THOMSON WEEKLY TAX BULLETIN

13 MAY 2008

Issue 20

Please click here if you are having problems viewing this email.

2008 FEDERAL BUDGET REPORT

Advertisement

EXECUTIVE SUMMARY

TAX SYSTEM REVIEW

TAX MEASURES ANNOUNCED BUT NOT ENACTED

PERSONAL TAXATION

BUSINESS TAXATION

GST MEASURES

FBT MEASURES

SUPERANNUATION

OTHER BUDGET MEASURES

On Tuesday, 13 May 2008, the Federal Treasurer, the Hon Wayne Swan MP, handed down the 2008-09 Federal Budget, his 1st Budget. From a taxation point of view, this Budget detailed a wide range of tax changes (although it must be said that many have been previously announced), plus it reiterated the Government's intention to deliver its 2007 election campaign tax cuts (already in a Bill that has all but passed through Parliament - see para [729] of this Bulletin).

Revenue measures announced

In summary, the many revenue measures announced in the 2008 Federal Budget include:

• tax system review: further details announced of the proposed review of the tax system;
• TOFA: stages 3 and 4 have been deferred until 1 July 2009, plus other amendments announced;
• family trusts: Government confirms reversal of family trust changes;
• company losses: Government to proceed with changes to company loss recoupment rules;
• simplified imputation: Government to complete the simplified imputation system;
• employee share schemes: changes re elections and removal of double taxation;
• consolidation: Government confirms it will proceed with modifications to the consolidation regime, including CGT scrip-for-scrip roll-over for corporate restructures;
• CGT: extension of CGT small business concessions re related entities and partnerships;
• capital protected borrowings: change to benchmark interest rate;
• GST: several measures eg re charities, international communications, sale of real property;
• FBT: tightening of work-related exemption, amendments re jointly held assets, tightening of meal exemption;
• legislation by press release: the Government has proposed what it believes is a way of more effectively dealing with previously announced tax changes;
• valuations and private rulings: Government releases draft regs;
• depreciation on in-house computer software: increasing the write-off period to 4 years;
• Medicare levy: thresholds for levy and surcharge increased;
• First Home Saver accounts: substantial changes announced.

More information on the tax and related announcements is also contained in a number of press releases - see the Treasurer's Website and the Assistant Treasurer's Website.

Budget economic snap-shot

In the lead-up to the Budget, the Prime Minister and the Treasurer both repeatedly promised a "strong surplus" and an economically responsible Budget. In fact, almost on Budget eve, the Treasurer reiterated that the Government's objective is to have strong growth with low inflation. 'And you won't get strong growth and low inflation unless you rein in spending and deal with interest rates', he said.

In the wash-up, the Treasurer announced in the Budget a forecast surplus in 2008-09 of $21.7bn, 1.8% of GDP, with projections for the surplus to be $19.7bn in 2009-10, $19bn in 2010-11 and $18.9bn in 2011-12. Mr Swan said the Government expects to see growth in the economy moderate to 2.75% in 2008-09, but then step up to 3% for the following 3 years.

Where to get Budget documents

On the Web

The Budget Papers are available at any of the following Websites:

• Federal Government
• Parliament of Australia
• Australian Taxation Office
• Department of Finance and Deregulation

Those Websites also link to previous years' Federal Budget papers going back to 1996-97.

Print copies

The 2008-09 Commonwealth Budget Papers are also available for sale from the CanPrint Communications Pty Limited shopfront in Canberra at 16 Nyrang St, Fyshwick (tel: 1300 889 873), and during business hours from 14 May 2008 in the following cities:

• Sydney - Salmat Bookshop Services - tel: 1300 656 986;
• Melbourne - Information Victoria - tel: 1300 366 356;
• Brisbane - SDS Publications - tel: (07) 3118 6900;
• Perth - State Law Publisher - tel: (08) 9321 7688;
• Adelaide - Service SA - tel: 13 23 24;
• Hobart - Printing Applied Technology Pty Ltd - tel: (03) 6233 3289.

Full details of purchase options are on the Federal Budget Website.

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

Although announced just before the Budget, the Government released further details in the 2008 Budget Papers of its proposed comprehensive inquiry into the tax system. The Treasurer said the review will examine Federal, State and local government taxes ie it will be a comprehensive review of the relationship between all of those.

The review follows the recent 2020 Summit, which proposed a comprehensive review of State and Federal taxes to consider measures to harmonise and simplify taxes, reduce inefficient taxes, ensure a progressive system and address negative interaction with the welfare system.

In the Budget, the Government announced that the review will encompass Australian Government and State taxes, except the GST, and interactions with the transfer system, and will consider:

• the balance of taxes on work, investment and consumption and the role for environmental taxes;
• further improvements to the tax and transfer system facing individuals, families and retirees;
• the taxation of savings, assets and investments, including the role and structure of company taxation;
• the taxation of consumption and property and other state taxes;
• simplifying the tax system, including the interactions between federal, state and local government taxes; and
• interrelationships between the elements of the tax system, as well as the proposed emission trading system.

The Treasurer said that, "in doing so the review will reflect the Government's policy not to increase the rate or broaden the base of the GST; preserve tax-free superannuation payments for the over 60s; and the Government's announced aspirational goals for personal income tax".

