The Treasurer Mr Wayne Swan’s third Federal Budget was handed down at 7.30 pm on 11 May 2010. It is intended to be a responsible Budget that will return the government to surplus ahead of schedule. As expected, it contained measures to provide a tax discount on savings and to make it easier to fill in tax returns. However, the Budget unexpectedly contained a raft of other minor tax changes.
Here are the tax highlights of the 2010/11 Budget.
From 1 July 2011, individuals will be entitled to a 50% discount on up to $1,000 of interest earned, including on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products. For example, for a person earning an average pre-tax interest rate of 6%, the discount would apply up to a savings balance of just over $16,500. The discount will be available for interest income earned directly as well as indirectly, such as via a trust or managed investment scheme.
It is expected that banks, building societies and credit unions will benefit from a greater supply of stable deposit funding, which will reduce their requirement to borrow in international capital markets from overseas investors.
Taxpayers claiming the discount for interest income will have a reduced adjusted taxable income for the purpose of determining eligibility for transfer payments and other concessions. This will result in some individuals and families becoming eligible for transfer payments or eligible for a larger transfer payment.
The Government will seek consultation during 2010/11 on details concerning the operation of the discount, including on the final scope of eligible savings products and the mechanism for applying the discount to interest earned indirectly by individuals.
As a related measure, ASIC will allow listed entities meeting appropriate criteria to issue bonds to retail investors using a simplified process, while maintaining a strong level of investor protection. This is intended to make it easier for businesses to borrow directly from retail investors and reduce their reliance on borrowing from banks.
The Australia’s Future Tax System report had recommended a 40% savings income discount to individuals for non-business related net interest income (Recommendation 14).
Source: Treasurer’s Press releases: Reforms to boost business credit and encourage saving; and Improving incentives for saving to benefit 5.7 million Australians; Budget Paper No 2, p 38.
From 1 July 2012, individual taxpayers will be entitled to an optional standard deduction of $500 in lieu of claiming work-related expenses and the cost of managing their tax affairs. The standard deduction will be increased to $1,000 from 1 July 2013.
Taxpayers with expenses above the standard deduction will be able to continue to claim those expenses when lodging their tax return under the existing rules.
The government expects that the standard deduction will reduce individuals’ and families’ adjusted taxable income for the purpose of determining their eligibility for transfer payments and other concessions. This will make some individuals and families eligible for transfer payments or increased transfer payments (e.g. Family Tax Benefit, Baby Bonus, Child Care Benefit, Commonwealth Seniors Health Card and the Seniors Supplement).
The standard deduction was one of the recommendations of the Australia’s Future Tax System report (Recommendation 11).
Treasurer’s Press Release: Standard deduction to increase tax returns for 6.4 million Australians, 11 May 2010; Budget paper No 2, p 47.
The threshold above which a taxpayer can claim the net medical expenses tax offset will be increased from $1,500 to $2,000 and the threshold will commence to be annually indexed to the Consumer Price Index, with effect from 1 July 2010. The first indexation adjustment to the threshold will take place on 1 July 2011. The offset currently allows taxpayers to receive a tax offset equal to 20% of net unreimbursed eligible medical expenses above $1,500.
Source: Budget Paper No 2, p 35.
For 2009/10, the Medicare low-income thresholds will be increased to $18,488 for individuals and $31,196 for families. The additional amount of threshold for each dependent child or student will also increase to $2,865. The increase in these thresholds takes into account movements in the Consumer Price Index and ensures that low-income families and individuals are not liable to pay the Medicare levy.
The Medicare levy threshold for single pensioners below Age Pension age will increase to $27,697, with effect from 1 July 2009. This increase will ensure that pensioners below Age Pension age do not pay the Medicare levy when they do not have an income tax liability.
Source: Treasurer’s Press Release: Increase in the Medicare levy and Medicare levy surcharge low-income thresholds, 11 May 2010; Budget Paper No 2, p 36.
The first home savers accounts rules have been amended to allow FHSA monies to be transferred into an approved mortgage where the FHSA holder acquires a home before the end of the four-year period. Prior to this amendment FHSA holders who bought a house within 4 years of opening a FHSA would only maintain concessional treatment of their FHSA money if they transferred their money to their superannuation.
Source: Treasurer’s Press Release, Helping Australian’s buy their first home by increasing flexibility of first home saver accounts, 12 May 2010.
