The Budget has focussed on a significant raft of welfare benefit reductions to drive the Government’s debt/deficit reduction objectives, combined with a three year 2% Temporary Budget Repair Levy for those earning over AU$180,000.
With the changes in this Budget, the Government claims Government debt will be AU$389 billion by 2024, AU$278 billion lower than the projection of AU$667 billion at the 2013-14 mid-year economic and fiscal outlook. The Government then projects surpluses in the medium term well over 1% of GDP by 2024-25.
As expected, the Government has left structural reform in Australia’s tax system to its proposed Tax Reform White Paper which it will present before the next election.
There are a number of changes and initiatives affecting industry, the key ones being:
- Infrastructure: a further $11.6bn in Government spending on infrastructure projects (taking total spending up to $50bn by 2019-2020)
- Medical: a new Medical Research Future Fund of $20bn to fund future medical research, funded by a new $7 fee for GP visits
- Privatisations: the proposed privatisation of Medibank Private, ASIC’s registry business, Australian Hearing, Defence Housing Australia and the Royal Australian Mint
- Venture capital: The Government is abolishing the 15 year old Innovation Investment Fund and Commercialisation Australia and is establishing a new Entrepreneurs’ Infrastructure programme, resulting in approximately a 50% cut in spending allocated to innovation
- Defence: Department of Defence spending to rise to 2% of GDP within a decade (with a fast-tracked $1.5bn spending for new hardware)
- Renewable energy: a doubling of the time (from five to ten years) for Government to fund $2.55bn to the emissions reduction fund (the centrepiece of Direct Action) and eradication of certain environmental agencies, including Australian Renewable Energy Agency (ARENA)
- Public service: 16,500 full time Federal Government public service jobs to be abolished over three years
- Housing: the First Home Saver Scheme will be abolished from 1 July 2015
- Higher education: the deregulation of Higher Education, where fee caps will be removed for universities and higher education providers and government subsidies of courses will be decreased
As foreshadowed and affecting all industries, the paid parental scheme - where working mothers will be entitled to up to six months paid parental leave capped at $100,000 - will commence from 1 July 2015.
Treasurer Joe Hockey describes this as the “Contribute and Build” Budget – but in essence, it’s just a tough Budget with not a lot of good news stories.
A summary of other key tax and expenditure details of the proposed reforms are set out below.
Cut to Company Tax Rate
The Government has announced that from 1 July 2015 the company tax rate will be cut to 28.5% (currently 30%). However, for companies with a taxable income over AU$5 million, this tax rate reduction will be offset by a 1.5% Paid Parental Leave levy.
Managed Investment Trusts
The Government has already announced that it intends to implement a new tax regime for Managed Investment Trusts (MIT). Exposure draft legislation is expected in June 2014, but the new regime will not apply until 1 July 2015.
Fringe Benefits Tax
From 1 April 2015 until 31 March 2017, the fringe benefits tax rate will increase to 49% to match the top marginal tax rate. This change is designed to stop high income earners from trying to avoid the Temporary Budget Repair Levy. However the increase will hurt all employers who provide non-cash benefits to their employees. Employers may need to consider making employee’s contribute to the cost of providing benefits to reduce the overall tax burden.
Reduction in Research & Development Offset Rates
From 1 July 2014, research & development entities with an annual turnover of less than AU$20 million will have their refundable R&D offset reduced to 43.5% (currently 45%). Companies with turnover from AU$20 million to AU$20 billion will be entitled to a non-refundable R&D offset of 38.5% (currently 40%) of their R&D expenditure.
Employee Share Schemes
The anticipated changes to the taxation of employee shares schemes were not announced in the Budget. Treasury is undertaking a review of the taxation arrangements for employee share schemes for start-up companies, and it is understood an announcement may be made later in the year.
Carbon Tax, Mining Tax, and Other Un-Enacted Measures
The defeat in the Senate of the repeal of the Carbon Tax and Minerals Resource Rent Tax has resulted in uncertainty about whether the repeal of these measures will proceed after 1 July 2014 when the composition of the Senate changes. There are a number of other tax measures which have previously been linked with these measures, and the future for these measures is also uncertain, including the repeal of company loss carry back and the AU$6,500 instant asset write-off for small business.