The review panel will be chaired by the Secretary to the Treasury, Dr Ken Henry AC and will also comprise Mr Greg Smith (Australian Catholic University), Dr Jeff Harmer (Secretary of FaHCSIA), Heather Ridout (Australian Industry Group), and Professor John Piggott (University of New South Wales).  The review panel will be supported by a working group from within the Treasury, with representation from the Department of Families, Housing, Community Services and Indigenous Affairs, and drawing on other Australian Government and State agencies as appropriate. 

The review panel will consult the public to allow for community and business input. The review will also, where necessary, draw on external expertise and shall have the co-operation of State Governments and their Treasuries as well as relevant COAG working groups. 

The review will be conducted in several stages.  An initial discussion paper will be released by the end of July 2008.  The review panel will provide a final report to the Treasurer by the end of 2009. The Treasurer said the Government would "respond in a timely way to the tax review's recommendations as they are released".

The terms of reference for the review and other information about the review can be found on the Treasury Website under Reviews, Inquiries & Consultations.  The review may be contacted by email at AFTS@treasury.gov.au.

Source: Treasurer's press release, 13 May 2008

In commenting on the need for such a review, the Treasurer said:

'We think a modern economy needs a modern tax system, particularly given our situation in the world. A modern tax system needs to be efficient… internationally competitive … [and] fair. It needs to ensure that everybody pays their fair share, and it needs to be simpler. We think now is the right time to comprehensively review our tax system. There hasn't been a complete review of our tax system in many years. And we will look at everything. We'll look at personal taxation. We'll look at the transfer payment system. We'll look at how that affects individuals, how is affects families, how it affects retirees. We'll look at the company tax system, and we'll also look at all of the implications, say, of an emissions trading system for taxation as well.' ( Source: Treasurer's interview with Laurie Oaks, Sunday Program, Channel Nine, 11 May 2008.)

Thomson note

Many 'seasoned' tax practitioners (and taxpayers) may be overcome by a strong sense of déjà vu - they may even be tempted to say another day, another tax review, but perhaps that's being a little unkind at this early stage! Tax reform means different things to different people, although the announcement of the review certainly presents an opportunity for a wholesale look at all levels of all Australian tax systems. Perhaps it will draw on the already substantial work done in previous reviews. One might also have hoped that the review panel could have included representatives from the tax 'coal face' ie from the tax profession and from business itself (although it is noted that community and business input will be sought).

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

At the time the Federal Parliament was prorogued, on 15 October 2007, the Government said the previous government was still to enact almost 60 announced tax measures. The Government says it has been working its way through this stock of announced but unenacted measures with a view to arriving at a decision on each of them and "eliminating the considerable uncertainty that exists around them in the community". A joint press release by the Treasurer and Assistant Treasurer (entitled "The way forward on tax measures announced, but not enacted, by the previous government") lists in a table the stock of unenacted measures, and the Government's decision on the majority of those measures (note that many have already been included in Bills). 

For those measures the Government has decided should be adopted, the table also outlines an indicative timetable for implementing them, subject to other government priorities and the availability of legislative drafting resources.

Measures which the Government has decided should proceed, but where it proposes to make changes to the announcements by the previous government, were detailed in the Budget. Also detailed in the Budget are those measures the Government has decided should not proceed. 

Given the volume of unenacted measures, and the need to give each measure proper consideration, the Government said final decisions had not yet been reached in relation to some measures.  The Government said it will announce its decision in relation to these remaining measures as soon as possible.

Source: Joint press release by Treasurer and Assistant Treasurer, 13 May 2008

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

In the Budget, the Government announced that it had released for consultation draft regulations and an explanatory statement for one of the measures previously announced that it believes should proceed. This is to allow the Tax Office to charge for valuations required in the course of issuing private rulings. The draft regulations and explanatory statement are available from the Treasury Website.

Thomson note

The previous Government had announced that regulations would be enacted to outline how the Tax Commissioner may charge an applicant for a private ruling with a valuation component, where a valuer makes or reviews a valuation provided by the applicant: see 2007 WTB 36 [1600].

Source: Joint press release by Treasurer and Assistant Treasurer, 13 May 2008

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

The 2008-09 Federal Budget did not announce any changes to the proposed personal income tax rates for the 2008 to 2010 income years, inclusive, that are contained in the soon-to-be-passed Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008. The Bill has been passed by the House of Reps without amendment. It was then referred to the Senate Standing Committee on Economics which has recommended the Bill be passed by the Senate without amendment.

What follows is a reminder of what those rates are proposed to be.

The above Bill was introduced into the House of Reps on 14 February 2008. It implements the Government's election promise to amend the Income Tax Rates Act 1986 to increase the threshold at which the 30% marginal tax rate begins to apply (from $30,001 to $34,001, with effect from 1 July 2008, to $35,001 from 1 July 2009, and to $37,001 from 1 July 2010) and to decrease the 40% marginal rate to 38% (from 1 July 2009) and to 37% (from 1 July 2010). The Bill also amends the ITAA 1936 to increase the maximum amount of low income tax offset (to $1,200 for 2008-09, to $1,350 for 2009-10 and to $1,500 for 2010-11 and later years), and amends the Medicare Levy Act 1986 to increase the income threshold at which the Medicare levy becomes payable for taxpayers who are eligible for the senior Australians tax offset.

