced where previously unlimited. This effectively makes all use of meal entertainment benefits reportable.

As such, meal entertainment benefits will constitute as a separate cap however amounts which exceed the grossed-up cap of $5,000 can also be considered when determining whether the employee has exceeded their FBT exemption or rebate cap.

These measures will apply prospectively from 1 April 2016 to coincide with the start of the FBT year. 

prosperity blog

 

R & D Tax Incentive

The Government has introduced a cap of $100 million on the amount of eligible R & D expenditure for which companies can claim a tax offset at a concessional rate under the R & D tax incentive.

The rate of the R&D tax offset will be reduced to the company tax rate for the part of a company’s eligible R & D expenditure that exceeds $100 million for an income year.

This means that R&D expenditure above $100 million will provide no greater benefit to an entity than it would receive from a normal deduction. R&D expenditure below $100 million will not be affected by a rate reduction.

Furthermore, the Government has interestingly continued to endorse a reduced refundable (43.5%) and non-refundable (38.5%) offset rate, despite the proposal being rejected by the Senate in March 2015.

 

GST

The Government has provided additional funding to the ATO to extend the ATO GST Compliance Program.

In addition to the above the Government has also announced that it will not be proceeding with previously proposed changes regarding the replacement of the GST-free treatment of going concerns and farmland with a reverse charge mechanism.

 

Primary Production Deductions

From 1 July 2016 changes will be implemented to allow primary producers an immediate deduction for capital expenditure related to fencing and water facilities.

Accelerated depreciation will also be available in relation to fodder storage.

 

Large International Corporates and Business

To deal with the perceived avoidance of Australian tax by 30 large international groups the Government has proposed to strengthen the anti-avoidance provisions. This will include strengthening the Part IVA general anti-avoidance provisions and also strengthening the penalty provisions. The changes to the penalty provisions will enable a maximum penalty of 100% of the tax plus interest to be imposed.

 

Part IVA Changes

As noted above the Government has proposed changes be made to Part IVA to prevent large international groups avoiding tax in Australia.

In conjunction with the announced changes the Government released an exposure draft Bill.

The Draft Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015 aims to target the reduction of the Australian tax base by multinational entities using artificial or contrived arrangements to avoid the attribution of business profits to a taxable permanent establishment in Australia.

According to the proposed measure, the anti-avoidance rules will apply if in connection with a scheme:

  • A non-resident entity derives income from the making of a supply of goods or services to Australian customers, with an entity in Australia supporting that supply, and
  • The non-resident avoids the attribution of the income from the supply to a permanent establishment in Australia.

For this anti-avoidance law to apply, it must be reasonable to conclude that the division of activities between the non-resident entity, the Australian entity, and any other related parties has been designed to ensure that the relevant taxpayer is not deriving income from making supplies that would be attributable to an Australian permanent establishment. It will also be necessary that the principal purpose, or one of the principal purposes, was the tax benefit.

These measures will apply from 1 January 2016, and only apply to non-resident entities that have annual global revenue of over AU$1 billion.

 

Increased Penalties

Following on from the above the Government will also increase the penalties that can be applied to companies with global revenue of greater than $1 billion. These changes will double the penalties that can be applied to these groups from 1 July 2015.

 

Transfer Pricing Changes

For large corporates with a turnover of greater than $1 billion, the OECD’s new transfer pricing documentation standards will come into play from 1 January 2016.

Under the new documentation standards, the ATO will receive the information on large companies that operate in Australia. These reports will provide the ATO with a global picture of how multinational entities operate, assisting it to identify multinational tax avoidance.

 

 

Share scheme changes herald clever country thinking

A significant concession, and improvement, was announced to the Employee Share Scheme rules on Tuesday by the Federal Government. Employee shares schemes in emerging businesses had faded from relevance over the last 5 years following the implementation by the former Government in 2009 of measures that had the broad effect of taxing any discount on shares or options issued upfront to employees of most businesses.

Taxation occurred at a time prior to the employee shareholder having any cash flow with which to pay their tax bill – clearly a killer consequence. This removed the major form of employee remuneration that emerging businesses could use as an incentive to employees without affecting free cash flow. It also led to clumsy arrangements where a company would have to “loan” the employee the value of their shares to prevent then obtaining any taxable benefit.

The Tax Office become notorious for 20:20 hindsight valuation reviews which left employees unwilling to expose themselves. Many employees just would not buy the idea of their employer becoming a major creditor. What if the shares tanked? The employee could be stuck with repayment of a loan without any benefit.

The shareholder/ employee loan created a variety of difficulties ranging from potential requirements for the employee to use real cash flow to repay the loan under statutory “Division 7A” private shareholder rules. In some cases the loan became a problem for the employer who was required to manage it under the FBT regime. An employee might make a long term commitment to a company and be subject to a vesting period of 3-5 years before they became entitled to deal with the shares. However when this period expired, the employee would be obligated to “cash-out” their loan, often by taking a fully taxable one-off bonus.  This one off bonus often distorted the employee’s real earning position over their period of employment and forced them to be taxed on this component at a tax rate which was unfairly high.

Phasing issues emerged with the 50% CGT discount which generally applies to long term shareholdings. Deficiencies in these rules became so profound for early stage IT companies it became part of the reason emerging businesses began to leave the country. Most notably the IT success story Atlassian. The new rules remove some of the obstacles.

Actions to consider

  • If you presently have any form of share or rights scheme in place, it is likely that it can be “rebooted” under the new rules to drive significantly improved outcomes to employees.
  • Remuneration contracts currently being negotiated should be reviewed for the effect of the new rules.  The rules you thought applied when you inked the deal may not apply for the term of the arrangement.
  • Share schemes are not just for IT businesses.  If you have a SME business where you want to incentivise and tie employees into the growth of your business without a cash flow impact on your businesses – there is no better incentive. Costs of administration have dropped significantly in recent years.
  • If you are an SME owned “stuck” with the problem of how to exit the business and collateralise ownership interests into cash, employee share schemes can be a key tool in opening a dialogue and pathway to business succession.
  • Employee share schemes also have relevance to family businesses where they can be used as a tool to incentivise high performance in the next generation family owners. They are a form of participation which is not just a “gift”. They can be a key tool to assist with perceptions of fairness between family members who are “in the business” and those that are not.

A summary of key points in the new rules

  • Discounted options will generally be taxed when they are exercised (converted to shares), rather than when the employee receives the options.
  • Shares provided at a small discount by eligible start-up companies to will not be subject to up-front taxation, if held for three years. Options under certain conditions will have taxation deferred until sale.
  • Small discounts will be exempt from tax
    • The maximum time for tax deferral is lifted from seven years to 15 years.
  • The existing $1,000 up-front tax concession for employees who earn less than $180,000 per year will be retained.
  • The rules are expected to become effective from 1 July 2015.  Transitional arrangements are presently unclear.

