2011/12 Federal Budget highlights

The Federal Budget for 2011/12 was handed down by the Treasurer, Mr Wayne Swan, at 7:30 pm (AEST) on 10 May 2011. The Budget was a fiscally tight one, designed to return the budget to surplus in 2012/13, despite the impact of recent natural disasters. It contained anticipated tax changes such as amending the FBT statutory formula method for valuing car fringe benefits, removing the low income tax offset for minors receiving unearned income, and refunding excess concessional superannuation contributions. However, it also contained a raft of other tax measures, including measures designed to improve the integrity of the not-for-profit sector.

Here are the tax and superannuation highlights.

Individuals and families

• The rebate for dependent spouses aged less than 40 will be phased out to help encourage more Australians into paid employment.
• The amount of the low income tax offset that is delivered to low and middle income earners through their regular pay during the year will be increased from 50% to 70% of their total entitlements.
• The government will limit the ability of minors (children under 18 years of age) to access the low income tax offset to reduce tax payable on their unearned income, such as dividends, interest, rent, royalties and other income from property, with effect from 1 July 2011.
• From 1 July 2011, self-education expenses will no longer be deductible against all government assistance payments.
• From 1 January 2012, the discount available to students electing to pay their HECS student contribution up-front will be reduced from 20% to 10%, and the bonus on voluntary payments to the Tax Office of $500 or more will be reduced from 10% to 5%.
• From 1 July 2011, families in receipt of Family Tax Benefit Part A will be eligible for an advance of up to 7.5%, up to a maximum of $1,000, of their annual Family Tax Benefit Part A entitlement.
• Indexation of the Family Tax Benefit (FTB) Part A and B supplements will be suspended for 3 years. Indexation of family payment higher income thresholds and limits will also be paused at their current level until 1 July 2014 (rather than being CPI-indexed).
• From 1 January 2012, the eligibility for Family Tax Benefit Part A will be limited to children up to the age of 21 years.

Companies

• The company loss recoupment rules will be amended, making it easier for companies to satisfy the continuity of ownership test rules.

CGT

• The rules governing access to the small business CGT concessions will be tightened for trusts and broadened for some small businesses.
• Gains or losses from renewable resource assets or preserving environmental amenity will be CGT exempt.
• Scrip for scrip rollover integrity provisions are to apply to trusts, superannuation funds and life insurance companies.
• Minor amendments will be made to the tax laws to ensure the CGT provisions operate as intended.
• Various concessions will apply to special disability trusts to make them more beneficial to families.

FBT

• A flat rate of 20% will replace the scale of statutory rates currently used to calculate the taxable value of a car fringe benefit under the “statutory formula” method.

Financial arrangements

• The TOFA rules relating to hedging will be amended to ensure they operate as intended.
• The debt/equity rules will be amended to restrict the application of an integrity provision that deems an interest from an arrangement that funds a return through connected entities to be an equity interest under certain circumstances.
• For certain situations, the tax rules for securities lending arrangements will be amended to ensure that the lender under a securities lending arrangement is treated as not having disposed of the lent securities.

Not-for-profit sector

• The government has announced a range of reforms to the not-for-profit (NFP) sector, including a statutory definition of “charity”, a new Charities and Not-for-profits Commissioner and reforms to ensure that the concessions are targeted only at those activities that directly further a NFP’s altruistic purpose.

International tax

• Interim Investment Manager Regime arrangements will be extended to the 2010/11 year.
• The list of countries reported in the Taxation Administration Regulations 1976 whose residents are eligible to access a reduced rate of withholding tax on certain distributions from Australian managed investment trusts will be updated.

Tax administration

• A technical deficiency in the transitional rules imposing general interest charge and shortfall interest charge liabilities will be corrected to ensure their continuous operation.
• The GDP adjustment factor for PAYG instalment taxpayers who use the GDP adjustment method will be reduced from 8% (which is the rate that would apply for the 2011/12 income year under the current law) to 4% for the 2011/12 income year.
• Various measures to improve tax compliance will be introduced including increasing company directors' personal liabilities for company debts and increasing Tax Office resources.

Superannuation

• Eligible individuals will have the option of having excess concessional superannuation contributions assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.
• A higher concessional contributions cap will apply for the over 50s with superannuation balances under $500,000 from 1 July 2012.
• Superannuation fund trustees will be able to make greater use of tax file numbers to locate member accounts.
• Employees will receive information on their payslips about the amount of superannuation paid into their accounts.
• Superannuation funds will no longer be able to treat certain assets as trading stock.
• The pension drawdown relief that has been provided over the last three years will be phased out.
• The freeze to the indexation of the income threshold for superannuation co-contribution purposes will be extended for an additional year to 2012/13.

