Watch our Federal Budget Briefing live

Prosperity Advisers’ National Tax Practice Leader, Stephen Cribb and Director of Financial Planning, Gavin Fernando talk about the real impacts of Federal Budget. 

With so many of our clients so busy running businesses, and in locations all over the country we have this year put together a recording of our Federal Budget Briefings in a video recorded on Google Hangouts.  If you were unable to attend these briefings, click on the image below to watch it live on our blog site.

PART ONE

PART TWO

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.

 


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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.