Federal Budget 2010

The 2010 Budget that was handed down last night contained few surprises. All of the big ticket taxation announcements had already been made when the Henry Tax Review was released last week. The Government has confirmed the reduction in personal tax rates from 1 July 2010 that was announced in last year’s Budget. The main new taxation announcements relate to a reduction in tax on interest bearing accounts, a standard deduction for tax returns, and a cap on childcare rebate.

Fiscal responsibility and bringing the Budget back to surplus within three years were the key messages. Despite global economic volatility and uncertainty, the economy is now expected to rebound from the recent downturn, with forecast real GDP growth of 3.25% in 2010-11 and 4% in 2011-12. This time last year the economy was expected to enter a recession, with GDP forecast to contract by 0.5% in 2009-10. Fast forward one year and the economy grew by 1.4% during 2009 and GDP is now forecast to grow by around 2%. The Treasurer predicts that unemployment to fall from 5.3% to 4.75% by June 2012. This is around the level consistent with full employment.

Follow the links below to a detailed discussion of the various aspects of the budget and discover what this Budget means for you.

Taxation

Previously announced tax rates maintained
In keeping with the previously announced tax cuts in the 2008 budget, the personal income tax thresholds for the 2010-2011 year will be as follows:

Tax rates 2010/11

If you have implemented a transition to retirement strategy you may wish to change your salary sacrifice amount to take into account the new $37,000 threshold rate.

50% savings discount for interest income
A 50% tax discount will be available on up to $1,000 of interest earned by individuals, including interest earned on deposits held in authorised deposit taking institutions, bonds, debentures and annuities. Read more...

Standard tax deduction
A standard tax deduction for work-related expenses and the cost of managing tax affairs will be introduced. It will be $500 for the 2012/13 financial year, and increased to $1,000 in the 2013/14 year. This deduction will be available regardless of whether relevant expenditure was actually incurred. The standard deduction will translate into a $157.50 saving for a person on a 30% marginal tax rate in the first year of the measure, and a $315 saving in subsequent years. Where a person’s deductible expenses exceed the standard deduction amount, they will be able to claim the higher expenses instead of the standard deduction.

Net medical expenses tax offset
The threshold above which a taxpayer may claim the net medical expense tax offset will be increased from $1,500 to $2,000 effective from 1 July 2010. The threshold will then be indexed to the Consumer Price Index (CPI) on an annual basis. This reduces the amount of tax offset that can be claimed. Taxpayers can currently claim a tax offset equal to 20% of net unreimbursed eligible medical expense above $1,500 for themselves or eligible dependants. Eligible medical expense includes some ongoing aged care fees and charges, dental and optical expense, laser eye surgery etc.

Superannuation co-contribution
The Government proposes to permanently retain the matching rate of 100%. Other changes include plans to freeze the indexation on the income threshold.  Read more...

Changes to First Home Owners Savers Accounts (FHSA)
Rather than requiring savings in an FHSA to be paid to a superannuation account, the Government proposes that they can be paid into an approved mortgage after the end of a minimum qualifying period. Read more...

Business

Company tax rate
As announced as part of the Government’s response to the Henry Review, the company tax rate will be decreased from 30% to 28%. Small businesses will benefit from this reduction in the 2013 tax year but for other companies it will be phased in over the next two years (29% for the 2014 tax year and 28% for 2015). However, this proposal hinges upon the successful implementation of the Resources Super Profits Tax on non-renewable resources.

Small business assets
Also as a result of the Henry Review, small business will be able to immediately write off assets costing less than $5,000 (currently $1,000). 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. Note that the Henry Review recommended that the small-business entity turnover threshold should be increased from $2m to $5m but there was no formal response to this recommendation.

Non-commercial loan rules
The Government introduced a bill in March 2010 to amend the Division 7A non-commercial loan rules to prevent the use of a private company’s assets by shareholders and their associates for less than market value. A property owned by a company and provided to a shareholder or their associate that is used as a main residence will be caught by these rules as of 1 July 2009 once the bill is passed.

The Government has announced that an exemption will apply to the use of a dwelling where the private company acquired the dwelling before 1 July 2009 and where the company continues to meet a modified continuity of ownership test.

Earnout arrangements
The Government will amend the existing legislation to allow for all payments under a qualifying earnout arrangement to be treated as relating to the underlying business asset.  Read more...

Registration of business names
Currently, businesses need to register a business name separately in each state and territory. This involves the payment of multiple fees in each jurisdiction. The Government has proposed changes that involve a national administration and registration process for business name registrations with a single fee. The Australian Securities & Investment Commission (ASIC) will assume the administration from the states and territories. In addition, these reforms should result in:

	A single, national online registration system for business names and ABNs
	A business-friendly way of searching for trademarks
	A Business Licensing Information Service to give businesses customised information about their regulatory requirements including licences, registrations and permits
	Online accounts that will allow businesses to access registrations, monitor compliance requirements and access regulatory change notifications from all governments.

