- Published on Wednesday, 30 May 2012 12:04
Written by Kim Armstrong-Fray
Article Read: 2028
The Australian economy is in somewhat of a holding pattern despite expectations that it will continue to outperform other developed economies.
Our two-speed economy continues to define economic performance, with:
- The mining boom continuing to grow at just under 9% per year through to 2013–2014, with $120 billion of investment in 2012–2013. We are however moving into a new phase, with export prices having already peaked.
- The non-resources sectors are expected to grow at around 2% per year – with retail prospects continuing to be hampered by greater levels of consumer saving and the higher than average Australian dollar.
This federal budget has prioritised spending on areas such as health, social policy and other equity initiatives but has not provided a comprehensive roadmap for lifting productivity and future economic growth. As part of our federal budget analysis, we provide the following commentary on topics that will be relevant to many management rights operators.
Corporate tax - Company tax rate cuts are not to proceed.
The Australian government has announced that it will not proceed with proposed reductions to the company tax rate. The proposed reduction in the company tax rate to 29% (from the current rate of 30%) was to apply from the 2012–2013 financial year for small business taxpayers.
For management rights owners operating their business through a company structure, the anticipated reduction on the company tax rate is unfortunately off the table – at least as far as the current Australian government is concerned.
Loss "carry back" measure for companies - In the lead up to the federal budget, the Australian government announced a loss "carry back" measure for companies to commence from the start of the 2012–2013 financial year. Under this measure companies will be able to "carry back" losses to offset prior year profits and obtain a refund of tax previously paid on those prior year profits. This measure is intended to assist corporate businesses facing pressures from the patchwork economy and encourage growth and investment.
While the specific details of the measure announced by the Australian government are still to come and will be the subject of a discussion paper yet to be released, it appears that the Australian government has largely accepted the model put forward by the Business Tax Working Group. Key features of this model will include:
- An initial one-year carry back period from the 2012–2013 financial year (ie, 2012–2013 tax losses can be carried back and offset against tax paid in 2011–2013);
- A two-year loss carry back prior to apply from the 2013–2014 financial year;
- A $1 million cap on the amount of losses able to be carried back; and
- Refunds will be limited to the balance of a company's franking account.
The Australian government has also announced that the loss "carry back" will be subject to integrity rules, however no details of these rules have been provided. This measure is seen by the Australian government as a major tax reform to assist small businesses, although the benefits of the measure will be available to all companies regardless of size.
Specifically, the $1 million cap on the amount of losses able to be carried back translates to a real cash benefit of up to $300,000 per annum for eligible companies (based on a corporate tax rate of 30%) and is realised at a time when they are most vulnerable to cash flow concerns.
A loss "carry back" regime will bring the Australian tax system in line with a number of international tax systems including the United States, the United Kingdom, Canada, France and Germany.
Some further practical observations include:
- Only companies (and entities taxed like companies) can benefit from the proposal. Therefore, businesses operated by sole traders (individuals) or through Trusts will miss out on the benefit of this measure;
- The loss "carry back" applies to revenue losses only – no relief is given to capital losses;
- The measure is aimed primarily at assisting companies that experience a temporary setback which results in a period of losses following a period of profits. It is of limited benefit to start-up companies and businesses that typically experience a sustained period of losses before generating a profit;
- The limit on carry back refunds to the balance of a company's franking account means that companies will need to consider this as part of planning for the payment of franked dividends. Paying out franked dividends to shareholders may limit the ability of a company to carry back losses in future income years; and
- For those companies which are looking to carry forward losses to later income years, we are yet to see if there will be any future reforms to the application of the same business test which is often onerous and difficult for many companies to pass.
For management rights owners operating through a company structure, we recommend you seek advice from your accountant as to whether you can access the loss "carry back" regime.
Indirect tax - GST compliance program extension.
The Australian government has announced that it will provide $195.3 million to the Australian Taxation Office in 2014–2015 and 2015–2016, effectively extending the GST compliance measures announced in the 2010–2011 federal budget for a further two years. These measures are intended to ensure that the ATO can continue to closely examine issues relating to:
- fraudulent GST returns
- under-reporting of GST liabilities
- failure to lodge GST returns; and
- outstanding GST debts.
It is notable that the expected revenue increase from this measure is significant – $986.2 million. It is clear that while the Australian government continues to move forward with its GST administration reform agenda, the ATO will maintain a high level of scrutiny on taxpayer compliance.
For management rights owners, this is a reminder to ensure you are receiving sound accounting advice as to your compliance with the ATO, in particular GST legislation.
Small business - There was much speculation that the 2012–2013 federal budget would be a "small business budget". Changes directly impacting small businesses that satisfy the "$2 million turnover test" from 1 July 2012 relate to previously enacted or announced measures, these include:
- allowing small businesses to write off depreciating assets of less than $6500
- the introduction of simplified pooling rules for depreciating assets of $6500 or more; and
- an immediate tax deduction of up to $5000 for the cost of a motor vehicle.
For management rights owners the increase to the write-off amount of depreciable assets is a bonus – given that most plant and equipment used in the day-to-day operation of your business should fall within these capital expenditure parameters. In addition, from 1 July 2012 that new company car you had your heart set on may now be a tax-effective option.
Personal tax - Although the 2012–2013 tax rate changes for resident taxpayers are welcomed by low income earners, higher income earners will receive no real benefits. Higher income earners will also feel the full impact of the reduced Private Health Insurance Rebate that is to apply to premiums paid on and after 1 July 2012. Some limited relief for higher income earners will come from the removal of the Flood and Cyclone Reconstruction Levy that will no longer apply after 30 June 2012.