GST

• The GST treatment of property in possession of a mortgagee will be amended from 1 July 2012.
• Certain supplies to health insurers will be GST - free from 1 July 2000.
• Small businesses in a net refund position will be allowed access to the GST instalment system.
• The start date for certain GST reform measures recommended by the Board of Taxation is to be delayed.

Other measures

• The Government will clarify how the taxing point is calculated for the purposes of the Petroleum Resource Rent Tax, with effect from 1 July 1990.
• The timing difference between the assessability of payments under the Sustainable Rural Water Use and Infrastructure Program and the deductibility of amounts spent under program agreements will be eliminated, with effect from 1 April 2011.
• Primary producers affected by natural disasters can access their farm management deposits within 12 months of making the deposit without losing their concessional tax treatments under the scheme.
• Certain trusts and partnerships keeping accounts in foreign currency can calculate net income using that currency.
• The introduction of excise and excise-equivalent customs duty on alternative fuels will be delayed until 1 December 2011 in response to representations from industry to allow additional time to implement the tax changes.
• There will be no immediate tax consequences for indigenous corporations that amalgamate.
• Luxury car tax will not apply to imports by public museums and art galleries.
• The roll-out of the National Rental Affordability Scheme will be spread over a longer period.
• Eligibility criteria for the film tax offsets will be broadened from 2011/12, and the amount of the offsets will be increased.
• Rollovers will apply to ensure the smooth implementation of State and Territory government reforms relating to water delivery systems.
• Minor amendments will be made to various rules affecting the CGT main residence exemption, small business participation percentage and appointment of a director of a self managed superannuation fund trustee.

Dependent spouse rebate to be phased-out

The dependent spouse rebate will be phased out for taxpayers with a dependent spouse born on or after 1 July 1971.
This reform addresses a barrier to participation by progressively removing the tax concession for taxpayers with a non-working spouse and no children.
Taxpayers with an invalid or permanently disabled spouse, supporting a carer, or people who are eligible for the zone, overseas forces and overseas civilian tax offsets will not be affected by this change.
Source: Budget Paper No 2, p 14.

Low income tax offset brought forward

The amount of the low income tax offset (LITO) that is delivered to low and middle income earners through their regular pay during the year will be increased from 50% to 70% of their total entitlements. The remaining 30% of their LITO benefit will still be paid as a lump sum on assessment of income tax returns.
This measure will have effect from 1 July 2011.
Source: Budget Paper No 2, p 15.

Minors and low income tax offset

The government will limit 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 1 July 2011. This measure will discourage income splitting between adults and children.
Income earned by minors from work will still be eligible for the full benefit of the LITO. Unearned income of minors who are orphans or disabled, as well as compensation payments and inheritances received by minors, will not be affected by this measure.
Source: Budget Paper No 2, p 40.

Self-education expenses against Youth allowance payments denied

The tax law will be amended to disallow self-education expenses against all government assistance payments. The change is being introduced in response to the 2010 High Court decision in FC of T v Anstis 2010 ATC ¶20 - 221. The proposed changes will have effect from 1 July 2011. Thus, individuals who receive Youth Allowance (Student) will be able to claim a deduction for expenses incurred in gaining their payment for the 2010/11 income year.
For each of the years 2006/07 to 2009/10, the Commissioner has determined that he will administer the law to allow eligible taxpayers to receive an automatic deduction of $550 or make potentially higher claims if the relevant self-education expenses can be substantiated.
Source: Budget Paper No 2, p 39.

Tax-related measures: HECS and FTB

HECS discount

From 1 January 2012, the following discounts applying to HECS payments will be reduced:

• the discount available to students electing to pay their student contribution up-front will be reduced from 20% to 10%, and
• the bonus on voluntary payments to the Tax Office of $500 or more will be reduced from 10% to 5%.

Source: Budget Paper No 2, p 163 - 164.

FTB and family payments adjustments

From 1 July 2011, families in receipt of Family Tax Benefit (FTB) Part A will be eligible for an advance of up to 7.5 per cent, up to a maximum of $1,000, of their annual FTB Part A entitlement. Advances will be repaid over six months by reducing future fortnightly FTB payments. Payment of advances will be subject to an assessment of a family's ability to repay the advance without falling into financial hardship. Advances can be taken at any point throughout the year.

From 1 January 2012, the eligibility for FTB Part A will be limited to children up to the age of 21 years, as young people aged 22 and over are considered independent. When a child turns 22 years of age, parents will no longer be able to receive FTB Part A for that child but the child may be eligible to receive Youth Allowance subject to usual means testing and academic progress rules.

Indexation of the FTB Part A and B supplements will be suspended for 3 years. The FTB supplements will be fixed at the current 2010/11 levels of $726.35 per annum per child for FTB Part A and $354.05 per annum for FTB Part B until 1 July 2014 (rather than being CPI-indexed).