GST & Hire Purchase arrangements
Currently, a business registered on a cash basis for GST purposes is unable to claim upfront the input tax credits on the acquisition of assets used in their business funded through hire purchases arrangements. Instead, the input tax credits can only be claimed in proportion to the capital payments made on the hire purchase facility. This means that the input tax credits are claimed over the life of the finance term. On the other hand, an entity that funds a business asset by way of a chattel mortgage arrangement is able to claim 100% of the input tax credits at the time the asset is acquired.

The Government proposes to change the current requirements and allow businesses registered on a cash basis for GST purposes to claim 100% of the input tax credits upfront on hire purchase arrangements. This will align hire purchase arrangements with the treatment of chattel mortgage arrangements. These measures will take effect from 1 July 2012.

Financial supplies
The general rule for GST purposes is that no input tax credits can be claimed on acquisitions related to making financial supplies. Financial supplies include the making of loans, share trading and the provision of life insurance. An exception to the general rule ensures that entities are not denied input tax credits for making financial supplies that are not part of their principal commercial activities. The exception has a “de minimus” test, which is currently $50,000 of input tax credits, or 10% of total input tax credits for a year.

This threshold is to increase to $150,000 of input tax credits and be effective from 1 July 2012. However, there is no indication that the Government will make any changes to the current 10% test.

GST Margin Scheme
The margin scheme provisions will be restricted to clarify and simplify the current provisions, effective from 1 July 2010. The current margin scheme provisions are quite complex. The proposal to simplify the margin scheme provisions are the result of recommendations made by the Board of Taxation’s review regarding the administration of the GST.

GST compliance program
The Government has announced funding of $337.5m over four years to the ATO funding additional activities to promote voluntary GST compliance for Australian businesses. We would therefore expect to see further audit activity undertaken by the ATO in the coming years.

Minor changes to GST
The Government has made further minor revisions to its 2009-10 Budget measure. This is in response to the Board of Taxation’s review of the legal framework for the administration of the Goods and Services Tax. This will have an ongoing, unquantifiable revenue impact and unknown impact on GST payments to the states and territories. The start date for the following components of the 2009-10 Budget measure has been revised to 1 July 2011:

	adopt the income tax self assessment regime for indirect taxes and refresh the period of review
	reform the change of use adjustments
	allow adjustments for pre-registration acquisitions
	clarify the treatment of tax law partnerships
	simplify the GST grouping membership interest rules and allow grouping of non-operating holding companies and
	introduce a reverse charge for supplies of going concerns and farmland.

Social security/Centrelink

Family Tax Benefit non-lodgement suspensions
In the 2008 Budget, the Government proposed to suspend FTB payments to people who had not lodged their tax return in 12 months and had not responded to Centrelink requests to do so. This measure will be retained with two exceptions. Payments will continue to people who do not have any FTB debt, or where ceasing the payments would cause undue hardship.

Child Care Rebate capped
The Child Care Rebate will be capped at $7,500 per child (2008/09 level), reduced from the current annual cap of $7,778 per child. Indexation of the cap will also be paused for four years from 1 July 2010. The out-of-pocket reimbursement of child care expenses will remain at 50% up to the annual cap.

Other items

New public ancillary fund regulatory framework
The Government has confirmed its commitment to the growth in the philanthropic sector and supporting community-based charitable initiatives. The Budget papers indicate that greater accountability for public ancillary funds will be introduced through a revised regulatory framework which would take effect from 1 July 2011. This framework will be similar to the rules for private ancillary funds introduced this year. These guidelines will require regular valuation of assets, clarify investment and distribution rules and set out a system of administrative penalties.

Official development assistance
The Budget announced some targeted increases to development assistance funding particularly in the climate change space. The Government has also reaffirmed its commitment to development assistance totalling 0.5% of Gross National Income by 2015-16 but has said that this will happen on a “managed scale” approach. Deferring the implementation of this target is estimated to save approximately $1 billion over the next four years.

Interest withholding tax
The Government announced it will phase down the interest withholding tax paid by local subsidiaries of overseas parents on offshore borrowings. For local subsidiaries of overseas parents the interest withholding tax will be reduced on such borrowings from 10% to 7.5% in 2013/14 and to 5% in 2014/15. The Government has indicated it is favourably disposed to reducing this rate to 0% subject to its medium-term fiscal objectives. These measures were recommended in the Henry Tax Review.

Confirmation of the Henry Report

As expected, the 2010 Budget reiterated the Government’s commitment to the following proposals announced in response to the Henry Tax Review:

	Increase of super guarantee rate from 9% to 12%, commencing 1 July 2013.
	Raising the super guarantee maximum eligibility age to 75 from 70.
	Introducing a 15% low income earners Government contribution capped at $500, effectively refunding contributions tax on up to $3,330 of concessional contributions.
	Retaining the $50,000 concessional cap for those age 50 or over who have super balances of less than $500,000.
	Reducing the standard company tax rate to 29% from 1 July 2013 then 28% from 1 July 2014.
	Reducing the small business company tax rate to 28% from 1 July 2012.
	Allowing small businesses to immediately write off assets valued at under $5,000 and other assets in a single 30% rate depreciation pool.

Published : 12 May 2010