2012-13 Federal Budget Highlights

·         Company tax rate reduction – scrapped

·         Companies can carry back tax losses to create refunds for prior year’s tax payments

·         Deferral of the $50,000 cap on concessional contribution for 2 years

·         50% tax break on interest income – scrapped

·         Standard, simplified deduction for work related deductions – scrapped

·         Non-residents lose access to 50% general capital gains tax discount

·         An extra 15% tax applies to concessional contributions for high income earners

·         Accelerated deprecation applies to asset purchases by small business

·         Further restrictions on LAFHA tax concessions

Business

Company tax rate reduction – scrapped

The proposed reduction to 29% for company tax rate has been scrapped.

This was to take effect from 1 July 2012 for small businesses and from 1 July 2013 for all other business.

The company tax rate will remain at 30%.

Company loss carry-back

From 1 July 2012, companies will be able to carry back up to $1m worth of losses to get a refund of tax already paid in the 2012 tax year.

From 1 July 2013, companies will be able to carry back up to $1m worth of losses against tax paid up to 2 years earlier.

Date of effect – 1 July 2012

TIPS:

  • Tax paid in the tax years before the 2012 year cannot be refunded under this “carry-back” proposal.
  • The refund of tax paid in a prior year will be limited to the franking account balance – therefore if a dividend has been declared and effectively the company tax passed onto shareholders as a franking credit, then there will not also be a refund the same tax under the carry-back provisions.

Accelerated Depreciation – small business

This concession was announced prior to the budget night.

From 1 July 2012, small businesses will be able to immediately deduct the cost of any new business asset costing less than $6,500. There is no limit on the number of these “small” assets being claimed.

In addition, businesses will be able to write off assets costing more than $6,500 in a single pool (15% in the first year, 30% in each subsequent year).

Small businesses will be able to also immediately deduct the first $5,000 of a new or used motor vehicle, purchased from 1 July 2012.

Date of effect – 1 July 2012

TIP:

  • A small business is a business (and its associates) with an annual turnover of $2million or less.
  • For a small business consideration could be given to the deferral of asset purchases to 1 July 2012.

Bad debts – non-consolidated groups

The Australian Taxation Office (ATO) want to align (in one area) tax consolidated groups with groups that do not consolidate. This covers the claim for a bad debt where the debtor and creditor are related. From budget night there will be no tax deduction for bad debts between related parties. On the flip side the creditor will not be assessed on the write off of its debts.

Date of effect – 7.30 pm (AEST), 8 May 2012

Individuals

Changes to personal tax rates

As previously announced and legislated, the changes to tax free threshold and statutory tax rates for resident individual taxpayers will be achieved in two rounds of tax cuts.

The personal income tax rates and thresholds are summarised for resident taxpayers in the table below:

Personal income tax rates and thresholds

2011-12 2012-13

2015-16

Threshold Rate Threshold Rate Threshold Rate

1st rate $6,001 15.0% $18,201 19.0% $19,401 19.0%

2nd rate $37,001 30.0% $37,001 32.5% $37,001 33.0%

3rd rate $80,001 37.0% $80,001 37.0% $80,001 37.0%

4th rate $180,001 45.0% $180,001 45.0% $180,001 45.0%

Date of effect – from 1 July 2012

Changes to Low Income Tax Offset

As previously announced and legislated, Low Income Tax Offset (LITO) will be changed in two phases:

  • From 1 July 2012, individuals will be entitled to receive the LITO if their taxable income is below $66,667. The maximum value of the LITO will be reduced from $1,500 to $445 and will be phased out at the rate of 1.5 cents for every dollar of taxable income over $37,000. This will mean low-income earners will have an effective tax-free threshold of $20,542; and
  • From 1 July 2015, individuals will be entitled to receive the LITO if their taxable income is below $67,000. The maximum value of the LITO will be reduced to $300 and will be phased out at the rate of 1 cent for every dollar of taxable income over $37,000. This will mean low-income earners will have an effective tax-free threshold of $20,979.

