Federal Budget 2012-13 - Taxation & Superannuation

On 8 May 2012 the Treasurer handed down the 2012-13 Federal Budget.  The Budget is a surplus of $1.5 billion for 2012-2013 mainly as a result of cuts in Government spending on defence, foreign aid and abandoning planned tax cuts for businesses, foreign investors into Australia and individuals. 

Of note, the Government has back tracked on previous announcements, such as the reduction in the company tax rate and the tax breaks for the Green Buildings program.  Most disappointing for the managed funds  industry is the increase in the managed investment trust withholding tax rate from 7.5% to 15% which will have a significant impact on inbound foreign investment, particularly in the property sector.  The Government has further targeted non-resident investors into Australia by removing the 50 per cent CGT discount for non-residents.

As expected, the doubling of the superannuation contributions tax for those on incomes above $300,000 has been confirmed.  The proposal to allow individuals with superannuation balances below $500,000 to contribute $50,000 a year as a concessional contribution has been deferred until 1 July 2014. 

On a more positive note, as expected, companies will be able to carry back revenue tax losses and claim a refund on tax previously paid.  This will assist businesses being operated in a corporate and in particular small business with cash flow issues.

Set out below is an overview of the main Budget announcements for businesses and superannuation. 

COMPANIES

Company tax loss carry-back measures

From the 2012-3013 income year, companies will be able to carry back revenue tax losses so that they get a refund of tax previously paid.  From 1 July 2012, companies will be able to carry back up to $1 million worth of tax losses to get a refund of tax paid in the previous year.  From 1 July 2013, companies will be able to carry back up to $1 million worth of tax losses against tax paid up to 2 years previously. 

Currently businesses are entitled to carry tax unused tax losses (both revenue and capital) forward to offset future taxable income (provided certain tests are met), however, have not been entitled to carry losses back to obtain a refund of tax previously paid. 

This measure is one of the only good news items for businesses in this year's Federal Budget.  However, the measure is limited to businesses being carried on through a company (or through an entity that is taxed like a company, such as public and corporate trading trusts).  Further, the amount of tax loss that can be carried back is limited to $1 million, and only applies to revenue tax losses which means that capital losses cannot be carried back.  The measure will be subject to integrity rules and limited to a company's franking account balance.  In essence, this measure is aimed at assisting small businesses with cash flow issues. 

For small businesses not currently operated in a company structure, we anticipate seeing an increase in the restructure of small businesses to a corporate structure utilising capital gains tax rollover relief.

This measure will apply from 1 July 2012.

Related party financing – no bad debt deduction

A tax deduction will no longer be available for a bad debt written, where the debtor is a related party not part of the same tax consolidated group.  The corresponding gain for the debtor will likewise not be subject to tax.  This is to ensure a consistent tax treatment of bad debts between related parties whether or not they are part of the same tax consolidated group.

This measure takes effect from 7:30pm (AEST) on 8 May 2012.

INTERNATIONAL

Managed investment trusts - increase in withholding tax rate

The managed investment trust final withholding tax rate will be increased from 7.5% to 15% with effect from 1 July 2012.  

It is disappointing that the Government is increasing the withholding tax (given its only recent reduction).  This measure will have a significant impact on foreign in-bound investment into Australia, particularly in the property industry. 

Investment manager regime prospective arrangements

This measure will extend the previously announced conduit income measure to exempt foreign managed funds from tax on gains from the disposal of certain non-Australian assets and certain non-portfolio conduit income.  These funds (and their non-resident investors) will also be exempt from Australian tax on Australian sourced income and gains from certain portfolio financial arrangements.

This measure will have effect from 1 July 2011.

CGT discount for non-residents abolished

The 50 per cent CGT discount for non-residents will be abolished for capital gains occurring on or after 8 May 2012.  The CGT discount will remain available for capital gains accrued prior to this time where non-residents choose to obtain a market valuation of assets as at 8 May 2012.

CAPITAL GAINS TAX (CGT)

Scrip for scrip roll-over and small business concessions

Changes will be made to support the effective operation of the 2011-12 Budget measures providing greater consistency in the application of the scrip-for-scrip roll-over and small business concessions to trusts, superannuation funds and life insurance companies.  This will ensure the provisions concerning absolutely entitled beneficiaries, bankrupt individuals, security providers and companies in liquidation interact appropriately with the CGT provisions.
 
The changes will apply at the option of taxpayers from the 2008-09 income tax years and automatically from Royal Assent. 

Revenue asset and trading stock roll-overs for interposing a company

Revenue asset and trading stock roll-overs that apply to the exchange of interests in a company or a unit trust for shares in another company will be broadened.  Under this measure, revenue asset and trading stock roll-overs will be available for all interests that qualify for the general conditions of each of the roll-overs not just shares in consolidated groups.  Replacement shares in the interposed company will be required to maintain the character of the original asset or trading stock asset that was exchanged. 

This measure takes effect from 7:30pm (AEST) on 8 May 2012. 

