Reduce Your Rate Reduce Your Stress.

On 11 May 2010, the Treasurer Mr Swan handed down the 2010-11 Federal Budget, his third Budget.

In looking to set a Budget to take the Government to the next election, a brighter economic outlook appears to have delivered the funding for a range of tax sweeteners. While still essentially a “no frills” Budget, the Government has announced a 50% tax savings discount on up to $1,000 of interest earned by individuals and a standard $500 deduction for work-related expenses.

A summary of the major measures proposed in the Budget are included below:

From 1 July 2011, the Government will provide individuals with a 50% tax discount on up to $1,000 of interest earned by individuals, including interest earned on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products. Importantly, the discount will be available for interest income earned directly as well as indirectly, such as via a trust or managed investment scheme, and is expected to benefit around 5.7m taxpayers in 2011-12. For a person earning an average pre-tax interest rate of 6%, the Government states that the discount would apply up to a savings balance of just over $16,500. Currently, the Government says there is considerable variation in the taxation treatment of alternative savings vehicles, with relatively higher levels of taxation applying to interest income. For instance, most interest income is currently taxed at the individual’s marginal rate, while certain capital gains can receive a 50% discount.

2) Adjusted taxable income

The Government states that taxpayers claiming the discount for interest income will have a reduced adjusted taxable income for the purpose of determining eligibility for transfer payments and other concessions. This may result in some individuals and families becoming eligible for transfer payments or eligible for a larger transfer payment. The Government noted that the consequential expense primarily affects Family Tax Benefit, but will also affect other payments such as the Baby Bonus, Child Care Benefit, Education Tax Refund, Commonwealth Seniors Health Card (CSHC) and the Pensioner Supplement (which is linked to eligibility for the CSHC).

The Government will provide individual taxpayers with a standard deduction of $500 for work-related expenses and the cost of managing tax affairs from 1 July 2012. The standard deduction will increase to $1,000 from 1 July 2013. Those taxpayers with deductible expenses greater than the standard deduction amount will still be able to claim their higher expenses, in lieu of claiming the standard deduction amount. According to the Government, this measure is an important step towards a “tick and flick” system of pre-filled tax returns that will make life easier for taxpayers at tax time. A standard tax deduction was recommended by the Henry Tax Review. The standard deduction will reduce individuals’ and families’ adjusted taxable income for the purpose of determining their eligibility for transfer payments and other concessions (eg the Family Tax Benefit, Baby Bonus, Child Care Benefit, the Commonwealth Seniors Health Card and the Seniors Supplement). This will make some individuals and families eligible for transfer payments or eligible for a larger transfer payment.

The Government did not make any changes to the currently legislated tax rates for 2010-11 (as previously enacted by the Tax Laws Amendment (Personal Income Tax Reduction) Act 2008). This means that for the year commencing 1 July 2010, the resident tax rates will be as follows:

The legislated current and 2010-11 personal tax rates and thresholds for resident individuals (excluding the 1.5% Medicare levy) are (with key changes highlighted in bold):

The main tax cuts to apply from 1 July 2010 will reduce the tax rate on incomes between $80,000 and $180,000 from 38% to 37%, providing tax savings of up to about $25 per week for those on $180,000. Also from that date, the low income tax offset will increase from $1,350 to $1,500 thereby increasing the effective tax-free threshold to $16,000 for people earning $30,000 or less.

5) Low income tax offset

For the current 2009-10 income year, taxpayers are entitled to the low income tax offset of $1,350 if their taxable income is less than $63,750. For 2010-11, this upper threshold will increase to $67,500 to accommodate the previously legislated increase in the offset to $1,500. The low income tax offset will continue to phase out at a rate of 4 cents in the dollar for every dollar of income over $30,000. As a consequence of the increases in the low income tax offset, the income level above which senior Australians (eligible for the senior Australians tax offset) begin to pay tax will increase. This will mean that eligible senior Australians will have no tax liability until their incomes reach:

• $29,867 for singles and $25,680 for each member of a couple in the 2009-10 income year; and
• $30,685 for singles and $26,680 for each member of a couple in the 2010-11 income year.