Federal Budget 2014 – “Lifters not leaners”

An old proverb says “people unite over problems but divide over solutions”.  The weight of expectation lies heavily on Joe Hockey’s first Federal Budget to solve many many long standing fiscal problems without creating a war in the voter base over the solutions.  The budget sell is an appeal to a vision of a national ideal that Australians are “lifters not leaners”.  It is a sales pitch with modest increases in taxation and significant cost reduction measures including significant welfare reductions.  In return, the budget deficit will reduce from a projected $49.9 billion in 2014 to $29.8 billion in 2015.

Almost all the tax increase measures had been leaked prior to the budget.  Of 235 pages of budget measures, only 14 pages are devoted to revenue measures.  The headline revenue measure is the 3 year “Temporary Budget Repair Levy” of 2% which applies to income in excess of $180,000.  This increases the personal income tax rate to 49% from 1 July 2014.  To match the personal tax increase, the FBT rate increases to 49% from 1 April 2015.  Interestingly this means that there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between 1 July 2014 and 31 March 2015.  Will we see a salary packaging frenzy in the short term?  The same opportunity arises from 31 March 2017 to the end of the 3 year levy on 30 June 2017.  Indexation of the fuel excise is set to recommence ½ yearly by indexation to movements in customs duty rates on other fuels.  This will hit people at the bowser.

The balance of the budget is devoted to expense measures directed at cost management and reductions and which affects various forms of welfare.  In particular, the reduction in the income limit on primary earners for Family Tax Benefit B from $150,000 to $100,000 will sting the middle class from 1 July 2015 and apply only to children under 6 with a 3 year phasing out for older children.  From 1 July 2015 the Medicare rebate for a standard consultation will reduce by $5 with a doctor entitled to collect a patient contribution which would appear to create a $2 per visit windfall to doctors who choose to collect $7. Patients on concession cards and with children under 16 return to the current rebate after 10 visits each year.

Gens X, Y and late blooming boomers (born after 1 July 1958) will be hit by the increase in the qualifying age for the aged pension to age 70 by 1 July 2035. Pension income and assets threshold increases will be paused for 3 years from 1 July 2017.  The increase in the SGC rate to 12% will be slowed rising to 9.5% from 1 July 2014, remaining static to 30 June 2018 before rising over 5 years to 2023 to 12% and excess super contributions will become refundable.

Students will be affected from 1 July 2016 by a requirement to repay HELP debt at a lower starting income level set at 90% of the threshold that would currently apply, being in the order of $50,638.  However, the rate of repayment will reduce from 4% to 2% of income above the threshold.  The “cost of finance” on unpaid HELP debt will also be increased to a rate matched to the 10 year bond yield capped at 6%. Deregulation of fees for higher education will also shake up the cost of higher education.

What about small to medium enterprises? Not much.  $10,000 per employee to employ a worker over 50 who has been on benefits for 6 months.  A modest reduction in the refundable R&D tax offset of 1.5% applies from 1 July 2014 in anticipation of the drop in the company tax rate to 28.5% from 1July 2015.

All of these measures are of course subject to approval in a post 1 July hostile Senate which would appear to require cooperation with the Palmer United Party.  Early theatrics suggest that this could, at least, be entertaining.

Individuals & families

As a result of the need to improve the budgets bottom line, this years budget has focused heavily on individuals and families.

We note in particular that the changes to the family tax benefit part B will have a significant impact on many family budgets.

Deficit levy of 2% (Temporary Budget Repair Levy)

From 1 July 2014 to 30 June 2017, a temporary three-year deficit levy of 2% will be imposed on individuals with taxable income over $180,000.

A number of other tax rates that are currently based on calculations that include the top personal tax rate will also be increased accordingly (except the Fringe Benefits Tax rate) for the relevant 3 income years.  However to prevent high-income earners from utilising fringe benefits to avoid the levy, the FBT rate will be increased from 47% to 49% from 1 April 2015 until 31 March 2017 (see also companies section on FBT).

Example.  For a taxpayer with a taxable income of $200,000 per year, this results in an additional tax impost of $400 per year or $1,200 in total over three years.

 


  [Read more…]

Take our Federal Budget Poll

Take the Prosperity Advisers post-Budget Poll so we can understand your sentiment better.

National Commission of Audit: Summary of recommendations

On 1 May 2014 the Federal Government released its National Commission of Audit (NCOA) findings on streamlining the efficiency of government. The comprehensive scope of the report leaves little to the imagination and is expected to form the central blueprint for the 2014 Federal Budget.

The 64 recommendations are summarised below. The recommendations are divided into what I would call “themes” and have been grouped accordingly. Where appropriate a summary has been provided in Italics.

Theme: Approach to government and new fiscal rules (Recommendations 1-6)

These measures are aimed at shaking up the operational management of Government and bringing some of the disciplines to Government that many Australians already apply to the management of their personal financial and business affairs. To a non-economist, some of the measures belie how inefficient some aspects of management in government have become. The reforms proposed signal big potential changes to staffing within the Federal public service.

  • Achieve a surplus of 1 per cent of GDP by 2023-24.
  • Substantially reduce net debt over the next decade.
  • Ensure taxation receipts remain below 24 per cent of GDP.
  • Provide funding to unfunded public service superannuation liabilities.
  • Let the private sector take equity positions to prevent putting taxpayer funds into projects with low return and excessive risk.

Theme: Reforming the Federation (Recommendations 7-11)

These recommendations focus on delivering efficient government at the pavement level, eliminating duplication between layers of government and giving States access to tax income and gain more autonomy in their revenue collection settings.

  • Delivery is delivered by the level of government closest to the people.
  • Minimise duplication between the Commonwealth and the States.
  • Give the States access to the personal income tax base creating a State level income tax (similar to the US) and let them choose their level of tax to encourage competition between the States.
  • Share GST on a per capita basis and make equalisation grants to deal with any inequalities.
  • Replace COAG with the Productivity Commission.

Theme: Retirement system (Recommendations 12 -15)

Recommendations 12 – 13: Age Pension indexation and eligibility

Existing retirees will gradually be affected by a gradual slow down in the rate of increase in indexation of aged pensions, but the key measures are really directed at lifting the ladder on access to government pensions to Gen X, Y and beyond. The inclusion of “valuable” family homes (set below the level of the current Sydney median house price) in means testing will instantly lock many out of the government aged pension and force people in their 40’s to think about liberating value from the family home to fund their retirement. A gradual lift is proposed in the age the people can access their own superannuation savings to 62 by 2027 and ultimately 65. This could actually mean that smart acting middle aged people who have enough will be able to access key contributions concessions for a few more years.

