Flood levy bills now law: SMEs need to be ready

The bills imposing a one-year levy (tax) to help with reconstruction after the floods and Cyclone Yasi earlier this year are now law. So SMEs need to get ready for the new tax withholding rates they will need to apply to employees’ wages after July 1, 2011. The Tax Office will be hard at work right now in preparing the new schedules.

The tax will apply to the taxable incomes of individuals and will apply for the 2011-12 financial year only. It will be either 0.5% or 1% of taxable income. This effectively means that for one year from July 1, 2011, the top marginal tax rate will be 47.5% (including Medicare levy).

The tax will operate as follows:

individuals with a taxable income between $50,001 and $100,000 will pay a 0.5% levy on that part of taxable income above $50,000;
individuals with a taxable income of $100,001 or more will pay a 0.5% levy on that part of their taxable income between $50,001 and $100,000 and a 1% levy on that part of their taxable income above $100,000; and
no levy is payable where the taxpayer has a taxable income of $50,000 or less, or where they fall into an exemption category as specified in a legislative instrument that is made by the Minister.

The calculation of the tax can be conveniently shown as follows:

flood-levy-tax

People who received an Australian Government Disaster Recovery Payment (see details below) are exempt from the tax and 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. Details of this can be expected soon.

Under the Australian Government Disaster Recovery Payment, payments of $1,000 per eligible adult and $400 per eligible child will be made if:

a person was seriously injured, or
a person is the immediate family member of an Australian killed as a direct result of the disaster, or
a person’s principal place of residence has been destroyed, or
a person’s principal place of residence has sustained major damage, or
a person is unable to gain access to their principal place of residence for a period of 24 hours or more, or
a person is stranded in their principal place of residence for a period of 24 hours or more, or
a person’s principal place of residence was without electricity, water, gas, sewerage services or another essential service for at least 48 hours (a utility failure) and the utility failure was caused by damage to public or private infrastructure, or
a person is a principal carer of a dependent child who has experienced any of the above.

The payments are being made in relation to the:

Western Australia bushfires – January/February 2011
Tropical Cyclone Yasi – February 2011
Victoria floods – January/February 2011
NSW floods – January 2011
QLD flooding – December 2010/January 2011
WA floods – December 2010

Information on these payments can be accessed on the Disaster Assist website and the Centrelink website.

Employees who are exempt from the levy (eg. those whose annual taxable incomes are below $50,000) 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.

From June 2011, SMEs may get requests from employees who are exempt from the tax to lower their regular tax withholding payments. They can do this by completing a Withholding declaration form and giving it to their employer.

For exempt employees who don’t complete the form to vary their tax amount downward to exclude the flood levy tax, their employers will include the flood levy when they calculate how much to deduct from their pay.

The ATO asks that those who are exempt to notify it accordingly when they lodge their 2012 tax returns. The ATO will refund them any flood levy overpayment they may have made during the year.

This levy will impose some extra burden on SMEs from July 1, although hopefully it will be minimal.

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