Indexation of family payment higher income thresholds and limits will also be paused at their current level until 1 July 2014 (rather than being CPI-indexed). This means that:

• FTB Part B primary earner income limit will remain at $150,000
• the income limit for receiving the dependency tax offsets will remain at $150,000
• the Baby Bonus eligibility limit will remain at $75,000 of family income in the six months following the birth or adoption of a child, equivalent to $150,000 a year
• the Paid Parental Leave primary carer income limit will remain at $150,000 in the financial year before the birth or adoption of a child, and
• the higher income-free threshold of FTB Part A will remain at $94,316 of family income, with an additional $3,796 provided for each child after the first.

Income limits are the amount a family can earn before they are no longer eligible for family payments, and the higher income-free area for FTB Part A is the income level at which FTB payments begin to reduce.
Source: Budget Paper No 2, p 188 - 189, 194 - 196.

 

More flexible loss recoupment rules

The continuity of ownership test (COT) rules will be amended such that companies need not trace ownership through certain superannuation entities. The amendments will also remove technical deficiencies in the modified rules for widely held entities where:

• an entity is interposed between certain stakeholders and the loss company in certain circumstances
• an interposed entity demerges
• an interposed foreign entity issues bearer depository receipts, or
• a corporate change arising from the issue of new shares happens.

Under the amendments, membership interests in an entity will be treated as a single asset when applying the low value asset exclusion under the loss integrity rules.
The amendments will be effective from the 2011/12 income year.
Source: Budget Paper No 2, p 28.

 

Small business CGT concessions

Trusts will not be able to avoid being treated as connected entities for the purpose of testing eligibility for the CGT small business concessions on the basis that trusts do not own assets for their own benefit. These changes will also ensure that some small businesses will be able to access the concessions because the changes will make their business assets "active" .
This measure will have effect for CGT events happening after 7.30pm (AEST) on 10 May 2011.
Source: Budget Paper No 2, p 16.

CGT exemption for renewable resources or environmental benefits

Gains or losses arising from a right to a financial incentive granted to taxpayers under an Australian government scheme that encourages taxpayers to acquire renewable resource assets or to agree to preserve a part of Australia's environmental amenity will be exempt from CGT. Eligible schemes may be provided by the Commonwealth or a State or Territory government. Examples of renewable resource assets include photovoltaic solar cells or solar hot water systems. An example of preserving environmental amenity is refraining from removing remnant vegetation.
This measure will also turn off the income tax recoupment rules in relation to any underlying assets (eg, a solar hot water system) to ensure that the incentive keeps its full financial value. It will apply to income tax assessments for the 2007/08 income year and later income years.
Source: Budget Paper No 2, p 16.

Scrip for scrip rollover

The scrip for scrip roll-over integrity provisions that currently apply to individuals and companies will also apply appropriately to trusts, superannuation funds and life insurance companies, with effect for CGT events happening after 7.30pm (AEST) on 10 May 2011.
The integrity provisions apply to transactions where stakeholders in the target and acquiring entities have the potential to influence both entities. As trusts, superannuation funds and life insurance companies own the interests for the benefit of others (ie, the beneficiaries) rather than for their own benefit, they consider that the integrity provisions do not apply to them. However, this was never the intended interpretation of the integrity provisions and so the Government will amend them to ensure that they apply effectively to all stakeholders.
Source: Budget Paper No 2, p 15.

Ensuring the proper functioning of the CGT rules

The income tax law will be amended to ensure the proper functioning of CGT and related provisions. These include:

• ensuring that, in the roll-over for the exchange of shares in one company for shares in another company, there is deferral of a profit or loss where the original shares are held on revenue account at the time of the exchange (with effect from 7.30 pm (AEST) on 10 May 2011)
• amending the roll-over for certain disposals of assets by a trust to allow roll-over relief to apply where a transferee company or trust holds rights, just before the disposal or transfer time, associated with a deed or similar document that is designed to facilitate the transfer of assets into the company or trust. Changes to the roll-over applying between a trust and a company will have effect for CGT events happening after 7.30 pm AEST on 10 May 2011; changes to the roll-over applying between trusts will have effect for CGT events happening on or after 1 November 2008
• ensuring that gains and losses arising from life insurance policies that are generally exempted from CGT are not then taxed under the ordinary income tax provisions by removing the CGT exception for such gains and losses (applicable to CGT events happening in the 2005/06 income year and later income years)
• legislating the current Tax Office practice of allowing a testamentary trust to distribute an asset of the deceased person without a CGT taxing point occurring. The income tax law in relation to deceased estates will also be rewritten using a principle based format. These will apply to CGT events happening on or after the day the legislation receives assent.

Source: Budget Paper No 2, p 18.

Special disability trusts and CGT

The Government will extend the 2009/10 Budget measure that provides a CGT main residence exemption to special disability trusts (SDTs). This concession applies where a dwelling owned by an SDT is used by a principal beneficiary as their main residence.

