The 2008 Federal Budget

The Government has stated that the 2008-2009 Federal Budget begins a “New Era of Responsible Economic Management”.

The Government believes that there is an economic case for cutting government spending in order to place downward pressure on inflation, giving us a buffer in a time of difficult economic conditions and begin overdue investment in our future. The underlying surplus of the budget is estimated to be $23.1 billion.

The Budget has been labelled as a responsible budget, based on sound policy and sound politics which delivers on Pre-Election promises.

The Budget contains a package of Tax Relief measures designed to help families with education, childcare and other living expenses, whilst means-testing a range of benefits.

As anticipated the Government’s first budget also initiated a broad review of the Tax system.

Nexia ASR provides the following summary of the Federal Budget for you.

PERSONAL INCOME TAX CUTS

1. New Individual Rates

The Government will deliver in full the tax cuts it announced during the 2007 election campaign. These tax cuts included deferring the previously budgeted reductions in the top marginal tax rate for taxpayers on incomes of more than $180,000 per annum until beyond 2010-11.

From 1 July 2008:

• the 30 per cent threshold will increase from $30,001 to $34,001 and
• the 40 per cent threshold will increase from $75,001 to $80,001 and
• the 45 per cent threshold will increase from $150,001 to $180,001.

From 1 July 2009:

• the 30 per cent threshold will increase to $35,001 and
• the 40 per cent marginal tax rate will be reduced to 38 per cent.

From 1 July 2010:

• the 30 per cent threshold will increase to $37,001 and
• the 38 per cent marginal tax rate will be reduced to 37 per cent.

2. Low income tax offset

From 1 July 2008, the low income tax offset will increase from $750 to $1,200. From 1 July 2009 it will increase further to $1,350 and from 1 July 2010 to $1,500. The offset will continue to be withdrawn once income exceeds $30,000. Those eligible for the full low income tax offset will have an effective tax free threshold of $14,000 in 2008-09, $15,000 in 2009-10 and $16,000 in 2010-11. Importantly, withholding schedules will be created so that low and average income earners will receive half of the benefits of the low income tax offset through their regular pay, rather than all of the offset as a lump sum when their income tax returns are assessed.

3. Senior Australians Threshold Income Levels Increase

The amount of income a senior Australian eligible for the senior Australians’ tax offset can earn before they incur an income tax liability will increase to $28,867 for singles and $24,680 for each member of a couple from 1 July 2008. These income levels will increase to $29,867 for singles and $25,680 for each member of a couple from 1 July 2009 and to $30,685 for singles and $26,680 for each member of a couple from 1 July 2010. The relevant Medicare levy low-income threshold will be increased to ensure that senior Australians do not pay the Medicare levy until they begin to pay income tax.

4. Personal tax rate scale proposals

The Government has also set an aspirational tax goal over six years for a personal income tax system which reduces the number of rates from four to three with a personal income tax scale of 15 per cent, 30 per cent and 40 per cent. The effective tax free threshold for those eligible for the low income tax offset will also increase to $20,000 by 2012-13, through an increase in the value of the offset.

5. Dependency Tax Offsets - tightening eligibility

The Government will introduce an income threshold of $150,000 for the claimant to determine eligibility for the Dependent Spouse, Housekeeper, Child Housekeeper, Invalid Relative and Parent/Parent-in-law tax offsets, with effect from 1 July 2008.

This measure will better target the benefit provided by these offsets. From 1 July 2009, the Government will align the definition of income for these offsets with that applying to family assistance payments. In addition, the income threshold of $150,000 will be indexed from 1 July 2009.

This measure is designed to align the eligibility criteria more closely with those applying to family assistance.

6. Family Tax Benefit - $150,000 income test on primary earner for FTB-B

The Government will limit eligibility for Family Tax Benefit Part B to families where the primary earner has an adjusted taxable income of $150,000 a year or less. Adjusted taxable income includes taxable income, plus other amounts that reflect a person’s financial means, such as net rental property losses and tax free pensions or benefits. The income test will be indexed annually by the consumer price index.

7. Medicare Levy - Low-income thresholds and surcharge threshold

The Government will increase the Medicare levy low-income thresholds to $17,309 for individuals and $29,207 for individuals who are in families, with effect from 1 July 2007. The additional amount of threshold for each dependent child or student will also increase to $2,682. 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 Government will also increase the Medicare levy threshold for pensioners below Age Pension age to $22,922, with effect from 1 July 2007. 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.

