A $50 billion deficit with promises of it being reduced in future years – that was a key message from the Treasurer’s fourth budget on May 10. But what of tax measures – what indeed? There were many of them and that was a surprise.
Here’s a quick overview of some of the tax measures announced and my initial take on some of them:
Tax rates stay the same, although don’t forget about the flood levy that will apply to incomes over $50,000 from July 1. That might reverse the traditional tax planning technique of, where possible, deferring income and bringing forward deductions. This year, the reverse applies – although it is acknowledged that the increase in tax rates will be only small.
The Government will provide Australian small businesses with an instant tax write-off of the first $5,000 of any motor vehicle purchased from 2012-13. The Treasurer said that, for example, a tradesman on a 30% marginal tax rate, buying a new $33,960 ute would receive an extra tax benefit of $1,275 in the year they purchased the vehicle. The remainder of the purchase value can be transferred into the general small business depreciation pool, which is depreciated at 15% in the first year and 30% in later years. The new write-off will effectively replace the Entrepreneurs’ Tax Offset (ETO), which will be abolished with effect from the 2012-13 income year. The Henry Tax System Review recommended abolition of the ETO because of its poor targeting and high compliance costs. While the $5,000 deduction will be welcome for many small businesses, those with cashflow issues may find it difficult to outlay the initial funds to secure the deduction.
The Government announced that the current statutory formula four percentage rate scale method for valuing car fringe benefits will be replaced with a single statutory rate of 20%, regardless of the number of kilometres travelled. The changes will apply to new vehicle contracts entered into after 7:30pm (AEST) on May 10, 2011, and will be phased in over four years. The new flat 20% rate had been widely reported but the four-year phase-in was a surprise, although it will help soften the blow for some. The new 20% rate will particularly benefit those who drive less than 15,000 kilometres. It may even prompt some employers to purchase lower cost and more fuel efficient cars.
The Government will remove the ability of minors (children under 18 years of age) to access the low income tax offset (LITO) to reduce tax payable on their unearned income, such as dividends, interest, rent, royalties and other income from property, with effect from July 1, 2011. This was an expected measure, but will cause headaches for those who have availed themselves (quite legally) of this in the past.
Although not formally announced in the budget (as it is a carry-over measure from previous years), the Government plans to re-introduce its previously defeated legislation to impose an income test on those that receive the 30% private insurance rebate. This will be a hip-pocket measure for many people. The previous income thresholds where the means testing would start (ie. $75,000 for singles and $150,000 for families) will be indexed, so will be slightly higher in the new legislation.
The budget provides an increase in Family Tax Benefit (FTB) Part A for 16-19 year olds. From January 1, 2012, the new maximum rate of FTB Part A for 16-17 year olds in secondary school will be increased from the current $52.64 per fortnight to $214.06 per fortnight, ie. by around $160 per fortnight – an increase of around $4,200 per year. For 18-19 year olds in school, the rate will be $3,741 per year.
The Government will extend indexation pauses on higher income limits for a further two years until June 30, 2014 in the following areas:
The budget includes $281 million for additional tax-free payments to encourage apprentices in critical trades to complete their qualifications. The Government expects the $1,700 Trades Apprentice Income Bonus to support 200,000 trade apprentices over four years in skills shortage occupations to stay in their training and get a skilled job. From January 1, 2011, eligible Australian Apprentices have received an additional tax-exempt bonus of up to $1,700 as they reach milestones in their training, including an $800 completion bonus, bringing them to a total of a maximum of $5,500 over the course of their apprenticeship.
The Government will require certain businesses to report annually on payments made to contractors in the building and construction industry. The reporting regime will require businesses to report information they should already collect under existing tax arrangements. This measure also includes an increase in funding for the Tax Office of $46.4 million over the forward estimates period which will allow the Tax Office to undertake data matching, reviews of contractors’ tax liabilities and targeted audits.
The Government said it will strengthen the tax law, effect from July 1, 2011, to counter fraudulent phoenix activity (which involves a company intentionally accumulating debts to improve cashflow or wealth and then liquidating to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their previous debts and liabilities). Under the proposed measures:
The Government will provide eligible individuals who breach the concessional superannuation contributions cap by up to $10,000 with a one-off option to request that these excess contributions be refunded to them. This new refund option will only apply to first time breaches from July 1, 2011. The changes will give individuals the option to take excess concessional contributions out of their superannuation fund and have them assessed as income at their marginal rate of tax, rather than the excess concessional contributions tax rate of 31.5% (in addition to the 15% contributions tax for the fund). Of course, this does not overcome the problem of people actually knowing they have exceeded the cap. Since 2009-10, the “concessional contributions cap” has been set at $25,000 (or $50,000 for those aged 50-74 until June 30, 2012). Note that the Government has proposed to allow individuals aged 50 and over with less than $500,000 in super to contribute $25,000 more per year than other individuals from July 1, 2012.
The minimum annual payment amounts for pensions and annuities will be reduced by 25% for 2011-12 and will return to normal in 2012-13. In this respect, the Government will begin to phase out the 50% pension drawdown relief that has been provided for 2008-09, 2009-10 and 2010-11 financial years. Reducing the minimum payment amounts by 25% for account-based, allocated and market linked (term allocated) pensions from July 1, 2011 seeks to provide some assistance to holders of these products to recoup capital losses incurred as a result of the global financial crisis.
The Government will continue the freeze on the income thresholds for an additional year to 2012-13. Under the co-contribution scheme, the Government provides a matching co-contribution for contributions made into superannuation out of after-tax income. The matching Government co-contribution is up to $1,000 for people with incomes of up to $31,920 in 2010-11 (with the amount available phasing down for incomes up to $61,920). This measure will continue to freeze these thresholds at $31,920 and $61,920, respectively.
The Government is to defer the implementation of Paid Paternity Leave by six months, from July 1, 2012 until January 1, 2013. The measure will provide eligible working fathers, and other partners who are providing full-time care or sharing the child’s care, with two weeks paternity leave paid at a rate equivalent to the national minimum wage for children born on or after January 1, 2013.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions . 
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