Equivalent taxation treatment will be provided to SDTs established under different Acts. This will ensure that the taxation treatment of SDTs set up under the Veterans' Entitlements Act 1986 will be the same as the treatment for SDTs set up under the Social Security Act 1991.

There will be a CGT exemption for assets transferred into a SDT for no consideration. For inter vivos transfers, the transferor will disregard any gains or losses on the asset when it is transferred into the SDT. For testamentary transfers, the first element of the asset's cost base and reduced cost base in the hands of the trustee of the SDT will be equal to the market value of the asset on the day the transferor died.

In addition, there will be a CGT exemption in the advent of the death of the principal beneficiary of an SDT for the intended recipient of the principal beneficiary's main residence, if the recipient disposes of the dwelling within two years of the principal beneficiary's death. To be eligible for the exemption, just before the principal beneficiary's death, the dwelling must be the principal beneficiary's main residence, the dwelling must not be used to produce assessable income, and the trust must be an SDT. A partial exemption may be available to the trustee of the SDT if the dwelling was used to produce assessable income just before the principal beneficiary's death.

These changes will apply from the 2006/07 income year, to align with when SDTs were first able to be established.
Source: Budget Paper No 2, p 17; Assistant Treasurer's Press Release: Removal of Income Tax Impediments Affecting Special Disability Trusts.

Statutory formula reforms for car fringe benefits

Over the next four years, the existing statutory fractions ranging from 7% to 26% applied when working out the taxable value of a car fringe benefit using the "statutory formula" method will be phased out and replaced by a flat rate of 20%.

Under the "statutory formula" method, the taxable value of a car fringe benefit depends on the relevant statutory fraction applied to the cost of the car. Currently, this statutory fraction decreases as the distance travelled by the vehicle increases. The new flat rate of 20% will apply regardless of the distance travelled during the year, removing the incentive for people to drive more than necessary to access higher tax concessions.

The 20% flat rate will only apply to new vehicle contracts entered into after 7:30 pm (AEST) on 10 May 2011, and will be phased in over four years as shown in the table below.

Statutory rate (multiplied by the cost of the car to determine a person's car fringe benefit) applied to new contracts entered into after 7:30pm (AEST) on 10 May 2011

Distance travelled during the FBT year (1 April - 31 March)	From 10 May 2011	From 1 April 2012	From 1 April 2013	From 1 April 2014
0 - 15,000 km	0.20	0.20	0.20	0.20
15,000 - 25,000 km	0.20	0.20	0.20	0.20
25,000 - 40,000 km	0.14	0.17	0.20	0.20
More than 40,000 km	0.10	0.13	0.17	0.20

Source: Budget Paper No 2, p 23; Treasurer's Press Release: Reforms to car fringe benefit rules, 10 May 2011.

 

TOFA reforms

The Taxation of Financial Arrangements (TOFA) tax hedging rules will be amended to ensure they operate as intended and to provide further certainty and reduce compliance costs for affected taxpayers. The amendments will apply from the start of the income year in which the TOFA Stages 3 and 4 rules start to apply to the particular taxpayer.

For taxpayers who have elected to apply both the TOFA tax hedging rules and the TOFA reliance on financial reports tax timing method, only the effective portion of the gains and losses from hedging financial arrangements will be subject to the TOFA tax hedging treatment. Gains and losses from hedging financial arrangements that hedge a risk or risks in relation to a firm commitment (as defined in the accounting standards) are to be brought to account for tax purposes when gains, losses or other amounts in relation to the assets or liabilities arising out of the cessation of the firm commitment are recognised for tax purposes.

Source: Budget Paper No 2, p 49.

Debt/equity: scope of integrity provision

The debt/equity rules will be amended to restrict the application of an integrity provision that deems an interest from an arrangement that funds a return through connected entities to be an equity interest under certain circumstances.

The changes will ensure that this provision will only apply to arrangements where both the purpose and effect is that the ultimate investor has, in substance, an equity interest in the issuer company. Additionally, the integrity provision will not apply where the Commissioner considers that it would be unreasonable for the provision to apply. The amendments will apply from the commencement of the debt/equity tax rules (generally 1 July 2001).

Source: Budget Paper No 2, p 20.

Securities lending arrangements tax rules

The tax rules for securities lending arrangements will be amended to ensure that the lender under a securities lending arrangement is treated as not having disposed of the lent securities where:

• the borrower does not return the securities, or identical securities, within 12 months due to the borrower's insolvency, and
• no later than 30 days after the resulting default (or within such longer period that the Commissioner allows), the lender restores their original position prior to the securities lending arrangement by using the collateral received under the arrangement to purchase identical securities.

The amendments will apply to securities lending arrangements in existence as at 1 July 2008 and those arrangements entered on or after that date.
The government will also consult on whether and, if so, what changes are required to address the suspension of securities on a stock exchange.