The Senior Australians tax offset regulations affecting the calculation of the rebate threshold will be amended, with effect from 1 July 2010, to take account of the low income tax offset (LITO).
Currently, the formula specified in the regulations for calculating the rebate threshold fails to reflect the fact that the LITO is reduced when taxable income exceeds $30,000. This measure will ensure that where the rebate threshold exceeds $30,000, the calculation of the rebate threshold incorporates the reduction in the LITO.
Source: Budget Paper No 2, p 13.
The benchmark interest rate on capital protected borrowings is the Reserve Bank indicator rate for standard variable housing loans plus 100 basis points (instead of the RBA indicator rate for standard variable housing loans as announced in the 2008-09 Budget). The measure will apply to capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008.
The Government will also extend the transitional arrangements for capital protected borrowings entered into at or before 7:30 pm (AEST) 13 May 2008 from the previously announced date of 13 May 2013 to 30 June 2013. This extension is intended to reduce compliance costs for affected taxpayers in the 2012/13 income year.
The Government has released the draft legislation that gives effect to these changes for consultation on technical details. The consultation period for the exposure draft bill finishes on 11 June 2010 and copies of all relevant materials are available at Treasury website.
Source: Assistant Treasurer’s Press Release: Change to benchmark interest rate for capital protected borrowings, 11 May 2010; Budget Paper No 2, p 18.
Further to a press release of 20 April 2010, the Government has registered regulations that facilitate debt tax treatment of certain term subordinated notes. The regulations commenced on 15 April 2010 and apply to payments of principal or interest made under the relevant notes on or after 1 July 2001. The regulations provide that certain solvency and capital adequacy clauses in the relevant notes do not preclude the notes from being a debt interest under the debt/equity tax rules. The clauses allow or require the payment of principal or interest on the notes to be deferred in certain circumstances. Without the regulations, the clauses may make the obligation to pay the principal or interest a contingent obligation and consequently preclude the relevant note from being a debt interest for tax purposes.
Source: Budget paper No 2, p 22.
Further to a press release of 20 April 2010, the Government will extend the debt/equity transitional period for Upper Tier 2 capital instruments to 1 July 2010, with effect from the date of Royal Assent of the enabling legislation. Extension of the debt/equity transitional period to 1 July 2010 is expected to allow time to transition to the proposed regulations that will ensure that certain Upper Tier 2 subordinated notes are not precluded from being a debt interest under the debt/equity tax rules. The measure will apply to Upper Tier 2 instruments issued before 1 July 2001.
Source: Budget paper No 2, p 22.
The interest withholding tax (IWT) rate on borrowings of local subsidiaries from their overseas parents will be reduced from 10% to 7.5% in 2013/14 and to 5% in 2014/15. The Government is "favourably disposed" to reducing this rate to zero, subject to its medium-term fiscal objectives.
In addition, the IWT rate for borrowings by any bank branch from its overseas head office will be reduced from 5% to 2.5% in 2013/14 and to zero in 2014/15.
This reform also extends to Australian-owned financial institutions borrowing from related parties overseas, and any financial institution borrowing offshore retail deposits which they on-lend in Australia.
The measure is aimed at allowing non-major banks to access cheaper funding so they can offer cheaper loans to Australian households and businesses.
The announced measure was one of the recommendations of the Australia’s Future Tax System report (Recommendation 33). It also responds to a key recommendation of the Australian Financial Centre Forum’s report, Australia as a Financial Centre: Building on our Strengths.
As an integrity measure, the IWT phase-down will not apply to either interest paid on non-resident retail deposits held in Australia or offshore borrowings by entities that are not financial institutions.
IWT rates and exemptions for financial institutions
Type of borrowing |
Current IWT |
IWT from 2013-14 |
IWT from 2014-15 |
Financial institution borrows from a foreign financial institution (where not exempt under a tax treaty) |
10% |
7.5% |
5% Aspirational target of zero |
Foreign bank branch borrows from overseas head office |
5% |
2.5% |
Exempt |
Financial institution borrows from offshore retail deposits (proceeds used and traced to Australian operations) |
10% |
7.5% |
5% Aspirational target of zero |
Financial institution borrows through a publicly offered debenture issue, non-equity share or syndicated loan |
Exempt |
Exempt |
Exempt |
Offshore banking unit (borrows and on-lends offshore) |
Exempt |
Exempt |
Exempt |
Financial institution borrows from nonresident retail deposits held in Australia |
10% |
10% |
10% |
Source: Treasurer’s Press Release: Phasing down IWT on financial institutions to support banking competition, 11 May 2010; Budget paper No 2, p 43.
