Client Alerts
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Budget Overview
Despite softening the Australian public up for a hard hitting budget with pre budget leaks, last night's Federal Budget was not particularly tough. It does however, propose a number of key reforms in health, education and workforce participation with the Government announcing it has imposed strict spending limits, saving $22 billion to fund in part some of these new initiatives.
There are a large number of minor tax reforms over a broad range of areas. None of these reforms are particularly significant in their own right, but collectively they add to a considerable amount.
The Government is promoting the following as the core items for this budget:
- A plan to build a more productive workforce
- A plan for better schools, hospitals and health care, and
- Cost of living relief for families, investments in a sustainable Australia, and new assistance for small businesses and manufacturers.
The notable omission from the budget was in relation to any expected budget implications in respect of the carbon price. The fiscal implications will be advised once the design of the Governments proposals in relation to taxing carbon have been finalised.
The Economics
The budget forecasts a deficit of $45.7 billion for the 2010/11 year and a deficit of $20.3 billion for the 2011/12 year, with the Government expecting the budget to return to a modest surplus of $3.5 billion in the 2012/13 year.
The Government is projecting that the economy will grow at a rate of 4% to June 2012 and 3.75% in the 2013 financial year. This is despite a 0.75% overall decrease resulting from natural disasters occurring both in Australia and abroad.
Unemployment is also expected to drop from a current rate of 5% to 4.75% by June 2012 and a further drop to 4.5% by June 2013.
Inflation is also tipped to drop from a current rate of 3.25% to 2.75% by June 2012 and then back up to 3.0% by June 2013.
The boldest claim in the budget (even more bold than when it was made in last year’s budget) is the return to a modest $3.5 billion surplus by June 2013, 3 years ahead of the timeframe predicted at the time of 2009’s budget.
There are also spending measures in the key areas of workforce training ($558 million), infrastructure ($36 billion), health (over $18 billion, with $16.4 billion on hospitals and $2.2 billion on mental health), schools (over $800 million), and regional development of $4.3 billion amongst others.
Significant Budget Measures
The following are the major budget announcements:
- No change to personal marginal rates. However the flood levy will apply from 1 July 2011 to increase the effective marginal rate of tax for income above $50,000 in between an additional 0.5% and 1%. The effective top marginal rate becomes 47.5% for incomes above $180,000.
- Minors no longer eligible for the low income tax offset from 1 July 2011. This will directly impact on the amount that minors can receive from discretionary trusts and investments in their own names without facing the penalty rates that apply to ‘unearned income of minors. It means that the tax free amount of passive income they can receive tax free will reduce from $3,333 per annum for the year ended 30 June 2011 to $416 for the year ended 30 June 2012.
- No deductions against Government assistance payments such as youth allowances from 1 July 2011.
- The dependant spouse rebate will be phased out for spouses with no children who are under 40 years of age (born after 1 July 1971) from 1 July 2011.
- The Government will seek to reintroduce the previous provisions that it could not get passed by Parliament in relation to the means testing of the Private Health Insurance rebate.
- There will be a reduction in both the upfront and lump sum HECS payment discounts from 1 July 2012. Both levels of discounts will be reduced by 50%.
-There will be a one off opportunity to have excess contributions refunded where concessional contributions breach the cap by up to $10,000 from 1 July 2011. The refund will be assessable income and tax at marginal rates rather than the effective 46.5% that would apply under the excess contributions tax regime. As a result the proposal will only benefit those who face a marginal rate lower than the top marginal rate and it is a once only opportunity. There are also a number of other specific superannuation changes in relation to minimum pension amounts, higher concessional contribution caps for those over 50 in certain circumstances, ensuring all share transactions are subject to capital gains tax and new super contribution reporting requirements. There are also minor changes to the instalment warrant provisions.
- Small business (those with a turnover of less than $2 million) will be eligible to claim a deduction for the first $5,000 of any motor vehicle purchased from 1 July 2012. The balance of the car’s cost can then be depreciated. This deduction is in addition to the increase in the low value asset write-off to $5,000 (from $1,000) announced in the previous budget for new assets. The accelerated car deduction replaces the Entrepreneur’s tax offset that ceases to apply from 1 July 2012.
- The company tax rate for Small Business will be reduced to 29% (down from 30%) from 1 July 2012. For large business, the previously announced drop to 29% will continue to take effect from 1 July 2013.
- The statutory rate for car fringe benefits will be phased out over 4 years to be a flat rate of 20% of the cost of the car. The flat rate replaces the varying rates that applied based on the distance travelled. The rates and timetable are as follows:
FBT statutory rate method
Statutory rate (x cost of car to determine person's car fringe benefit)
Distance travelled during FBT year
(1 April - 31 March) |
Existing contracts (%) |
New contracts from 10 May 2011 (%) |
New contracts from 1 April 2012 (%) |
New contracts from 1 April 2013 (%) |
New contracts from 1 April 2014 (%)
|
| 0 - 15,000km |
26 |
20 |
20 |
20 |
20 |
| 15,000 - 24,999km |
20 |
20 |
20 |
20 |
20 |
| 25,000km - 40,000km |
11 |
14 |
17 |
20 |
20 |
| More than 40,000km |
7 |
10 |
13 |
17 |
20 |
As a result, higher kilometre cars will need to rely on the log book and business percentage rules to reduce the amount of FBT payable as compared to applying the statutory formula method. Those travelling less than 15,000 km will find that salary packaging a car is now more attractive. Where a fixed total remuneration package is in place and the FBT cost rises, the increased FBT cost will be passed on to the employee who will in effect suffer a decrease in their wages. Any increase in reportable fringe benefits will also impact on the ability to access certain Government benefits and assistance. It should be noted that the announcement provides that it only applies to new vehicle contracts entered into after 10 May 2011.
- The income tax, FBT Deductible Gift Recipient and GST concessions that apply to charities will be limited in respect of their unrelated commercial activities from 1 July 2011. A statutory definition of charity will also be legislated.
- A payment reporting scheme will be implemented for certain businesses in respect of payments made to contractors in the building industry. An extension of this scheme to the commercial cleaning industry will also be considered.
- Changes will be made to strengthen the director penalty regime and to curb phoenix activity. The director penalty regime will be extended to superannuation guarantee amounts, making directors personally liable for unpaid superannuation contributions for employees. The ATO will also be given the ability to take direct recovery action against directors without the usual 21 day notice period being applied in respect of certain unpaid tax liabilities that remain unreported for more than 3 months after becoming due. Directors will also be denied credits for unpaid PAYG in their personal returns where the amounts have not been remitted to the ATO.
The above is a broad summary of the issues only, if you would like further detail on any measures and how they will affect your business, please contact our Taxation Partner, Darren Shone Email Darren