Source: Budget Paper No 2, p 42.

 

Not-for-profit sector reforms

The government has announced a range of reforms to the not-for-profit (NFP) sector, including a statutory definition of "charity", a new Charities and Not-for-profits Commissioner and reforms to ensure that the concessions are targeted only at those activities that directly further an NFP's altruistic purpose.

Better targeting of concessions

The tax concessions provided to NFP entities will be reformed to ensure they are targeted only at those activities that directly further an NFP's altruistic purposes. The new arrangements will commence on 1 July 2011 and will initially affect only new unrelated commercial activities that commence after 10 May 2011.

Under this measure, the NFP income tax concessions will only apply to profits generated by unrelated commercial activities that are directed back to an NFP entity to carry out its altruistic work. This means NFP entities will pay income tax on profits from their unrelated commercial activities that are not directed back to their altruistic purpose, ie the earnings they retain in their commercial undertaking.

NFP entities, in respect of their unrelated commercial activities, will also not have access to the FBT exemptions or rebate, GST concessions, or deductible gift recipient support in relation to those activities.

Commercial activities that further an NFP entity's altruistic purposes, and small-scale and low-risk unrelated commercial activities, will not be affected by the reforms. NFP entities with existing unrelated commercial activities will initially be able to continue to use their tax concessions to support these activities. The Government will consult on transitional arrangements for these existing activities, with the intention of phasing these out over time. NFP entities that have entered into a government service delivery contract as at 10 May 2011 will be allowed to use their tax concessions in support of that contract.

Likewise, the 50,000 National Rental Affordability Scheme allocations will be unaffected by the tax changes.

Statutory definition of charity

The government will consult on and introduce a statutory definition of "charity" for all Commonwealth laws to take effect from 1 July 2013. It will be based on the 2001 Report of the Inquiry into the Definition of Charities and Related Organisations, taking account of the findings of recent judicial decisions, such as Aid/Watch Incorporated v FC of T 2010 ATC ¶20-227.

The government will also consult with the states and territories with the intention of developing and introducing a definition of "charity" that can be adopted by all jurisdictions.

Charities and Not-for-profits Commission

The government will provide $53.6 million over four years for the establishment of a new independent statutory agency, the Australian Charities and Not-for-profits Commission (ACNC), by 1 July 2012 and related structural changes required to the Tax Office.
An implementation taskforce (headed by the expected Commissioner of the ACNC) will also be set up in Treasury from 1 July 2011 to ensure the ACNC is ready for operation by 1 July 2012.

The Commissioner of the ACNC will be appointed by the government and report to parliament through the Assistant Treasurer. The Commissioner will have sole responsibility for determining charitable, public benevolent institution, and other not-for-profit status for all Commonwealth purposes. The ACNC will also initially be responsible for providing education and support to the sector; implementing a 'report-once use-often' general reporting framework for charities; and implementing a public information portal by 1 July 2013.

From 1 July 2011, the Tax Office will structurally separate its role of determining charitable status from its role of administering tax concessions, in preparation for the establishment of the ACNC. The Commissioner of Taxation will retain responsibility for administering tax concessions for the not-for-profit sector. The Tax Office will provide corporate service support to the ACNC in the form of information technology services, human services, financial services and other related functions. The Government will also undertake negotiations with the States and Territories on national regulation and a new national regulator for the sector, with the aim of minimising reporting and other regulatory requirements through coordinated national arrangements.

Source: Budget Paper No 2, pp 36-37, and 322.

 

Interim Investment Manager Regime arrangements

Interim Investment Manager Regime (IMR) arrangements will be introduced to address uncertainty regarding the taxation arrangements for certain portfolio investment income of foreign managed funds. Under this measure, where a foreign managed fund has never lodged an Australian tax return, the Tax Office will generally not raise an assessment in respect of certain portfolio investment income of the fund for the 2010/11 or prior income years. This measure, which was initially announced on 17 December 2010 to apply for the 2009-10 and prior income years, has been extended to 2010/11 as part of this Budget.

Furthermore, to the extent relevant investment income of a foreign managed fund is taxed only because the fund is taken to have a 'permanent establishment' in Australia, such income will be exempt from tax (except for the arm's length fee for services provided by Australian investment advisors). This will remove an impediment to foreign funds engaging Australian investment advisers to manage primarily offshore assets, and will apply to the 2010/11 and later income years.

Source: Budget Paper No. 2, p 30.

Reduced withholding tax on Australian managed investment trusts distributions

The list of countries reported in the Taxation Administration Regulations 1976 whose residents are eligible to access a reduced rate of withholding tax on certain distributions from Australian managed investment trusts will be updated.