The government will further refine the non-commercial loan rules announced in the 2009/10 Budget by clarifying the scope of payments that can give rise to a deemed dividend when they are provided to shareholders or their associates, with effect from 1 July 2009. The measure will clarify that, where a private company provides a dwelling to the shareholder of the private company or their associate for use as their main residence, a payment will not arise under the non-commercial loan rules. The exemption will apply to the use of a dwelling where the private company acquired the dwelling before 1 July 2009 and the private company continues to meet a modified continuity of ownership test.
Source: Budget Paper No 2, p 35.
The income tax treatment of qualifying instalment warrants will be amended to provide certainty for investors by treating them as the owner of the underlying asset for income tax purposes, with effect from 1 July 2007. The measure will also ensure that the opportunity for non-recourse borrowing by trustees of superannuation funds permitted under prudential regulations is not undermined by its tax treatment.
Source: Budget Paper No 2, p 28.
The Government has announced a number of CGT changes including changes to the treatment of earn out arrangements, the extension of CGT rollover relief for certain business restructures, and roll-over relief for transfers by the Commonwealth Superannuation Corporation to the ARIA investment trust .
The Government has announced a number of amendments to the CGT provisions to improve the ability of businesses to restructure.
The proposed changes will apply to CGT events happening after 7.30 pm (AEST) on 11 May 2010.
Initial consultation on the first 3 measures will be undertaken on the design of these amendments with a consultation paper providing further information about these measures available at the Treasury website. The Government will also release an exposure draft of the legislation at a later date.
CGT rollover will apply to Indigenous incorporated bodies converting to a company incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act) after 7.30 pm (AEST) on 11 May 2010. Indigenous companies will also be able to move between the Corporations Act 2001 and the CATSI Act without CGT consequences. The rollover has also been made more flexible to better accommodate business practices. This caters for situations where bodies are wound up and subsequently reincorporated and also allows for taxpayers to receive shares on incorporation to reflect all of the interests and rights they held in the original body. Roll-over will also be available for any gains or losses realised by the original entity when it ceases to own its CGT assets, trading stock, and depreciating and revenue assets that become assets of the newly incorporated entity as part of the reincorporation.
Australian interest holders will be able to access a broader range of CGT rollovers where an entity restructures using a share or interest sale facility for foreign interest holders.
Currently, where a business restructures and uses a share or interest sale facility for foreign interest holders, Australian resident interest holders are unable to access some CGT rollovers. The proposed change will allow entities undertaking certain restructures to use a share or interest sale facilities for dealing with the interests of foreign residents without automatically failing the ownership proportion tests in the applicable roll-over while ensuring that ownership requirements are appropriately maintained.
The CGT demerger relief provisions will be amended so that demerger groups which currently include corporations sole or complying superannuation entities can benefit from the relief. This measure is intended to remove a current defect in the CGT legislation that has restricted access to CGT demerger relief if the head entity is a corporation sole or a complying superannuation entity.
The Government will allow all payments under a qualifying earn out arrangement to be treated as relating to the underlying business asset. The measure will have effect from the date of Royal Assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007.
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 capital gains tax (CGT) asset. This treatment can result in anomalous outcomes for taxpayers where the actual payments under the earn out right differ from the amounts estimated at the start of the arrangement, such as by reducing access to the CGT small business concessions. This measure will ensure that the CGT treatment of earn out arrangements does not create an impediment to the efficient market for the sale of businesses or business assets.
The Government will provide roll-over relief for the transfer by the proposed Commonwealth Superannuation Corporation of assets from the Military Superannuation Benefits Scheme to the Australian Reward Investment Alliance (ARIA) investment trust, with effect from 1 July 2010 until 30 June 2011. The CGT roll-over will ensure that no capital gain or loss will be recognised at the time of the transfer. The provision of this CGT roll-over reflects the involuntary nature of the transaction due to proposed changes in the governance of the funds.
Source: Assistant Treasurer’s Press Release: Reforms to capital gains tax to make it easier for businesses to restructure, 11 May 2010; Budget paper No 2, pp 15-17.