Date of effect – from 1 July 2012

Changes to Private Health Insurance Rebate

The Government has introduced the following three new ‘Private Health Insurance Incentives Tiers’ from 1 July 2012;

Private Health Insurance Incentive Tiers

Singles Families <$84,000 <$168,000 $84,001-97,000 $168,001-194,000 $97,001-130,000 $194,001-260,000 >$130,001 >$260,001

Private Health Insurance Rebate

< age 65 30% 20% 10% 0%

Age 65-69 35% 25% 15% 0%

Age 70+ 40% 30% 20% 0%

Medicare Levy Surcharge

All ages 0.0% 1.0% 1.25% 1.5, , %

 Singles earning $84,000 or less and families earning $168,000 or less will continue to receive the existing 30, 35 and 40 per cent rebate, depending on their age.

For the 2011-12 income tax year, the income thresholds for the Medicare levy surcharge were increased to $80,000 per year for singles and $160,000 per year for couples/families.

The ATO has advised the three separate income thresholds for the 2012-13 income tax year (as shown in the above table).

The ATO website has an ‘Income for MLS purposes calculator’ at:
https://expertsystems.ato.gov.au/scripts/net/RITUI/(S(kjye40mfgq4ppi45rdkj05mn))/MLS/scMLSQuestions.aspx?PID=68&ms=Individuals

Net medical expenses tax offset tightened

The net medical expenses tax offset (NMETO) will be means tested from 1 July 2012.

For people with adjusted taxable income above the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for couples or families in 2012/13), the threshold above which a taxpayer may claim NMETO will be increased to $5,000 (indexed annually thereafter) and the rate of reimbursement will be reduced to 10% for eligible out of pocket expenses incurred.

Date of effect – from 1 July 2012

Introducing Schoolkids Bonus

The education expenses tax offset will be replaced with a new Schoolkids Bonus of $410 pa for each primary school student and $820 pa for each secondary school student.

The Schoolkids Bonus will be available to families receiving Family Tax Benefit Part A.

The Schoolkids Bonus will not be a taxable payment.

As a transitional arrangement for 2011/12, the education expenses tax offset will be paid out in full to eligible families in June 2012.

Date of effect – from 1 January 2013

ETP “golden hand shake”

Access to concessional rates of tax on certain ETPs will be limited.

Currently concessions apply so that

a)    For those over their preservation age an eligible ETP is taxed at no more than 15%;

b)    For those under their preservation age an eligible ETP is taxed at no more than 30%.

From 1 July only that part of the ETP that takes the recipient’s taxable income below a threshold of $180,000 will be able to access the concessional rates of tax.

The additional part of the ETP will be taxed at normal marginal rates of tax.

Date of effect – 1 July 2012

TIP:

  • If you are about to receive an eligible ETP you need to consider the costs and benefits of receiving the ETP earlier or later.

 Standard Deduction – scrapped

Last year’s Federal Budget announcement on “standard deductions for work related expenses” was aimed at a simplification process for employees. This has been scrapped. Therefore the current substantiation requirements continue to apply to work related expenses.

50% discount on interest income – scrapped

Last year’s Federal Budget announcement on a 50% discount on interest income will not proceed.

 Non-residents

 Changes to non-resident tax rates

The Government announced that it will adjust the personal income tax rates and thresholds that apply to non-residents’ Australian income. From 1 July 2012, the first 2 marginal tax rate thresholds will be merged into a single threshold. The marginal rate for this threshold will align with the second marginal tax rate for residents (32.5%) and will apply to all taxable income below $80,000. From 1 July 2015, the same marginal rate will again rise from 32.5% to 33%.

The tax rates for non-residents that will apply for the 2012-13 and later income years are:

Taxable income $ Tax payable $

for the 2012-13 and 2013-14 years for the 2014-15 and later income years

0 – 80,000 32.5% 33%

80,001 – 180,000 26,000 + 37% of excess over $80,000 26,400 + 37% of excess over $80,000

180,001+ 63,000 + 45% of excess over $180,000 63,400 + 45% of excess over $180,000

 Date of effect – from 1 July 2012

 Removal of CGT discount for non-residents

The 50% CGT discount for non-residents will be abolished for capital gains.