  • Age Pension indexation arrangements to a benchmark of 28% of Average Weekly Earnings over 15 years.
  • Increase the eligibility age for the Age Pension to around 70 by 2053. The proposed change would not affect anyone born before 1965.
  • Replace the current income and assets tests with a single comprehensive means test, which deems income from a greater range of assets from 2027-28.
  • Include in the new means test the value of the principal residence above a relatively high threshold. The threshold in 2027-28 would be equivalent to the indexed value of a residence valued today at $750,000 for coupled pensioners and the indexed value of a residence valued today at $500,000 for a single pensioner.
  • Increasing the income taper rate from 50 per cent to 75 per cent for new recipients from 2027-28 onwards.

Recommendation 14: Superannuation preservation age to 62 by 2027

  • Increasing the superannuation preservation age to five years below the Age Pension age so the preservation age reaches 62 by 2027.

Recommendation 15: Tighten means testing for the Commonwealth Seniors Health Card

Theme: Health care (Recommendations 16 to 19)

The key emphasis is to push people to more of a user pays setting.

Recommendation 16: Slowing the phasing in of the National Disability Insurance Scheme

Recommendation 17: Short to medium-term health care reforms

  • Requiring higher-income earners to take out private health insurance for basic health services in place of Medicare; and precluding them from accessing the private health insurance rebate.
  • Co-payments for all Medicare funded services, underpinned by a new safety net arrangement that would operate once a patient has exceeded 15 visits or services in a year. General patients would pay $15.00 per service up to the safety net threshold and $7.50 per service once the safety net threshold has been exceeded. Concession card holders would pay $5.00 per service up to the safety net threshold and $2.50 per service once the safety net threshold has been exceeded;

Recommendation 18: Come up with a proposal to reform the overall health care (again!)

Recommendation 19: Co-payments under the Pharmaceutical Benefits Scheme

  • For general patients with costs below the safety net, a co-payment increase of $5.00 (increase from $36.90 to $41.90), while above the safety net a rise of $5.00 (from $6.00 to $11.00);
  • In line with the increased co-payment arrangements, the general patient safety net should increase from $1,421.20 to $1,613.77; and
  • For concession card holders, no increase to the current co-payment of $6.00 while below the safety net threshold of $360.00. However, once the safety net limit has been reached, concession card holders will be required to co contribute $2.00 to the cost of their medicines;
  • Opening up the pharmacy sector to competition

Theme: Family benefits

The general message is that middle class welfare in the form of direct hand-outs is being removed. The NCOA believes Government money is better spent on expanding the types of care available through the childcare system at the expense of the Government’s current proposed levels of paid parental leave.

Recommendation 20: Family Tax Benefits

  • Changing arrangements for Family Tax Benefit Part A by introducing a new single means test, with the maximum rate of the benefit paid up to a family adjusted taxable income of $48,837 and then phasing out at 20 cents in the dollar until the payment reaches nil;
  • Abolishing Family Tax Benefit Part B;
  • Introducing a new Family Tax Benefit Part A supplement to be paid to sole parent families who have a child under the age of eight. The supplement should be the same as the current maximum rates of Family Tax Benefit Part B ($4,241 for a family with a child under five, or $3,070 for those whose youngest child is aged five to eight years);
  • Changing the per child rates to be based on the current Family Tax Benefit Part A rates for a first child and paid at 90 per cent of this for second and subsequent children; and
  • Removing the Large Family Supplement and Multiple Birth Allowance recognising that the costs of children are sufficiently covered by the basic rates.

Recommendation 21: Paid Parental Leave

  • Targeting expenditure to those most in need by lowering the Paid Parental Leave wage replacement cap to Average Weekly Earnings (currently $57,460), indexed annually to movements in this wage; and
  • Savings from the lower wage replacement cap be redirected to offset the cost of expanded child care assistance, with the intent of making the changes broadly budget neutral, including retaining the 1.5 per cent levy on company taxable income above $5 million per year.

Recommendation 22: Child care

  • Should include in-home care and other types of care that are not currently subsidised

Theme: School Education

Funding generally is stepped back from the long term “Gonski” levels, but appears positioned to honour short term funding commitments of the Government. It looks like big adjustments are planned to the public service head-count in the Federal Department of Education.

Recommendation 23: Schools funding

  • Policy and funding responsibility for government and non government schools is transferred to the States, with annual funding provided in three separate, non-transferrable pools – one each for government schools; Catholic systemic schools and independent schools.
  • Publish funding and student outcomes on a nationally consistent basis.
  • Base Commonwealth funding from 2018 onwards on 2017 levels with funding indexation based on CPI and average wage price movements.

Theme: Defence (recommendation 24)

Better control of efficiency, effectiveness, accountability and transparency of Defence spending. Big shake-ups in public service organisation and staffing levels.

Theme: Government Care

Introduction of new means testing measures to limit access to Government care and further deregulation of the aged care sector.

Recommendation 25: Aged care

  • Full value of the principal residence in the current aged care means test;
  • Allow access equity in a residence, to pay for part of aged care costs;
  • Introduce a fee for providers to access the accommodation bond guarantee or insure against default of a patient.

Recommendation 26: Carer payments

  • Only one Carer Supplement per carer;
  • Income test for the Carer Allowance, set at $150,000 per year;
  • Reviewing eligibility criteria to encourage the carer to participate in employment;
  • Aligning Carer Payment to Age Pension changes (28% of AWOTE).

Theme: Unemployment benefits (Recommendation 27)

  • Young single people aged 22 to 30 without dependants to relocate to higher employment areas or lose access to benefits after a period of 12 months on benefit
  • Increasing the income test withdrawal (taper) rate to 75 per cent for Newstart recipients and other related allowances.

The minimum wage (Recommendation 28)

  • ‘Minimum Wage Benchmark’, set at 44 per cent of Average Weekly Earnings;
  • Transition over 10 years by indexing at less than; and

Theme: The Disability Support Pension (Recommendation 29)

  • Aligning the Disability Support Pension to the revised benchmarks for the aged pension described above and increasing

Theme: Higher education (Recommendation 30)

  • Students pay more, government pays less (55:45 vs the current 41:59)
  • Deregulation of bachelor degree fees
  • Increasing the interest rate on student HELP debt and increasing repayments

Theme: Foreign aid Recommendation 31

  • Outcomes focused spending with limitation of future growth in the aid spend by requiring business case justification rather than unevaluated indexation

Theme: Industry Assistance

Recommendation 32: Industry assistance

  • Limit assistance to areas of genuine market failure and transitional assistance
  • Eliminating or reducing funding for 22 existing programmes
  • Softening anti-dumping rules so they only apply on a cost/ benefit basis
  • Agenda of labour market reform, deregulation, energy policy and provision of economic infrastructure.

Recommendation 33: Assistance to exporters

Abolish:

  • Export Market Development Grants
  • Tourism industry grants
  • Asian Business Engagement Plan,

Halve funding for Tourism Australia.

