The 2006 Federal Budget

The Government last night issued its 2006/2007 financial year Budget featuring substantial income tax cuts for individuals and significant superannuation changes. The Budget also contained substantial business tax measures. On the one hand, it is difficult to escape the thought that the Government is simply handing back tax money to taxpayers. On the other hand, the tax cuts and the increases in the tax thresholds, are substantial and should have a positive effect on the economy.

In addition, given that next year’s Budget will be a so called “Election Budget” it is expected that there will be further tax cuts to individuals and indeed, more tax incentives to business. Our view is that this Budget is positive both for individuals and Australian business, on the basis that it is part one of a two step process.

We provide the following overview of the main measures in the Budget. The following overview should not be regarded as advice. Please discuss any matters from the Budget with your Nexia ASR advisor.

A PERSONAL INCOME TAX CUTS

1 New Individual Rates
The top individual tax rates of 47% and 42% will be cut by 2% points each from 1 July 2006; delivering a significant boost in take home pay for higher income earners.

Effective from 1 July 2006, the new personal income tax thresholds and rates will be as follows.

2 Senior Australians Threshold Income Levels Increase
Due to the effect of the personal income tax cuts, amendments will be made to ensure that Senior Australians Tax Offset will phase out only once income exceeds an annual amount of up to $24,867 for singles and $41,360 for couples. Senior Australians do not pay the Medicare Levy until they begin to incur an income tax liability.

3 Medicare Levy – Low Income Threshold Increases
The Medicare Levy income threshold is to increase from 1 July 2006 as follows.

4 Removal of the Part-Year Tax-Free Threshold for Students
From the 2006-2007 income year all resident taxpayers who cease full time education for the first time will be able to claim the full tax-free threshold ($6,000).

5 Beneficiary Tax Offset Eligibility – Extended
From the 2006-2007 income year, eligibility for the beneficiary tax offset will be extended to taxpayers who receive Interim Income Support Payments to ensure consistency with the treatment of Exceptional Circumstances Relief Payments.

6 Indirect Tax Concessions for Diplomatic and Consular Missions
Refunds and exemptions will be provided for certain indirect taxes (including GST) to specific countries’ diplomatic and consular representation under the Indirect Tax Concessions Scheme.

7 Tax Compliance – High Wealth Individuals & Associated Entities
The ATO will be provided with an additional $82 million in resources over four years to assist in maintaining tax compliance of high wealth individuals and their associated entities.

8 More Help for Families Incentive
8.1 Family Tax Benefits (FTB) Part A
From 1 July 2006, the amount a family can earn before their FTB Part A is reduced will increase to $40,000, up from the current $33,361. Families will receive an average of $9.60 per fortnight, with a maximum benefit of $9.62.

The 2006-2007 Budget focuses on the Government’s “More Help for Families Incentive”, providing further assistance to families with children, to help them balance work and family responsibilities.

8.2 Large Family Supplement
From 1 July 2006, the Government will also extend eligibility to the Large Family Supplement of $248.20 a year to families with three children. Currently the supplement applies to families will four children or more.

8.3 Childcare
From 1 July 2006, the Government will boost the number of childcare places by removing the cap on the number of outside school hours care and family day care places. The Government estimates that an additional 25,000 places will be created by the move.

B BUSINESS TAX CHANGES

The business tax changes announced can be summarized as follows.

1 Increase in Tax Depreciation Rates
For eligible assets purchased on or after 10 May 2006, there will be a significant increase in the diminishing value method of tax depreciation. Quite simply the rates of depreciation for this depreciation method will be increased from 150% to 200% for, eligible assets purchased from today. In other words, this is equivalent to a 33% increase in the allowable depreciation rate (using the diminishing value method) for these assets. This will make the real cost of acquiring new plant and equipment significantly more attractive for business as the tax deductions (using the diminishing value method) will be higher in the earlier years.

2 Trust Measures
A number of changes to family trusts have been announced. Firstly, family trust elections and interposed entity elections will, in certain circumstances (please note that the circumstances have not been specified as yet), be able to be revoked or varied. In addition, the definition of the family group will be broadened to include lineal descendents and former spouses, and to widows or widowers of family group members.

Note that these measures will only apply from the income year in which the relevant legislation receives Royal Assent.

3 FBT Changes
A number of FBT measures have been announced. Firstly, note that the FBT rate will be reduced from 48.5% to 46.5%, with effect from 1 April 2006.

In addition, there will be an increase from $500 to $1000 for in-house fringe benefits from 1 April 2007.

4 Changes to Small Business CGT Concessions
A number of positive changes have been announced to the small business CGT concessions. Firstly, changes will be made to the Small Business CGT concessions by making changes to the maximum net asset value test, the active asset test, the 15 year exemption, the small business roll-over and how the concessions apply to partnerships. These changes will occur to CGT events that happen in the 30 June 2007 income year and thereafter. (Clients contemplating selling an eligible business, may wish to consider holding off from such a sale until these measures are implemented in the next financial year.)

In addition, the current Small Business CGT concession test requiring a 50% controlling individual, will be replaced with a more user-friendly 20% significant individual test. The maximum net asset value test will be increased from $5million to $6million. However, note that the changes mentioned in this paragraph will apply from the start of the following financial year – ie - the year commencing 1 July 2007.

5 Distribution of Net Income by Australian Managed Funds & Custodians to Non-Residents
This is a very important measure for the managed fund industry as the current rules applying to Australian companies making payments to non-residents are inconsistent and confusing.

Under these measures, all Australian managed funds and custodians will withhold tax at the Australian company tax rate for income (other than for dividends, interest or royalties), distributed to non-residents, regardless of the identity of the non-resident.

Non-residents affected by this measure, will be able to lodge an Australian income tax return and claim a credit for the Australian tax withheld. We commend this measure as it greatly simplifies the existing tax rules on such payments to non-residents.

This measure will apply from 1 July, following the date of Royal Assent.

6 Venture Capital Incentives
Significant changes have been announced to the venture capital industry. The rules here are quite detailed, but the bottom line is that the existing venture capital limited partnership rules will be improved through a range of changes. In addition, a new investment vehicle to be known as an “early stage venture capital limited partnership” will also be introduced by the Government. This entity will provide follow-through tax treatment and exempt income both to revenue and capital distributions, received by domestic and foreign partners. Clients in this industry seeking further advice on these measures should contact their Nexia ASR advisor.

7 Other Business Tax Measures
There were quite a number of other business tax measures announced in the Budget. Briefly, these include the following:

• amendments to ensure that there is consistent tax treatment of all foreign dividends received by Australian companies:
• philanthropy measures to allow for tax deductions of publicly listed shares (that have been held for at least 12 months and are valued at $5,000 or less);
• a review of the full range of Government support measures for funding films in Australia, with the review to be conducted by October 2006;
• a number of GST measures:
• some limited changes to the Research and Development measures;
• employee share schemes, so as to extend the current concessions to stapled security arrangements from 1 July 2006;
• certain measures for the treatment of boat hire arrangements; and
• amendments to ensure that mining, petroleum and quarrying rights are treated in the same way as other depreciating assets under the uniform capital allowance regime.
  

C SUPERANNUATION

The Federal Government announced sweeping changes to superannuation and the pension asset tests in a bid to encourage older Australians to remain in the workforce.

The Treasurer released a consultation document titled ‘A Plan to Simplify and Streamline Superannuation’. It contains a number of significant proposals, including:

• Changes to the taxation of superannuation benefits as follows:
  - benefits paid over age 60 will not be subject to tax;
  - benefits paid before age 60 will be subject to taxation in largely the same manner as currently applies (but simplified by reducing the number of components);
  - reasonable benefit limits will be abolished;
• Age-based deduction limits will be abolished, and replaced with:
  - Deductible contributions up to a limit of $50,000 per person per annum will be taxed at 15%;
  - Undeducted contributions will be limited to $150,000 per year;
• Employers will receive a full deduction for all superannuation contributions they make for employees up to age 75;
• Self-employed taxpayers will be able to claim a deduction for all superannuation contributions, and they will be eligible for the Government co-contribution.

Over 50 Contribution Deduction Limits
As the current maximum deductible contribution for people age 50 and over is currently over $100,000, a transitional period is proposed whereby persons age 50 and over during the period 2007-08 to 2011-12 can have a maximum deductible contribution of $100,000 pa.

As you will note, the tax changes announced in the Budget are quite significant. We recommend that you meet with your Nexia ASR advisor as soon as possible to discuss how these changes affect you and your business.

Should you have any questions regarding the 2006 year Budget, please contact your Nexia ASR advisor.

For further information, please contact:

Kevin Mullen 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

Dennis Tomaras Partner – Taxation Advisory
Ph: 03 9608 0121 Email: dtomaras@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

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.

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