Federal Budget Update 2005/2006

Following the handing down of the Federal Budget last night and the Victorian State Budget last week, we report some of the highlights from the respective budgets that we believe will impact on many of our clients.

Personal income tax rate cuts

The Government has announced tax cuts to be phased in over the next two years as reflected in the following table:

The revised tax rates will deliver most benefit to taxpayers earning in excess of $58,000. The increase of the upper tax thresholds will move Australia into a much more favourable position in the OECD comparative taxation rankings and will assist many of our clients.

Some relief is available for taxpayers at the lower end of the scale with the reduction in the 17% rate to 15%. Taxpayers who are eligible for the full low income tax offset will not pay tax until their annual income exceeds $7,567 (up from $7,382 currently). Senior Australians who receive the Senior Australians Tax Offset will also be able to earn more income without paying tax. Singles will be able to have taxable income up to $21,968 (up from $20,500) and couples up to $36,494 (up from $33,612), depending on the income earned by each party before tax will be payable.

Abolition of superannuation surcharge

The Government announced that it will abolish the superannuation surcharge from 1 July 2005. As a result, the surcharge will no longer apply in respect of superannuation benefits that accrue, contributions made, or termination payments received, from that date.

This will restore some of the attraction of superannuation and will encourage many people to maximise their superannuation benefits and enhance their retirement provision.

Splitting of superannuation contributions between couples

The Government had previously announced that it would enable the splitting of superannuation contributions between spouses to be effective from 1 July 2004. However the budget papers reveal that this will be deferred and will now operate from 1 July 2006.

Business “blackhole” expenditure

The Government has announced that it will provide additional tax deductions for so-called “blackhole” expenditure (being legitimate business expenditures not currently recognised in the tax system). The new measures will:

	permit deductions for capital expenditures incurred by businesses that are carried on for a taxable purpose
	provide deductions for certain pre-business expenditures incurred by existing businesses and
	recognise these expenditures in a new provision that will only apply where the expenditures do not have tax treatment, or are denied a deduction, elsewhere in the tax laws. Therefore, the new provision will be a provision of last resort.

Some blackhole expenditures will be recognised by increasing the range of expenditures that form the cost base of an asset for capital gains tax purposes.

The new provisions are to apply to expenditures incurred on or after 1 July 2005 and will be able to be written off on a straight-line basis over five years.

Abolition of the foreign loss and foreign tax credit quarantining rules

Some clients will benefit from the government's announcement that it will remove the requirement for taxpayers to quarantine foreign losses from domestic income. Also, the need for these taxpayers to quarantine their foreign losses and foreign tax credits (FTCs) into separate classes will be removed.

The changes will apply to foreign losses and FTCs arising in income years commencing on or after the date the legislation receives Royal Assent.

The press release also sets out some changes in regard to loss quarantining and controlled foreign companies.

These changes will remove some of the complications and impediments associated with doing business abroad.

State tax issues

The Federal Government has shown a willingness to continue with tax reform. The strong economy also brings GST revenues to the states that are well above expectations. The Federal Government is maintaining its pressure on the States to continue tax reform at the state level.

The Institute of Chartered Accountants in Australia (ICAA) in its indirect taxes policy has called upon the States and Territories to abolish all stamp duties identified for removal under the Intergovernmental Agreement (where this has not already occurred).

Last week’s State budget saw some relief that will impact business and individuals. In particular:

	The bank debits tax will be removed with effect from 1 July 2005. This was originally part of the new tax system reform agenda and it is pleasing to see the State honour this commitment.
	The land tax rates have been reformed to bring about some relief due to rising land prices.

Published : 11 May 2005