Significantly reduce Austrade and restructure Austrade and Tourism and Australia into DFAT.

Recommendation 34: Research and development

Abolish sector-specific research and development programmes;

  • reducing government support for Rural Research and Development Corporations to better reflect the mix of private and public benefits;
  • Streamlining existing grants processes;
  • Better government oversight of CSIRO.

Other recommendations

Recommendation 35: Indigenous programmes – create a PM’s Indigenous Affairs agency and rationalise and consolidate programs

Recommendation 36: External review of resourcing diplomacy and consular activities, fees for consular services

Recommendation 37: Abolish the Farm Finance Concessional Loans Scheme

Recommendation 38: Housing assistance: disband existing afforable housing programs and replace with rent assistance to States that charge market rates of rent

Recommendation 39: Vocational education and training: abolish Federal schemes and drive through the States

Recommendation 40: Mental health – remove duplication between the Commonwealth and the States

Recommendation 41: Natural disaster relief – push to the States and make disaster-specific grants

Recommendation 42: Community Investment Programme – push to the States

Recommendation 43: Visa processing – Outsource

Recommendation 44: Employment services – cust costs oer jobseeker

Recommendation 45: Efficiency of the public broadcasters – better benchmarking of performance of the ABC and SBS

Recommendation 46: Containing costs associated with Illegal Maritime Arrivals

Recommendation 47: Fair Entitlements Guarantee Scheme

  • cap maximum redundancy payment equivalent to 16 weeks’ pay
  • limit the wage base for the scheme to Average Weekly Earnings.

Recommendation 48: Scale back Medical indemnity subsidies

Recommendation 49: Grants programmes – centralise administration and decrease volume

Rationalising and streamlining government bodies

Recommendation 50: Reduce the number of government bodies by 73

Recommendation 51: Consolidation of border protection services

Recommendation 52: Consolidated crime intelligence capability

Recommendation 53: Consolidation of Health bodies

Recommendation 54: Single civilian merits review tribunal

Recommendation 55: A central register and new guidelines for establishing bodies

Recommendation 56: Reduce the number of boards, committees and councils

Improving government through markets and technology

Recommendation 57: Privatisations

Short term

  1. Australian Hearing Services.
  2. Snowy Hydro Limited.
  3. Defence Housing Australia.
  4. ASC Pty Ltd.

Medium term

  1. Australian Postal Corporation.
  2. Moorebank Intermodal Company Limited.
  3. Australian Rail Track Corporation Limited.
  4. Royal Australian Mint.
  5. COMCAR.

Long term

  1. NBN Co Limited.

Recommendation 58: Management of the Commonwealth Estate – adopt commercial property management expertise

Recommendation 59: Professionalise outsourcing, competitive tendering and procurement

Recommendation 60: Outsourcing of the Department of Human Services payments system

Recommendation 61: Data – “get commercial” on big data

Recommendation 62: e-Government – accelerate on-line service delivery

Recommendation 63: Cloud computing – adopt “cloud first” strategy

Recommendation 64: Corporate services and systems – moved to shared services for all departments and agencies.

 

National Commission of Audit: Clearing the way for another golden age?

Click here to view the full National Commission of Audit Recommendations

The sun has risen on first day after the release of the National Commission of Audit (NCOA) report on the efficiency of the Commonwealth Government. Despite the frenzy of cries of disadvantage reacting to specific recommendations, my bet is that the sun will continue to keep rising. The only people at risk of imminent injury are people who try to lift the entire report in one movement.

I read several kilos of the Report last night while I watched the TV news reports tallying up how much I am going to lose when my share of the ‘kick in the guts’ is delivered. But the overall message of this document is actually positive. Australia is not yet a fiscal basket case and if some things are changed we will avoid the distress some other developed countries find themselves in.

Put specific recommendations aside, there is a lot of good common sense. The Report draws focus on massive inefficiency and duplication of activity across tiers of Government – poor fiscal management where taxpayer’s money on the expense line is being wasted on what a small business operator or a pensioner would call a profligate scale. This report is all about trimming this out of the expense line of the Government’s profit and loss statement.

In return, a massive dividend is on offer. If some of these measures are adopted, the budget bottom line could improve in our time by $60-70 billion per annum.  Please re-read the last sentence. That’s a lot of money – and a very big pot of gold to benefit the country to be reinvested in its future.

There are some gutsy moves.

  • Giving States the power to levy income taxes could put an interesting cat amongst the pigeons and cause mass migration to ‘tax haven’ States.
  • Pension and retirement measures feature heavily. For existing pensioners and retirees there is good news. The most significant changes are designed to take full effect by 2027-28 when the pension age is expected to rise to age 70 and the access age for private super will rise to 62 (then ultimately 65). The Report is raising the ladder to access the Government pension and gaining early access to private superannuation for Gen X and Gen Y. Pain for current and imminent retirees looks limited.
  • The most immediate health care initiative is the $15 medicare co-payment and extension of the existing obligation for high income earners to obtain private health insurance for basic services.
  • The Government’s Paid Parental Leave policy takes a hit with a proposal to limit it to average weekly earnings. However there is a proposal to reinvest the saving in expanded access to childcare to services including nanny style at home care.
  • Family Tax Benefit B would get removed completely and Family Tax Benefit A becomes more tightly means tested.
  • Exporters will be disappointed with the proposed removal of the Export Markets Development Grant and significant reforms to the administration and allocation of grants and research and development which looks to a key target of efficiency reform.

Not all of these measures will succeed.  They may not be designed to succeed in their present form.  Australia has a poor record of adopting recommendations from reports by eminent Australians. The authors who assume the burden of responsibility – whom I have no doubt are passionate enthusiasts for our country – must surely push some measures to the limit in the expectation that a less severe mid-point will ultimately be chosen in the tug-of-war of the political process.  A ‘kick in the guts’ is much more likely to be a dull ache.

Prosperity’s Steve Cribb warns of ATO ramp up on TEN eyewitness news

Prosperity’s Steve Cribb warns of ATO ramp up on TEN eyewitness news

View interview

 

 

 

The Federal Budget 2013-2014: Comedy or Tragedy?


As potentially the final act plays out in Treasurer Wayne Swan’s Federal Budget performances, it is perhaps fitting to ask the question – was this long drama a comedy or a tragedy? 

Tonight’s budget was a safety first affair, largely being a renouncement of previous big announcements designed to reassure the patrons before they prepare to leave the theatre.  There is nothing in this budget to give a strong indication that the box office will not close on 14 September when the Federal Election is held.

The Budget confirms the announced significant deteriorations in the fiscal outlook.  Deteriorating commodity prices, diminished company tax revenues, disturbingly low carbon tax and mining tax revenues.  The inability of the Treasurer to reliably estimate short term forward revenue over past months definitely presents as a comedy.

