The Australian Treasurer, Wayne Swan, delivered the 2010-2011 Australian Federal Budget on 11 May 2010. In this article I will concentrate only on the taxation and superannuation matters that will be of more general interest. I will not cover all of the changes. Also, I will not repeat announcements that were part of the Government's response to the Henry review.
The key announcements I will discuss are: (1) An increase in the Low Income Tax Offset (2) An increase in the level of net medical expenditure necessary to obtain a tax rebate (3) An optional standard deduction for work related expenses and cost of managing tax affairs (4) A 50% discount in relation to the earning of certain interest income (5) A change in the way that Capital Gains Tax applies to earn-out arrangements (6) A permanent reduction to the superannuation co-contribution rate. (7) GST changes to the margin scheme and the financial supplies threshold. Here are the details:
Low Income Tax Offset
From the 1st of July 2010 there will be an increase from $1,350 to $1,500 of the Low Income Tax Offset. Due to this, a person that earns up to $16,000 will not have to pay income tax.
Net Medical Expenditure Threshold
Currently, if a taxpayer has net medical expenditure of $1,500 or more, a tax offset can be claimed for 20% of the expenditure above the threshold. From 1 July 2010 the threshold will be raised to $2,000, thus making it more difficult to make a claim. Also, in following years, the threshold will be indexed in line with the Consumer Price Index.
Optional Standard Deduction
In a big win for millions of taxpayers, from 1 July 2012, there will be an optional standard deduction in lieu of claiming work-related expenses and the cost of managing a person's tax affairs. This will only apply to individual taxpayers. The optional standard deduction amount will be $500 in the year ending 30 June 2013. In the year ending 30 June 2014, this amount will be $1,000. The standard deduction is optional as taxpayers will still have the ability to claim actual expenditure.
50% Discount for Interest
To encourage savings, from the 1st of July 2011, there will be a tax discount of 50% on up to $1,000 of interest earned. So if a person has $20,000 in the bank that is earning 5% interest, the whole amount of this interest will be eligible for the discount. This will also mean that some individuals and families will become eligible for Government assistance or be able to obtain larger Government assistance with such things as the Family Tax Benefit, Child Care Benefit and so forth.
Capital Gains Tax and Earn-Out Arrangements
There is going to be a change to an annoying part of the Capital Gains Tax law that relates to the sale of a business where there is an earn-out arrangement. An earn-out arrangement is used to adjust the sale price of a business depending on how it trades after the business changes hands. Typically there will be a set amount paid for the business plus a contingent amount based on trading over, say, the next 12 months. So, for example, a purchaser of a business may agree to pay a certain percentage of the gross margin of a business as further consideration for the purchase of the business.
Under the current interpretation of the law, the earn-out component is a separate asset from the underlying business. This causes a number of problems, including the inability to apply the small business CGT concessions to the earn-out component of the purchase price of the business. The Government will change the capital gains tax law so that the earn-out component of the sale price will be treated as consideration for the underlying business and not consideration for a separate right created by the contract of sale.
This change will apply from the date the law receives Royal Assent. There will be transitional provisions in certain cases from 17 October 2007.
Matching Rate for the Superannuation Co-Contribution System
The Government has announced that it will permanently keep the matching rate for the superannuation co-contribution system at 100%. Further, the maximum co-contribution will be set at $1,000.
Goods and Services Tax Changes
Turning to GST, the Government has announced that there will changes in the way the margin scheme operates. These changes will apply from 1 July 2012. There is not much detail as to how these changes will operate but the changes will be designed to address a number of problems with the current law.
Finally, the threshold below which businesses need not be concerned with making financial supplies will be increased by 3 times from $50,000 to $150,000 of input tax credits. This change will have effect from 1 July 2012.
Wishing you easier business
John M. Jeffreys
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