Federal Budget tweaks tax system once again

14 May 2008

Given all the leaks that preceded it, the 2008/09 Federal Budget was a fairly uneventful document and relatively well received by most analysts. It delivered the foreshadowed mix of spending restraint and tax integrity measures and is clearly designed to rein in inflation and keep a lid on interest rates. The bottom line is a projected budget surplus of $21.7bn in the 2008/09 financial year with modest economic growth of 2.75%.

From a business perspective, there were fairly few significant measures although that may change once the Government completes its proposed 'comprehensive review of the tax system.' This review is expected to be finalised by the end of 2009.

Personal income tax cuts

From 1 July 2008, the income threshold for the 30% tax rate will rise from $30,001 to $34,001, he 40% threshold will be lifted from from $75,001 to $80,001, and the 45% threshold will go up from $150,001 to $180,001.

Low Income Tax Offset (LITO)

The low income tax offset will increase from $750 to $1,200 from 1 July 2008. This means that those who are eligible for the full LITO will have an effective tax-free threshold of $14,000 in 2008/09.

Senior Australians Tax Offset (SATO)

The amount of income that a senior Australian can earn and still be eligible for SATO will be increased from $25,867 to $28,867 for singles and from $21,680 to $24,680 for each member of a couple.

Therefore retirees who are eligible for both SATO and LITO will be able to earn taxable income of $28,867 per annum if they are single or a combined $49,360 per annum for couples.

Medicare levy surcharge

The Medicare levy surcharge income threshold will rise on 1 July 2008 from $50,000 to $100,000 for singles and $100,000 to $150,000 for families.

Capital Gains Tax

The Goverment has announced several measures that will improve the operation of capital gains tax as it applies to investors and business owners.

• Interests in widely held companies and trusts. The law will be changed to allow investors in these entities whose shares or units are cancelled or surrendered to calculate their capital gain or loss using the actual proceeds rather than the market value as presently required.
  
  
• CGT small business concessions. The Government will extend access to the CGT small business concessions to taxpayers who own a CGT asset that is used in a business but is legally held by a related entity and for partners that own a CGT asset used in the partnership business.
  
  
• Scrip for scrip rollovers. Amendments will be made to the scrip-for-scrip CGT rollover relief rules so that the cost base of the shares acquired in the target entity will reflect the tax cost of the target company's net assets.

Fringe benefits tax

The Government has outlined a number of measures to restrict FBT concessions including -

• tighter rules for exempt work items such as laptop computers and PDAs;
  
  
• restricting the ability to gain concessions under salary sacrifice arrangements for jointly-held assets; and
  
  
• the exemption applying to rules consumed on an employer's premises.
  

Goods & Services Tax

The Government has announced important changes to the sale of real property under the margin scheme and restrictions on GST refunds.

Family Trust elections

The Government will change the definition of 'family member' so that it only includes direct lineal children and grandchildren of the test individual or their spouse.

The ability to make a one-off variation of the test individual will also be removed except where this is required due to a marriage breakdown.

Franking credits from testamentary trusts

At present, testamentary trusts cannot distribute certain dividend franking credits to their income beneficiaries unless they make a family trust election. The Government has announced plans to tackle these difficulties but the legislative changes are not expected to be introduced before 2009.

Depreciation of computer software

The period over which in-house computer software can be depreciated will be increased from 2.5 years to 4 years for expenditures incurred after 13 May 2008.

Managed fund distributions to non-residents

The rate of Australian withholding tax applicable to managed fund distributions to non-residents will be progressively reduced from 30% to 7.5% over the next four years. However this only applies to countries which have an effective exchange of information (EOI) with Australia.

Superannuation

• Superannuation Clearing House. The Government is proposing to introduce a superannuation contribution clearing house to allow employers to make one contribution payment and have the clearing house distribute the money to the relevant superannuation fund.
  
  
• Salary sacrifice and co-contributions. From 1 July 2009, the definition of income used to determine the eligibility for the governement co-contribution will be expanded to include salary sacrificed income. Taxpayers who have implemented a salary sacrifice strategy and make non-concessional contributions to get the co-contribution may want to review the appropriateness of this strategy.
  
  
• Tax free lump sums for persons who are terminally ill. The Government has announced that it will back date to 1 July 2007 the previously announced measures to allow tax-free superannuation lump sums for people suffering a terminal medical condition.