But in my view, this is a tragic budget.  This Government, in its possible final act, has decided to attack large corporates and foreign investors in ways that achieve modest revenue gains, but which clearly present the message to the world that Australia is indifferent and ungrateful to inbound foreign capital  investors, or to corporate innovation and research and development by large corporates.

R&D concessions are scrapped for businesses with turnover of more than $20 billion.  Thin capitalisation thresholds are potentially reduced from a debt equity ratio of 3:1 to 1.5:1.  Outbound corporate investors will lose a tax deduction for interest on borrowings against some foreign investments that produce tax exempt dividends (still ultimately fully taxed to shareholders).  We will apply a non-final 10% of face value withholding tax when foreigners sell commercial real estate, mining assets (or residential real estate with a value of more than $2.5 million). Ultimately, we will require all entities with a turnover of more than $20 million to pay tax instalments monthly, creating a permanent cash drain even on smaller businesses.

The announced superannuation reforms are simply ill considered, riddled with potential injustices and inconsistencies which demonstrate a lack of proper due diligence and a tendency to announce measures without fully assessing potential impacts. Expect a red tape boom as compliance costs soar across all these measures that, by their nature, must be complex.

Small to medium business gets just about nothing (again!).  Exceptions are the quarterly refund of R&D tax credits to small enterprises – a welcome cash flow reprieve – and the removal of the thin capitalisation rules where debt deductions are less than $2 million.

The big picture measures have already been announced – the Gonski Education Reforms, the modest “Industry and Innovation” package, DisabilityCare Australia (funded by an increase in the Medicare levy from 1.5% to 2% from 1 July 2014).  Reannouncements of big infrastructure projects mainly already in the budget (again).  There is nothing to capture the imagination of businesses (large, small or international) and set up the environment for the next economic boom.  This budget represents an opportunity missed and simply sets up this Government and its people to tread water until voters express themselves at our looming election.  But most tragic of all, many of these budget measures may never see the light of day in Parliament. 

 

INDIVIDUALS & FAMILIES

Increase in the Medicare levy

From 1 July 2014, the Medicare levy will increase from 1.5% to 2%. This increase in the levy will fund DisabilityCare Australia.

2012/13 Medicare levy low income thresholds

The Medicare levy low income threshold for the 2012/13 income tax year will increase to $20,542 for individuals and $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset.

The Medicare levy low income threshold for families for the 2012/13 income tax year will increase to $33,693, and the additional family threshold for each dependant child or student will increase to $3,094.

Net Medical expenses tax offset to be phased out

For those taxpayers who claim the NME tax offset in the 2012/13 income year they will continue to be eligible for the offset in the 2013/14 income tax year if they have out of pocket medical expenses above the relevant thresholds.

The relevant threshold for people with adjusted taxable incomes above $84,000 ($168,000 for couples) is $5,000 in out of pocket expenses and the rate of reimbursement is 10%. For those taxpayers who claim the NME tax offset in the 2013/14 income year they will continue to be eligible for the tax offset in the 2014/15 income year.

Income tax cuts deferred 

Income tax cuts that had already been legislated (by way of increasing the tax free threshold) and that were due to commence on 1 July 2015 will be deferred indefinitely.

Replacing the Baby Bonus with new family payment arrangements 

Family Tax Benefit Part A (FTB Part A) payments will be increased by $2,000, to be paid in the year following the birth of a first child, and $1,000 for a second and subsequent child. The additional FTB Part A will be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly instalments.

As a result of these reforms the Baby Bonus will be abolished.

HECS-HELP discount and voluntary HELP repayment bonus discounts will end

From 1 January 2014, the following discounts relating to the Higher Education Loan Program will be removed:

  • The 10% discount available to students electing to pay their student contribution upfront, and
  • The 5% bonus on voluntary payments made to the Tax Office of $500 or more. 

Work related self education expenses

From 1 July 2014, a taxpayer will only be able to claim a maximum deduction of $2,000 for work related self education expenses.

Eligible work related self education expenses include costs incurred on a course of study or other educational activity such as a conference or workshop, and include tuition fees, registration fees, textbooks, professional and trade journals, travel and accommodation expenses and computer expenses, where these expenses are incurred in the production of the taxpayer’s current assessable income.

Introduction of CGT Withholding Tax Regime for Non-resident Taxpayers

From 1 July 2016, where a foreign resident disposes of taxable Australian property, the purchaser will be required to withhold and remit to the Tax Office 10% of the proceeds from the sale. This measure will apply to commercial property and residential property with a value over $2.5million.

 

CORPORATES AND BUSINESS

The dramatic fall in the health of the budget has meant that for the business community the budget delivers only bad news. This bad news comes in the form of bringing forward the timing of tax payments irrespective of the cash flow and administrative problems this may cause, or the tightening of other provisions such as the thin capitalisation provisions for international businesses.

In a business environment that is probably best described a fragile, let’s hope the budget doesn’t further hamper an already difficult environment.

Monthly PAYG Tax Instalments

Changes to the PAYG tax instalment system to be introduced by government will result in all large entities paying monthly tax instalments to the government. These changes will be an administrative nightmare and result in cashflow management issues for the entities affected.

The entities caught and timing of the changes have been summarised in the table below:

Entity Affected Date Monthly Instalments Begin
Companies with turnover greater than $1b. 1 January 2014
Companies with turnover greater than $100m. 1 January 2015
Companies with turnover greater than $20m and all other entities with greater than $1b turnover. 1 January 2016
All other entities with turnover greater than $20m. 1 January 2017

As shown in the table above these changes are far reaching in the number of taxpayers that will be impacted.

Foreign Non-Portfolio Equity Interests

Presently, the receipt of dividends from a non-portfolio investment of greater than 10% in a foreign company are treated as exempt from tax. These rules are going to be tweaked by the government to ensure they operate as intended.

This will include ensuring that the exemption flows through a trust or partnership correctly.

Interest Expenses Relating to Foreign Exempt Income

The government has announced that it will be amending the legislation to prevent an interest deduction being claimed with respect to the derivation of certain foreign exempt income.

Changes to Mining Concessions 

The generous tax concession available to the mining industry are being tightened to exclude acquired mining rights and information from those assets that can be claimed as an immediate deduction as part of the cost of assets first used for exploration. Affected assets will need to be depreciated over the shorter of their effective life or 15 years.

Only original costs of issue from government and genuine new exploration expenditure will qualify for outright deduction.

This does not apply to rights and information acquired from a government authority. These changes will apply from budget night.

Thin Capitalisation

As was expected by many advisers, the government has made the decision to tighten the thin capitalisation rules that apply to foreign companies that have operations in Australia and Australian companies that have operations overseas.

The government has increased the de minimis threshold from $250,000 to $2 million. This means that taxpayers with total interest expense below $2 million are not subject to the thin capitalisation rules. The rules broadly apply to disallow interest deductions where a taxpayer has more than $3 of debt to every $1 of equity. Interest deductions are reduced on proportionate basis.

