2014/2015 FEDERAL BUDGET TAX BRIEF

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1 14 May /2015 FEDERAL BUDGET TAX BRIEF On Tuesday 13 May 2014, the Federal Treasurer Mr Joe Hockey handed down the Federal Government Budget. Being the new Government s first budget, the Treasurer was under scrutiny as to how he would handle the balancing act of the key election promise of no new taxes against the political reality of burgeoning Government debt and a huge deficit. Fiscal reality won the day with the Government electing to break promises in favour of fixing the deficit. Due to the harsh fiscal realities, Mr Hockey calls on every Australian to make a contribution now to build the workforce, economy and opportunities we need for the future. The Government plans to raise revenue in the form of an it s not a tax, it s a temporary budget repair levy, various tax offsets being reduced or removed and savage cuts to Government spending, breaking further election promises not to touch certain sectors. The Treasurer and the Prime Minister previously highlighted an end of the age of entitlement signalling changes to the welfare transfer system and this has certainly occurred with certain entitlement payments being frozen, removed or deferred. Some of the cuts are balanced with infrastructure spending on roads, airports and other significant assets designed to create jobs and stimulate the economy. While the budget is fiscally responsible, many would argue it is ill targeted. It is also sadly lacking in real tax reform, although the Government plans to release a tax white paper in the future. The official estimate is for a deficit of 29.8 Billion for the 2014/15 year. This is forecast to trend downwards until reaching a balanced budget in 2018/19. This report summarises the key aspects of the Budget that we expect will affect Hanrick Curran s client base primarily comprising small to medium enterprises and associated individual taxpayers. It has been prepared based on our understanding of the budget papers and associated press releases. Please note that the announced measures are not law and cannot be relied upon until enacted. There will no doubt be positive and negative ramifications for you and your business from this budget. We encourage you to contact your usual Hanrick Curran adviser, Peter Maletz or Chris Campbell for specific advice on the impacts on Alternatively further details can be found on the Government s Budget website: Suite 73, Executive Centre Offices, The Pier at Shangri-La, 1 Pierpoint Road, Cairns QLD 4870 GPO Box 7170 Cairns QLD 4870 phone fax mail@hanrickcurran.com.au Liability limited by a scheme approved under Professional Standards Legislation

2 INDIVIDUALS & FAMILIES Tax Changes Income Tax s Unchanged, but new Levies A key Government pledge during last year s election was no increase in income tax. Headline income tax rates may remain unchanged, but levies have increased. The previous Government announced a 0.5% levy to help pay for the National Disability Insurance Scheme. This will be tacked onto the Medicare Levy creating a 2% Levy to apply from 1 July The Government have announced a temporary (3 year) 2% Temporary Budget Repair levy (commonly known as the budget deficit tax). This will only apply to individuals with personal incomes exceeding 180,000 and will only apply to the excess above 180,000. This is due to cease on 30 June This creates an effective top marginal tax rate of 49% (including Medicare levy). The previous Government as part of its Carbon Tax reform had announced various changes to the tax free threshold with the final change due to occur in 2015/16 year. This final increase was announced to be cancelled; however, the legislation cancelling the change has not been passed, so the tax rates as enacted are as follows: Australian Resident Tax s 2014/2015 Tax s 2015/2016 Announced 2015/2016 Announced but not enacted 1 18,201 19% 19,401 19% 18,201 19% 2 37, % 37,001 33% 37, % 3 80,001 37% 80,001 37% 80,001 37% 180,001 47% 180,001 47% 180,001 47% 445 #1.5% above 37, #1% above 37, #1% above 37,000 *4 Low Income Tax Offset (LITO) Effective tax free threshold 20,542 20,979 # at which LITO reduced above threshold * Includes 2% Budget Deficit Levy only above 180,000 ** All above rates are exclusive of the 2% Medicare Levy Bold text indicates changes 20,542

