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Setting Australia's direction
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The new Federal Government has handed down its first Budget, and in keeping with its promise to be fiscally responsible, the Budget shows a strong cash surplus of $21.7 billion for the 2008-09 financial year. A key feature of the Budget is a package of tax measures targeted at assisting families with expenses such as education and child care while at the same time also ‘means testing’ various Government payments such as the Baby Bonus and Family Tax Benefit Part B. The Budget also offers assistance to first home buyers through targeted savings accounts. Read more | | | |
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Future tax system review
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The Government has announced that it will provide $10 million over two years so that a comprehensive review of Australia’s tax system can be conducted. The review is to recommend a tax structure that positions Australia to deal with the demographic, social, economic and environmental challenges of the 21st century and enhance Australia’s economic and social outcomes. Read more |
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Capital Gains Tax: Scrip for Scrip Rollovers
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‘Scrip for scrip’ rollovers allow a company to acquire shares in another company by issuing shares in itself without triggering Capital Gains Tax for the shareholders in the target company. Read more |
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Taxation of Financial Arrangements
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Reintroduction of TOFA Stages 3 and 4
The Government plans to proceed with Taxation of Financial Arrangements (TOFA) Stages 3 and 4 which represent the final stages of the TOFA reforms. The Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 (2007 TOFA Bill), which was introduced into Parliament last year, contained the TOFA Stages 3 and 4 measures. The Bill lapsed when the 2007 Federal election was called.
Specifically, TOFA Stages 3 and 4 measures will introduce new tax rules for accruals/realisation, fair value, retranslation and reliance on financial reports and hedging. They contain rules covering tax treatments for certain financial arrangements which will achieve compliance cost savings by allowing eligible taxpayers to make use of particular aspects of the accounting standards to determine their taxable income from financial arrangements.
The rules apply to ‘financial arrangements’ which very broadly, are defined as ‘cash settlable’ rights/obligations to receive/provide a financial benefit. The key is to identify whether a ‘financial arrangement’ exists because a gain or loss arising under a financial arrangement is subject to the various elective methodologies that may be adopted in determining how a gain or loss is recognised for tax purposes. Examples of financial arrangements may include debt instruments (loans, bond, notes, securities); derivative arrangements such as swaps, forwards and options; and certain hybrid arrangements.
TOFA Stages 3 and 4 is designed to modernise the tax-timing treatment of financial arrangements by introducing methodologies in determining the tax recognition of the timing of gains and losses of financial arrangements. The legislation will apply for income years commencing on or after 1 July 2009. The elective commencement date of 1 July 2008 contained in the 2007 TOFA Bill will not apply.
BDO Kendalls’ comment
The proposed TOFA Stages 3 and 4 rules potentially deliver compliance savings for companies in the financial services, mining and resources industry. Companies will need to assess whether various taxation elections should (or should not) be made to align the taxation treatment of gains and losses arising from financial arrangements to the accounting treatment. This will entail undertaking a cost-benefit analysis of adopting a methodology that delivers compliance savings but, at the same time, potentially resulting in the taxation of unrealised gains and losses that could have adverse cash flow implications.
Further, BDO Kendalls recommends corporate taxpayers revisit their accounting systems and consider whether adjustments will be required to accounting numbers to determine the correct amount that should be reflected in a tax return. Obviously, the linkage between tax and accounting will also mean that greater communication is needed between an in-house tax function and the accounting function to identify the appropriate tax treatment of financial arrangements.
Debt/Equity: Upper tier 2 hybrid instruments
The Government will proceed with measures that clarify the tax treatment of certain Upper Tier 2 and similar instruments. In particular, regulations will be made to facilitate debt tax treatment for certain Upper Tier 2 and similar capital instruments issued by authorised deposit-taking institutions (ADIs) that are banks or non-mutual building societies. The Government will also extend the debt/equity transitional arrangements under the income tax law to 1 July 2008 to ensure that the law preceding the debt/equity tax rules continues to apply for Upper Tier 2 instruments.
By way of background, Division 974 of the Income Tax Assessment Act 1997 contains rules to determine what is equity in a company and what is debt in an entity for tax purposes with effect from 1 July 2001. Transitional rules existed for amounts paid on all interests issued before 1 July 2001. The law as it existed prior to 1 July 2001 continued to operate in relation to those interests until 1 July 2004 unless:
• the terms of the interest were materially altered
• the interest was rolled over
• the original term of the interest was extended, or
• the issuer elected that the new debt and equity rules applied. This transitional election must have been lodged with the Tax Office, generally by 31 December 2001.
The debt and equity tests determine whether a return on an interest in an entity may be frankable and non-deductible (like a dividend), or may be deductible to the entity and not frankable (like interest payments).
BDO Kendalls’ comment
In determining what is a debt interest, the rules use a single organising principle – the effective obligation of an issuer to return to the investor an amount at least equal to the amount invested. This new debt/equity test effective from 1 July 2001 has regard to the substance of the arrangement, and is not based purely on legal form, which is what the pre 1 July 2001 law is based on. The extension of time for the application of the debt/equity transitional provisions applying to certain capital raising hybrid instruments (known as Upper Tier 2 instruments) will allow further time for consultation and development of an Upper Tier 2 regulation. Under this transitional provision, the pre-1 July 2001 law will continue to apply to these instruments. It will also apply to entities that have undertaken to comply with the capital adequacy requirements issued by the Australian Prudential Regulation Authority.
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Current election of taxation treatment
Under the current law, a taxpayer may elect to be assessed on any discount received on employee shares or rights in the income tax year in which the shares or rights are acquired. Read more | | | |
Managed Investment Trusts: Final withholding tax
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Distributions of income from Managed Investment Trusts (MITs) to non-residents (apart from interest, dividends and royalties) are currently subject to a non-final withholding tax of 30%. New rules will ultimately replace this with a final Withholding Tax of 7.5% on these distributions, and the rules will cover distributions made directly from MITs to foreign residents as well as distributions made through other intermediaries (including custodians). Read more |
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Managed funds: Changes to the eligible investment rules
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As part of the Government’s policies to attract international investment in Australian managed funds and to maintain the competitive neutrality between businesses conducted by companies and trusts, the 2009 Budget announces measures to clarify the application of the ‘public trading trust’ rules contained in Division 6C of the Income Tax Assessment Act 1936. Read more |
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Depreciation of computer software
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The Government will increase the period over which capital expenditure on in-house computer software is depreciated. Read more |
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Family Trusts: Reversing the concessions
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The Budget announcement followed up on the current Government’s election promise to wind back the increased flexibility of family trusts enacted by the former Government. Family trusts that have appointed inappropriate Read more |
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Capital Gains Tax: Small Business Concessions
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The Government has announced that it will extend small business capital gains tax (CGT) concessions to partners in a partnership and entities owning CGT assets used by a related entity where the partnership or related entity passes the small business entity test. Read more |
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Superannuation: Easing the administrative burden
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Superannuation Clearing House Facility
The Government will provide $16.1 million to the Australian Taxation Office to fund a Superannuation Clearing House Facility from 2009-10, to assist managing employers’ obligations to provide superannuation choice to employees. A Superannuation Clearing House allows an employer to pay their contributions to a single location. The clearing house will then distribute the contributions to the superannuation funds chosen by each employee. Read more |
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Fringe Benefits Tax
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The Budget measures on Fringe Benefits Tax (FBT) are by and large ‘integrity measures’ to combat what the Government perceives as an erosion of the fairness of the FBT system through tax planning arrangements and changes in technology. Read more |
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GST: Key issue
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Increased integrity measures surrounding the sale of real property, the GST-free status of international telecommunications and abandoning the previously announced package of GST relief for charities are the key GST issues arising from the 2008/09 Federal Budget. In addition, the GST refund provisions will be amended to clarify their operation and to restore the intended four year time limit on refunds. Read more |
Expansion of the Export Market Development Scheme
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The Treasurer announced an expansion of the popular Export Market Development Scheme, committing an extra $50 million in 2009/2010. The increased funding is in addition to the broadening of the eligibility criteria which takes effect from 1 July 2008. This measure is likely to have the effect of opening up the scheme to many previously ineligible companies. Read more |
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Customs duty & excise changes
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The Government has indicated that a number of changes will occur in respect of the customs duty and excise regime. Read more | | | |
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Luxury Car Tax changes
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As was widely tipped, the Government has indicated that the Luxury Car Tax (LCT) rate will increase effective 1 July 2008. Read more |
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Personal Income Tax
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In recognition of the increased financial pressures and rising living costs for families, the Government will deliver in full the previously announced:
• Personal income tax cuts;
• Increase in the low income tax offset;
• Increase in thresholds for the Senior Australians Tax Offset; and
• Increase in Medicare Levy Surcharge thresholds. Read more |
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Means-testing for Government support
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The Government will expand the definition of ‘income’ used to determine eligibility for Government support programs. According to the Government the changes are designed to make income tests for assistance programs fairer and better targeted to those in need. Read more |
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First Home Saver Account
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Assisting Australians save larger deposits for first homes
The Government announced changes to the proposed First Home Saver Accounts (FHSA) regime following the consultation process around the discussion paper released on 8 February 2008 and the issues identified as a result. Read more |
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Capital protected borrowings
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As part of the Budget, the Government has announced changes to the benchmark interest rate used to determine the capital component of capital protected borrowing arrangements. Read more |
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Removal of differential treatment of same sex couples and their children
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The Government has announced that it plans to remove differential treatment of same-sex couples and their children from Commonwealth laws in many areas including taxation. In relation to taxation, all legislative changes are expected to take effect on 1 July 2009 with the exception of Fringe Benefits Tax (where the amending legislation will apply from 1 April 2009). Read more |
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Increased funding for the ATO
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The Government has announced that it will provide additional funding of $257 million over four years from 2008-09 to the Australian Taxation Office (ATO). The purpose of the additional resources is to enable the ATO to improve compliance activities, particularly for large businesses and high wealth individuals. The additional cost of the compliance activities is expected to increase revenue by $2 billion over four years. Read more | | | |
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Budget gives Australia green light
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Labor’s first budget has provided Australian businesses and households with a range of grants, subsidies and incentives aimed at tackling the issue of climate change. Read more |
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Holding pattern for innovation
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There were no surprises in the Federal Budget with respect to the Government’s innovation programs. Read more | | | |
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