The budget has proposed that this ratio be reduced to $1.50 of debt for every $1 of equity. This is a significant blow to both Australian companies that are looking to expand offshore and to international companies looking to invest in Australia.

For foreign multinational companies this is a significant change that makes Australia a less appealing place to carry on business. When the boards of these large foreign companies sit down to determine where to invest their capital, this is one extra reason to choose a country other than Australia.

The government has noted that these changes will apply to financial years beginning on or after 1 July 2014. These changes are significant and therefore it will be crucial to closely monitor the details of how these changes will be implemented and the drafting of the legislation surrounding these changes.

Other Changes Impacting Corporate Taxpayers

Other changes to note include the following:

  • Removal of dividend washing opportunities exploited by some taxpayers. This enables some sophisticated investors to claim franking credits twice by selling shares ex-dividend and re-purchasing other shares that carry a right to dividends.
  • R&D benefits have been scrapped for corporate groups that have greater than $20b turnover.
  • The changes previously announced by the government in the 2009/2010 budget with respect to the CFC and FIF provisions have been put on hold until the OECD has finished a review of international profit shifting. This announcement means that businesses with international operations face a longer period of uncertainty.
  • The Venture Capital regime will be amended to encourage ‘angel’ investors. This will be achieved through lowering the minimum invested capital requirement from $10m to $5m.
  • Various amendments are to be made to the tax consolidation provisions, to prevent taxpayers from obtaining unintended benefits, such as double deductions through shifting assets between groups and deducting liabilities twice.

 

CHARITIES AND NOT FOR PROFIT ENTITIES

Definition of Charity

A statutory definition will be applied to the term charity from 1 January 2014, rather than the reliance that is currently placed on common law principles. The statutory definition will however preserve these principles.

Not For Profit Tax Concession Changes

Planned changes to the tax concession that apply to commercial activities that are carried on by not for profit entities are to be delayed. These changes will commence from either 1 July 2014 or 1 July 2015 depending on when the activities commenced.

These changes will broadly mean that income tax concessions will not always be available for unrelated commercial activities carried on by not for profit groups. The availability of income tax concessions will only be available where the unrelated commercial activity profits are not directed back to the organisations altruistic purpose.

FBT, GST and DGR benefits will also not be available in relation to the unrelated commercial activities.

These changes could be far reaching for the not for profit sector and should therefore be considered in detail for clients that operate in this sector. This issue is further hampered by uncertainty surrounding what these provisions will actually entail when legislated.

 

SUPERANNUATION

Increase in concessional contributions cap

A temporary cap of $35,000 (up from $25,000) will apply from 1 July 2013 for individuals aged 60 and over. The increased cap will apply for individuals aged 50 and over from 1 July 2014.

The government will index the general cap of $25,000 that applies to everyone else from the 2015 financial year onwards. The increase in the cap to $35,000 will apply as follows:

Start Date Age Requirement
From 1 July 2013 60 and over
From 1 July 2014 50 and over
From 1 July 2018 No age requirement 

Example

Tony’s birthday is 12 May 1954. He is 59 years old on 30 June 2013. For the 2013-14 financial year, Tony’s concessional contributions cap is $35,000, and his non-concessional contributions cap is $150,000 (where the general concessional contributions cap is $25,000).

Removal of $500,000 superannuation balance test 

As a result of the above-proposed increase in the concessional contributions cap, the previously announced concessional contribution limit of $50,000 for individuals with superannuation balances below $500,000 will be removed.

Taxation of earnings on superannuation assets supporting income streams 

From 1 July 2014, future earnings (such as dividends and interest) on assets supporting income streams will be tax free up to $100,000 a year (to be indexed in $10,000 increments), and the balance of earnings will be taxed at 15%.

Under the current law, all superannuation earnings on assets supporting superannuation pensions and annuities are tax-free.

The change to the taxation of superannuation funds in pension phase will undoubtedly punish good investment performance. For example, the Government announcement points out that “assuming a conservative estimated rate of return of 5%, earnings of $100,000 would be derived from individuals with around $2 million in superannuation”. However, if a superannuation fund earns 10%, then it will be subject to tax for assets that are at the $1 million level.

Special transitional rules for capital gains

  • Special arrangements will apply for capital gains on assets purchased before 1 July 2014:
    • For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
    • For 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
    • For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

The government is yet to release draft legislation with respect to this measure but the flow-on impact, if legislated, is likely to impact other areas. For example, if after 1 July 2014 you buy a capital asset in your superannuation fund, sit on it for 10 years, and then realise a $1 million gain to fund your pension as a one-off.

Without further clarification from the government, it might be that averaging will apply to the capital gain, that is, $100,000 gain each year that the asset was held, thereby limiting tax exposure. Alternatively, $900,000 of the capital gain could potentially be taxed at a higher tax rate.

Tax relief for excess contributions

Many innocent people have been subject to a punitive rate of tax if they accidentally exceed their concessional contributions threshold. Individuals are taxed at 46.5% even if their personal tax rate is lower, where they have exceeded the cap. Moreover, if the excessive contribution was accidental, it has not been possible to withdraw the excess contribution and correct the error.

Pleasingly from 1 July 2013, it will be possible to withdraw the excessive contributions, be taxed at your ordinary rate with an interest charge on the benefit of a tax timing difference that arises because of the different tax payment dates of the superannuation fund.

Changes to government co-contributions

The government has introduced legislation to halve the co-contribution to $500 for eligible taxpayers.

The superannuation co-contribution matches eligible (after-tax) personal superannuation contributions made to a superannuation fund up to the maximum amount of $500. However, the government has recognised that this benefit is not as popular with the targeted group – lower income earners.

Increase in Superannuation Guarantee

The Superannuation Guarantee rate is gradually increasing from the current 9% to 12% by 1 July 2019 in 0.25% increments each financial year. From 1 July 2013, employer will be required to contribute 9.25% to superannuation.

The government has also increased the maximum age limit to 75 for when employers are required to make superannuation guarantee contributions for employees. Previously, employers were not required to make superannuation contributions on behalf of employees over the age of 70.

 

INNOVATION AND RESEARCH

While not specifically a budget measure, one of the key developments in 2013 was the announcement of the 1 billion dollar “Industry and Innovation Statement” in February 2013. Financials of this package were re-announced in the budget.  There are some beneficial elements which apply from 1 July 2013 in this package.

Research and Development

Following the announced changes, there are now three tiers of research and development support:

  • A 45% refundable tax offset for those businesses with an aggregated assessable income turnover of less than $20 million.
  • A non-refundable 40% tax offset which is available for businesses with turnover between $20 million and $20 billion.
  • Access to the ordinary dollar for dollar tax deduction rules, capital allowance rules and blackhole expenditure rules for large businesses that have a turnover of more than $20 billion.