The Government will increase the Medicare levy surcharge (MLS) thresholds for singles from $50,000 to $100,000 and for those who are members of a family from $100,000 to $150,000, with effect from 1 July 2008.

8. PAYG annual instalments

The Government has deferred until 1 July 2009 the measure to align the pay as you go (PAYG) instalments and GST payment and reporting requirements for taxpayers who are voluntarily registered for GST.

9. Baby Bonus Changes

The Government will limit eligibility to the Baby Bonus to families with an adjusted taxable income of $75,000 or less in the six months after the birth of a baby (equivalent to an annual income of $150,000) from 1 January 2009. This will ensure that family payments are targeted to families on the basis of need.

The Government will also pay the Baby Bonus in 13 fortnightly instalments from the date of claim, rather than as a lump sum, to all eligible births from 1 January 2009.

The Government will increase the Baby Bonus from $4,258 to $5,000 on 1 July 2008 and will index the payments by the Consumer Price Index each subsequent year on 1 July.

10. Education Tax Refund

The Government will introduce a 50 per cent Education Tax Refund on eligible educational expenses from 1 July 2008. Eligible families can claim up to $750 for each one of their children undertaking primary school studies (that is, a refund of up to $375 per child, per year) and $1,500 for each child undertaking secondary school studies (that is, a refund of up to $750 per child, per year). These amounts will be indexed annually from 1 July 2009.

BUSINESS TAX CHANGES

The business tax changes announced in the Budget can be summarized as follows.

1. Family Trust Changes

The Government will change the definition of family in the family trust election rules to limit lineal descendants to children or grandchildren of the test individual or of the test individual’s spouse. This will have effect from 1 July 2008.

Presently, it is possible to distribute income to any descendants of the test individual.

This measure will also preclude family trusts making a once-off variation to the test individual specified in a family trust election (other than in relation to a marriage breakdown). This will have effect from the 2007-08 income year.

2. Capital Gains Tax – cancellation of interests in widely held entities

The Government will allow taxpayers to calculate their capital gains or losses using the actual proceeds received where shares or units in widely held entities are cancelled or surrendered, with effect from the 2006-07 income year.

The current tax law provides that when shares or units in widely held entities are cancelled, surrendered or similarly brought to an end, a taxpayer is required to calculate any capital gains tax liability using the asset’s market value rather than the proceeds they actually receive.

This measure ensures that for shares or units in widely held entities, any capital gains tax liability will be calculated according to the proceeds that the taxpayer receives, rather than the share or unit’s market value at the time of cancellation.

3. Capital Gains Tax – extend small business concessions

The Government will increase access to the Small Business Capital Gains Tax (CGT) concessions for taxpayers owning a CGT asset used in a business by a related entity and for partners owning a CGT asset used in the partnership business, with effect from the 2007-08 income year. Currently, the small business entity test does not cover business structures where the CGT asset is owned by an entity but is used in a related entity which carries on the business. In addition, for partnerships, the small business entity test requires the taxpayer making a capital gain to be a partner in the partnership and for the asset to be an asset of the partnership.

This measure will allow more structures and assets to qualify for the CGT small business concessions.

4. Capital Gains Tax – modifications to the scrip for scrip roll-over provisions

The Government will modify the scrip for scrip capital gains tax roll-over provisions to ensure that for corporate restructures the acquiring entity’s cost base of shares in the target entity reflects the tax costs of the target entity’s net assets, with effect from 7.30 pm (AEST) on 13 May 2008. This cost base will also be used in determining the value of the target entity’s assets in consolidation if the target entity subsequently joins the acquiring entity’s consolidated group.

5. Capital Protected Borrowings – change to benchmark interest rate

The Government will adjust the benchmark interest rate that applies to capital protected borrowing arrangements to increase the capital component of the overall expense for arrangements entered into from 7.30 pm (AEST) on 13 May 2008. The measure abolishes a tax concession and a tax expenditure.

6. Depreciation of computer software

The Government will increase the period over which capital expenditure on in-house computer software is depreciated from 2.5 years to 4 years. This will apply to expenditure incurred on or after 7.30 pm (AEST) on 13 May 2008.

In-house software is computer software, or the right to use computer software, that is acquired, developed or developed by someone else and that is mainly used by the taxpayer in performing the functions for which the software was developed (that is, not for resale). This would include off-the-shelf software acquired for use by a taxpayer. Expenditure on in-house computer software will continue to be depreciated on a straight line basis.