The reduced withholding tax rate is restricted to residents of countries with which Australia has effective exchange of information arrangements and which are listed in the Regulations. This requirement safeguards the integrity of the managed investment trust withholding tax system and signals Australia's commitment to using effective exchange of information to reduce opportunities for international tax evasion and avoidance. This measure updates the list to include Belize; the Cayman Islands; the Commonwealth of the Bahamas; the Principality of Monaco; the Republic of San Marino; the Republic of Singapore; St Chris her and Nevis; and St Vincent and the Grenadines.

Source: Budget Paper No. 2, pp 31-32.

 

Correcting technical deficiency to ensure continuous operation of GIC

A technical deficiency in the transitional rules imposing general interest charge (GIC) and shortfall interest charge liabilities will be corrected to ensure their continuous operation. The transitional rules do not impose the GIC on income tax and shortfall interest charge liabilities due on or after 1 July 2010 and related to financial years ending 30 June 2010 or earlier due to a technical deficiency when they were rewritten into the Income Tax Assessment Act 1997.

The amendment will rectify this deficiency.

Source: Budget Paper No 2, p 24.

PAYG instalment payers: GDP adjustment method

The GDP adjustment factor for PAYG instalment taxpayers who use the GDP adjustment method will be reduced from 8% (which is the rate that would apply for the 2011/12 income year under the current law) to 4% for the 2011/12 income year.
The GDP adjustment factor for the PAYG instalment taxpayers increases the previous year's adjusted taxable income by the previous year's nominal GDP growth, to determine the tax instalments to be paid in the income year. The GDP adjustment method is used by the overwhelming majority of taxpayers required to pay quarterly income tax instalments, mainly small businesses, but also some individual investors, certain trustees and small superannuation funds.

Source: Budget Paper No 2, p 38.

Tax compliance improvements

In an effort to improve tax compliance, various measures will be introduced as follows:

• Tax law to counter fraudulent phoenix activity will be strengthened. With effect from 1 July 2011, the director penalty regime will be expanded, including making company directors personally liable for unpaid employee superannuation and being prevented from using their individual withholding credits if the company has withholding amounts owing to the Tax Office.
• With effect from 1 July 2012, certain businesses will be required to annually report payments to contractors in the building and construction industry.
• The Tax Office will be provided with additional resources to, among other things, enhance refund fraud detection and monitor accounting of government grants and payments.
• The Government will also publicly consult on the introduction of a reporting regime for payments to contractors in the commercial cleaning industry.

Source: Budget Paper No 2, pp 45-47.

 

Refund of excess concessional contributions

Eligible individuals will be provided with the option of having excess concessional contributions taken out of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

The measure will apply where an individual has made excess concessional contributions of up to $10,000 (not indexed) in a particular year and is only available for breaches in respect of 2011/12 or later years, and only for the first year, commencing from 2011/12, in which a breach occurs.

Excess contributions tax is incurred where an individual exceeds their concessional contributions cap. Concessional contributions include compulsory superannuation guarantee payments, salary sacrifice contributions, and other deductible contributions. Excess concessional contributions are taxed at 31.5 per cent, in addition to 15 per cent tax when contributions are made to the fund.

This measure makes the superannuation system fairer by allowing those who have breached the cap for the first time, by $10,000 or less, the option to have these contributions refunded and taxed at their potentially lower marginal tax rate rather than the 46.5% effective excess contributions tax rate.
Source: Budget Paper No 2, p 43-44.

Higher superannuation contribution caps for over 50s

The government will set the higher concessional superannuation contributions cap for eligible individuals aged 50 and over with total superannuation balances of less than $500,000, due to apply from 1 July 2012, to $25,000 above the general concessional cap.

This measure clarifies the operation of the higher cap for the over 50s which was introduced in the 2010/11 Budget, and means those eligible Australians over 50 will be able to contribute $25,000 more per year than other workers.

The general concessional contribution cap is set at $25,000. When it increases due to indexation, the higher cap will increase by the same dollar amount.
Source: Budget Paper No 2, p 44.

Greater use of tax file numbers

The government will allow superannuation fund trustees and retirement savings account (RSA) providers to make greater use of tax file numbers (TFNs) to locate member accounts and to facilitate the consolidation of multiple member accounts.

This measure will improve superannuation industry administration by removing the existing requirement for fund trustees and RSA providers to use other methods of identification to locate accounts before TFNs can be used, with effect from 1 July 2011. It will also assist fund trustees and RSA providers to carry out more efficient consolidation of multiple member accounts, with effect from 1 January 2012, if not proclaimed earlier.
Source: Budget Paper No 2, p 43.

Limiting the CGT trading stock exemption for superannuation funds

The government will remove the trading stock CGT exception for complying superannuation entities for specified assets, with effect from 7.30 pm (AEST) 10 May 2011. This will ensure gains or losses on those assets (primarily shares, units in a trust and land) are subject to CGT, consistent with CGT being the primary code for taxing gains and losses of complying superannuation entities. This will prevent complying superannuation entities treating shares as trading stock, so as to deduct losses on their shares against income other than capital gains.

