The 2007 Federal Budget

Despite all the media hype of the last few weeks, the 2007/2008 Federal Budget was reasonably unspectacular from the perspective of being a so called "election Budget". In fact, the over-hyped tax cuts were relatively modest and simply involved some minor adjustments at the margin.

Instead, we are left with a Budget that has a number of overall positive tax and superannuation changes - though none of these measures can be said to be "visionary". They are more a series of minor measures which often clarify the law, or rectify some past problems in the tax system.

As a result, cynics may be inclined to ponder whether there might be more tax cuts prior to the announcement of a federal election.

Irrespective of how the Australian electorate may view this Budget, Nexia ASR provides the following summary of the measures for our clients.

A PERSONAL INCOME TAX CUTS

1. New Individual Rates
As anticipated, the Government will provide tax cuts worth $31.5 billion over four years.

From 1 July 2007:

• the 30 per cent threshold will rise from $25,001 to $30,001.
• the low income tax offset will increase from $600 to $750 and will begin to phase-out from $30,000.

From 1 July 2008:

• the 40 per cent threshold will rise from $75,001 to $80,001
• the 45 per cent threshold will rise from $150,001 to $180,001

2. Low income tax offset
To assist low-income earners, from 1 July 2007 the low income tax offset will increase from $600 to $750 per year. In addition, the income threshold at which the offset begins to reduce will increase from $25,000 to $30,000. As a result, some offset can be claimed up to an income of $48,750 compared to $40,000 currently. Taxpayers with annual incomes between $25,000 and $48,750 will benefit from both the increase in the 30 per cent threshold to $30,001 and the increase in the low income tax offset.

Those eligible for the full low income tax offset will not pay tax until their annual income exceeds $11,000 (up from $10,000 currently).

3. Senior Australians Threshold Income Levels Increase
Senior Australians eligible for the senior Australians tax offset currently pay no tax up to an annual income of $24,867 for singles and $41,360 for couples (depending on the income earned by each member of the couple). The effect of the tax cuts is to lift these income levels up to $25,867 for singles and $43,360 for couples.

The Medicare levy threshold that applies to senior Australians will be increased to ensure that senior Australians do not pay the Medicare levy until they begin to incur an income tax liability.

4. The Dependent spouse rebate increased
The Government will increase the dependent spouse rebate from $1,655 to $2,100 with effect from 1 July 2007. The full dependent spouse rebate is available to a resident taxpayer who contributes to the maintenance of a resident spouse whose separate net income does not exceed $282. The rebate is reduced by $1 for every $4 by which the dependent spouse's separate net income exceeds $282. This measure will increase the separate net income at which the rebate is completely phased-out from $6,901 to $8,681.

5. Medicare Levy - Low Income Threshold Increases
The Government will increase the Medicare low-income thresholds to $16,740 for individuals and $28,247 for families, with effect from 1 July 2006. The additional amount of threshold for each dependent child or student will also be increased to $2,594.
The Medicare levy low-income threshold for pensioners below age pension age will also be increased. From 1 July 2006, the threshold will rise to $21,637.

6. Making it easier to complete income tax returns
The Government will provide additional funding of $20 million in 2007-08 to enable the Australian Taxation Office (ATO) to pre-fill electronic individual income tax returns for the 2007-08 and following income years.

In summary, the ATO will automatically include the following information in returns:

• salary, wages and allowances, where the employer has electronically lodged the employee's payment summary with the ATO;
• dividend and interest income and distributions from managed funds;
• payments from Centrelink, the Department of Education, Science and Training and the Department of Veterans' Affairs;
• Medicare out-of-pocket expenses and private health insurance information; and
• Higher Education Contribution Scheme and Higher Education Loan Programme details.

7. PAYG instalments paid annually when voluntarily registered for GST
In a positive measure, the Government will align the pay as you go (PAYG) payment and reporting requirements with the annual payment and reporting requirements for taxpayers who are voluntarily registered for GST, with effect from 1 July 2008.


Currently, taxpayers can remit PAYG annually only if they are not registered for GST and they meet other eligibility requirements. This measure will allow taxpayers who voluntarily register for GST, and who report and pay GST on an annual basis, to meet their PAYG obligations on an annual basis, subject to the other eligibility tests.

The measure will reduce the compliance costs of eligible taxpayers, as they will be able to lodge only one Business Activity Statement per year.

8. Simplified accounting methods - extending availability
Subject to the unanimous agreement of the States and Territories , the Commissioner of Taxation will have power to develop simplified accounting methods (SAMs) for all entities with an annual turnover of less than $2 million that make mixed supplies - taxable and GST-free - or mixed purchases, with effect from 1 July 2007.

B BUSINESS TAX CHANGES

The business tax changes announced in the Budget can be summarized as follows.

1. Company Loss Test Changes
As strongly rumoured, the Government has decided to remove the highly unpopular $100 million cap on the Same Business Test ("the SBT"), with effect from 1 July 2005.
The Government has also announced a number of "improvements" to the Continuity of Ownership Test ("COT") for company losses, including:

• defining the meaning of "voting power" in the context of the COT test; and
• ensuring the "entry history rule" for consolidated groups is disregarded in applying the SBT, with effect from 1 July 2002.

2. Consolidation Regime - Improvements
The Government has announced a series of measures to improve the operation of the income tax rules for tax consolidated groups.
The announcements include changes to the cost of setting rules, the CGT provisions and the uniform capital allowance rules (or "tax depreciation") rules.

3. R & D Concession for Foreign Owned Subsidiaries
This measure was announced last week on 1 May. In short, the Government will extend the so called "premium" 175% R & D tax concession to Australian subsidiaries of multinational groups where the resulting intellectual property is held overseas.

4. Venture Capital Enhancements
The Government has also announced a further relaxation to the eligibility requirements for foreign residents investing in venture capital limited partnerships and Australian venture capital funds, with effect from 1 July2007.

5. Forestry managed investment schemes - statutory deduction for investments
The Government will allow investors in forestry managed investment schemes (MISs) to claim immediate upfront deductions for their expenditure on such schemes, provided that at least 70 per cent of the expenditure is directly related to developing forestry. This measure will have effect from 1 July 2007.
The immediate upfront deduction for forestry MIS interests will be subject to rules designed to ensure the integrity of investments receiving the deduction and to address issues of tax symmetry between deductions and proceeds.

6. Finance Leasing Rules to Remain Unchanged
The Government has announced that it will not proceed with the proposed reforms to the tax treatment of finance leases between tax-paying entities. The Government had previously accepted the recommendation of the Review of Business Taxation to a sale and loan treatment of certain finance leases.

The Government has in the Federal Budget announced that it will not proceed with this recommendation. Therefore, the long-standing tax treatment of finance leases between taxable entities will remain undisturbed.

C SUPERANNUATION

The main changes to Superannuation can be summarised as follows:

1. Superannuation - transitional arrangements for personal contributions
The Government will introduce transitional rules for the acceptance of personal superannuation contributions for people who were aged 64 or 74 at any time between 10 May 2006 and 5 September 2006. Under this measure, personal superannuation contributions can be made between 10 May 2006 and 30 June 2007 by a person: aged 64 at any time between 10 May 2006 and 5 September 2006, without having to satisfy the work test; or aged 74 at any time between 10 May 2006 and 5 September 2006, as long as the work test is met in either 2005-06 or 2006-07.
Currently, these individuals would need to satisfy the work test - 40 hours in a consecutive 30 day period - in the year in which they make the contribution.

This measure will benefit individuals who, owing to the timing of the Simplified Superannuation announcements, may have inadvertently missed the opportunity to take advantage of the transitional arrangements for non-concessional contributions made before 30 June 2007.

2. Capital gains tax - extending small superannuation fund roll-over on marriage breakdown
The Government will allow one spouse in a marriage breakdown to transfer their entire in specie interest in a small superannuation fund to another complying superannuation fund, without there being an immediate capital gains tax (CGT) taxing point. This measure will have effect from 1 July 2007.

Currently, the CGT roll-over for assets of small superannuation funds on marriage breakdown applies only to the spouse who benefits from a payment split made under the Family Law Act 1975 and only to the assets subject to the payment split. These assets can be rolled over only to another small superannuation fund.

This measure will facilitate complete separation of superannuation assets for spouses in a marriage breakdown and provide greater choice of fund to the spouse whose interest is transferred.

D GST

1. Increasing the GST registration turnover threshold
Subject to the unanimous agreement of the States and Territories, the annual turnover thresholds for registration for the GST will be raised to $75,000 for businesses and to $150,000 for non-profit bodies, with effect from 1 July 2007.
As a result of this measure, businesses and non-profit bodies with a turnover between the present threshold ($50,000 or $100,000) and the proposed threshold ($75,000 or $150,000) will no longer be required to register for GST. Those that voluntarily register for GST will have the option of remitting GST annually, rather than quarterly or monthly.

Taxpayers choosing not to register for GST will be able to claim, against their business income, the GST-inclusive cost of deductible business expenses, rather than the GST-exclusive amount. They will not be able to claim fuel tax credits.

2. Increasing the threshold for requiring an approved tax invoice for GST
Subject to the unanimous agreement of the States and Territories, businesses will be allowed to claim input tax credits for purchases with a GST-exclusive value of $75 or less (currently $50 or less) without the need for an approved tax invoice, with effect from 1 July 2007.

E AUSTRALIAN FILM & TV INDUSTRY CHANGES

As part of the Federal Budget, Senators Coonan and Brandis have announced a package of measures for the Australian film and television industry. First, the popular Divisions 10B and Division 10BA will be phased out and replaced. No new projects will be eligible for these rules from 30 June 2007.

The replacement to these divisions will be a new "Producer Rebate" comprising of;
- a 40% of eligible Australian expenditure rebate for qualifying feature films; and
- a 20% of qualifying expenditure rebate for television productions.

In addition, a new agency - to be known as the Australian Screen Authority - will be created and this body will incorporate the AFC, the FFC and the FAL, from 1 July 2008.
A new Location Rebate will replace the Refundable Film Tax Offset. This will be increased to 15% for certain costs in Australia for projects valued over $5 million. This measure will also apply from 1 July 2007.

Finally, the Film Licensed Investment Company scheme will not be renewed beyond 30 June 2007.

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.

For further information, please contact:

	Kevin Mullen Managing 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
	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
	Peter Zervos Principal Ph: 03 9608 0167	Email: pzervos@nexiaasr.com.au

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