7. Employee Share Schemes – election requirements

With respect to shares and rights acquired from 1 July 2008, the Government will improve the integrity of employee share schemes to ensure that income from these schemes is correctly reported by taxpayers.

Currently an employee can elect to be assessed on discounts provided on shares or rights in the year of income the shares or rights are acquired. If an election is not made, taxation of the discount (which includes gains on shares or rights) is deferred until a later time (such as when restrictions on the shares or rights are lifted).

8. Employee Share Schemes – removal of double taxation

The Government will remove double taxation that arises in relation to certain Employee Share Schemes (ESS) that use employee share trusts. The changes will apply in relation to capital gains tax (CGT) events occurring from 7.30 pm (AEST) on 13 May 2008.

Currently there is no CGT relief for the trustee (or beneficiary) of an employee share trust on the transfer of shares to an employee because shares acquired by an employee as a result of exercising ESS rights are not ESS shares. Double taxation arises because the capital gains made by the trustee while the shares are held in the trust are also assessable to the employee either under ESS provisions or later as a capital gain. This measure will ensure that CGT relief is provided.

9. Changes to the Eligible Investment rules

The Government will modify the eligible investment business rules to reduce compliance costs and uncertainty for managed funds, especially property trusts. The measure will have effect from the date of Royal Assent of the amending legislation.

The measure will clarify the scope and meaning of investment in land for the purpose of deriving rent, introduce a 25 per cent allowance for non-rental income from investments in land (excluding capital gains) and expand the range of financial instruments that a managed fund may invest in or trade.

SUPERANNUATION

The main changes to Superannuation can be summarised as follows:

1. Expanded definitions of income to include salary sacrificed contributions

The Government will expand the definition of income that is used to determine eligibility for government support programs to include certain ‘salary sacrificed’ contributions to superannuation, with effect from 1 July 2009.

The measure resolves an inconsistency in the treatment of ‘non-wage’ remuneration in the income tax and transfer system that allows individuals and families to access more government support payments than would be possible if their salary sacrificed contributions were paid as salary or wage income. It ensures employees who have access to salary sacrifice arrangements are treated equally as those who do not.

The measure affects government support programs such as income support payments for people below Age Pension age, family assistance, child support, superannuation co-contributions and financial and retirement savings assistance delivered through the tax system.

2. Expanded definitions of income to include net financial investment losses

The Government will expand the definitions of income used to determine eligibility for particular government support programs to include net financial investment losses and net rental property losses where appropriate, with effect from 1 July 2009.

Currently, net rental property losses are included in adjusted taxable income definitions used for the purposes of family assistance programs, some parental income tests, the Commonwealth Seniors’ Health Card, child support and loan repayment obligations under the Higher Education Loan Program.

This measure will expand the adjusted taxable income definitions to include net financial investment losses. The measure will also expand the definition of income used for particular tax programs to include net rental property losses and net financial investment losses. Affected tax programs include the Senior Australians’ Tax Offset, Medicare levy surcharge and dependency tax offsets.

3. Means-testing of government support – expanded definitions of income to include reportable fringe benefits

The Government will expand the definitions of income used to determine eligibility for certain tax offsets to include reportable fringe benefits, with effect from 1 July 2009.

Currently, the senior Australians’ tax offset and pensioner tax offset use taxable income in their income definition. Eligibility for the dependency tax offsets is determined on the basis of the dependant’s income.

This measure will expand the income definitions used for the dependency tax offsets, senior Australians’ tax offset and pensioner tax offset to include reportable fringe benefits.

GST

1. GST and the sale of real property – integrity measure

The GST provisions dealing with real property are intended to ensure that GST is payable on the value added to land once it enters the GST system. The margin scheme achieves this outcome by applying GST to the ‘margin’, that is, the difference between the purchase price paid by the seller and the price paid by the buyer. This measure provides that, where the margin scheme is used after a GST free or non-taxable supply, the value added by the registered entity which made that supply is included in determining the GST subsequently payable under the margin scheme.

2. GST and the sale of real property – not to proceed with previously announced deferred integrity measure

The Government will not proceed with a tax integrity measure previously announced in the 2005-06 Budget and then deferred in the 2006-07 Budget.

This was an integrity measure designed to prevent the interaction of the margin scheme with the GST free going concern and the GST free farmland provisions from inappropriately reducing GST revenue.

3. Luxury Car Tax

The Government will increase the luxury car tax rate from 25 per cent to 33 per cent, with effect from 1 July 2008. There will be no change to the luxury car tax threshold (currently $57,123) from which the luxury car tax applies.