Scrip for scrip integrity provisions

A number of integrity measures to the scrip for scrip rules will be made to remove "significant tax minimisation opportunities": 

• Taxpayers will not be able to get around the integrity provisions by holding interests to acquire ownership rights, such as convertible preference shares, rather than underlying shares;
• Taxpayers will not be able to defer indefinitely the CGT liability that would otherwise have arisen under the integrity provisions for the on-sale of the target entity by the acquiring entity;
• The measure broadens the scope of the rules that apply to intra group debt to cover debts owed to group entities other than the head entity, and remove CGT exemption for the repayment of such debts; and
• Ensure the integrity provisions apply appropriately to trusts. 

This measure will apply from 7:30pm (AEST) on 8 May 2012. 

CGT and loss relief to super reforms

Amendments will be made to ensure income tax considerations do not prevent mergers of superannuation funds or transfers of existing default members' balances and relevant assets in transition to Stronger Super and MySuper.  Option loss relief will be available from 1 June 2012 to 1 June 2017 for mergers of complying superannuation funds on the same terms and conditions as the former temporary loss relief with some exceptions. 

An option roll-over and loss relief will be made available for capital gains and capital losses on mandatory transfers of default members' balances and relevant assets to a MySuper product in another companying superannuation fund from 1 July 2013 to 1 July 2017. 

FINANCE

Limited recourse debt — amended definition

This measure will clarify that limited recourse debt will be extended to include arrangements where the creditor‘s right to recover the debt is effectively limited to the financed asset or security provided. 

This measure is aimed at ensuring that tax deductions are not available for capital expenditure on assets that have been financed by limited recourse debt, to the extent that the taxpayer is not effectively at risk for the expenditure and does not make an economic loss. 

This measure will have effect from 7:30pm (AEST) on 8 May 2012.

Tier 2 capital instruments treatment under Basel III reforms

Certain Tier 2 regulatory capital instruments issued by authorised deposit taking institutions (ADIs) and certain other related entities regulated by the Australian Prudential Regulation Authority (APRA) can be treated as debt for income tax purposes. 

Under the Basel III capital reforms, such instruments will have to be written off or converted into ordinary shares if APRA decides that the ADI would otherwise become non-viable. This measure ensures that the funding costs of such instruments will be tax deductible, whereas if the current law applied to these instruments, they would likely be treated as equity for income tax purposes and their funding costs would not be deductible.  .

This measure will apply on commencement of the Basel III capital reforms on 1 January 2013.

FRINGE BENEFITS TAX (FBT)

LAFHA – Limiting its use

As previously announced, the Government will introduce measures to restrict the use of the tax concession for living-away-from-home allowances (LAFHA).  This tax concession will be restricted to:

• limit access to the concession to employees who maintain a home for their own use in Australia, that they are living away from for work purposes; and
• to ensure that the maximum period the concession can be obtained is for a period of 12 months an employee in a work location away from home.

The 12-month limit will not affect the tax concession for 'fly-in fly-out' arrangements, or the tax treatment of travel and meal allowances provided to employees travelling for short periods of time (generally up to 21 days). 

This measure will particularly impact non-residents who are required to work in Australia and are away from their usual place of residence which is in a foreign country.  It is considered that the 12 month concession will provide little help for these arrangements given that few secondments to Australia are for a limited time.

The changes will apply from 1 July 2012 for arrangements entered into after 7:30pm (AEST) on 8 May 2012, and from 1 July 2014 for arrangements entered into prior to such time.

Airline transport fringe benefits reform

The taxable value of airline transport fringe benefits will be changed from the stand-by value to the market value.  The current method was developed when stand-by travel was a feature of commercial airline pricing and is no longer relevant as airlines now use discounted pricing to optimise passenger levels.

This measure will impact employees of an airline or travel agent that are provided with free or discounted travel on a stand-by basis. 

The change will apply to benefits provided after 7:30pm (AEST) on 8 May 2012.

GOODS & SERVICES TAX (GST)

Reduced ITCs for credit unions

Credit unions who rebrand as "banks" will from 1 July 2011 be able to access reduced input tax credits (RITC) once more.  This measure reinstates the existing concession by allowing a RITC for acquisitions from an entity wholly owned by credit unions or rebranded credit unions. 

The concession will apply to entities who were approved credit unions by the Australian Prudential Regulation Authority as at 1 July 2011 and subsequently changed their branding to include the title "bank" but otherwise do not change their corporate structure. 

Cross-border transactions

The Government will implement the Board of Taxation recommendations made from its Review of the application of GST to cross-border transactions, thus amending the 2010/11 Budget measures.  These measures will take effect from the first quarterly tax period follow the legislation receiving Royal Assent.
 
The measures will take effect from the first quarterly tax period following Royal Assent, instead of from 1 July 2012.  Following consultation on the design and implementation of the measures, the Government will make a number of other changes including those proposed to the supply of goods by non-residents and will not proceed with changes related to the non-resident agency provisions. 

The Government will also clarify and narrow the definition of permanent establishment for GST purposes. 