This measure also provides transitional rules to ensure that assets held or accounted for as trading stock before the time of announcement are unaffected.
Source: Budget Paper No 2, p 17.

Superannuation information on payslips

Employees will receive information on their payslips about the amount of superannuation actually paid into their account; and employees and employers will receive quarterly notification from their superannuation fund if regular payments cease, with effect from 1 July 2012.
Source: Budget Paper No 2, p 44.

Reduction in minimum payment amounts for account-based pensions in 2011/12

The government will phase out the pension drawdown relief that has been provided over the last three years. Minimum payment amounts for account-based, allocated and market linked (term allocated) pensions will be reduced by 25 per cent for 2011/12 and will return to normal in 2012/13.

Reducing the minimum payment amounts for account-based pensions will assist holders of these products to recoup capital losses incurred as a result of the global financial crisis. The government previously provided pension drawdown relief in the 2008/09, 2009/10 and 2010/11 years by halving the minimum payment amounts.
Source: Budget Paper No 2, p 41.

Freeze on superannuation co-contribution indexation extended

The government will continue the freeze, for an additional year to 2012/13, of the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.

Under the superannuation co-contribution scheme, the government provides a matching contribution for contributions made into superannuation out of after-tax income. The matching 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.`
Source: Budget Paper No 2, p 326.

 

Property in possession of a mortgagee

The GST law in relation to the mortgage lending sector will be amended to clarify its operation and reduce compliance costs, with effect from 1 July 2012.
The proposed measure will clarify that Div 105 of the GST Act will operate to the exclusion of Div 58 of the GST Act where a mortgagee in possession or control sells the property of a corporation.

This will provide certainty and reduce compliance costs for entities in the mortgage lending sector by allowing mortgagees in possession or control of property of corporations to continue to report and account for their GST obligations under a single registration.
Source: Budget Paper No 2, p 25..

Certain supplies to health insurers GST-free

Certain supplies made to health insurers in the course of settling health insurance claims will be GST-free with effect from 1 July 2000.
This measure follows the decision of the Full Federal Court in FC of T v Secretary to Department of Transport (Vic) 2010 ATC ¶20-196. In that case, it was held that a government department which paid a subsidy to taxi-cab operators was entitled to input tax credits for the GST component of the subsidy payments.
Source: Budget Paper No 2, p 26.

Access to GST instalment system for small businesses in net refund position

The current GST instalment system will be extended to allow access for small businesses that are in a net refund position.
This measure will allow small businesses in a net refund position to choose to access the GST instalments system, with an instalment amount each quarter of zero. Any refund or liability due to the taxpayer will be reconciled in their annual GST return.
This measure will come into effect when the relevant legislation receives assent.
Source: Budget Paper No 2, p 27.

Deferral of certain GST reform measures

The government will defer the start date for a number of components of the 2009/10 Budget measure implementing recommendations of the Board of Taxation's review of the legal framework for the administration of the GST that were to commence from 1 July 2011.
The revised start date will be the first quarterly tax period after the amending legislation receives Royal Assent, or, where appropriate, a later quarterly tax period after Royal Assent.

The revised start dates will apply to the following components of the 2009/10 Budget measure:

• adopting the income tax self assessment regime for indirect taxes and refreshing the period of review
• reforming the change of use adjustments
• allowing adjustments for pre-registration acquisitions
• clarifying the treatment of tax law partnerships
• simplifying the GST grouping membership rules, including grandfathering of current membership rules, and allowing grouping of non-operating holding companies and trusts
• amending indirect tax sharing agreement provisions, and
• introducing a reverse charge for supplies of going concerns and farmland.

This measure will allow additional time for the development of these components in consultation with taxpayers.

The government will also not proceed at this stage with the component of the 2009/10 Budget measure to provide an option to treat certain business-to-business supplies as taxable, which was scheduled to take effect on 1 July 2010. The deferral will enable more extensive consideration of the possible wider use of reverse charging or GST-free business-to-business transactions.
Source: Budget Paper No 2, p 26 - 27.

 

PRRT taxing point

The Government has announced that it will clarify how the taxing point is calculated for the purposes of the Petroleum Resource Rent Tax (PRRT), with effect from 1 July 1990. The proposed measure will confirm the existing application of the PRRT in relation to the taxing point and is designed to provide greater certainty for PRRT taxpayers. The location of the taxing point within a PRRT project is used in determining PRRT liabilities, and was the central issue recently considered by the Federal Court in the Esso Australia Resources decision. The amendments are intended to provide statutory support for the Court's decision and to be consistent with the established application of the legislation.
Source: Budget Paper No 2, p 40.