INTERNATIONAL TAX

1. A final withholding tax on certain distributions of Australian managed investment trusts to foreign residents

The Government will replace the existing 30 per cent non-final withholding tax applying to distributions of Australian source net income (other than dividends, interest and royalties) of Australian managed investment trusts to foreign residents with a final withholding tax regime. The measure will have effect for fund payments made in relation to the first income year after the date of Royal Assent of the enabling legislation, intended to be the 2008-09 income year.

Residents of jurisdictions with which Australia has effective exchange of information arrangements, to be specified by regulation, will be subject to a non-final withholding tax at the rate of 22.5 per cent for the first income year (intended to be 2008-09), a final withholding tax of 15 per cent for the second income year (intended to be 2009-10) and a final withholding tax of 7.5 per cent for the third (intended to be 2010-11) and later income years.

For the first income year, as an interim measure, such residents will be eligible to claim deductions for expenses relating to their fund payments. These residents will be taxed at a new rate of 22.5 per cent on an amount net of any deductions. Residents of other jurisdictions will be subject to a 30 per cent final withholding tax.

The new withholding tax regime furthers the Government’s objectives to establish Australia as a financial services centre in the Asia-Pacific region.

2. Australia-Japan double tax convention

The Government signed a tax treaty to update taxation arrangements with Japan on 31 January 2008. The convention will enter into force 30 days after both countries advise that they have completed their domestic requirements.

The arrangements will reduce withholding tax on certain dividend, interest and royalty payments. The convention will also align capital gains tax treatment more closely with OECD practice and provide for improved integrity measures.

FRINGE BENEFITS TAX

1. Exemption for eligible work-related items and removal of ‘double-dipping’

The Government will tighten the current fringe benefit tax (FBT) exemption for certain work-related items (including laptop computers, personal digital assistants and tools of trade) by ensuring the exemption only applies where these items are used primarily for work purposes. The FBT exemption will generally be limited to one item of each type per employee per year. The measure will apply to items purchased after 7.30 pm (AEST) on 13 May 2008. The measure reduces the FBT concession and tax expenditure for work-related items.

The measure will ensure consistency with the rules applying to mobile phones, computer software, and protective clothing. The current list of FBT exempt work-related items will also be updated to reflect changes in technology.

The Government will also deny employees depreciation deductions for FBT exempt items (that is, items purchased primarily for work purposes) purchased from 7.30 pm (AEST) on 13 May 2008. For items purchased before that time, employees will be denied depreciation deductions for the 2008-09 and later income years. This measure will ensure that employees are no longer able to gain a double benefit by obtaining an FBT exempt item (such as a laptop computer) from their pre-tax income, and then claim a deduction for depreciation.

2. Jointly held assets

The Government will amend the FBT law to ensure that the full value of a benefit that has been provided to both an employee and an associate in relation to a jointly held asset will be subject to FBT. This tax integrity measure will have effect for new arrangements from 7.30pm (AEST) on 13 May 2008.

The measure will re-establish the principle that income and deductions arising from jointly held assets should be allocated between joint owners according to their legal interests.

Employees who have already entered into salary sacrifice agreements with their employer will be able to utilise existing arrangements until 31 March 2009 (that is, the end of the current FBT year). This will provide time for employers and employees to renegotiate salary packages to avoid incurring a FBT liability.

LAND TAX CHANGES

The Victorian State Government has released its 2008 State Budget and we provide a brief snapshot of some of the more significant taxation matters addressed in this Budget.

The State Government has announced there will be an adjustment to the land tax thresholds from the 2009 land tax year as follows:

• the lowest land tax threshold increases from $225,000 to $250,000;
• the mid-range land tax thresholds increase from $540,000 to $600,000; $900 000 to $1 million; and $1.62 million to $1.8 million; and the highest land tax threshold increases from $2.7 million to $3 million.

