The coming tax changes SMEs must be across

Now that Federal Parliament has adjourned until the Treasurer hands down the budget on May 8, it’s worth noting a couple of legislation updates set to affect SMEs.

Means testing private health rebate

The legislation to apply an income test to the 30% private health insurance rebate has now passed through Parliament and the income test will start from July 1, 2012.

Obviously not all SME owners will be affected, but for those that are, they need to understand that their taxable income, any fringe benefits and superannuation come into the calculation of the income test. I will explain this below.

The legislation gives effect to 2009 Federal Budget announcements concerning the private health insurance rebate and consequential Medicare Levy Surcharge changes. The essence of the proposed changes is to effectively income test the 30% private health insurance rebate for individuals whose income for Medicare levy surcharge purposes is more than $84,000 per annum and for families where that income is more than $168,000.

To achieve the means testing, the legislation introduces three new “Private health incentive tiers” with effect from July 1, 2012. From that date, individuals and families may not be eligible for the full 30% rebate for their private health insurance premiums. In conjunction with this, also from July 1, 2012, the rate of Medicare levy surcharge for individuals and families without private patient hospital cover may increase depending on their level of income.

The effect of these new tiers would be that the rebate would begin to phase out for individuals who earn more than $84,000 and for families where that income is more than $168,000. There would be no rebate where individual income is over $130,000 and families over $260,000.

For single people aged 65 to 69 years, the rebate is 35% if they earn less than $84,000 and for those aged 70 and over earning that income, the rebate is 40%.

For families with more than one dependent child, the relevant threshold is increased by $1500 for each child after the first.

In future years, the singles thresholds will be indexed to average weekly ordinary time earnings and increased in $1000 increments (rounding down). The couples/family thresholds will be double the relevant singles thresholds.

The following table illustrates how the changes will operate from July 1, 2012:

For those who think they may be affected by the changes, the income test includes the sum of a person’s:

• taxable income (including the net amount on which family trust distribution tax has been paid, lump sums in arrears payments that form part of taxable income, and payments for unused annual and long service leave); plus
• reportable fringe benefits (as reported on the person’s payment summary); plus
• total net investment losses (includes both net financial investment losses (e.g. re shares) and net rental property losses); plus
• reportable super contributions (includes reportable employer super contributions (e.g. under salary sacrifice arrangements) and deductible personal super contributions),

Less:

• where the person is aged 55 to 59 years old, any taxed element of a lump sum superannuation benefit, other than a death benefit, which they received that does not exceed their low rate cap.

The rebate can currently be claimed in one of three ways:

• the health fund can provide the rebate as a premium reduction;
• where the full, upfront cost of the private health cover premiums has been paid, people can receive a cash payment from the government through their local Medicare office or by lodging the claim form by post;
• the rebate can be claimed on annual income tax returns if the full, upfront cost has been paid.

The changes are significant in a ‘hip pocket’ sense and because of the way in which the income test is calculated, people may need to consult their accountant to see how they may be impacted. As well, at least some private health insurance premiums have already increased, so those affected by the new income test rules will cop a double whammy – less rebate and increased premiums.

Contract outworkers

Legislation has now been passed by Federal Parliament – the Fair Work Amendment (Textile, Clothing and Footwear Industry) Bill 2012 – which will extend the operation of most aspects of the Fair Work Act 2009 to textile, clothing and footwear (TCF) contract outworkers.

This is designed to ensure that outworkers in the TCF industry have the same terms and conditions, as well as other rights and entitlements, as other workers regardless of their status as employees or contractors. The Government said the objective of the amendments is to ensure that contract outworkers are taken to have the same rights and responsibilities as employees in the same position.

This is important for affected SMEs, as it will have direct consequences for them.

Under the changes, the person who directly engages a TCF contract outworker will be treated as their employer.

The Bill also provides a mechanism to enable outworkers to recover unpaid amounts up the supply chain. Under the changes proposed, an outworker who has taken reasonable steps to seek payment from the person who is liable to pay them, will be able to recover an unpaid amount from another entity in the supply chain for whom work is done indirectly. This does not include retailers who sell goods produced by, or of a kind often produced by, outworkers, where the retailer does not have a right to supervise or otherwise control the performance of the work.

The amounts that may be recovered under these provisions will include not only wages or commission but also other amounts owing in relation to particular work, such as superannuation or reimbursement of expenses.

SMEs in the TCF sector need to be aware of these coming changes. They will commence on a day to be fixed by Proclamation.

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