Compliance Program

The Australian Taxation Office (ATO) will receive $195.3million for the 2014-14 and 2015-16 income tax years so that it can continue a range of activities that promote voluntary GST compliance and provide a level playing field for Australian businesses.  This ensures issues relating to fraudulent GST refunds, systemic under-reporting of GST liabilities, failure to lodge GST returns and outstanding GST debts continue to be closely examined by the ATO.  The Assistant Treasurer noted in Media Release 024 that these issues "have the potential to undermine community confidence in the integrity of the tax system".  The increased funding is consistent with the ATO's increased focus in recent times on compliance and collection of revenue.

Miscellaneous

The following measures were also announced: 

• The GST law in relation to the mortgage lending sector will be amended so that the GST law applies in all circumstances where a representative of an incapacitated entity is a creditor of that incapacitated entity and the representative makes a supply of the incapacitated entity's property in satisfaction of the debt that the incapacitated entity owes the representative. 
• A health supply by a health care provider paid for by statutory compensation scheme operator will be GST-free if the underlying supply from the health care provider to the individual is also GST-free. 

SUPERANNUATION

Contributions tax to double to 30% for individuals earning more than $300,000

From 1 July 2012, individuals with income greater than $300,000 will be subject to a contributions tax of 30% on concessional contributions made to superannuation, being twice the existing contributions tax of 15%.

If an individual's income (excluding their concessional contributions) is less than the $300,000 threshold, but the inclusion of their concessional contributions pushes them over the threshold, the increased contributions tax will only apply to the part of the contributions that are in excess of the threshold.

The increased contributions tax will not apply to concessional contributions which exceed the concessional contributions cap and are therefore already subject to 'excess contributions tax' as these contributions are already effectively taxed at the top marginal tax rate.

Treasury will consult with the superannuation industry and other relevant stakeholders on further design and implementation details.

Deferral of $50,000 contributions cap for over 50's with super less than $500,000

The Government has deferred the start date of the 2010-11 Budget measure of maintaining the concessional contribution cap at $50,000 for individuals over 50 with superannuation balances less than $500,000 by two years, from 1 July 2012 to 1 July 2014.

The two year deferral means that for 2012-13 and 2013-14, all individuals regardless of age will be restricted to making concessional contributions of up to $25,000 per year. In 2014 15, the Government states that the general cap is likely to increase to $30,000 through indexation, and the higher cap would then commence at $55,000 for those who over 50 with a superannuation balance of less than $500,000.

This change may affect salary sacrificing arrangements, deductions for personal contributions and transition to retirement pension strategies for relevant individuals.

Employment termination payment (ETP) offset

The Government will limit the availability of the ETP offset so that only part of an affected ETP (such as a golden handshake), that take as person's total taxable income (including the ETP) to no more than $180,000 will be able to receive the EP offset. 

Amounts received above this amount, will be taxed at marginal tax rate.  The ETP offset ensures that ETP's up to the ETP cap are taxed at a maximum rate of 15% for those over the preservation age, and 30% for those under the preservation age.  Existing arrangement will continue to apply to genuine redundancies, invalidity and compensation payments related to employment disputes and death.

This measure will apply form 1 July 2012. 

Funding to collect outstanding tax debts and superannuation guarantee charges

The Government will provide $106.0 million over four years to the ATO to improve the management of outstanding taxation debts and superannuation guarantee charges.

This measure is designed to assist the ATO to ensure taxpayers are meeting their reporting and payment obligations through contacting them earlier and by providing more targeted assistance.

For further information regarding these changes please contact any of our partners below.

PREVIOUS GOVERNMENT ANNOUNCEMENTS WITHDRAWN

Company tax cut will not proceed

The Government is not proceeding with the measure to lower the company tax rate from 2013/14, or to implement an early start to the company tax rate cut from 2012/13 for small businesses will not proceed.

Tax breaks for buildings

The government has announced that it will not proceed with the Tax Breaks for Green Buildings program.

OTHER MEASURES

Tax Reform Road Map

The Treasurer released a "Tax Reform Road Map" with the Budget, which provides a summary of previously announced tax reform measures, including those proposed by the Henry Review, the 2011 Tax Forum and some new measures.  The Government has said the Road Map shows the direction tax reforms will take over the next 10 years.

While the Road Map largely includes changes the Government has announced or introduced, the Government has said it is reducing disincentives for businesses to invest in long life infrastructure.  In recognition of the long horizon for infrastructure projects, the Government will introduce an uplift allowance so the value of tax losses is preserved over time.  These losses will also be exempt from the continuity of ownership test and same business test. 

The Government also notes a number of aspirational tax reform objectives in the Road Map, including reducing interest withholding tax paid by financial institutions to zero. 

Miscellaneous funding

The following funding has also been provided:

• The ATO and other agencies will receive an additional $76.8 million over three years to continue the focus on tax evasion, avoidance and related crimes. 
• The ATO will receive an additional $106 million over four years to improve the management of outstanding taxation debts and superannuation guarantee charges. 

This article was written by Betsy-Ann Howe, Partner and Benita Howell, Special Counsel.

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