Table 1 - 2009 (onwards) General land tax scale

Unimproved land value	Land tax payable
Up to $250 000	Nil
$250 000 - $599 999	$275 plus 0.2% for each dollar over $250 000
$600 000 - $999 999	$975 plus 0.5% for each dollar over $600 000
$1 000 000 - $1 799 999	$2 975 plus 0.8% for each dollar over $1 000 000
$1 800 000 - $2 999 999	$9 375 plus 1.3% for each dollar over $1 800 000
$3 000 000 and over	$24 975 plus 2.25% for each dollar over $3 000 000

Table 2 - 2009 (onwards) Special trust land tax payable

Unimproved land value	Land tax payable
Up to $24 999	Nil
$25 000 - $249 999	$82 plus 0.375% for each dollar over $20 000
$250 000 - $599 999	$926 plus 0.575% for each dollar over $250 000
$600 000 - $999 999	$2 938 plus 0.875% for each dollar over $600 000
$1 000 000 - $1 799 999	$6 438 plus 1.175% for each dollar over $1 000 000
$1 800 000 - $2 999 999	$15 838 plus 0.7614%* for each dollar over $1 800 000
$3 000 000 and over	$24 975 plus 2.25% for each dollar over $3 000 000

* The surcharge phases out for landholdings in excess of $1.8 million. For landholdings valued at or over $3 million, the surcharge is zero and the normal margin rate applies. (Source: Victorian State Budget Paper No.4)

DUTIES (STAMP DUTY) CHANGES

The Victorian Government’s changes will result in savings on duties on land transfers, and provide further concessions for first home buyers across the State. Budget initiatives include:

Table 3 - Transfer of Real Property rates (for contracts entered into on or after 6 May 2008)

Dutiable value range	Rate
$0 - $25 000	1.4% of the dutiable value of the property
$25 001 - $130 000	$350 plus 2.4% of the dutiable value in excess of $25 000
$130 001 - $960 000	$2 870 plus 6% of the dutiable value in excess of $130 000
More than $960 000	5.5% of the dutiable value

Table 4 - Duty rates for a principal place of residence (for contracts entered into on or after 6 May 2008)

Dutiable value range	Rate
$0 - $25 000	1.4% of the dutiable value of the property
$25 001 - $130 000	$350 plus 2.4% of the dutiable value in excess of $25 000
$130 001 - $440 000	$2 870 plus 6% of the dutiable value in excess of $130 000
$440 001 - $550 000	$18 370 plus 6% of the dutiable value in excess of $440 000
$550 001 - $960 000	$28 070 plus 6% of the dutiable value in excess of $550 000
More than $960 000	5.5% of the dutiable value

Table 5 - Declaration of Trust (on or after 6 May 2008)

Value of Dutiable property declared	Rate
$0 - $25 000	1.4% of the dutiable value of the property
$25 001 - $130 000	$280 plus 2.4% of the dutiable value in excess of $25 000
$130 001 - $960 000	$2 870 plus 6% of the dutiable value in excess of $130 000
More than $960 000	5.5% of the dutiable value
*Non dutiable property* or *unified property* declared	A flatrate of $200 is payable

FIRST HOME BUYERS GRANT

Victorian first home buyers who qualify for the Government’s $7,000 First Home Owner Grant are also eligible for a $3,000 First Home Bonus for homes valued up to $500,000. The value of the bonus increases to $5,000 for purchases of newly constructed homes and is available until 30 June 2009. The 2008-09 Budget provides for an additional $3,000 First Home Bonus for eligible first home buyers purchasing newly constructed homes in regional Victoria for contracts entered into on, or after, 2008-09 Budget day and will also be available until 30 June 2009. This brings the total assistance for such purchases to $15,000.

PAYROLL TAX

From July 1 2008, the Payroll Tax rate which was scheduled to drop from 5.05% to 5.00% will be reduced by a further 0.05% to be 4.95%.

This newsletter is published for the information of clients and should not be used or relied upon as advice. For specific advice on any matter please call our office.

For further information, please contact:

	Kevin Mullen Managing Partner Ph: 03 9608 0152	Email: kmullen@nexiaasr.com.au
	Phillip Grant Partner Ph: 03 9608 0105	Email: pgrant@nexiaasr.com.au
	Harry Rosenberg Partner Ph: 03 9608 0103	Email: hrosenberg@nexiaasr.com.au
	Tom Borsky Partner Ph: 03 9608 0100	Email: tborsky@nexiaasr.com.au
	Mark Hammerschlag Partner Ph: 03 9608 0165	Email: mhammerschlag@nexiaasr.com.au
	Gary Graco Partner Ph: 03 9608 0109	Email: ggraco@nexiaasr.com.au
	Gary Hershan Partner Ph: 03 9608 0101	Email: ghershan@nexiaasr.com.au
	George Dakis Partner Ph: 03 9608 0106	Email: gdakis@nexiaasr.com.au
	John La Rocca Principal – Taxation Advisory Ph: 03 9608 0171	Email: jlarocca@nexiaasr.com.au
	Peter Zervos Principal Ph: 03 9608 0167	Email: pzervos@nexiaasr.com.au

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