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Budget comment 2009

We have extracted a few elements form the Federal Government budget for 2009/10, announced tonight (12/5/09). 

The following items are details, with our comments to follow.  The big picture, not covered below, is the extraordinary arrogance that governments (of all political persuasions: this is not a political comment) continue to show to their employers (us, the taxpayers, remember).  The budget website is a wonderful display of graphs and numbers and projections (well, that is, if you get excited by numbers).  The unnerving aspect of it all is, though, if they can predict the future with such precision, down to decimal point accuracy, how come they missed the biggest shock to Australia’s economy, and the world economy, since the Great Depression?  Can we really trust the weather forecasters, when they missed the greatest fires/floods/droughts in living memory?

Budgets are predictions: nothing more than that.  If the expenditure side remains unchanged, while the revenue side takes a hit for any reason, then the Government needs to borrow.  That means the bill for today’s expenditure is on-handed to someone, tomorrow.  Do we want to be known as the generation that spent now, and didn’t pay later (we left that to our grandchildren)?

So, now for the detail, courtesy of Thomson Reuters, with a few comments thrown in:

Small business

Changes to Small Business and General Business Tax Break

The Government has announced that it will increase the rate of the one-off bonus tax deduction available to small businesses under the Small Business and General Business Tax Break to 50% where a small business acquires an eligible asset between 13 December 2008 and 31 December 2009, and the asset is installed or ready for use by 31 December 2010.

Previous rates

The rate of the bonus deduction as initially introduced was either 30% or 10% depending on the time of acquisition of an eligible asset. If a small business acquires the eligible asset between 13 December 2008 and 30 June 2009, and the asset is ready for use by 30 June 2010, the rate is 30%. Where the small business acquires the eligible asset between 1 July 2009 and 31 December 2009, and the asset is ready for use by 31 December 2010, the rate is 10%.

DR comment:  excellent news for foreign manufacturers of equipment to be purchased in Australia.  For the rest of us:  if you need to replace equipment, replace now.  But, and this is a DR Tax principle: if you don’t need to spend, don’t be induced by a tax deduction to spend.  It has always been Government advice not to be taken in by the touted tax benefits of an “investment”: but of course, that only applies to schemes that are not being touted by the Government.
And yes, I am very happy for the tax deduction attributable to the laptop on which I am tapping out this missive.
And yes, this is a real bonus for all of you who had decided to buy new equipment on the basis of the proposed 30% deduction.  But remember, not even the 30% measure has passed through parliament yet.

Superannuation

Concessional contributions caps cut to $25,000 from 2009-10The Government will cut the superannuation concessional contributions cap to $25,000pa (from $50,000pa) from the 2009-10 financial year. This cap will be indexed.

The transitional concessional contributions cap for those aged 50-74 (applicable to the 2009-10, 2010-11 and 2011-12 financial years) will be cut to $50,000pa (down from $100,000pa). The transitional cap is not indexed. From 1 July 2012, the concessional contributions cap for those aged 50 and over will revert to the lower $25,000 cap (or applicable indexed amount at that time).

The Minister for Superannuation and Corporate Law, Senator Nick Sherry, said the changes will impact on less than 2% of those making concessional superannuation contributions. Senator Sherry also said this measure is estimated to save approximately $2.8bn over the forward estimates period.

Grandfathering arrangements

The existing “grandfathering” arrangements that apply to certain members of defined benefit schemes in relation to the concessional contributions cap will continue. These arrangements will also be extended to certain persons who were members of defined benefit schemes on 12 May 2009.

Non-concessional contributions cap unchanged

The non-concessional contributions cap will remain at $150,000 for the 2009-10 financial year (or $450,000 over 3 years). In the future, the non-concessional contributions cap will only increase when the new lower $25,000 cap is increased by indexation. It will be calculated as 6 times the level of the (indexed) concessional contributions cap.