The Government will clarify the taxation treatment of changes of ownership by joint venture partners within a common project to enable deductions for expenditure on mining rights.
The Government will also give a refundable tax offset for greenfields exploration costs by junior exploration companies. However, the program will be capped at AU$100 million.
Subsidy for Employing Older Workers
A program will be introduced from 1 July 2014 to provide a subsidy to employers who employ a worker over the age of 50 who had been unemployed for a period of six months. The subsidy will start with a AU$3,000 payment once the employee has remained employed for six months, and will continue until the employee has been employed for two years up to a maximum of AU$10,000 per worker.
Excess Non-Concessional Contributions
The Government will allow taxpayers to withdraw contributions made to their superannuation fund from 1 July 2013 where those contributions exceed both the concessional or non-concessional contribution caps. This will prevent punitive tax rates where the limits are inadvertently breached.
Superannuation Guarantee Rate
The Government will now increase the SGC rate to 9.5% from 1 July 2014, and will leave it at that rate until 1 July 2018. It is then proposed to increase by 0.5% per year until it reaches 12%. This is a change from what was previously announced by the Government, and employers may need to urgently review their remuneration arrangements.
The 2% Temporary Budget Repair Levy
This 2% levy comes as no surprise, with the Government forewarning us that we would incur a “Temporary Budget Repair Levy”. This temporary levy will apply at 2% for incomes over AU$180,000 per annum from 1 July 2014 to 30 June 2017. For example, individuals with taxable income of AU$220,000 will pay 2% of AU$40,000, i.e., a levy of AU$800.
- FBT rates will be increased from 47% to 49% from April 2015 to June 2017 to prevent high income earners using fringe benefits to avoid the levy; and
- other tax rates based on calculations that include the top personal tax rate will be increased for the same three year period that the levy is in place.
This measure is expected to raise AU$3.1 billion in revenue for the Government.
Last Budget Medicare Levy Increase to 2% Starts from 1 July 2014
The increase in the Medicare levy, combined with the proposed budget deficit levy, results in the effective top marginal tax rate becoming 49% from 1 July 2014. This increase in the Medicare levy also affects other tax rates that are linked to the top personal marginal rate and the Medicare levy, for example, FBT, excess contributions tax and the tax withheld on bank accounts when the account holder has failed to provide their TFN.
Tax Receipt for Individuals will be Introduced from 1 July 2014
From 1 July 2014, the Government will introduce a receipt for taxpayers providing information about where and when tax funds were spent. The ATO will issue a one page receipt which states in dollar terms, how much of an individual’s tax bill was spent on each budget area.
Many Dependent Offsets to be Abolished
From 1 July 2014, the Government will abolish the dependent spouse tax offset – which has had limited application since the 2012 year to those taxpayers whose spouse was born before 1952 and to taxpayers who qualify for the zone tax offset (ZTO), overseas civilians tax offset (OCTO) or overseas forces tax offset (OFTO), regardless of the age of the dependent spouse. From 1 July 2014, the only offset available will be the dependant (invalid and carer) tax offset (DICTO) and all other dependency offsets will be abolished, whereby taxpayers who qualify for ZTO, OCTO and OFTO may qualify for DICTO if they have a dependant who is genuinely unable to work due to a carer obligation for a disability.
Mature Age Worker Offset Abolished
From 1 July 2014, the mature age worker tax offset (which was a maximum tax offset of AU$500) will be abolished. This offset will be replaced by the expanded seniors employment incentive payment called Restart – where from 1 July 2014, employers who hire a senior age worker over 50 who has been receiving income support for at least six months will be eligible for a payment up to AU$10,000 (on a staged basis over a 24 month period of employment).