3 Australian Non-Resident Tax s Tax s 2014/ / % 0 33% 2 80,001 37% 80,001 37% 3 180,001 47% 180,001 47% Medicare Levy Increase to 2% from 1 July 2014 The Medicare Levy will be increased from 1.5% to 2% of taxable income as part of the funding of the National Disability Insurance Scheme. The Medicare Levy low income threshold for individuals will remain at 20,542. The family threshold increases to 34,367. Fringe Benefits Tax (FBT) increases in line with Levies For those taxpayers who choose to salary package various benefits, the FBT for the 2014/15 year has already been increased to 47% (previously 46.5%) to capture the change in the Medicare Levy from 1 July The rate will be further increased (temporarily) to 49% from 1 April 2015 for the 2015/16 and 2016/17 FBT years in line with the effective top marginal tax rate plus levies. This creates a temporary tax arbitrage through salary packaging due to the 2% difference in tax rates for those with incomes above 180,000, but only until 31 March From 1 April 2015, those individuals salary packaging whose salary is less than 180,000 would be wise to make after tax reimbursements back to their employer to reduce the taxable value of any benefits received to avoid having to pay the 2% levy. We recommend that any salary packages be reviewed immediately to consider how these changes will affect the amount of take home pay. The FBT caps for certain not for profit entities, charities and Public Benevolent Institutions will be increased to reduce the effect of this levy. Tax Offsets Abolished The Dependent Spouse Tax Offset will be abolished from 1 July 2014 as will the Mature Age Worker Tax Offset. HELP (HECS) Repayment Lowered The income threshold at which students commence repayment of their Higher Education Loan Programme (HELP) debts will be reduced to 50,638 from 1 July A new minimum repayment rate of 2% will apply. Currently, the HELP Debts are indexed in line with inflation. This indexation will be replaced with interest equivalent to the Australian Government 10 year bond rate capped at 6%.

4 National Rental Affordability Scheme (NRAS) The fifth round of the NRAS will no longer proceed, nor will any funding for uncontracted housing from earlier rounds. All funding for contracted NRAS properties will remain. Key Welfare Changes Pension Age Change The age pension qualifying age will increase by six months every two years until it reaches a qualifying age of 70 on 1 July A 48 year old in 2014 will need to wait until they are 70 to qualify for the age pension. Family Tax Benefits (FTB) Various changes to the Family Tax benefits system include: FTB Part B primary income earner limit will be reduced from 150,000 to 100,000. The Part B payment will also be limited to families whose youngest child is younger than six years old. The Part A Large Family Supplement will be limited to families with four or more children and only be paid in relation to the fourth and subsequent children. End of year supplements will be revised back to their original values (600 per FTB Part A child and 300 per family for each family eligible for Part B). These measures will all apply from 1 July From 1 July 2014, all payment rates will be frozen for two years and thresholds will be frozen for three years. BUSINESS There has been very little in the way of changes to the business tax system. The Government has announced it intends to produce a white paper to consider the reform of the Australia taxation system. The Government has indicated they are still committed to reducing the company tax rate by 1.5% from 1 July 2015, although there was nothing explicit in the Budget about this. R & D Tax Incentive s Reduced The rates of the refundable and non-refundable tax offsets for the R & D Tax Incentive will be reduced from 1 July 2014 by 1.5% (i.e. from 45% to 43.5% refundable; and from 40% to 38.5% non refundable). This equates to an equivalent deduction of 145% (down from 150%) for Research and Development expenditure for qualifying companies with turnover of less than 20 Million.