Essentially, the message is that research and development incentives are not for the top end of town.

For businesses that are not yet cash flow positive and that have a turnover of less than $20 million, an important improvement in the refundable tax offset system is the ability to opt in for a quarterly refund from 1 July 2013. The refund for each quarter will be physically paid 28 days after quarter end. In theory, this means that the first payment of a quarterly refund would be 28 October (i.e. after the next Federal election).

Taxpayers can either choose to adopt a “safe harbour” instalment credit based on last years R&D claim. Alternatively, a reasonable assessment can be made. There are two key requirements in order to get the quarterly credit. The first is that the taxpayer must have a reasonable expectation of qualifying for the credit in this years income tax return. The second is that the taxpayer must have complied with all its obligations for the last five years and it must be reasonable to expect it will continue to comply. The ATO has a discretion to waive certain types of non-compliance.

Australian Industry Participation Authority

A non-revenue measure which has been announced by the government is that businesses that plan to initiate projects with a cost of greater than $500 million will be required to create an Australian Industry Participation Plan in the early stages of project planning to outline opportunities for local industry to participate in the project. The Australian Industry Participation Authority will then coordinate with industry to improve supply of local production, creating local jobs.

Projects which have a value of more than $2 billion will be required to “embed” Australian Industry Participation Officers.

Innovation Precincts

The government also announced plans to create up to 10 “innovation precincts”. The first two precincts have been announced in the manufacturing and food industries with hubs based around Melbourne. Participation in the precinct also opens access to a $50 million Industry Collaboration Fund which is aimed at getting different businesses aligned around common technology and process solutions required to drive that particular industry segment forward.

Venture Australia

An additional $350 million has been made available for new “Infrastructure Investment Funds”. In summary, approved managed fund operators will have the opportunity to place strategic investments in applicant businesses from this fund subject to the investment rules specified by government.

Enterprise Connect and Enterprise Solutions

The enterprise connect program has been expanded to include additional industry categories of professional services, information and communication technologies, and transport and logistics. This gives qualifying businesses the opportunity to work with a business coach to develop an appropriate business plan and is to apply for grant funding from the government to implement recommendations that are specified in that business plan. This can release $20,000 or in some cases more for businesses to address improvements to systems and processes.

Additionally, the government intends to proceed with a program to assist growing businesses to develop their capabilities to meet the standards for supply required by government.

Finally, qualifying businesses will gain access to “Gold” Executive Training (Growth Opportunities Leadership Development). This is a new executive training program aimed at building the next generation of leaders in future industry employers.

Superannuation earnings tax announced – good investment performance punished

“Stockholm syndrome is the psychological phenomenon where hostages express empathy and sympathy and have positive feelings toward their captors.  These feelings are generally considered irrational in light of the danger or risk endured by the victims, who essentially mistake a lack of abuse from their captors for an act of kindness” (Wikipedia).

As I read through today’s superannuation announcements I experienced a moment of deep gratitude that the Federal Government had been generous enough not to proceed with the most medieval of the options that had been on the table.  I then began to calculate the material disadvantage that will affect families to which these rules apply.  I realised that in my momentary relief, I had forgotten that surely every family in our democracy is entitled to have certainty of outcome under the set of rules that were represented by the Government of the day to apply to their self-funded retirement.  The more I considered the rules, the more I realised how poorly these rules will operate in practice.  Many other ordinary people will innocently get caught in the clutches of these rules at some point.  Make no mistake, as the compulsory Superannuation Guarantee charge increases from 9% to 12% some ordinary individuals will become hostage to these rules.

Superannuation pension earnings tax

From 1 July 2014, future earnings (such as dividends and interest) on assets supporting income streams will be tax free up to $100,000 a year (indexed in $10,000 increments), the balance of earnings will be taxed at 15%.  Remarkably, these rules punish good investment performance.  For example, the Government announcement points out that “(a)assuming a conservative estimated rate of return of 5%, earnings of $100,000 would be derived from individuals with around $2 million in superannuation.  Ergo, if my fund earns 10%, I will be subject to tax once my assets are at the $1 million level.  While the announcement is silent on this point, heaven help me if after 1 July 2014 I buy a capital asset and sit on it for 10 years and then realise a $1 million gain to fund my pension as a one-off.  How does this get taxed?  Will we be averaging over 10 years to $100,000 per year (safe) or is $900,000 of that gain fair game in the year of sale for the higher tax rate.  What about the small business owners that the Government encourages to put their business property into superannuation.  Is that an extra 10% clip of the ticket now when you make a gain on the sale of your warehouse?  Small business already has it hard enough.  If I held that business asset for 15 years outside of superannuation I would pay no tax.  Surely it was not intended that the superannuation system would be an inferior option.

Has the Government forgotten the GFC when there were double digit annual declines in return which depressed superannuation balances and for which superannuation pensioners were not compensated by the tax system.  Now if there is a 20-30% surge forward in one year do people who should not be punished by this system suddenly find they are subject to the system just as they earn their losses back?  Surely not.

I see the need for averaging, as well as extension of small business relief, as items that will rapidly get on the drafting agenda.

Pension withdrawals themselves will not be taxed.

Special transitional rules for capital gains

  • Special arrangements will apply for capital gains on assets purchased before 1 July 2014:For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
  • For 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
  • For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

Common sense arrives for “excessive contributions”

Many innocent people have been subject to a punitive rate of tax if they accidentally exceed their concessional contributions threshold.  They get taxed at 46.5% even if their personal tax rate is lower.  Moreover, if the excessive contribution was accidental, it has not been possible to withdraw the excess contribution and correct the error.  Pleasingly from 1 July 2013, it will be possible to withdraw the excessive contributions, be taxed at your ordinary rate with an interest charge on the benefit of a tax timing difference that arises because of the different tax payment dates of the superannuation fund.

In closing, the Government’s announced superannuation reforms are “less bad” than expected. Are we grateful that they are less bad?  Yes.  Can they unfairly single out and materially change the expected retirement income projections for taxpayers who have retired and generated asset balances around $1 million?  Yes, but only if they invest well.  Do they potentially punish people who have balances well under $1 million if they have a good year?  Yes.  Is mediocre performance more likely to avoid the tax than good performance?  Yes.  Oh dear.

Could this year’s federal budget really be Swan’s song?