Residents

The proposed rates and tax payable from 1 July 2008 for resident taxpayers are as follows:

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

Low income tax offset

For the 2008-09 income year, taxpayers will be entitled to the low income tax offset if their taxable income is less than $60,000. For 2009-10, this upper threshold will increase to $63,750, and from 1 July 2010, to $67,500. Those eligible for the full low income tax offset will have an effective tax-free threshold of $14,000 in 2008-09, $15,000 in 2009-10 and $16,000 in 2010-11.

Despite the raising of the $30,000 threshold level over the above years, the low income tax offset will continue to phase out from $30,000 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:

• $28,867 for singles and $24,680 for each member of a couple in the 2008-09 income year;
• $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.

Medicare levy

The Medicare levy threshold amount for individuals eligible for the senior Australians tax offset will increase:

• from 1 July 2008, from $25,867 to $28,867;
• from 1 July 2009, from $28,867 to $29,867; and
• from 1 July 2010, from $29,867 to $30,685.

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:

• from 1 July 2008, from $37,950 to $42,000;
• from 1 July 2009, from $42,000 to $43,500; and
• from 1 July 2010, from $43,500 to $44,500.

The Medicare levy phase-in limit for individuals eligible for the senior Australians tax offset will also increase:

• from 1 July 2008 from $30,431 to $33,961;
• from 1 July 2009 from $33,961 to $35,137; and
• from 1 July 2010 from $35,137 to $36,100.

The Medicare levy phase-in limit that applies to certain couples eligible for the senior Australians tax offset, will also increase:

• from 1 July 2008, from $44,647 to $49,412;
• from 1 July 2009, from $49,412 to $51,177; and
• from 1 July 2010, from $51,177 to $52,353.

Non-residents

The current and proposed personal tax rates and thresholds for non-resident individuals are:

Date of effect

Increases in the 30% threshold will apply to assessments for the 2008-09, 2009-10, 2010-11 and later income years. Reduction of the 40% marginal tax rate will apply to assessments for the 2009-10 income year and the 2010-11 and later income years. Amendments to the low income tax offset and consequential amendments to the Medicare levy for senior Australians will apply to assessments for the 2008-09 income year, the 2009-10 income year and the 2010-11 and later income years.

Previous announcement

These measures were originally announced during the 2007 Federal Election campaign: see 2007 WTB 44 [1945] and 2007 WTB 50 [2192].

Government's "aspirational" goals for 2013-14

The Government's "aspirational" tax rate goals were announced on 18 October 2007 in its " A Tax Plan for Australia's Future" policy. There, Labor set a 6-year goal to have a personal tax rate scale of 15%, 30% and 40% from 1 July 2013. Labor said that, subject to "national and international economic conditions and maintaining, as a general economic principle, budget surpluses of around 1% of GDP", this long-term goal includes reducing the top marginal tax rate to 40% for those individuals earning more than $180,000 and cutting the current 40% rate (which by 2010-11 would have been reduced to 37%) to 30%.

In the 2008-09 Budget papers (Budget Paper No 2 [p 15]), the Government reiterated this 3 tax rate goal (although did not specify the taxable income ranges to which they would apply) and said:

"This goal is dependent on national and international economic conditions and maintaining, as a general principle, sound budget surpluses. Provision of $6bn in 2011-12 has been made in the forward estimates in preparation for the next step in achieving the Government's tax aspiration".

FBT rate

Under the "aspirational" plan, as any reduction in the top marginal rate has been deferred until 1 July 2013, the FBT rate would only be reduced in line with this "aspirational" reduction in the top marginal rate, so that (including Medicare levy) it will be 41.5% from 1 April 2013 if these "aspirational" rates are achieved.

by Terry Hayes and Stuart Jones

ThomsonTax.Newsroom@thomson.com

In the 2008-09 Federal Budget, the Government announced that a taxpayer will be required to make an election to access the tax concessions available when receiving qualifying shares or rights under an employee share scheme: see 2008 WTB 18 [639].

Currently, a taxpayer can elect to be taxed upfront or defer the tax payable until a later time, such as when restrictions on the shares or rights are lifted.

This measure will ensure that the value of the discount (where it exceeds $1,000) is included in the assessable income of a taxpayer who has elected to be taxed upfront. If the amount is not included in the taxpayer's tax return, he or she will be taxed under the deferral option. The Commissioner retains the discretion to allow a taxpayer an extension of time to make the election.

The Treasurer has stated that this change will improve the integrity of the law by ensuring taxpayers appropriately report income in their tax returns. No further details were provided.

Budget Paper No 2 [p 20]; Treasurer's press release, 13 May 2008

by Eugene Ng

ThomsonTax.Newsroom@thomson.com

The Government has announced that it will remove double taxation that arises in relation to certain employee share schemes (ESS) that use employee share trusts.

Currently, there is no CGT relief for a trustee (or a beneficiary) of an employee share trust on the transfer of shares to an employee because shares acquired by the employee as a result of exercising ESS rights are not ESS shares. Double taxation arises because the capital gains made by the trustee while the shares are held in the trust are also assessable to the employee either under the ESS provisions or the CGT provisions.

The measure is intended to provide CGT relief.

The Treasurer has stated that this change will improve flexibility in the manner shares or rights can be provided to employees under an employee share scheme.

Date of effect

The measure will apply in relation to CGT events occurring from 7.30 pm (AEST) on 13 May 2008. 

Budget Paper No 2 [p 21]; Treasurer's press release, 13 May 2008

by Eugene Ng

ThomsonTax.Newsroom@thomson.com

The Treasurer announced that the 1% Medicare levy surcharge threshold for singles would increase from $50,000 to $100,000, and for a family, from $100,000 to $150,000, with effect from 1 July 2008.

Source: Budget Paper No 2 [p 33]; Treasurer's press release, 13 May 2008

Thomson note

In explaining the rationale for the increase, the Treasurer said they had not been changed since 1997. Mr Swan said that, previously, up to 2m Australians had been 'caught in a tax trap'. Mr Swan said that when the Medicare levy surcharge was originally introduced, 'it was supposed to be a surcharge on high income earners. And the previous government simply did not adjust those thresholds. All we have done is adjust those thresholds. We think the decision that we have taken is fair. We are supporters of private health insurance and the private health insurance industry…'.

The Treasurer said that, over time, people will make a choice about whether they stay in private health insurance, but that the Government has bolstered the public health system in measures outlined in the Budget. 

Background

A 1% Medicare levy surcharge applies in addition to the ordinary Medicare levy if the taxpayer, taxpayer's spouse and all dependants are not covered by health insurance for private patient hospital cover and single or combined taxable income and reportable fringe benefits (as appropriate) exceeds the above thresholds.

The surcharge is imposed on a pro rata basis according to the number of days during the year that the taxpayer, taxpayer's spouse and all dependants were not covered as required. Pro rata calculations on a number of days basis are also required if the taxpayer's marital status changes or a single taxpayer without dependants acquires dependants.

Lump sum payments in arrears receive concessional tax treatment in determining a taxpayer's liability for the Medicare levy surcharge. This means that certain taxpayers who are eligible for the lump sum payments in arrears tax offset under Subdiv 61-L of the ITAA 1997 and have a Medicare levy surcharge liability may receive a reduction in their surcharge liability. A person is not covered by an insurance policy that provides private patient hospital cover where the annual front end deductible (FED) is greater than $500 (singles) or $1,000 (families/couples).

Based on the Government's Budget announcement (which did not announce any changes to the extra child amount), the proposed Medicare levy surcharge thresholds from 1 July 2008 would be as follows:

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

From the 2007-08 income year, the Medicare levy low-income thresholds will be increased for singles to $17,309 (up from $16,740) and to $29,207 for those who are members of a family (up from $28,247 for 2006-07).

The additional amount of threshold for each dependent child or student will also be increased to $2,682 (from $2,594).

The Medicare levy low-income threshold for pensioners below Age Pension age will also be increased from 1 July 2007 to $22,922 (from $21,637). 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 Government has also announced changes to the Medicare levy surcharge thresholds from 1 July 2008: see para [732] of this Bulletin.

Date of effect

The measure applies from 1 July 2007.

Source: Treasurer's press release, 13 May 2008; 2008-09 Budget Paper No 2 [p 32]

by Stuart Jones

ThomsonTax.Newsroom@thomson.com

The Government announced that it will provide an income tax exemption of up to $1,000 to apprentices who receive early completion bonuses in skill shortage occupations from the Queensland Government.

Previous announcement

This measure is contained in Taw Laws Amendment (2008 Measures No 2) Bill 2008, which was introduced in the House of Reps on 20 March 2008: see 2008 WTB 13 [442]. The measure was also announced by the previous Government: see 2007 WTB 45 [1995].

Date of effect

The measure will apply to bonuses received from 1 July 2008. (Note: The No 2 Bill states that the measure will apply to early completion bonuses received in the 2007-08 and later income years, which is inconsistent with the Budget announcement.)

Budget Paper No 2 [p 33]

by Eugene Ng

The Government will introduce an income threshold of $150,000 for the claimant to determine eligibility for the dependent spouse, housekeeper, child housekeeper, invalid relative and parent/parent-in-law tax offsets, with effect from 1 July 2008. This threshold will be indexed.

In addition, from 1 July 2009, the Government will align the definition of income for the purposes of the dependant offsets with that applying to family assistance payments: see para [738] of this Bulletin. The new definition will apply to both the claimant and the dependant (ie for working out the dependant's separate net income).

The Government said that this measure is designed to align the eligibility criteria for the dependant tax offsets more closely with those applying to family assistance.

Budget Paper No 2 [p 34]; Treasurer's press release, 13 May 2008

by Trevor Snape

ThomsonTax.Newsroom@thomson.com

The Government has confirmed that it will introduce a refundable tax offset (the Education Tax Refund), to help with the costs of education. The offset will be claimed through the tax system on lodgment of an income tax return.

Eligible families will be able to claim a 50% refund every year for key education expenses up to:

• $750 for each child undertaking primary studies (maximum refundable tax offset of $375 per child, per year); and
• $1500 for each child undertaking secondary studies (maximum refundable tax offset of $750 per child, per year). 

Families receiving Family Tax Benefit (Part A) with children undertaking primary or secondary studies will be eligible for the Education Tax Refund. Families whose children receive any of the following payments or allowances will also be eligible: Youth Allowance, Disability Support Pension and ABSTUDY and payments or allowances under the Veterans' Children Education Scheme, the Student Financial Supplement Scheme and the scheme under s 258 of the Military Rehabilitation and Compensation Act 2004.

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.

Date of effect

The Education Tax Refund will apply to expenses incurred from 1 July 2008.

Treasurer's press release, 13 May 2008

by Trevor Snape

ThomsonTax.Newsroom@thomson.com

The Government will provide an income tax exemption for the Carer Adjustment Payment (CAP), with effect from 1 July 2007. The CAP provides financial assistance to families who have a child, aged up to 6 years, who has suffered a catastrophic event at some point after 1 January 2007. Providing an income tax exemption for the CAP is consistent with the tax treatment of other one-off payments made to carers in previous income years.

Budget Paper No 2 [p 37]

by Trevor Snape

ThomsonTax.Newsroom@thomson.com

Salary sacrificed superannuation

The Government will expand the definition of "income" that is used to determine eligibility for Government support programs, to include certain "salary sacrificed" contributions to superannuation, with effect from 1 July 2009.

The measure seeks to resolve an inconsistency in the treatment of "non-wage" remuneration in the income tax and transfer system that allows individuals and families to access more Government support payments than would be possible if their salary sacrificed contributions were paid as salary or wage income. The Treasurer said the changes will mean, for the purpose of means tested benefits, individuals who have access to salary sacrifice to reduce their taxable income will be treated on an equivalent basis to those who do not have access to salary sacrifice arrangements.

The measure affects government support programs such as income support payments for people below Age Pension age, family assistance, child support, superannuation co-contributions and financial and retirement savings assistance delivered through the tax system.

Net losses from investments

The Government will also expand the definitions of income used to determine eligibility for particular government support programs to include net financial investment losses, and net rental property losses where appropriate, with effect from 1 July 2009.

Currently, net rental property losses are included in adjusted taxable income definitions used for the purposes of family assistance programs, some parental income tests, the Commonwealth Seniors Health Card, child support and loan repayment obligations under the Higher Education Loan Program.

Net financial investment losses are not included in the definition of income for any program, although some financial investment losses would be captured by income definitions that include a concept of net passive business losses.

The measure will expand the adjusted taxable income definitions to include net financial investment losses. The measure will also expand the definition of income used for particular tax programs to include net rental property losses and net financial investment losses. Affected tax programs include the Senior Australians Tax Offset, Medicare levy surcharge and dependency tax offsets.

Reportable fringe benefits

The Government will expand the definitions of income used to determine eligibility for certain tax offsets to include reportable fringe benefits, with effect from 1 July 2009.

Currently, the senior Australians tax offset and pensioner tax offset use taxable income in their income definition. Eligibility for the dependency tax offsets is determined on the basis of the dependant's income.

The measure will expand the income definitions used for the dependency tax offsets, senior Australians tax offset and pensioner tax offset to include reportable fringe benefits.

The Government will provide the Tax Office with additional funding of $1.1m over the forward estimates period to implement this measure.

Date of effect

These measures will apply from 1 July 2009.

Source: 2008-09 Budget Paper No 2 [pp 29-31]; Treasurer's press release, 13 May 2008

by Stuart Jones

ThomsonTax.Newsroom@thomson.com

The Government will provide a tax exemption for rent assistance paid to Austudy recipients, with effect from 1 July 2007.

Rent assistance has been payable to Austudy recipients from 1 January 2008. This measure will ensure that Austudy recipients will not be required to pay tax on rent assistance amounts. Providing an income tax exemption for rent assistance paid to Austudy recipients is consistent with the tax treatment of rent assistance paid to Youth Allowance, Newstart Allowance and ABSTUDY recipients.

Budget Paper No 2 [p 32]

by Trevor Snape

ThomsonTax.Newsroom@thomson.com

In the Budget, the Government announced that it would reduce the scope for family trusts to be used to lower income tax by utilising losses, as follows:

• the definition of "family" in the family trust election rules will be changed to limit lineal descendants to children or grandchildren of the test individual or of the test individual's spouse. This will have effect from 1 July 2008;
• amendments will also be made to preclude family trusts making a once-off variation to the test individual specified in a family trust election (other than in relation to a marriage breakdown). This will have effect from the 2007-08 income year.

The Government said these changes will implement its election commitment.

Thomson note

The Government's election commitment was to the effect that it would "reverse the changes to Family Trusts introduced ... in Tax Laws Amendment (2007 Measures No 4) Act 2007": see 2007 WTB 49 [2150] and 2007 WTB 51 [2236].

Source: Budget paper No 2 [p 12]

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

In the Budget, the Government announced that it would proceed with Taxation of Financial Arrangements (TOFA) Stages 3 and 4. However, it said it would amend and reintroduce the Stages 3 and 4 measures, with effect from 1 July 2009. The amendments lapsed when Federal Parliament was prorogued in October 2007. Stages 3 and 4 will introduce new tax rules for accruals/realisation, fair value, retranslation, reliance on financial reports and hedging. 

Date of effect

As noted above, the legislation will apply for income years commencing on or after 1 July 2009.  The Government said the elective commencement date of 1 July 2008 contained in Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 (the 2007 TOFA Bill) will not apply. 

The Government considers that a commencement date of 1 July 2009 will give taxpayers time to plan for the commencement of the measures and to raise issues in consultation with the Treasury.  This period will allow appropriate adjustments to be made, including interactions with other parts of the tax law, prior to the commencement date. The legislation will be finalised in consultation with interested parties. 

Debt/equity: Upper tier 2 hybrid instruments

The Government also announced that it would proceed with measures that clarify the tax treatment of certain Upper Tier 2 and similar capital instruments.

Specifically, regulations will be made to facilitate debt tax treatment for certain Upper Tier 2 and similar capital instruments issued by:

• authorised deposit-taking institutions (ADIs) that are banks and their Australian Prudential Regulations Authority (APRA) regulated subsidiaries;
• ADIs that are non-mutual building societies and their APRA regulated subsidiaries;
• any entity that has undertaken to comply with APRA's prudential standards dealing with capital adequacy and any of its subsidiaries covered by the undertaking;
• a foreign ADI that is a bank and is regulated for prudential purposes by a foreign prudential regulator that has a regulatory role comparable to that of APRA, and under ADI capital requirements comparable to those of APRA.

The Government said it will extend the debt/equity transitional arrangements under the income tax law to 1 July 2008 to ensure that the law preceding the debt/equity tax rules continues to apply for Upper Tier 2 instruments. Consultation on the draft regulations, which will have effect for returns made on or after 1 July 2001, will be undertaken prior to their finalisation.

Foreign currency amendments

In the Budget, the Government announced that it would proceed with amendments to the foreign currency provisions of the income tax law to extend the scope of a number of compliance cost saving measures in the law, and to make technical amendments to ensure that the provisions operate as intended.

Since their introduction, the Government said a number of issues concerning their operation have been raised by industry and professional bodies. The Government said the amendments will address many of the concerns by extending the scope of compliance cost saving measures in the provisions and ensuring that the provisions operate as intended. The amendments, which will have effect from 1 July 2003, will be developed in consultation with interested parties.

Source: Budget Paper No 2 [pp 37-38]; Joint press release by Treasurer and Assistant Treasurer, 13 May 2008

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

In the Budget, the Government announced that it would proceed with modifications to the consolidation regime. These changes are designed to clarify the operation of the consolidation regime and improve interactions with other parts of the law. The modifications will:

• amend the tax cost setting rules to ensure the tax cost allocated to an asset is used to work out the amount that is assessable income or allowed as a deduction under other parts of the law;
• treat rights to future income as retained cost base assets with a tax cost setting amount equal to the terminating value for the rights at the joining time;
• modify the allocable cost amount for a joining entity to ensure an amount is taken into account only once;
• change the pre-CGT factor rules so that, subject to certain integrity rules, the proportion of pre-CGT membership interests in an entity that joins a consolidated group is preserved when the entity leaves the group;
• clarify the adjustment to the allocable cost amount for a joining entity where there has been a pre-joining time CGT roll-over;
• ensure that, if an entity joins a consolidated group with a nil available fraction and transfers losses to the group, the capital gain that arises under CGT event L5 when the entity leaves the group is reduced in certain circumstances;
• modify the mechanism for working out the taxable income of consolidated groups that have life insurance company members where there are intra-group transactions;
• ensure that, subject to certain integrity rules, consolidated groups can convert to multiple entry consolidated groups (MEC groups), and vice versa, with minimal tax consequences - this change will apply to conversion events that happen on or after 27 October 2006;
• clarify the accounting principles that must be used to determine certain elements of the allocable cost amount;
• clarify that, where the value of liabilities for a joining entity that is determined for tax cost setting purposes is reduced by future income tax deductions, the amount of the reduction cannot be added back under another provision;
• ensure that the tax cost setting rules apply appropriately in respect of liabilities that an entity takes with it when it leaves a consolidated group;
• limit intra-group liabilities owed to a leaving entity in step 3 of the exit allocable cost amount to accounting liabilities;
• modify the operation of the tax cost setting rules when a general insurance company joins or leaves a consolidated group;
• change the tax cost setting rules so that units held in a cash management trust that have a market value equal to their face value are retained cost base assets;
• ensure the tax cost setting rules apply appropriately to inherited deductions for expenditure on certain assets acquired on or before 13 May 1997;
• modify the over-depreciation adjustment to the tax cost setting rules so that a joining entity only needs to look at the 5 years of dividend history immediately prior to the joining time - this change will apply to entities that join a consolidated group after 8 May 2007;
• for the period between 1 July 2002 and 8 May 2007, ensure CGT event L7 will not apply to amounts that are recognised under another provision of the income tax law and, with effect from 8 May 2007, repeal CGT event L7;
• allow the head company of a consolidated group to reduce a capital gain arising under CGT event L3 by the value of doubtful debts held by a joining entity at the joining time - this change will apply from 8 May 2007;
• ensure that, if an entity enters into a contract that causes a CGT event to arise and, before the contract is settled, the entity joins or leaves a consolidated group, then the entity that receives the capital proceeds will include the capital gain or loss in its taxable income - this change will apply from 8 May 2007;
• extend the single entity rule to shareholders who dispose of shares in the head company of a consolidated group, for the purposes of the CGT discount rules and CGT event K6 - this change will apply from 8 May 2007;
• modify the operation of the loss multiplication rules so that widely-held companies do not need to make adjustments under those rules unless a controlling stakeholder in a loss company has an equity interest in the entity, the loss company's losses are reflected in that interest, and the reflected losses are recognised for Australian tax purposes;
• ensure that beneficiaries of a trust that joins or leaves a consolidated group part way though an income year are taxed on an appropriate share of the trust's net income - this change will apply from the 2007-08 income year;
• extend certain transitional concessions to consolidated groups that have substituted accounting periods and formed on a day that was not the first day of the group's income year;
• clarify that the CGT provisions relating to blackhole expenditure that apply to consolidated groups also apply to MEC groups - this change will apply from 1 July 2005; and
• ensure the entry history rule applies to determine the time that depreciating assets of a joining entity are acquired by the head company of a consolidated group - this change will apply from 8 May 2007.

Date of effect

Unless otherwise specified, the amendments will apply from 1 July 2002 ie from the commencement of the consolidation regime.  However, the Government says the application dates and the need for appropriate transitional rules will be reviewed as part on the ongoing consultation process with business and professional groups during the development of legislation to implement these changes. Some of these measures may also be reviewed as part of that consultation process.

Source: Joint press release by Treasurer and Assistant Treasurer, 13 May 2008

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

The Government will modify the CGT scrip for scrip roll-over provisions to ensure that, for corporate restructures, the acquiring entity's cost base of shares in the target entity reflects the tax costs of the target entity's net assets, with effect from 7.30 pm (AEST) on 13 May 2008. This cost base will also be used in determining the value of the target entity's assets in consolidation if the target entity subsequently joins the acquiring entity's consolidated group.

Under the current provisions, the acquiring entity obtains a market value cost base for the shares it acquires in the target entity. This can result in significant unintended tax benefits arising if, for example, the target entity subsequently joins the acquiring entity's consolidated group. The measure seeks to prevent companies from obtaining unintended tax benefits if they restructure.

The Assistant Treasurer said the measure will replace the former Government's announced changes to the consolidation rules following certain CGT roll-overs, which caused significant disruption to the operation of Australia's capital markets. Further consultation with the private sector will be conducted during the development of legislation to implement this proposal, the Assistant Treasurer said.

Scrip for scrip CGT roll-over

In particular, the operation of the scrip for scrip CGT roll-over provisions will be modified if:

• an entity (the acquiring entity) acquires membership interests of another entity (the target entity);
• one or more shareholders dispose of their membership interests in the target entity and receive similar interests, or an entitlement to similar interests, in the acquiring entity (or its holding company);
• the existing integrity rules in the scrip for scrip CGT roll-over provisions do not apply in respect of these membership interests; and
• the arrangement is taken to be a restructure.

An arrangement will be taken to be a restructure if, under the arrangement, the market value of the net assets of the acquiring entity immediately before the arrangement is less than 20% of the market value of its net assets immediately after the completion of the arrangement. 

If the net assets of the acquiring entity immediately before the arrangement include membership interests in the acquiring entity that were subject to a previous application of this rule, the market value of the net assets of the acquiring entity immediately before the arrangement must be reduced by the market value of those membership interests.

To reduce compliance costs, the Assistant Treasurer said consideration will be given to proxies that may be used to determine the market value of a company for these circumstances.  For example, for listed companies, the quoted price of shares on a stock exchange may be a suitable proxy for market value in some circumstances.

If the acquiring entity acquires the membership interests of two or more target entities simultaneously under an arrangement, then the target entities will be taken to be acquired sequentially, in the order elected by the acquiring entity.

If an arrangement is taken to be, in substance, a restructure, the first element of the cost base and reduced cost base of the shares that the acquiring entity acquires in the target entity under the arrangement, other than shares acquired for cash, will be worked out having regard to the total of the cost bases of the target entity's assets less its liabilities in respect of those assets rather than the market value of the shares.

Alternatively, the acquiring entity can make an election to prevent a scrip for scrip CGT roll-over from being available to original shareholders of the target entity who exchange their shares for shares in the acquiring entity (or its holding company).  The election can be made without the acquiring entity determining whether an arrangement would otherwise be taken to be a restructure.

If the acquiring entity makes an election, the first element of the cost base and reduced cost base of the shares that it acquires in the target entity under the arrangement will be determined by applying the normal cost base rules.

Date of effect

If an arrangement involves a listed company, the measure will apply where an intention to undertake a corporate action by takeover bid or scheme of arrangement is announced by either party to an approved stock exchange after 7.30 pm (AEST) on 13 May 2008.

If an arrangement involves an unlisted company, the measure will apply to a corporate action by takeover bid or scheme of arrangement that is made to shareholders of the target company after 7.30 pm (AEST) on 13 May 2008.