The superannuation co-contribution reduction will be permanent for all workers from the 2012/13 income year. The co-contribution decline and cut-out low thresholds will also be frozen for the next two years at their present levels of $31,920 and $61,920.
Previously the co-contribution matching rate was legislated to increase to 125% in the 2012/13 income year and to return to its prior level of 150% in the 2014/15 income year.
Source: Budget Paper No.2, pp 298-299.
The Tax Office will receive an additional $16m a year to ensure that participants in the superannuation co-contribution scheme satisfy eligibility requirements.
The Superannuation Complaints Tribunal (SCT) will receive an additional $5.9m to handle the increased workload of superannuation complaints.
Source: Minister for Financial Services and Superannuation Press Release: Sustaining the SCT’s capabilities,12 May 2010; Budget Paper No 2, pp 298-99.
The Government has released a number of other superannuation measures including:
Source: Budget Paper No 2, pp 48-50.
All the recommendations of the Board of Taxation from its Review of the application of GST to cross-border transactions will be implemented, with effect from 1 July 2012. The package will reduce the number of non-residents who are unnecessarily drawn into Australia’s GST system, through: limiting the connection with Australian provisions, expanding the compulsory reverse charge provision, extending the GST-free rules for cross-border supplies, and removing the need for some non-residents to register.
Components of the package that are a change to the GST base are subject to the unanimous agreement of the States and Territories.
Source: Budget Paper No 2, p 23.
This measure will remove unintended policy outcomes and ensure that the reforms achieve their maximum effectiveness in reducing compliance costs, streamlining the provisions and removing anomalies in the GST administrative framework.
The start date for the following components of the 2009/10 Budget measure has been revised to 1 July 2011:
Source: Budget Paper No 2, p 24.
The GST law will be amended to replace the current mechanism for exempting Australian taxes, fees and charges with a principles-based legislative exemption, with effect from 1 July 2011.
The GST law currently specifies that Australian taxes, fees and charges are exempt from GST if they are included in a determination made by the Treasurer. This measure will allow the GST treatment of an Australian tax, fee or charge to be determined against legislative principles. This measure will provide increased certainty to taxpayers and Government agencies in relation to the GST treatment of new taxes, fees and charges, as the tax treatment is not dependent on the item being listed in a determination.
Source: Budget Paper No 2, p 25.
The financial supply provisions of the GST law will be amended to clarify the operation of the legislation and reduce compliance and administrative costs, particularly for many small businesses, with effect from 1 July 2012. This measure will increase GST payments to the States and Territories by $8m over the forward estimates period. The reforms are the result of three reviews into specific aspects of the GST announced in the 2009/10 Budget following recommendations by the Board of Taxation’s Review of the Legal Framework for the Administration of the GST.
The reforms include: increasing the threshold above which businesses need to interact with the financial supply provisions from $50,000 to $150,000 of input tax credits, delivering compliance savings for many more small businesses, protecting the GST base by reducing opportunities for businesses to inappropriately take advantage of the reduced input tax credit concessions by bundling services, and allowing small businesses accounting for GST on a cash basis to claim input tax credits up front in relation to hire purchase arrangements (this change will assist those businesses that have been forced into higher cost chattel mortgages following the introduction of the GST).
Components of the package that are a change to the GST base are subject to the unanimous agreement of the States and Territories.
Source: Assistant Treasurer’s Press Release: Further reductions in GST compliance costs for business, 11 May 2010; Budget Paper No 2, p 26.
After consultation with the public on the effectiveness and efficiency of the margin scheme, the Government canvassed a range of options aimed at achieving the desired outcome, including replacing the existing scheme with a set of principles. However, the Government came to the view that the costs and risks to revenue integrity associated with addressing the ‘gaps" within the existing current policy would outweigh the potential benefits, resulting in more, rather than less, complex legislation and placing additional information needs on taxpayers.
Therefore, the margin scheme provisions will be restructured to clarify and simplify the current provisions, with effect from 1 July 2012. The Government will also make a minor technical amendment to ensure that a valuation can be obtained for the purposes of using the margin scheme for subdivided land. The reforms are the result of three reviews into specific aspects of the GST announced in the 2009/10 Budget following recommendations by the Board of Taxation’s Review of the Legal Framework for the Administration of the GST.
Source: Assistant Treasurer’s Press Release: Further reductions in GST compliance costs for business – Attachment A, 11 May 2010; Budget Paper No 2, p 26.
