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The 2011/12 Federal Budget - Implications for Business

There were a number of tax changes announced covering areas such as superannuation, income tax, CGT, GST, FBT and charities. However there was no change in tax rates, unless you count the Flood Levy for 2012, and the Mining Tax is still very much a part of the Government’s plans to return Australia to surplus.
An overview of the major announcements that may affect your business is given below.

BUSINESS TAX MATTERS

Minors no longer entitled to low income tax offset on unearned income
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 and other income from property, with effect from 1 July 2011. The Government said that this is designed to discourage income splitting between adults and children.

The Assistant Treasurer said the increases in LITO over recent years have increased the amount of income that can be allocated to children tax-free. He said these increases have been accompanied by increased distributions of income to children, especially from discretionary trusts.

Therefore for the 2012 year looks like we are back to a $416 distribution rather than a $3,333 tax free distribution per child.

Small business motor vehicle tax write-off to replace Entrepreneur's Tax Offset

The Government will provide Australian small businesses with an instant tax write-off of the first $5,000 of any motor vehicle purchased from 1 July 2012. 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 of 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.

These reforms will be available to all small businesses, including sole traders and businesses operating through trusts, partnerships and companies.

The new small business instant write-off will effectively replace the Entrepreneurs Tax Offset (ETO), which will be abolished with effect from the 2012-13 income year.

FBT and cars - flat 20% valuation rate to apply

The Government announced what would amount to implementation of Henry Tax Review Recommendation 9(c) that the current statutory formula method for valuing car fringe benefits be replaced with a single statutory rate of 20%, regardless of the number of kilometres travelled.

The changes will apply to new vehicle contracts entered into after 7:30pm (AEST) on 10 May 2011, and will be phased in over 4 years as follows:

FBT Statutory rate method
Statutory rate (x cost of car to determine person's car fringe benefit)
 Distance travelled during FBT year
 (1 April - 31 March)   
 Existing Contract  New Contracts from
 10 May 2011 (%)
New Contracts from
 1 April 2012 (%) 
 New Contracts from
1 April 2013 (%)
New Contracts from
1 April 2014 (%)
 
 0 - 15,000km    26  20  20  20  20
 15,000 - 24,999km  20  20  20  20  20
 25,000 - 40,000km  11  14  17  20  20
 More than 40,000km  7  10  13  17  20

People who use their vehicle for a significant amount of work-related travel will still be able to use the "operating cost" (or "log book") method to ensure their car fringe benefit excludes any business use of the vehicle.

PAYG instalments - GDP adjustment factor reduced for 1 year

The Government will reduce income tax instalments paid under PAYG using the gross domestic product (GDP) adjustment method for one year. PAYG instalments in 2011-12 will be set at 4% above a small business's taxable income for the previous year, half the statutory rate that would otherwise have applied. In accordance with the existing law, taxpayers may still vary their quarterly tax instalments if they consider their income is expected to be lower or higher than the amount determined by the Commissioner of Taxation using the 4% adjustment factor.

This is a one-year benefit, and the statutory rate will apply as normal from 2012-13.

This reduction does not apply to taxpayers who calculate their instalments based on the instalment rate notified by the ATO. Their payments will automatically adjust when they apply the given rate to their actual income for the quarter.

This measure is only expected to provide an average $5 per week cashflow benefit to affected businesses.

Countering fraudulent phoenix activities by company directors

The Government will strengthen the tax law to counter fraudulent phoenix activity (which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt.

Under the proposed measures:
-  the director penalty regime will be extended to superannuation guarantee amounts,
-  directors will be personally liable for their company's failure to pay employee superannuation;
-  the Tax Office will be given the power to commence recovery against directors under the director penalty regime,
   without providing a 21 day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due; and
-  in certain circumstances directors and associates of directors will be prevented from obtaining credits for withheld amounts in their
   individual tax returns where the company has failed to pay withheld amounts to the ATO.

The measures will apply with effect from 1 July 2011. It will be interesting to see how the Government legislates to ensure it only applies to so-called “phoenix companies” and not all companies in distress.

Small business tax concessions amendments

The Government will amend the small business tax concessions so that trusts will not be able to avoid being treated as connected entities for the purpose of testing eligibility for the concessions on the basis that the trusts do not own assets for their own benefit. These changes will also ensure that some small businesses will be able to access the small business CGT concessions because the changes will make their business assets active.

This closes a small loophole that existed for trusts selling business assets where they could argue they were not connected with other family entities to avoid aggregation for the $6 million Net Asset Test.

The measures will have effect for CGT events happening after 7.30pm (AEST) on 10 May 2011.

SUPERANNUATION FUNDS

Excess contributions tax: refund option for contributions up to $10,000

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 expects that this reform will help to reduce the number of occasions where the concessional contributions are exceeded resulting in an excess contributions tax (ECT) assessment. The Government said it will consult with the superannuation industry on the implementation of this measure. It is a shame this measure was not retrospective and only applies for a first time breach.

This measure will apply from 1 July 2011 in respect of 2011-12 or later years, and as mentioned, only for the first year, commencing from 2011-12, in which a breach occurs.

Concessional contributions: higher cap for those 50 and over

The Government will set the proposed higher concessional contributions cap at $25,000 above the general concessional cap for eligible individuals aged 50 and over with total superannuation balances of less than $500,000.

The proposal to allow individuals aged 50 and over with total superannuation balances below $500,000 to continue making up to $50,000 per year in concessional contributions from 1 July 2012 was previously announced as part of the Government's response to the Henry Tax Report on 2 May 2010.

The Government has confirmed that the higher cap will enable eligible persons over 50 to be able to contribute $25,000 more per year than other workers subject to the general concessional contributions cap of $25,000. As a result, when the general concessional contributions cap increases with indexation from $25,000 to $30,000, the higher cap will increase by the same dollar amount.

This measure will apply from 1 July 2012.

Limiting the trading stock exception for super funds

The Government will remove the trading stock exception to the CGT primary code rule for complying superannuation entities for specified assets. This measure will ensure gains or losses on specified assets (primarily shares, units in a trust and land) are subject to CGT, consistent with CGT being the primary code for taxing gains and losses of complying superannuation entities. A small number of complying superannuation entities are seeking to treat shares as trading stock, so as to deduct losses on their shares against income other than capital gains.

The measure will apply with effect from 7.30 pm (AEST) 10 May 2011. However, transitional rules will apply to ensure that assets held or accounted for as trading stock before the time of announcement are unaffected.

If you would like to discuss the information please contact our office.