Assessability of Sustainable Rural Water Use and Infrastructure Program payments

The timing difference between when payments under the Sustainable Rural Water Use and Infrastructure Program are taxed and when deductions are available for amounts spent under program agreements will be eliminated, with effect from 1 April 2011.
Source: Budget Paper No 2, p 48.

Early access to farm management deposits for natural disaster victims and other changes

Access to farm management deposits (FMDs) within 12 months of making the deposit currently provided to primary producers affected by severe drought will be extended to those affected by natural disasters.

Changes to the administration of the FMD scheme will require more timely and frequent reporting from authorised deposit taking institutions holding FMDs and allow primary producers to hold FMDs with more than one financial institution. The unclaimed monies provisions of the Banking Act 1959 will also be amended such that FMD accounts that have been non-operative for at least seven years are treated as unclaimed monies only following unsuccessful reasonable efforts by the financial institution to contact the FMD holder.
Source: Budget Paper No 2, p 22..

Functional currency rules extended to certain trusts and partnerships

Certain trusts and partnerships keeping accounts solely or predominantly in a foreign currency will be able to calculate their net income using that foreign currency. This measure is effective from the date of assent of the amending legislation.
Source: Budget Paper No 2, p 23.

Alternative fuels: delayed introduction and other changes

The introduction of excise and excise-equivalent customs duty on alternative fuels until 1 December 2011 will be delayed in response to representations from industry to allow additional time to implement the tax changes.

The government will also simplify the arrangements by applying transitional tax rates to gaseous fuels and biodiesel at the scheduled effective tax rates during the transition to 2015/16, instead of imposing tax at the final rate and providing offsetting production grants.

The government will also make several other minor changes, including revising the unit of measurement of compressed and liquefied natural gas for taxation purposes from cents per litre to cents per kilogram, consistent with general industry practice.
Source: Budget Paper No 2, p 14.

Rollovers for indigenous corporations

Amendments will ensure that there are no immediate taxation consequences for Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act) corporations that amalgamate with one or more CATSI Act corporations, with effect for income tax assessments for the 2007/08 income year and later income years. This will be achieved by a CGT roll-over for members' interests in CATSI Act corporations that amalgamate, and a roll-over for any gains or losses realised by the original corporation when it ceases to own its CGT assets, revenue assets, trading stock and depreciating assets that become assets of the newly amalgamated entity.
Source: Budget Paper No 2, p 19.

Luxury car tax exemption for public museums and art galleries

To be consistent with the GST free and Customs duty free treatment of imported art work or collectors' pieces, eligible entities such as endorsed public museums and art galleries will be able to import cars free of the luxury car tax. This change will apply from the date of assent of the enabling legislation.
Source: Budget Paper No 2, p 32.

National rental affordability scheme

The roll-out of the National Rental Affordability Scheme (NRAS) will be achieved over a longer time period. Priority will also be given to applications from flood-affected areas across Australia in allocating the remaining NRAS incentives under the 2013-14 target.
Source: Budget Paper No 2, p 310.

Film tax offsets

There will be a range of enhancements to the film tax offsets program over four years from 2011/12. These include:

• lowering the threshold of the producer offset to $500,000
• providing direct funding for low budget (under $500,000) documentaries in place of the producer offset
• increasing the rate of the location offset from 15% to 16.5%
• increasing the post, digital and visual effects offset from 15% to 30%
• permitting some additional screen production costs to be claimed as Qualifying Australian Production Expenditure (QAPE) under the film tax offsets and
• allowing television series to benefit from the producer offset for the first 65 broadcast hours (replacing the current 65 episode limit).

These changes will be partly offset by removing the GST amounts from QAPE for the film tax offsets and increasing the minimum expenditure thresholds for documentaries to $500,000 in production (from the current threshold of $250,000).
Source: Budget Paper No 2, p 285.

Tax relief for water reforms

Certain State and Territory government reforms provide greater certainty to taxpayers about the application of the federal Water Market Rules 2009, remove unnecessary regulation and give water users flexibility to reconfigure their water delivery systems. The Government will ensure that income tax, including CGT, does not discourage these reforms by providing CGT and capital allowance roll-overs, applicable to income tax assessments for the 2009/10 income year and later income years.
Source: Budget Paper No 2, p 29.

Minor tax law amendments

The government will make various minor amendments to the tax law as follows:

• the Commissioner will have the discretion to extend the two-year ownership period by which a trustee of a deceased estate or its beneficiary must dispose of their interest in the deceased's dwelling to have access to the full capital gains tax main residence exemption or a greater partial exemption.
• a taxpayer can have a non-zero direct small business participation percentage where either company shares are jointly held or no discretionary trust distribution has been received because the trust had a tax loss or no net income for that year.
• a parent or guardian of a self managed superannuation fund member that is a minor can be a director of that fund's body corporate trustee.

Source: Budget Paper No 2, p 48.