Federal Budget 2008
Personal income tax – from 1 July 2008
Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008 proposes cuts to personal income tax rates and increases to the low income tax offset. Therefore, the 2008 Budget announcements regarding tax cuts were simply a restatement of the changes in this Bill. The Bill has been passed by the House of Representatives and the Senate Standing Committee on Economics has recommended the Bill be passed by the Senate without amendment.
Low income Tax Offset (LITO)
From 1 July 2008 the low income tax offset is to increase to $1,200 from $750, reducing once taxable income reaches $30,000 and cutting out once it reaches $60,000. It will further increase to $1,350 from 1 July 2009 and $1,500 from 1 July 2010.
Senior Australians Tax Offset (SATO)
The amount of income a senior Australian eligible for SATO can earn before incurring a tax liability will increase to –
• $28,867 for singles (up from $25,867)
• $24,680 for each member of a couple (up from $21,680).
These limits will increase further with the above-mentioned increases in LITO from 1 July 2009. The relevant Medicare levy low-income threshold will be increased to ensure that senior Australians do not pay the Medicare levy until they begin to pay income tax.
Medicare Levy Surcharge Threshold
The Government will increase the Medicare levy surcharge threshold for singles from $50,000 to $100,000 and for members of a family from $100,000 to $150,000, with effect from 1 July 2008.
The Medicare levy low income thresholds will increase to $17,309 for singles and to $29,207 for members of a family. The dependant child threshold will also increase to $2,682 (from $2,594).
Cancellation of Interests in Widely Held Entities
The Government will allow taxpayers to calculate their capital gains or losses using the actual proceeds received where shares or units in a widely held entity are cancelled or surrendered, with effect from the 2006-07 income year.
This will provide for a fairer capital gains assessment as the taxpayer will be assessed on the actual proceeds received and not the market value at the time of cancellation.
Extension of the Small Business Concessions
The Government will increase access to the small business concessions for taxpayers owning a CGT asset used in a business by a related entity and for partners owning a CGT asset used in the partnership, with effect from 2007/08.
Education Tax Refund
From 1 July 2008, families receiving Family Tax Benefit (Part A) with children undertaking primary or secondary studies will be able to claim a 50 per cent refund every year for key education expenses up to $375 per child per year for primary students and $750 per child per year for secondary students.
Eligible families will be able to recoup the cost of items such as laptops, home computers, home internet connection, printers, education software, trade tools for use at school, school text books and stationery.
Parents will be able to claim the 50 per cent refund when they complete their tax return.
Dependency Tax Offset
Eligibility for the dependency tax offsets have been targeted so those earning more than $150,000 will not be entitled to the dependent spouse, housekeeper, child-keeper, invalid relative and parent/parent-in-law tax offset, with effect from 1 July 2008.
From 1 July 2009, the Government will align the definition of income for the above that will apply to family assistance payments.
From 1 July 2008, the Government will change the definition of family in family trust elections rules to limit lineal descendants to child and grandchildren of the test individual or of the test individual’s spouse.
This may reduce the ability to distribute family trust income to more beneficiaries thus potentially reducing the tax effectiveness of the family trust investment structure strategy.
Withholding Tax on Certain Managed Fund Distributions to Non-Residents
Australian taxation to be withheld from certain components of managed fund distributions to non-residents will be reduced from the current 30% to, ultimately, 7.5%. This reduction is in excess of what was originally anticipated.
The reduction will only apply to residents of jurisdictions with which Australia has ‘effective exchange of information arrangements’ to be specified under Regulations. Residents of other jurisdictions will have 30% Australian tax withheld, as a final tax (without set off of deductions in Australia) from certain components of managed fund distributions.
The Australian tax rate to be withheld from fund payments to residents of eligible residents is intended to be as follows:
1. non-final withholding tax at 22.5 per cent (ie taxpayer can claim deductions for expenses relating to these payments) for the 2009 tax year;
2. final withholding tax of 15 per cent (without reduction for expenses) for the 2010 year; and
3. final withholding tax of 7.5 per cent (without reduction for expenses) for the 2011 and later tax years.
These withholding tax arrangements will apply to distribution components relating to Australian sourced net income (other than dividends, interest and royalties for which there are no changes to the withholding tax rates).
Capital Protected Loans - New Benchmark Interest Rate
The deductible portion of the funding costs attributable to capital protected loans will decrease for arrangements entered into after 13 May 2008. The non-deductible portion is capital in nature and gives rise to differing CGT outcomes at the completion of the loan depending on whether the investments have increased in value or not.
Existing loans will preserve the current tax treatment for the shorter of five years or the life of the product. Typically, capital protected loans are used to acquire shares with the additional feature of protection against a reduction in the value of the shares. The funding costs under these loans are usually higher than vanilla margin loans to reflect the protection.
Under the previous law, the deductible portion of the funding costs under these loans was limited to the Reserve Bank’s personal unsecured loan variable interest rate. For new loans, the deductible amount will be limited to the Reserve Bank’s indicator variable rate for standard housing loans.