Individual taxpayers will be disappointed that the proposed 50% discount for interest income and the standard tax deduction for work-related expenses – both due to commence on 1 July 2013 – are no longer being introduced.
Personal income tax rates 2013 - The Australian resident individual income tax rates for the 2012–2013 financial year are set out below. The most significant change from the 2011 financial year to the 2012 financial year is the increase in the tax-free threshold from $6000 to $18,200.
|18,201 – 37,000||19|
|37,001 – 80,000||32.5|
|80,001 – 180,000||37|
For management rights owners the increase in the tax-free threshold is a welcome relief.
Superannuation - It appears the so called "simpler super" measures introduced in 2007 are gradually being wound back. The biggest concern is the growing proposition of additional complexity with respect to the administration of superannuation.
Additional tax on concessional contributions - The Australian government has confirmed an additional tax of 15% on concessional superannuation contributions from 1 July 2012 for individuals whose income exceeds $300,000. The additional tax paid on a $25,000 contribution will be up to $3750. Income for this purpose will include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, target foreign income, tax-free government pensions and benefits, less child support.
For management rights owners superannuation still remains an attractive investment vehicle despite the possible complexities and administrative costs involved, due to the tax concessions provided on contributions, the 15% tax rate on investment earnings and the tax-free status of investment earnings and pension withdrawals in retirement, commonly referred to as "transition to retirement".
Concessional superannuation contribution caps reduced from the 2012–2013 year - The Australian government has deferred to 1 July 2014 its previously stated policy of a $50,000 concessional contributions cap for individuals aged 50 years and over, where their accumulated superannuation balance does not exceed $500,000.
The concessional contribution limit for individuals aged 50 years and over will therefore reduce to $25,000 from 1 July 2012. Concessional contribution limits will be as follows, including indexation adjustments expected to apply in 2015:
|Year||Under Age 50 Years||Over Age 50 Years|
A reduction in the concessional superannuation contributions cap for individuals aged 50 years and over will provide even more pressure on the cumbersome and costly excess contributions tax regime as more and more individuals inadvertently breach their caps. There were no changes to non-concessional superannuation contribution limits.
Fringe benefits tax - Further reform of living-away-from-home allowances and benefits.
Building on the 2011–2012 Mid-Year Economic Fiscal Outlook measure fringe benefits tax – reform of living-away-from-home allowances and benefits, additional reforms have been made to living-away-from-home allowances and benefits to better target the concession to people that are legitimately maintaining a second home in addition to their actual home for an initial period. The updated measures are as follows:
- access to the tax concession will be limited only to those employees who maintain a home for their own use in Australia that they are living away from for work purposes; and
- providing the tax concession for a maximum period of 12 months for an individual employee for any particular work location.
The welcome news is that the Australian government has listened to extensive feedback from the recent consultative process associated with the previously proposed LAFH changes and indicated that there will be transitional relief through to 1 July 2014 for arrangements entered into before 7.30pm (AEST) 8 May 2012. Any arrangements entered into post the federal budget will cease to be eligible for FBT concessions from 1 July 2012.
Tax administration - More funding provided to the ATO to collect debts.
The Australian government has announced that it will provide $106 million over four years to the ATO to improve its management of the collection of tax debts and superannuation guarantee charges. It is intended that the funding will be used by the ATO to make contact with taxpayers earlier than would otherwise be the case with a resulting projected increase in cash receipts over the forward estimates period.
For management rights owners with outstanding debts with the ATO, it is critical that you discuss your options (such as ATO payment plans) with your accountant.
Tax reform agenda - What's next on the tax reform agenda?
The Australian government has committed to a long term plan of major reform to build a stronger, fairer and simpler tax system. The current reform agenda has its origins largely based on Australia's Future Tax System Review (the Henry Review), that was commissioned by the Australian government in 2008 and released on 2 May 2010. During the two years that have passed since the Henry Review was released, significant progress has been made in implementing reforms (although note that many of these measures are yet to be enacted into law), including:
- a resources tax which applies from 1 July 2012, albeit in a different form to that originally proposed in the Henry Review
- a limited loss carry back rule for companies in the lead up to the 2012–2013 federal budget
- an increase in the superannuation guarantee rate to 12%
- changes to the capital allowance arrangements for small businesses, including an immediate deduction for the acquisition of depreciating assets costing less than $6500, to apply from 1 July 2012; and
- a process currently underway to update and re-write the rules regarding the taxation of trusts.
Progress on tax reform will no doubt be high on the agenda at the Australian government's Economic Forum scheduled for 12–13 June 2012. The forum is intended to continue the debate on a range of economic policy priorities, the challenges facing the economy – such as the impact of a sustained high dollar, and opportunities to improve Australia's competitiveness and productivity.
As part of the federal budget, the Australian government released its Tax Reform Road Map that outlines the Australian government's plan for tax reform for the future. It is disappointing that the Australian government announced in the federal budget that a number of measures originating from the Henry Review that were previously accepted, such as the 50% discount for interest income and the standard tax deduction for work-related expenses (both due to commence on 1 July 2013) and the 29% corporate tax rate, are no longer proceeding.
The latest trend around retrospective tax law amendments introduces a new element of tax risk and uncertainty for taxpayers that may require careful planning. If you are in any doubt as to your compliance with any of the matters above, or require advice in relation to any particular aspect of your taxation and accounting affairs, please consult with your professional representatives.
The information, recommendations, opinions or conclusions provided above are generic in nature and do not express individual advice. You should always consult your professional representatives before taking any action.