The CGT discount will remain available for capital gains accrued prior to this time where non-residents choose to obtain a market valuation of assets as at 8 May 2012.

Date of effect – 7.30pm (AEST), 8 May 2012

TIP:

  • As a non-resident, you should obtain a market valuation (as at 8 May 2012) for any Taxable Australian Properties acquired after 19 September 1985.

 Superannuation

 Concessional contributions for individuals with annual income greater than $300,000 will suffer an additional 15% tax. Currently those contributions are taxed at 15% and this will increase to 30% from 1 July 2012.

The “income” in this threshold test includes taxable income, increased by adding back total net investment losses (e.g. the loss from a negatively geared property), plus concessional contributions, plus Reportable Fringe Benefits, plus tax free government pensions/benefits, less child support.

2 year deferral – higher concessional contributions cap

Concessional contributions will be capped at $25,000 for all individuals from 1 July 2012.

Last years Federal Budget had proposed that this cap would remain at $50,000 for individuals aged 50 and over with total superannuation balances of less than $500,000.

This proposal has been deferred for 2 years. It will now start in the 2014/2015 year.

Not-for-Profit Sector

Last year’s Federal Budget contained significant changes to the entire not-for-profit sector.

Substantial work has been done on many areas of this reform over the last 12 months. Much more work still needs to be done.

One important aspect of the announcements is that charities with pre-existing tax concessions will not need to go through a re-registration process under the Australian Charities and Not-For-Profits Commission (ACNC).

TIP:

  • It is recommended that all NFP entities (including tax exempt charities) undertake an internal review and documentation of their continuing compliance with their tax status. Once other announcements concerning areas such as governance and financial reporting are finalised, a rigorous process of internal review needs to be undertaken and documented to ensure new standards are met.

Fringe Benefit Tax

Changes to Living Away From Home Allowance (LAFHA)

This Budget together with the Government’s 2011-2012 Mid-Year Economic and Fiscal Outlook will make the following reforms to the tax concessions for Living-Away-From-Home Allowances (LAFHA);

1)    The employees are required to substantiate their actual expenditure on accommodation, and food beyond a statutory amount;

2)    the tax concession will be available to the employees depending on their residency status and when the LAFHA arrangement is in place:

Arrangement entered into before 7:30 pm (AEST) on 8 May 2012   Arrangement entered into after 7:30 pm (AEST) on 8 May 2012

Temporary residents who don’t maintain a home located within Australia   LAFHA is not an exempt benefit for FBT purposes from 1 July 2012 onwards   LAFHA is not an exempt benefit for FBT purposes from 1 July 2012 onwards

Eligible permanent residents & Eligible temporary residents who maintain a home located within Australia   LAFHA is an exempt benefit until 1 July 2014. From 1 July 2014, LAFHA will be an exempt benefit for a maximum period of 12 months for any particular work location for FBT purposes   LAFHA is an exempt benefit for a maximum period of 12 months for any particular work location for FBT purposes

3)    The ‘fly-in fly-out’ arrangements will not be subject to the 12-month limit;

4)    Employees who receive travel and meal allowances for having to travel from their usual place of work for short periods will not be affected by the changes; and

5)    Eligible permanent residents & eligible temporary residents may be required to demonstrate that their home in Australia that they are currently living away from is maintained for their own personal use. Renting out the home could potentially fail the test – this will be confirmed with further consultation on the technical detail of the proposed legislation.

Date of effect – from 1 July 2012

For any queries regarding the taxation aspects of the Budget please contact Steve Fitzsimons on 02 9232 5111 or Steve.Fitzsimons@hr-ss.com.au

For any queries regarding the superannuation aspects of the Budget please contact Garvin Jones on 02 9232 5111 or Garvin.Jones@hr-ss.com.au