How the flood levy tax will affect SMEs

Much has already been written about the proposed flood levy tax. By now we all know that the Government plans to impose a temporary levy tax on the taxable incomes of individuals, to apply for the 2011-12 financial year only, to help fund flood reconstruction work in Queensland and elsewhere.

The levy will be either 0.5% or 1% of taxable income and is proposed to apply for one year only, ie. from July 1, 2011 to June 30, 2012. The Government has estimated that the cost to the Federal Budget of the floods is just over $5.6 billion and the levy is expected to raise about $1.8 billion.

As employers, and as businesses involved in industries possibly affected by the associated spending cuts announced (see below), SMEs will be affected by the proposed tax and need to be aware of what is happening. Although businesses do not pay the levy, they will need to deduct it from their employees’ wages via new tax withholding schedules that will be released.

Legislation for the levy will be introduced into Parliament next week. It will then be debated.

The details of the proposed levy are:

a levy of 0.5% will be applied on that part of an individual’s taxable income (ie. after tax deductions are claimed) between $50,001 and $100,000;
a levy of 1% will be applied on taxable income above $100,000;
no levy will apply on taxable incomes of $50,000 or less;
those who receive the Australian Government Disaster Recovery Payment for a flood event in 2010-11 will be exempt from the levy.

The calculation of the levy will be as follows:

flood-levy-tax

Under the levy, someone who has a taxable income of $80,000 will pay $2.88 extra per week. Someone on average annual adult full-time total earnings of $68,125 will pay $1.74 a week.

The levy will be paid through tax instalments taken out of an individual’s regular pay through the PAYG system. Assuming the levy is passed by Parliament, businesses will need to apply a new withholding schedule to their employees to withhold levy payments.

People who received an Australian Government Disaster Recovery Payment can seek a variation to their tax instalment payment so they don’t have to pay the levy. It is understood the ATO is also investigating the possibility of automating PAYG Instalment amounts so that people who don’t have to pay the levy are not charged an amount in their PAYG instalments ie the tax taken out of their pay.

Employees who are exempt from the levy could ask their employers not to withhold the levy from their regular pay with other tax withheld. Alternatively, at the end of the year, the ATO will assess taxpayers’ tax liability taking into account the exemption from the levy.

Spending cuts

When announcing the levy, the Prime Minister also announced a number of spending cuts, some of which will affect SMEs. The cuts included:

the Cleaner Car Rebate Scheme (the so-called “cash for clunkers” scheme) will not proceed. This proposed to provide grants of $2,000 to motorists who scrap their pre-1995 passenger vehicles and purchase new, low emission, fuel efficient vehicles;
a cap will be placed on the National Rental Affordability Scheme to limit the dwelling target to 35,000 by 2013-14 (instead of the planned 50,000 dwellings). The Scheme seeks to address the shortage of affordable rental housing by offering financial incentives to the business sector and community organisations to build and rent dwellings to low and moderate income households at 20% below-market rates for 10 years. Among other things, the Scheme provides tax offsets (up to a maximum of $6,000 per dwelling per year for a maximum of 10 years) to those who participate in it;
a cap will limit claims under the LPG Vehicle Scheme to 25,000 per annum, ie. there will be fewer LPG conversions under the scheme. The Scheme provides grants for the LPG conversion of a registered motor vehicle or the purchase of a new vehicle fitted with LPG prior to first registration, subject to eligibility criteria. The grant is $1,500 for conversions between July 1, 2010 and June 30, 2011, and $2,000 for the purchase of new vehicles fitted with LPG before first registration where the vehicle purchase is completed between July 1, 2009 and June 30, 2014;
a cap will be placed on funding for the Solar Hot Water Rebate. Under the Rebate, eligible households can claim a rebate of $1,000 for a solar hot water system or $600 for a heat pump hot water system. The rebate applies for systems ordered and purchased from February 20, 2010.

The Federal Opposition is opposed to the new levy, while the Australian Greens said they support a new flood rebuilding tax (levy), but oppose environmental budget cuts. The views of the Independents in the House of Reps and the Senate are therefore critical to the passage (or not) of the levy.

Given it is not to apply until July 1 this year, debate on the levy may not be finalised next week. As employers (who will need to apply new tax withholding schedules), and as participants in industries possibly affected by the spending cuts, SMEs should keep a close eye on the progress of the levy once the legislation is introduced.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .