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Bulletin - Federal Budget 2011

On Tuesday 10 May 2011, the Treasurer Mr Swan handed down the 2011-12 Federal Budget, his 4^th Budget. The highlights are as follows;

The Government did not make any changes to the currently legislated tax rates which apply for the 2010-11 and following years (not forgetting that, from 1 July 2011 for one year, those rates will include the flood levy, where applicable). The resident tax rates, including the flood levy, as follows 

Note – the rates above do not include the Medicare Levy

The Government will remove the ability of minors (children under 18 years of age) to access the low income tax offset (LITO) to reduce tax payable on their unearned income, such as dividends, interest, rent, royalties, distributions from discretionary trusts, and other income from property, with effect from 1 July 2011. This is designed to discourage income splitting between adults and children. 

Income earned by minors from work will still be eligible for the full benefit of the Low Income Offset.

The Government announced it will phase out the tax offset for dependent spouses aged less than 40 (ie born on or after 1 July 1971) to help encourage more Australians into paid employment. This change will mean taxpayers with a dependent spouse aged less than 40 years will no longer be eligible for the dependent spouse tax offset (DSTO) from 1 July 2011.

The change will not affect taxpayers whose dependent spouse is a carer, who is an invalid, or permanently unable to work; and taxpayers with children (eligible for Family Tax Benefit B), or eligible for the zone, overseas forces or overseas civilian tax offsets. Dependent spouses with children are not affected by this measure because they receive Family Tax Benefit B rather than the DSTO.

From the 2010-11 income year, the Medicare levy low-income thresholds will be increased for singles to $18,839 (up from $18,488 for 2009-10) and to $31,789 for those who are members of a family (up from $31,196 for 2009-10).

The additional amount of threshold for each dependent child or student will also be increased to $2,919 (from $2,865).

The Medicare levy low-income threshold for pensioners below Age Pension age will also be increased from 1 July 2010 to $30,439 (from $27,697). 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.

From 1 July 2012, the Government will reduce the following discounts applying to payments made under the Higher Education Contribution Scheme (HECS):

• the discount available to students electing to pay their student contribution up-front will be reduced from 20% to 10%; and
• the bonus on voluntary payments to the Tax Office of $500 or more will be reduced from 10% to 5%.

Under HECS, students electing to pay their student contribution up-front will continue to receive a 10% discount on the payment. Students choosing not to pay up-front can take out a concessional loan to pay their student contribution under the Higher Education Loan Program (HELP).

Under HELP, students accrue an outstanding debt which is repaid gradually when their assessable income exceeds a minimum repayment threshold. Students can also elect to make additional voluntary payments through the Tax Office to further reduce their outstanding HELP debt. Payments of $500 or more will now attract a 5% bonus so that a payment of $500 would reduce an individual's outstanding HELP debt by $525.

The minimum annual payment amounts for pensions and annuities will be reduced by 25% for 2011-12 and will return to normal in 2012-13. In this respect, the Government will begin to phase out the 50% pension drawdown relief that has been provided for 2008-09, 2009-10 and 2010-11 financial years.

Reducing the minimum payment amounts by 25% for account-based, allocated and market linked (term allocated) pensions from 1 July 2011 seeks to provide some assistance to holders of these products to recoup capital losses incurred as a result of the global financial crisis. 

The minimum annual payment amounts are as follows;

The Government will provide eligible individuals who breach the concessional contributions cap by up to $10,000 with a one-off option to request that these excess contributions be refunded to them. This new refund option will only apply to first time breaches from 1 July 2011.

The changes will give individuals the option to take excess concessional contributions out of their superannuation fund and have them assessed as income at their marginal rate of tax, rather than the excess concessional contributions tax rate of 31.5% (in addition to the 15% contributions tax for the fund).

The Government will provide Australian small businesses with an instant tax write-off of the first $5,000 of any motor vehicle purchased from 2012-13. The Treasurer said that, for example, a tradesman on a 30% marginal tax rate, buying a new $33,960 ute would receive an extra tax benefit of $1,275 in the year they purchased the vehicle. The remainder of the purchase value can be transferred into the general small business depreciation pool, which is depreciated at 15% in the first year and 30% in later years.

The Treasurer said this new write-off was in addition to the Government's proposed tax reforms for small businesses to be introduced in 2012-13 that would allow:

• an immediate write-off all assets valued at under $5,000 (up from $1,000 presently),
• a write-off of all other assets (except buildings) in a single depreciation pool at a rate of 30%. Currently, small businesses allocate assets to 2 different depreciation pools, with 2 different depreciation rates (30% and 5%); and
• a reduction in company tax rate to 29% for incorporated small businesses.

The new small business instant write-off for the first $5,000 of any motor vehicle will effectively replace the Entrepreneurs Tax Offset (ETO), which will be abolished with effect from the 2012-13 income year. 

The Government announced that the current statutory formula 4-percentage rate scale method for valuing car fringe benefits be replaced with a single statutory rate of 20%, regardless of the number of kilometres travelled.