What a difference a week makes in politics.  A little over a week ago the more radical and negative federal budget measures looked to be under containment.  Following the Government’s self immolation last week, atreasure chest of the better performing, experienced and more pro “business and aspiration” ministers went to the back bench and were replaced by less experienced and potentially more left leaning replacements.
The exiting ministers raised concerns over a planned strategy of class warfare, looming policy faux pas and hinted at sinister plans that may be hatching to make an all out appeal to marginal electorates by launching a budget attack on those voters that Labor has already lost to pay for the election pork barrel.It appears now that the first thing the Government must do is survive a no confidence motion in Parliament. Then to succeed with any substantive budget measure, it must align to the Independents and Greens to get the crucial majority to carry its measures through.In this volatile environment, almost anything could happen. We could have an early election, we could have a toothless budget where no substantive measures get through the House of Representatives or we could have a leap to the left and an attack on the wealthy with the gloves off. My bet is for the Government to play for support from the Greens and Independents in a bid to retain legislative power (as for the policy backflip on the Carbon Tax). This means the top end of town and the wealthy (which now includes the middle class) need to brace for impact.Here are some of the possible measures that may emerge in the budget and preparatory action pre- budget night.

SUPERANNUATION

Higher taxes for superannuation account balances greater than say $700-$800,000.  There are enough superannuation accounts at this level to raise some decent revenue.  Taxes on accumulation earnings were proposed to raise from 15% to say 30%.  This appears to have been a planned budget measure.  There were leaks to the press which highlighted massive voter resistance to the idea.  The Government appears to have ruled out taxation on superannuation withdrawals but not earnings.  There are suggestions this week that the new “war cabinet” may put the entire issue back on the table because it may only affect voters who have deserted Labor.

Some in the market have suggested cashing out your superannuation prior to budget night if you are in pension phase.  I think you would be foolish to do this.  The Liberals have stated they will repeal this measure in Government.  Even should it get through and stand I suspect leaving the money in super will outperform, you will just get ahead slower.

Deductible superannuation contributions being taxed in the fund at say 30% or the marginal tax rate of the member, or a new  general rate greater than the current 15%.  This one does not appear to have been ruled out.  Presently a 30% rule affects people with adjusted incomes of more than $300,000, but expect this to creep down to $180,000 or a bit lower where such a measure can raise some decent revenue. There have been suggestions contributions should be taxed at marginal tax rates (long ago this was a Hewson Liberal policy, it did not work too well for him).

Bring your deductible superannuation contributions forward to pre budget night if you want to lock in the 15% rate.  It will be hard for the Government to make this retrospective.  If there is no action on this measure on budget night, bringing forward the contribution does not harm you.

Transition to retirement pensions:  At age 60 retirees can access their superannuation benefits.  To assist people in the process of transitioning to retirement, it is possible to commence a “transition to retirement pension” from age 55 which changes the rate of taxation on assets funding the pension to 0%.  The Government could remove this concession, locking in super money at a potentially new higher tax rate for longer.  If you are 55 or over, it might make sense to commence a transition to retirement pension prior to budget night.

NEGATIVE GEARING

The Greens want a war on negative gearing.  A week ago I would have said no Government is foolish enough to remove the benefits of negative gearing, but in a fight for survival to 14 September, perhaps some change of position may emerge to get the numbers.  The Government could introduce loss quarantining for individuals with adjusted incomes of around $180,000 or their higher benchmark of $300,000.  This requirement could for example say that you can have the loss on gearing on a rental property, but only offset it from future income of the same class.  This would destroy the tax timing benefit created by negative gearing.  It would also create a tax fiction, you would have a real cash loss, but the government would not allow this outflow to reduce the tax you pay while gearing produces a negative result.  You may recall the Hawke/ Keating government had a crack at this decades ago and the response was so damaging to property prices and voters, they had to repeal it.  Officially, gearing is on the Governments’ promise list to retain.

My bet is that the Government will attack gearing at the big end of town for international businesses.  It is likely that the Government will further limit tax deductions for interest on borrowings paid offshore – the so called thin capitalisation rules.  Such a move would massively prejudice Australia’s standing as an importer of investment capital and a place to headquarter international business, but it may be a vote winner in the marginals.

It may make sense to bring forward interest prepayments to prior to budget night to lock in a deduction under the existing rules.

If gearing is “grandfathered” to pre-budget night investments, planned investments may best be locked in prior to budget night.

RESEARCH AND DEVELOPMENT

The top end of town will lose concessions and smaller enterprises may have access to an innovation fund.  We are short on the detail, but expect to see more in the budget and a lot of noise about this.  Smaller enterprises may be unexpected winners, but the pool of real available funds looked small in the announcement, so you may need to get in quick.

CASH OWED TO PRIVATE COMPANIES

The so called Division 7A rules which tax amounts owing by shareholders or their associated family trusts to a private company as unfranked dividends have been largely criticized as punitive and ripe for reasonable reform this year.  In a normal year, sensible reform would be a great positive to introduce to ease the pain on small business.  I cannot see this getting up this year, as such favorable reforms are likely to be seen as concessions to the “wealthy” and therefore unlikely to win votes in the right seats.

EVERYTHING IS TAX AVOIDANCE

In a moment of budget surplus desperation (several Assistant Treasurers ago), legislation was created to massively expand the general tax anti avoidance provision.  The motivation was that the tax office was losing too many big cases to the taxpayer and Treasury lobbied that this was a threat to the budget.  The draft legislation is a monster.  It may force you to look at the simplest way you could have effected a transaction, ignoring how you actually effected the transaction, and force you to take the less favourable tax result of the transaction you did not do.  Yes, read that sentence again.  It is self evidently ridiculous and is testimony to the state of Government in this country.

This may re-emerge packaged as a Robin Hood weapon against evil wealthy wrong doers threatening marginal voters.  These measures could really mess up typical, legitimate and appropriate planning techniques and change the way you invest in the future paying more tax. 

TAXING FOREIGN SOURCED/UNTAXED PROFITS OF IT BUSINESSES

You have heard the rhetoric.  Google, Apple etc don’t pay much tax in Australia because they are structured to locate the taxable source of profits in low tax jurisdictions.  Expect a tax measure to get these “baddies”.  You may not have picked this up from the media reports, but they have not done anything wrong.  They are simply applying the tax rules and often with the ATO’s sanction.  The problem is that this is not just an Australian issue, it is a global issue.  These businesses are eminently capable of turning on a coin to change operations for any change in tax laws across the globe.  Why set up your server in high cost Australia when you can set it up anywhere in the world.

The top end of town have the resources to adjust/ defend against the impact of a new tax.  My fear is that small Australian IT start ups and IP commercialisation businesses may find that the tax rules that helped larger competitors become globally great may not be available to them.  At the end of the day, if Australians bring the money home, Australia will eventually be in a position to tax it.  If the Government frightens all our innovators into relocating offshore, another country will be the long term winner. 

MINING

The mining tax was a disaster.  They are not off the hook yet.  Expect new lines of attack to raise more revenue from miners.  Options are reductions in the diesel fuel rebate, which will be popular with the Greens.  Further tweaks to depreciation rules to make them less favourable may also be fertile ground.

Stephen Cribb is a Director of Prosperity Advisers Group.