DR comment: I like the idea of “grandfathering arrangements” – and all things “grandfather” – but not many will benefit from this one.
Generally: super is increasingly on the nose as a retirement strategy.  Effect of this budget measure?  First thought: the scare tactics of the press of the last two days (quick, tip in your money now, today,  before the door closes)  are exposed for what they are as a cheap sales pitch.  And, bravo to the Treasurer for announcing a substantial change with a reasonable lead time.
Downside: super is on the nose.  Reduced incentives to contribute = reduced contributions = less money flowing into the stock market = fall in value of said sharemarket = reduction in value/attraction of superannuation = increased reliance on government  support via pensions = intention of this measure (the last part of my analysis is conjecture, perhaps tinged with a smidgeon of bias…)
Upside: if you are prepared to discount my ravings above, there is a window between now and 30/6 to maximise  your contributions.

Health insurance

Private health insurance rebate and surcharge changesThe Government announced that high income earners will receive less Government payments for their private health insurance, but will face an increase in costs should they opt-out of their health cover.

From 1 July 2010, the Government will introduce what it calls 3 new “Private Health Insurance Tiers” – so that, in the Government’s words, “higher income earners receive less ‘carrot’ and more ‘stick’ to be insured”:

  1. Tier 1: for singles earning more than $75,001 (couples $150,001), the Private Health Insurance Rebate will be 20% for those up to 65 years (25% for those over 65, and 30% for those over 70 years). The stick: The Surcharge for avoiding private health insurance will remain at 1%.
  2. Tier 2: for singles earning more than $90,001 (couples $180,001), the Private Health Insurance Rebate will be 10%, for those up to 65 years (15% for those over 65, and 20% for those over 70 years). The stick: The Surcharge for avoiding private health insurance will be increased to 1.25%.
  3. Tier 3: for singles earning more than $120,001 (couples $240,001), no Private Health Insurance Rebate will be provided. The stick: The Surcharge for avoiding private health insurance will be increased to 1.5%.

All income thresholds would continue to remain indexed to wages.

For low and middle-income earners, the existing 30, 35, 40% Private Health Insurance rebates will remain in place.

Source: Budget Paper No 2 [pp 310-311]; Joint press release by the Treasurer and the Minister for Health and Ageing, 12 May 2009

DR comment: Q: why is health care such an expensive service? A: subsidies – whether government payments or insurance.  Remove subsidies, and we will find out what things really cost… now, back to reality:
The surcharge is an attempt to match cost with ability to pay. There is a trade off in these measures: the reduction in rebates for those who choose to stay in private health cover; and the increase in the surcharge for those who stay out.  You will need to do the numbers to work out how this affects you in the short term: but make sure you look to the long term as well.
If this measure means that more people take the economic decision to leave private hospital cover (and that is not foregone – the measures seem to be pitched to ensure that the pain of leaving will just exceed the pain of remaining) then there will be a greatly increased strain on the public hospital system.  Economic effect: more tax (or more likely, more borrowing, which means ultimately more tax for our grandchildren.  Maybe our grandchildren won’t like us as much when they are served with the bills for all of this… )

Foreign income

New tax arrangements for foreign employment incomeThe Government has announced new arrangements for taxing foreign employment income.

Currently, Australian residents working overseas for over 90 consecutive days are eligible for a general income tax exemption (under s 23AG of ITAA 1936) which means that they do not pay any Australian income tax on their foreign employment income. Under the new measures, foreign employment income will generally be taxable, but taxpayers will be entitled to a tax offset for foreign tax paid on the foreign employment income.

The present general exemption will continue to be available for income earned by an Australian resident as:

  1. an aid or charitable worker employed by a recognised non-government organisation;
  2. a government aid worker; or
  3. a specified government employee (for example, defence and police force personnel deployed overseas).

Income earned by an individual employed on an overseas project approved by the Minister for Trade as being in the national interest will remain exempt, as provided for by existing rules (s 23AF of ITAA 1936).

Source: Budget Paper No 2 [p 19]; Treasurer’s media release, 12 May 2009

DR comment: this will affect a number of our clients.  If you currently receive exempt foreign service income, you are potentially caught by this changed measure.   We will consider the effects of this proposal, and advise you or your employers of the steps you need to take to minimise its effects.

 

Charities

Govt announces its interim response to High Court decision in Word Investments caseIn the 2009 Budget, the Assistant Treasurer announced the Government’s interim response to the High Court’s decision in FCT v Word Investments Ltd [2008] HCA 55 (reported at 2008 WTB 51 [2302]). The High Court handed down its decision on 3 December 2008. Two issues were resolved in favour of the taxpayer and contrary to longstanding ATO tax rulings:

  1. commercial businesses with charitable objects that direct their profits to charities are eligible for endorsement by the ATO as tax concession charities and therefore have access to a number of tax concessions; and
  2. charities are considered to be pursuing their objectives principally “in Australia” if they merely pass funds within Australia to another charity that conducts its activities overseas.

Passing funds to overseas charities

The Government said it will amend the “in Australia” requirements in Div 50 of the ITAA 1997 “to ensure that Parliament retains the ability to fully scrutinise those organisations seeking to pass money to overseas charities and other entities”. This measure will have effect from the date of Royal Assent of the amending legislation.

The change will reverse the decision that charities and other income tax exempt entities can direct funds to overseas projects outside the current restrictions. The measure will reinstate the principles underlying the current integrity rules. The Assistant Treasurer said the proposed changes will be subject to public consultation.

DR comment: this is the Governments’ word on Word.  Principle: the High Court may rule, but the Government will over-rule.  So, why do we need a High Court? The point is that tax legislation is not about “fairness”or “justice”, but about revenue. How comforting it is to know that “Parliament will scrutinise those organisations…” Only one   organisation will be allowed to support needy people overseas: not you, not any association of people like you; but only the Government of the day. Sad day… 
That’s all for now..

 

Tax Bonus Breaking News

3-4-09 – The High Court has this morning ruled that the Tax Bonus, of up to $900, is valid. The reason for the descision had not yet been released.

For now that means that payments will be delivered, beginning on Monday 6 April.

If you have not yet lodged your income tax return, you have until 30 June to do so and still be eligible for the payment. The Tax Office have advised that prior year outstanding returns, or any other outstanding tax matters will not cause a delay, as the legislation provides only that it relates to 2008 income tax returns.

If you need to get your return lodged, make an appointment now!

19-3-09 – Today we read that there is to be a constitutional challenge to the legality of the $900 tax bonus. The High Court has agreed to hear a challenge on March 30 and 31.
This is a new twist. The economic merits of the proposal are debateable, at best. (Recall that the US government sent out $600 cheques last year – and how much good that did…) This is a legal test. If it gets up, the so-called economic stimulus package will be dead in the water.

Moral of the story: don’t count your chickens before they hatch. My guess is that they will hatch, but this is going to produce some interesting debate. Stay tuned…

Tax Bonus

The Bill for The Tax Bonus for Working Australians received Royal Assent on 18 February. That means it is now law. Many people are wondering if they will be entitled to the bonus. For a quick check, click here. The other question is, how much? There is a graduated scale of payments:

$900 if your income is up to $80,000

$600 if your income is between $80,000 and $90,000

$250 if your income is between $90,000 and $100,000

And nothing if your income is over $100,000

In order to receive the bonus, you must have your 2008 tax return lodged by 30 June 2009 at the latest.

One further nice touch is that if you have a tax debt, the bonus will not be offset against it. You will receive the bonus as a cash payment, irrespective of any other liabilities you may have. (They want you to spend it, you see…)

It will be paid in the same way as your tax refund (if any) was paid last year. If you want to change that, for example to give the Tax Office your bank account details, you can phone them on 1300 686 636. Make sure you do this if your refund was paid into our trust account last year. That will ensure that the refund comes direct to you, rather than the delay (and cost!) of passing it through our account.

Small Business Tax Break

Draft legislation for the Small Business and General Business Tax Break was released on 25 February. Note that it is not law yet. The draft legislation is out for submissions until 10 March. We should expect it to be passed very soon after that. The legislation provides for a temporary 30% investment allowance for eligible capital investments of $1,000 or more – that is, for equipment used in the business. Be careful if you intend to finance any equipment, though, as the allowance will only be available “where a business acquires an eligible asset”. That word “acquires” is important – on the face of it, a leased asset will not qualify. This may be one area that will be amended in final legislation, but don’t count on it. If you are looking to buy equipment to take advantage of this provision, and you need finance, make sure that you take a loan or a chattel mortgage.