FBT - New Limitations to Exemptions for Eligible Work Related Items and Denial of Tax Deductible Depreciation Claims
The current FBT exemptions for certain eligible work-related items will be tightened so that they are only available where the items are primarily used for work purposes. This is intended to cover items such as laptops, PDA’s and tools of trade. The exemption will also be limited to one item of each type per employee per year.
In addition, the ability of employees to claim depreciation deductions on these exempt benefits, such as laptops, that were purchased under effective salary sacrifice arrangements will no longer be available for new purchases. For items already purchased, the employee will be able to claim deductions for the 2008 tax year only and future deductions will be denied.
FBT - Salary Sacrificing Costs for Jointly Held Assets
This measure reverses case law supporting the proposition of an employee salary packaging interest expenses, where the employee and their spouse used the underlying loan to jointly acquire income producing assets. Typically, the employee had a higher marginal tax rate than the spouse.
These arrangements generally resulted in the benefit of the (otherwise) tax deductible interest being at the higher marginal rate. Conversely, the actual investment income was subject to tax at their respective marginal rate, in their relevant proportions of ownership.
The FBT law will be amended to ensure that the full value of the benefit enjoyed by the employee and the spouse will be subject to FBT. This will apply to new arrangements.
Employees who have previously entered into such arrangements will be able to continue the existing arrangements up to 31 March 2009.
Employee Share Schemes - Elections Requirements
The election requirements in respect of employee share schemes will be tightened. Under the current law, employees are able to make an election such that the discount they receive (less $1,000) on shares or rights acquired under employee share schemes is taxed in the year in which they are acquired. In the event that no election is made, the taxing point is deferred until disposal restrictions or forfeiture conditions are lifted, up to a maximum of 10 years.
An election to be taxed upfront needs to be made before that year’s tax return is lodged. The election itself is not required to be lodged with the ATO.
The election is irrevocable and as such the intention is that the employee cannot have the benefit of hindsight to determine the better tax outcomes.
For shares or rights acquired after 1 July 2008, the election process will be tightened such that an employee who makes the election must include the assessable discount in their tax return in that year. If no amount is so included, then the employee will be taken to have not made the election and will be subject to tax under the tax deferred option.
First Home Savers Accounts
These will be offered either as a savings account with a financial institution or through a separate trust structure. Super funds will not be able to offer them through the super fund itself.
The start date for the first home savers accounts will be 1 October 2008.
1. The Government will provide a flat 17 per cent co-contribution on the first $5000 of contributions.
2. The tax on investment earnings will be 15 per cent (as previously announced).
3. A cap of $75,000 account balance (indexed) after which no further personal contributions can be made. This replaces the originally announced cap of $10,000 p.a.
4. It is expected to cost the Government $1.1 billion over four years ($975 in co-contributions and $125 million in tax concessions on earnings).
Super House Clearing Facility
The Government has announced $16 million to the Australian Taxation Office over three years for a superannuation clearing house facility to commence on 1 July 2009. Employers can pay super contributions to a single location and the clearing house will send the contributions on to the nominated super funds. The facility will be free for employers with less than 20 employees and fee for service for those with 20 or more employees. The ATO will not provide the facility itself, but will contract it out to the private sector.
Simpler Financial Services Disclosure
The Government has promised $3 million over two years to develop simpler financial services disclosure. So we can expect improvements in PDS’s over the next two years.
From 1 July 2008, the child care rebate for out-of-pocket expenses will increase from 30 per cent to 50 per cent, which will be capped at $7,500 per child, per year. The payment will be quarterly, instead of annually, with families receiving the first quarterly payments from October 2008.
Carers Payment & Allowance
The Carer Allowance recipients will receive a $600 tax-free bonus for each eligible care receiver and Carer Payment recipients will receive a $1,000 tax-free bonus for each eligible care receiver.
From 1 July 2008, the baby bonus lump sum payment will increase to $5,000. Though from 1 January 2009, the baby bonus will be means tested and subject to an annual $150,000 limit based on the families adjusted taxable income.
Changes to the Definition of Income - Tax Offsets and Social Security Benefits
From 1 July 2009, the Government will expand the definition of ‘income’ that is used to determine eligibility for government support programs such as the superannuation co-contribution, the Commonwealth Senior Health Card (CSHC), family assistance benefits and other social security income tested benefits.
The definition of ‘income’ will incorporate:
1. salary sacrificed contributions to superannuation;
2. superannuation pension income; and
3. net losses from financial investments.
The Government will also expand the definition of income used for particular tax programs such as the senior Australians tax offset, Medicare levy surcharge and dependency tax offsets to include net rental property losses and net financial investment losses.
The measure will also expand the income definitions used for the dependency tax offsets, senior Australians tax offset and pensioner tax offset to include reportable fringe benefits
Until next week.