A number of minor revisions to its 2009-10 Budget measure that reduces GST compliance costs for businesses involved in the domestic transport of exported and imported goods will be made, to ensure that the place of consignment will always be determined by the place of delivery in the principal contract. The measure will also ensure that ancillary services to the international transport of goods receive the same GST treatment as the transport supply that they facilitate.
Source: Budget Paper No 2, p 27.
$337.5m will be provided over four years to the Taxation Office to fund additional activities that promote voluntary GST compliance and provide a level playing field for Australian businesses. This measure will address issues relating to: fraudulent GST refunds, systematic under-reporting of GST liabilities, non-lodgement of GST returns, and non-payment of GST debts. $6.5m in capital funding will be provided to the Taxation Office in 2010/11, which will give additional capacity to store and analyse data that is obtained from external agencies.
Source: Budget Paper No 2, p 27–28.
The 2004/05 Budget measure to introduce an energy content-based fuel excise system will be amended to introduce an energy content-based fuel system, in particular, for ethanol. The excise and excise-equivalent customs duty rate for ethanol will be set at 25 cents per litre from 1 July 2011, phasing down to 12.5 cents per litre from 1 July 2015. There will be an offsetting grant payment to domestic ethanol producers that will be progressively reduced from 22.5 cents per litre on 1 July 2011 to zero by 1 July 2015. There will be no offsetting grants for excise-equivalent customs duty. It is anticipated that the measure will provide the Australian ethanol industry with adequate time to prepare for the forthcoming changes.
Source: Budget paper No 2, p 23.
Public ancillary funds will be subject to a new regulatory regime to ensure that they comply with minimum standards covering administration, deductible gift recipients and other governance matters.
The guidelines will be legislated and the Commissioner of Taxation will be able to levy administrative penalties on trustees who do not comply with these rules.
The new system will commence from July 2011.
Source: Assistant Treasurer’s Press Release: New regulatory framework to further improve transparency in charitable sector, 12 May 2010; Budget Paper No 2, p 37.
The government will provide $107.9m over four years to the Tax Office to address unfair competitive advantages that arise when some small business operators avoid their taxation obligations by conducting some or all of their business in the cash economy.
This measure will assist Australian small business to compete on a level playing field by addressing unfair tax practices through increasing the visibility of the Tax Office in the community. This measure is expected to result in an additional $491.8m in revenue in fiscal balance terms over four years and an increase of $39.9m in Tax Office administered expenses over the same period. In underlying cash terms, the expected increase in revenue is $366.5m over four years, including $146.7m in GST collections that will be paid to the States and Territories.
Source: Budget Paper No 2, p 13.
The government will increase flexibility in managing running balance accounts and provide for interest to be paid to taxpayers where overpayments arise because of an amended franking deficit tax assessment. The measure will take effect from a date to be decided after public consultation.
Source: Budget Paper No 2, p 28.
The government has responded to the Report of the Australian Financial Centre Forum Australia as a financial centre: Building on our strengths (Johnson Report) and has provided in-principle or direct support for nearly all of the Report’s 19 recommendations, including the introduction of an Investment Manager Regime.
In relation to taxation and as announced in the Budget, the government will phase down the interest withholding tax (IWT) paid by financial institutions. The main IWT rate will come down from 10% to 5% and will reduce that to zero when fiscal circumstances allow. As an integrity measure, the Government will maintain the existing IWT rate on non-resident retail deposits in Australia.
The government has asked Mr Mark Johnson to chair a task force of senior financial sector representatives to continue its work in promoting Australia as a financial centre for the region and facilitate industry input into the design of a range of proposals including the Asia Region Funds Passport, the Investment Manager Regime, and funds management vehicles. The role of the Task Force will cover three areas: (1) regional engagement and enhancing Australia’s presence in Asia; (2) engagement with domestic industry on an informal basis; and (3) facilitation of industry input into the design of several of the key outputs that flow from the recommendations of the Johnson Report.
The Government’s response to the Johnson Report will complement other government action to increase the international attractiveness of Australia’s financial sector:
The government will also ask the Board of Taxation to:
Source: Joint media releases of the Minister for Superannuation and the Assistant Treasurer: Government responds to Australia as a Financial Services Centre Report; and Australian Government commences consultation on an Investment Manager Regime, 11 May 2010.
A large number of measures announced in the Budget were released last week in the Government’s response to the Australia’s Future Tax System report (Henry Review) including: