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2010 Federal Budget

On 11 May 2010, the Treasurer Mr Swan handed down the 2010 Federal Budget, his third Budget, with a $40.8bn deficit. The highlights are as follows;

1. 50% tax savings discount - from 1 July 2011, the Government will provide a 50% tax discount on up to $1,000 for interest earned by individuals (including interest income earned indirectly via a trust or managed investment scheme);

2. Standard deduction for work-related expenses - individual taxpayers will get a standard deduction of $500 for work-related expenses and the cost of managing tax affairs from 1 July 2012 (increasing to $1,000 from 1 July 2013);

3. Personal tax rates - no change to already legislated cuts to the individual tax rates for 2010-11. Residents: rates and tax payable from 1 July 2010;

4. Medicare levy low-income thresholds - from 1 July 2009, increased for singles to $18,488 ($31,196 for members of a family);

5. Senior Australians Tax Offset (SATO) rebate - calculation of the rebate threshold will be amended to correctly factor in the effect of the low income tax offset;

6. 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;

7. The Government is proposing changes to the First Home Savers Account (FHSA) Scheme. The current rules require that FHSA holders keep their savings in a 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 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;

8. All payments under a qualifying earn-out arrangement will be treated as relating to the underlying business asset. Earn-out arrangements are used to structure the sale of a business (or business assets) to manage uncertainty about the value of the business. Under the earn-out arrangement, an earn-out right may entitle the buyer or seller to additional payments depending on the subsequent performance of the business. Currently, an earn-out right is treated as a separate CGT asset. The measure will have effect from the date of assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007;

9. CGT demerger relief extended - CGT demerger provisions to be amended to allow another member of a demerger group to qualify as the head entity of the group where the existing head entity cannot demerge its interests in the demerger group, effective for CGT events happening after 7:30pm on 11 May 2010;

10. CGT: share sale facility - legislation to be enacted to allow Australian interest holders to utilise a broader range of CGT rollovers where an entity restructures using a share or interest sale facility for foreign interest holders, effective for CGT events happening after 7:30pm on 11 May 2010;

11 Consolidated groups - rules relating to the calculation and collection of income tax liabilities from consolidated groups and MEC groups to be amended to allow an entity in a tax sharing agreement to leave a consolidated group or MEC group clear of any future income tax liabilities relating to the group;

12. Running Balance Accounts - Government to increase flexibility in managing running balance accounts and provide for interest to be paid to taxpayers if an overpayment arises because of an amended franking deficit tax assessment;

13. The Government has announced that it will clarify and simplify the margin scheme. The amendments to the margin scheme will apply from 1 July 2012;

14. Export of boats used for recreational purposes - the Government announced that a supply of a boat used for recreational purposes to be GST-free if the boat is exported by a purchaser (from Australia) within 12 months and only used for recreational purposes whilst in Australia;

15. Interest withholding tax - to be phased down for financial institutions;

16. Managed Investment Trusts (MIT) - definition of MIT to be amended for withholding tax purposes to include certain wholesale managed investment schemes and certain widely held pooled superannuation trusts;

17. Film tax offsets - proposed changes to the eligibility requirements for film tax offsets effective from 1 July 2010;

18. Co-contribution matching rate permanently reduced to 100%. 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;

19. Terminal medical condition benefits - range of benefits that are deductible by complying superannuation funds to be extended to include terminal medical condition (TMC) benefits;

20. Minor super amendments - Commissioner to be able to exercise discretion for the purposes of excess contributions tax before an assessment is issued and time limit to be increased for deductible employer contributions made for former employees;

The 2010 Budget follows the Government’s initial response to the Henry Tax Report released on 2 May 2010. The Budget Papers contain various references to these previously announced Government measures in response to the Henry Report, including;

21. Resource Super Profits Tax that will tax non-renewable resource projects (at a rate of 40%) on their profits rather than just their production;

22. 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);

23. 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;

24. 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;

25. Superannuation Guarantee age limit will be increased from 70 to 75 from 1 July 2013;

26. Superannuation Guarantee rate will rise to 12% by 2019-20 (to be phased in from 1 July 2013);

27. Government will provide a $500 annual superannuation contribution to individuals with an adjusted taxable income up to $37,000;

28. The Government will establish a national system of registering business names. Currently, businesses have had to register separately in each State and Territory and pay registration fees to each state government. Under the proposed measures, businesses will need to register only once and pay only one fee. The administration of business names will be transferred from the States to ASIC. The 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; and
• online accounts that will allow businesses to access registrations, monitor compliance requirements and access regulatory change notifications from all governments.

29. 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 freeze the indexation of the cap for 4 years. The rebate will commence from 1 July 2010.