Tax Consequences of the Budget

The Labour Government has significantly reduced some of the taxation concessions available to Australian taxpayers.

The Government has decided to reduce superannuation concessions which they believe will save around $4.2 billion over four years.

From 1 July 2009, the Government will reduce the annual cap on concessional superannuation contributions from $50,000 to $25,000, and the transitional cap (which applies until 30 June 2012 for those aged 50 years and over) from $100,000 to $50,000.

Low income earners will also be affected as the Government will also temporarily reduce the superannuation co-contribution matching rate from 150 per cent to 100 per cent for contributions made in 2009-10, 2010-11, and 2011-12 (a maximum co-contribution of $1,000 will apply), and to 125 per cent for contributions made in 2012-13 and 2013-14 (a maximum co-contribution of $1,250 will apply).

The Government is also reducing the level of the PHI rebate for higher income earners.

Effective 1 July 2010, the Government will introduce three new 'Private Health Insurance Incentive Tiers' to better balance the mix of incentives for people to take out private health insurance. Existing arrangements will remain unchanged for singles with income of less than $75,000 per annum and families with incomes of less than $150,000 per annum. Income in this context refers to income for Medicare levy surcharge purposes.

• Tier 1 will apply to singles with income between $75,001 and $90,000 ($150,001 and $180,000 for families) based on current projections. The private health insurance rebate will be 20 per cent, increasing to 25 per cent at 65 years of age, and to 30 per cent at 70 years. The surcharge for not taking out complying private health insurance will remain at 1 per cent.
• Tier 2 will apply to singles with income between $90,001 and $120,000 ($180,001 and $240,000 for families). The private health insurance rebate will be 10 per cent, increasing to 15 per cent at 65 years of age, and to 20 per cent at 70 years. The surcharge for not taking out complying private health insurance will be increased to 1.25 per cent.
• Tier 3 will apply to singles with income of more than $120,000 (more than $240,000 for families). No private health insurance rebate will be provided. The surcharge for not taking out complying private health insurance will be increased to 1.5 per cent.

The Government is also introducing a number of measures to reduce the opportunities for taxpayers to minimise tax. These tax reforms, which will raise additional revenue of around $4.6 billion over the forward estimates, include:

• tightening the rules applying to the use of non-commercial business losses to prevent high-income individuals (those who earn $250,000 or more) from deducting losses against their salary, wage and other income from activities that are unlikely to make a profit, and which are often more like hobbies or lifestyle choices;
• limiting the scope of the tax exemption for the foreign employment income of Australians who work overseas for periods of 91 days or more so that this exemption only applies to aid workers (both government and non-government organisations), charitable workers, certain government employees (such as defence and police force personnel deployed overseas) and those employed on overseas projects approved by the Minister for Trade as being in the national interest;
• better targeting the concessions for employee share schemes by abolishing the option to defer the tax on share discounts and means testing the availability of the $1,000 'up front' exemption for discounts, limiting this concession to individuals with an adjusted taxable income of $60,000 or less;
• extending the tax file number withholding arrangements to include distributions by closely held trusts; and
• preventing company owners from getting tax-free benefits through use of private companies.

There is some good news, though. The bonus tax deduction under the Small Business and General Business Tax Break will be increased to from 30 to 50 per cent for small businesses. The 50 per cent deduction is available for eligible assets costing $1000 or more acquired between 13 December 2008 and 31 December 2009 and installed ready for use before 31 December 2010. The expansion will have an estimated cost to revenue of $141 million.

The 30 per cent rate announced earlier this year can still be accessed by all other businesses that acquire eligible assets before 30 June 2009, as well as the rate of 10 per cent applying for eligible assets acquired before 31 December 2009.

The Government will provide $10 million over two years to establish a Small Business Support Line, which will link to Business Enterprise Centres and provide initial advice and referral services for small business on matters such as obtaining finance and cash flow management. The ATO will also receive $168 million to assist small businesses and help them remain viable.

The Government has also provided cash flow relief to small businesses by announcing reduced PAYG instalments in 2008-09 and 2009-10.

The Government will introduce a simplified research and development tax credit to replace the current research and development tax concessions. This effectively doubles the support for innovative small and medium-sized firms, while improving incentives for smaller firms in tax loss positions.

To limit growth in payments made to higher income families, the Government will pause CPI indexation of upper income eligibility thresholds for three years.

The indexation pauses will affect eligibility for FTB-B, the Baby Bonus and dependency tax offsets for families earning over $150,000 on an annual basis. For FTB-A the income limit at which payments cease will remain around $112,000 (for a family with two children under 13).

To further reform the family payment system, Family Tax Benefit Part A (FTB-A) will, in future, be indexed by the CPI only. The maximum rate for children aged under 16 will no longer be linked to the couple pension rate.

The Government has restated its promise of tax cuts as previously announced.

The First Home Owners Boost is also being extended for an extra 6 months.