Further information

Treasury contact: Paul McMahon

Tel: (02) 6263 3385

Source: 2008-09 Budget Paper No 2 [p 18]; Assistant Treasurer's press release, 13 May 2008

by Stuart Jones

ThomsonTax.Newsroom@thomson.com

In the 2008 Federal Budget, the Government announced that it would proceed with 3 changes to improve the operation of the company loss recoupment rules and to remove uncertainty:

1. Changes will be made to help ensure that companies do not fail the continuity of ownership test (COT) because of having multiple classes of shares on issue, or because of having special arrangements in place to make distributions of dividends and capital returns.  Date of effect: This change will apply from 1 July 2002, the date coinciding with the measure relaxing the COT tracing rules and introduction of the consolidation regime.
2. The meaning of "voting power" in the context of the COT where the company's shares do not all have the same voting rights for all matters affecting the company will be clarified. The change will ensure that, in these circumstances, the meaning of voting power will look at the power to vote on a poll for the election of a director to a company. Failing that, the meaning of voting power will look to the power to change the company's constitution.  Date of effect: This change will apply from 1 July 2007.
3. Changes will be made to ensure that the entry history rule in the consolidation regime is disregarded in applying the same business test.  Date of effect: This change will apply from 1 July 2002, the date coinciding with introduction of the consolidation regime. 

The Government said that business and professional groups will be consulted during the development of legislation to implement these changes.

Source: Joint press release by Treasurer and Assistant Treasurer, 13 May 2008

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

In the Budget, the Government announced that it would finalise the implementation of the simplified imputation system.

The simplified imputation system commenced from 1 July 2002 and has been gradually implemented since 2002 in a rolling program of legislation. The system is now largely complete. The primary element that remains outstanding is the franking credit trading rules (ie the holding period and related payment rules). The Government said a modification will be made to these rules to ensure that income beneficiaries of testamentary trusts are not prevented from accessing franking credits because of the operation of these rules. Other minor technical amendments will also be finalised. 

Business and professional groups will be consulted during the development of legislation to implement the final elements of the simplified imputation system.

Source: Joint press release by Treasurer and Assistant Treasurer, 13 May 2008

by Terry Hayes

ThomsonTax.Newsroom@thomson.com

The Government will increase access to the CGT small business concessions via the $2m aggregated turnover test 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 business, with effect from the 2007-08 income year.

Currently, the small business entity test does not cover business structures where the CGT asset is owned by an entity but is used in a related entity which carries on the business. In addition, for partnerships, the small business entity test requires the taxpayer making a capital gain to be a partner in the partnership and for the asset to be an asset of the partnership. This measure will allow these structures and assets to qualify for the CGT small business concessions.

Date of effect

The 2007-08 income year. Legislation expected to be introduced in Winter or Spring 2008. 

Further information

Treasury contact: Paul McMahon

Tel: 02 6263 3385

Source: 2008-09 Budget Paper No 2 [p 17]; Treasurer and Assistant Treasurer, joint press release, 13 May 2008

by Stuart Jones

ThomsonTax.Newsroom@thomson.com

The depreciation period for expenditure on "in-house computer software" which is capital in nature will be increased from 2.5 years to 4 years. A 4-year depreciation period for expenditure on in-house computer software is the same period as the Commissioner's effective life determination for computer hardware.

Expenditure on in-house computer software is expenditure by a taxpayer on acquiring, developing or having someone else develop computer software that is mainly used by the taxpayer in performing functions for which the software was developed (ie not for resale). This includes off-the-shelf software acquired for use by a taxpayer.

Expenditure on in-house computer software will continue to be depreciated on a straight line basis.

Date of effect

This measure will apply to expenditure on in-house computer software incurred on or after 7.30 pm (AEST) on 13 May 2008.

Budget Paper No 2 [p 20]; Treasurer's press release, 13 May 2008

by Trevor Snape

ThomsonTax.Newsroom@thomson.com

The Government has announced that it will introduce a new withholding tax regime on certain distributions from Australian managed investment trusts (MITs) to foreign resident investors. This was an ALP election commitment.

The new withholding tax regime will apply to fund payments that are distributions of Australian source net income (other than dividends, interest and royalties) of Australian MITs to foreign residents. It will cover distributions made directly from MITs to foreign residents, as well as distributions made through other intermediaries (including custodians). Distributions of dividends, interest and royalties will continue to be covered by the existing final withholding tax arrangements.

The nature of the new withholding tax regime will vary depending on whether the foreign investor is resident in a jurisdiction with which Australia has effective exchange of information (EOI) arrangements on tax matters. The list of jurisdictions with which Australia has effective EOI will be specified in regulations. Residents of such jurisdictions will be subject to:

• a 22.5% non-final withholding tax for fund payments of the first income year after the enabling legislation receives Royal Assent; 
• a 15% final withholding tax for fund payments of the second income year; and
• a 7.5% final withholding tax for fund payments of the third and later income years.

For the first income year, as an interim measure, investors resident in EOI jurisdictions will be eligible to claim a deduction for expenses relating to fund payments. The net amount will be subject to tax at a new rate of 22.5%.  

Residents of non-EOI jurisdictions will be subject to a 30% final withholding tax, with effect for fund payments of the first income year in which the enabling legislation receives Royal Assent.

Date of effect

These measures will apply with effect from the first income year after the date of Royal Assent of the enabling legislation.

Source: Budget Paper No 2 [p 13]; Treasurer's and Assistant Treasurer's joint media release, 13 May 2008

by Trevor Snape

ThomsonTax.Newsroom@thomson.com

The Government will introduce a family income test for the entrepreneurs' tax offset. The family income test will limit access to the offset by restricting eligibility for singles from $70,000 and families from $120,000 adjusted taxable income per year.

The entrepreneurs' tax offset presently provides a 25% tax off