6) Medicare levy

The Medicare levy threshold amount for individuals eligible for the senior Australians tax offset will increase to $30,685 from 1 July 2010 (up from $29,867 for 2009-10). The Medicare levy threshold amount for certain couples eligible for the senior Australians tax offset, where the threshold for single senior Australians is not sufficient to ensure that they incur no Medicare levy liability until they incur an income tax liability, will increase to $44,500 from 1 July 2010 (up from $43,500 for 2009-10). The Medicare levy phase-in limit for individuals eligible for the senior Australians tax offset will also increase to $36,100 from 1 July 2010 (up from $35,137 for 2009-10). The Medicare levy phase-in limit that applies to certain couples eligible for the senior Australians tax offset, will also increase to $52,353 from 1 July 2010 (up from $51,177 for 2009-10).

7) Non-resident individuals

For the year commencing 1 July 2010, the non-resident tax rates are already legislated as follows:

The legislated current and 2010-11 personal tax rates and thresholds for non-resident individuals (excluding the 1.5% Medicare levy) are (with key changes highlighted in bold):

From the 2009-10 income year, the Medicare levy low-income thresholds will be increased for singles to $18,488 (up from $17,794 for 2008-09) and to $31,196 for those who are members of a family (up from $30,025 for 2009-10). The additional amount of threshold for each dependent child or student will also be increased to $2,865 (from $2,757). The Medicare levy low-income threshold for pensioners below Age Pension age will also be increased from 1 July 2009 to $27,697 (from $25,299). This increase will ensure that pensioners below Age Pension age do not pay the Medicare levy while they do not have an income tax liability.

The regulations affecting the calculation of the rebate threshold for the senior Australians tax offset (SATO) will be amended to correctly factor in the effect of the low income tax offset. The rebate threshold is the amount of rebate income an eligible taxpayer can have before the amount of SATO is reduced. The formula in the regulations for calculating the rebate threshold (in the Income Tax Regulations) currently fails to reflect the fact that the low income tax offset is reduced when taxable income exceeds $30,000. The regulations will be amended to correct this.

The regulations will be amended with effect from 1 July 2010.

The medical expenses rebate threshold will increase from $1,500 to $2,000 from 1 July 2010. Taxpayers presently receive a rebate equal to 20% of net unreimbursed eligible medical expenses above $1,500. This $1,500 threshold will increase to $2,000. In addition, from 1 July 2011, the threshold will be indexed annually to the Consumer Price Index.

The Government is proposing changes to the First Home Savers Account (FHSA) scheme. The current rules require that FHSA holders keep their savings in an FHSA for 4 financial years before they are able to use those savings to buy a home. However, if an account holder buys a home before the end of that 4-year period, the balance of their FHSA must be transferred to their superannuation (the logic here is that it thus remains in a concessionally taxed environment). The Government proposes that savings in an FHSA can be paid into an approved mortgage after the end of a minimum qualifying period, rather than requiring it to be paid to a superannuation account. The Government will release draft amendments for consultation over the coming months. The changes will apply for houses purchased after assent of the legislation that will give effect to this measure.

The Government will adjust the benchmark interest rate that applies to capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008 to the Reserve Bank of Australia (RBA) indicator rate for standard variable housing loans plus 100 basis points, instead of the RBA indicator rate for standard variable housing loans as announced in the 2008-09 Budget. The Government will also extend the transitional arrangements for capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008 from the previously announced 13 May 2013 to 30 June 2013.

The Government will phase down the interest withholding tax (IWT) paid by financial institutions on most interest paid on offshore borrowings. For local subsidiaries of overseas parents, the IWT rate will be reduced on such borrowings from 10% to 7.5% in 2013-14 and to 5% in 2014-15. The Government is favourably disposed to reducing this rate to zero, subject to its medium-term fiscal objectives.

The Government announced that it will look to permanently set the matching rate for the superannuation co-contribution at 100% and the maximum co-contribution that is payable on an individual’s eligible personal non-concessional superannuation contributions at $1,000. As a result, the previously-legislated increase in the matching rate to 125% for 2012-13 and 2013-14 (and 150% for 2014-15 and later years) will not proceed, if the Government proposal is enacted. In addition, the Government said it will freeze for 2010-11 and 2011-12 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 currently provides a matching contribution for contributions made into superannuation out of after-tax income. The matching contribution is up to $1,000 for individuals with incomes of up to $31,920 in 2009-10 (with the amount available phasing down for incomes up to $61,920). This measure will freeze these thresholds at $31,920 and $61,920 for 2 years.

The Government announced that it will seek to make a number of minor amendments to improve the operation of the superannuation legislation. The amendments will include:

• allowing the Commissioner to exercise discretion for the purposes of excess contributions tax before an assessment is issued;
• clarifying the due date of the shortfall interest charge for the purposes of excess contributions tax;
• increasing the time-limit for deductible employer contributions made for former employees;
• permanently allowing a claim for a deduction for eligible contributions to be made to successor superannuation funds;
• providing new arrangements for public sector defined benefit schemes which fund benefits through “last minute contributions”.

The measures will apply from the 2010-11 income year.

The Government has announced that it will cap the annual Child Care Rebate to the 2008-09 level of $7,500 per child from the current annual cap of $7,778 per child. However, the Government states that the reduction in the Rebate will not alter the percentage of out-of-pocket expenses reimbursed by the Commonwealth. The Government has also announced that it will pause the indexation of the cap for 4 years.

The Government announced that it will remove eligibility for the War Widows (or Widowers) Pension for people whom before applying for the Pension, enter into a de facto relationship following the death of their veteran partner. According to the Government, the proposed amendment will remove an anomaly which allows widows (or widowers) who have entered into a de facto relationship following the death of their veteran partner to claim the Pension, whereas those who have since married cannot claim it. However, war widows (or widowers) who remarry or enter into a de facto relationship after claiming the Pension will not lose their entitlement under this measure, said the Government.

18) Govt response to Henry Report

The 2010 Budget follows hot on the heels of the Government’s initial response to the Henry Tax Report released on 2 May 2010. The Government’s initial response to the 138 recommendations in the Henry Report focused primarily on the resources sector, superannuation, a reduction in the company tax rate and some benefits for small business. The Budget Papers contain various references to these previously announced Government measures in response to the Henry Report, including:

• a Resource Super Profits Tax that will tax non-renewable resource projects (at a rate of 40%) on their profits rather than just their production (taxpayers will be eligible for a credit for royalties paid to State and Territory Governments) – this will apply from 1 July 2012;
• a refundable tax offset (the Resource Exploration Rebate) at the company level, set at the prevailing company tax rate, for exploration expenditure in Australia incurred on or after 1 July 2011;
• reduction in company tax rate to 28%- small businesses will benefit from 2012-13, but it will be phased in for other companies (29% for 2013-14 and 28% from 2014-15);
• small businesses will be able to immediately write-off assets valued at under $5,000 (currently $1,000) and all other assets (except buildings) will be written off in a single depreciation pool at a rate of 30% – this will apply from 1 July 2012;
• super contributions cap concession: workers aged 50 and over with super balances below $500,000 will be able to make up to $50,000 in annual, concessional superannuation contributions – to apply from 1 July 2012;
• Superannuation Guarantee age limit will be increased from 70 to 75 from 1 July 2013;
• Superannuation Guarantee rate will rise to 12% by 2019-20 (to be phased in from 1 July 2013); and
• Government will provide a $500 annual superannuation contribution to individuals with an adjusted taxable income up to $37,000.

Source: Simon Rayner