5 Managed Investment Trusts Another Deferral The proposed changes to the taxation of Managed Investment Trusts have been deferred yet again until 1 July Superannuation Guarantee Changes 9.5% from 1 July 2015 The previous Government had legislated that the Superannuation Guarantee Contribution was to rise to 12% over the next few years. The Government had tried to defer these increases as part of removing the Minerals Resource Rent Tax (MRRT), but this Bill did not get passed. Accordingly, businesses should factor in an increase in Superannuation Guarantee Levy to 9.5% commencing 1 July The rate is proposed to remain at 9.5% until 30 June 2018 when it will then increase by 0.5% each year until it reaches 12%. Employer Support for Hiring Older Workers Replacing the Mature Age Workers Tax Offset is a more targeted Restart Program that provides employers with incentives of up to 10,000 to employ workers aged 50 or older. Entrepreneurs Infrastructure Program A new program to support commercialisation of good ideas, job creation and lifting the capability of small business will be run by the Department of Industry. Some Million has been committed over five years. The program also aims to provide market and industry information and facilitate access to business management advice. While the Government should be applauded for supporting innovation and small business, in reality this program is replacing many existing programs and centralising them under one agency. Various programs that will be replaced from 1 January 2015 include: Commercialisation Australia; Enterprise Connect; and Innovation Investment Fund No information is available at this stage about how existing participants in these schemes will be affected in the interim. Adjustment of Existing Tax Measures As usual, the Government has announced various measures to tighten inefficient legislation. These include: Modifying the announced tax consolidation integrity package announced in the 2013/14 budget. Modifying changes to the principal asset test for CGT exemptions for foreign residents Seeking further advice on integrity rules to help prevent profit shifting from thin capitalisation. Modifying certain Tax Administration measure so they operate as intended.

6 Not For Profit Entities & Charities The positive news for not for profit organisations and charities is that the Government has abandoned the previous Government s better targeting of not- for-profit tax concessions plan to tax the business profits of charities and not-for-profits and reduce concessions accordingly. The Government had previously announced it was seeking alternatives, but have now confirmed that no measures will proceed at this time. This is a positive result for charities that can get on with the job of supporting the needy and have one less concern around funding and taxation issues. Regional Queensland While there has been no particular focus on regional Queensland, we highlight some of the key changes in Government spending that will affect some of our Regional clients: The Government will develop a Reef 2050 Plan including the establishment of a 40 Million trust to provide a long term approach to address key threats to the Great Barrier Reef. This will focus on issues such as water quality, crown of thorns starfish cull and a dugong and turtle protection plan. However, funding to the Great Barrier Reef Marine Park Authority will be reduced over the next four years. The Government confirmed its prior announcement of the 320 Million over four years to support farmers in drought including: More generous criteria for income support Concessional loans to drought affected farmers Assistance to install water infrastructure Funding has been set aside for road infrastructure including a Bruce Highway upgrade plus a Toowoomba Second range Crossing. While the Government s announcement of increasing the fuel excise with indexation will change the headline cost of fuel, the indexation also will apply to fuel tax credits which should mean the net cost of livestock transport should not change. Recap on certain announced changes last year by the previous Government Self Education Tax Deductions Capped at 2,000 This measure never got passed by the previous Government and the Government have announced that they do not plan to introduce it. Dividend Washing Scheme Loophole to be Closed The Government and ATO have come down hard in relation to the perceived Dividend Washing Loophole. Not only do the ATO see this as tax avoidance, the Treasury have released draft legislation to ensure that no tax benefit can be claimed in the future. Refer details of the tax determination.

7 R & D Tax Incentive The proposal to provide quarterly tax credits for those with R & D Tax Incentive claims has been abolished. Thin Capitalisation The proposal to change the Thin Capitalisation rules from 1 July 2014 to tighten the measures to discourage debt financing by multinationals has still not been enacted. The proposal was that the safe harbour debt to equity limit will be halved from 3:1 down to 1.5:1. Any borrowings in excess of these limits will result in a denial of tax deductions. A real positive for small companies is that the 250,000 debt deduction de minimis exemption will be expanded to 2 Million. This means that companies with less than 2 Million of interest expense should not be affected by the Thin Capitalisation rules. These proposals were to be implemented with effect from 1 July 2014, so business is left in limbo once again due to unlegislated Government announcements. Small Business Instant Asset Write-off Under the small business concessions, small businesses (<2 Million turnover) can write off any assets costing less than 6,500 and the first 5,000 of the cost of a motor vehicle. These rules were proposed to be repealed with effect from 1 January 2014 along with the MRRT legislation, but this was not passed. If the rules were repealed, the previous laws would return allowing an instant write-off for assets costing less than 1,000. Currently, the 6,500 and 5,000 threshold remain. The Government has announced it will again try to remove the MRRT legislation after the Senate changes on 1 July Therefore a degree of uncertainty remains as to how assets purchased after 1 January 2014 will be treated.