Family Tax Benefit Payments to Freeze for Two Years; Part B Threshold to Decrease
The Government is introducing the following changes to Family Tax Benefits (FTB):
- from 1 July 2014 to 1 July 2016, there will be a freeze on FTB payments – for Part A and Part B payments, resulting in expected savings of AU$2.6 billion over four years;
- the FTB Part B primary earner income limit will be reduced from AU$150,000 to AU$100,000 per annum, expecting to result in savings ofAU$1.2 billion over four years;
- FTB Part B will be limited to families whose youngest child is under six years of age from 1 July 2015, with a transitional arrangement for two years for families with the youngest child over six years from 30 June 2015;
- a new FTB allowance of AU$750 per child will be introduced for single parents on the maximum rate of FBT Part A whose youngest child is between six and 12 from when they become ineligible for FBT Part B;
- the large family supplement (currently approximately AU$313 per child) will be limited to families with at least four children and will only be paid in respect of the fourth and subsequent children;
- the FBT Part A per child add-on to the higher income free threshold for each additional child will be removed from 1 July 2015; and
- the FTB end-of-year supplements will be revised to original values and indexing will cease from 1 July 2015. The revised supplements will provide AU$600 per annum per FTB Part A child and AU$300 per family per annum for each FTB Part B family.
Changes for Pensioners
- Pension age increasing to 70 by 2035: From 1 July 2025, the Age Pension qualifying age will start rising by six months every two years, from the age of 67 years that will apply at that time, to 70 years by 1 July 2035. Those born before 1 July 1958 are unaffected.
- Changes to Seniors Health Card: Income limits for the Commonwealth Seniors Health Card (CSHC) will be indexed by the Consumer Price Index (CPI) over the next five years but, from 2015, will also include untaxed superannuation income. The Seniors Supplement for CSHC holders will end from 20 September 2014, although a range of concessional benefits will remain.
- Pension payments indexed by CPI: Pension and pension-equivalent payments, and Parenting Payment Single, will be indexed by CPI. Currently, these payments are indexed by the higher of the increases in the CPI, Male Total Average Weekly Earnings and the Pensioner and Beneficiary Living Cost Index.
- Reset the Assets Test Deeming Rate Thresholds: Thresholds used in the pension assets test will be reset to AU$30,000 for singles and AU$50,000 for couples from 20 September 2017.
- Eligibility thresholds for Australian Government payments maintained: Eligibility thresholds for non-pension payments (including Family Tax Benefit, Child Care Benefit and Rebate, Newstart Allowance and Parenting Payments) will be maintained for 3 years from 1 July 2014. Thresholds for pension and pension-related payments (including Aged Pension, Carer Payment and Disability Support Pension) will be maintained for 3 years from 1 July 2017.
- Further supplements abolished: The Pensioner Education Supplement, Education Entry Payment and Aged Care Payroll Tax Supplement will cease from 2015.
Under 30s seeking employment
From 2015, all new claimants of Newstart Allowance and Youth Allowance who are under 30 must look for jobs and participate in employment support services for 6 months before receiving payments. After six months, claimants will need to participate in Work for the Dole for 25 hours per week to receive income support. This will also apply to existing recipients from 1 July 2015. Exemptions apply to claimants who have partial work capacity, are principle child carers, are part-time apprentices, are studying or are job seekers in certain service streams.
Changes to Disability Support Pension (DSP)
- Limitations on overseas travel: Recipients who leave Australia from 2015 onwards will receive DSP for a maximum of four weeks in a 12 month period should they travel overseas (decreased from multiple six week periods). Exemptions for special circumstances will continue.
- Young recipients under review: Until 30 June 2019, recipients under 35 who were granted DSP between 1 January 2008 and 31 December 2011 will be reviewed against current eligibility criteria. The Government will also introduce compulsory activities for young recipients including sanctions for non-compliance. Exemptions to both measures will apply for those with severe impairment.
New HECS and HELP measures introduced from 1 June 2016
- Income threshold for repaying students' Higher Education Loan Programme (HELP) will reduce by 10%.
- A new repayment rate of 2% of income will apply.
- HELP debts will be indexed to the 10 year bond yield rate (capped at 6% p.a.) instead of CPI
- The HECS-HELP benefit, which was intended to incentivise graduates of particular courses to take up related occupations or work in specified locations will end from 2015-16.
- Loan fees will be removed for fee-paying undergraduate courses and vocational education and training courses.
If you have any questions relating to the matters in this update, please contact Louise Boyce (Of Counsel, Tax Strategy & Benefits, Sydney), John Poulsen (Managing Partner, Australia) Campbell Davidson (Managing Partner, Sydney) or Michelle Segaert. (Partner, Global Corporate Practice, Sydney)