8 2014/2015 BUDGET SUPERANNUATION BRIEF Author: Chris Campbell While superannuation funds were spared from any adverse tax changes in last night s Federal Budget, the Treasurer has said that the process of restoring the budget to surplus will be an ongoing task for this Government. Superannuation tax concessions continue to be one of the largest line items of notional expenditure in the National Accounts, making superannuation funds and contributors a prime target for tax saving measures. In particular, the Treasurer has said that the Government will methodically consider and review the remainder of the 86 issues raised by the National Commission of Audit that were not addressed in the 2014/15 Budget. Raising the Superannuation Preservation Age to 70 One of the issues raised by the National Commission of Audit was the raising of the superannuation preservation age to age 70. Currently the age at which a person can retire and access their superannuation is 55 years. This preservation age is already increasing gradually to age 60 over 5 years for those born after 1 July 1960 following changes back in Raising the preservation age further to age 70 would increase the earliest retirement date by a further 10 years. This measure is to be considered by the Murray Financial System Inquiry and a forthcoming Government Tax White Paper. Reform of excess non-concessional contributions tax Reform of the excess contribution rules is always welcome news for those contributing to superannuation, and their advisers. Non-concessional undeducted contributions are capped at 150,000 in 2013/2014, rising to 180,000 in 2014/2015 for eligible contributors. The penalty for exceeding the non-concessional cap has been excess contributions tax (ECT) at 46.5% on the excess amount contributed. The Treasurer announced in the Budget that the ATO will allow individuals the option of withdrawing superannuation contributions in excess of the non-concessional contributions cap made since 1 July 2013, and any associated earnings with these earnings to be taxed at the individual s marginal tax rate. This is welcome relief and restores common sense, given that non-concessional undeducted contributions come from a person s private after tax savings. Taxing the earnings made while the excess amount was in a superannuation fund at personal marginal rates also seems to be an equitable solution. It was noted that an Inspector-General s report into ECT made a further 9 recommendations to improve the ECT system, including further ATO resources to assist taxpayers in monitoring their contribution levels, also welcome news.

9 Super Guarantee Increase to 9.5% from 1 July 2014 As announced in the Budget, the Government now proposes to allow the scheduled increase to the compulsory Superannuation Guarantee (SG) rate to rise to 9.5% from 1 July 2014, but will freeze SG at this rate for 4 years, until 30 June The SG rate will then recommence its scheduled increase of 0.5% p.a. until reaching 12% of an employee s earnings, as introduced by the previous government. A pre-election promise was to freeze the current 2013/2014 SG rate at 9.25% for 2 years, easing the burden on struggling employer businesses. The promised 2 year freeze was rejected by the Senate. Seniors Health Card expanded income test From 1 January 2015, the Government will include untaxed superannuation income such as tax free superannuation pensions in the assessment of income for eligibility for the Commonwealth Seniors Health Card. For retirees over age 60 intending on taking a superannuation pension, this announcement will be disappointing news. However, those over age 60 receiving an account based superannuation pension that is in place prior to 1 January 2015 will be able to retain their Seniors Card under grandfathering rules. The current test of eligibility for a Seniors Card is 50,000 of adjusted taxable income for singles and 80,000 for couples. Tax free superannuation pensions will now be deemed to be included as notional income to determine eligibility. Military Superannuation From 1 July 2016, the Government will establish a funded superannuation scheme for new members of the Australian Defence Forces, closing the current Military Superannuation & Benefits Scheme to new members. Military personnel will also have a choice of fund for the first time, allowing them to have contributions made to private sector superannuation funds and self managed superannuation funds (SMSFs). Retired MPs & Superannuation no pension increases A proposed 12 month freeze on Parliamentary salaries will also see the pensions of former MPs frozen from indexation increases for 12 months.

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