Archived News - 2006
2006-05-10
Budget 2006 Overview
The Treasurer, Peter Costello delivered the 2006-07 Commonwealth Budget on 10 May 2006 announcing a significant range of initiatives and strategies aimed at reducing disincentives to work, save and invest in Australia. The key Budget tax initiatives are:
- Significant reductions in personal income tax rates, that are worth more than $36.7 billion over four years.
- Increased financial support for Australian families worth $1.5 billion, including increased family tax benefits and child support;
- Fundamental and long overdue reform of Australia's superannuation tax rules;
- Tax simplification and tax reductions for small business worth $435 million;
- Fringe Benefits Tax reform, the most important being the cut in the FBT rate from 48.5% to 46.5%;
- Provision to revoke or vary Family Trust Elections; and
- Increase in the Dimishing Value depreciation rate from 150 percent to 200 percent for all eligible assets acquired on or after 10 May 2006.
The above initiatives will have a number of impacts on current salary packaging strategies.
Personal Income Tax Cuts
The show stopper's from last night's budget were further individual tax relief of some $36.7 billion over four years as well as announcements to simplify and streamline superannuation worth in excess of $6 billion over the next four years.
The Treasurer has delivered significant personal income tax cuts in addition to the reductions announced in the 2005-06 Budget. The top personal tax rate will be reduced to 45% (46.5% including Medicare Levy) and will only apply to income in excess of $150,000. The table below details the new scale of rates.
| Current tax thresholds income range($) | Tax rate% | Thresholds announced in 2005-06 income range($) | Tax rate% | New thresholds 2006-07 income range($) | Tax rate% |
|---|---|---|---|---|---|
| 0 - 6,000 | 0 | 0 - 6,000 | 0 | 0 - 6,000 | 0 |
| 6,001 - 21,600 | 15 | 6,001 - 21,600 | 15 | 6,001 - 25,000 | 15 |
| 21,601 - 63,000 | 30 | 21,601 - 70,000 | 30 | 25,001 - 75,000 | 30 |
| 63,001 - 95,000 | 42 | 70,001 - 125,000 | 42 | 75,001 - 150,000 | 40 |
| 95,001 + | 47 | 125,001 + | 47 | 150,001 + | 45 |
In addition, the low income tax offset will be increased from $235 to $600 and will begin to phase out from $25,000. Those eligible for the full low income tax offset will not pay tax until their annual income exceeds $10,000 (up from $7,567 currently).
As a result of the increase in the low income tax offset from $235 to $600 it will be possible for minors (children less than age 18 years) to receive more than $1,000 of income tax free each financial year.
CHANGES TO FAMILY TAX BENEFIT PART A
Eligibility for the maximum rate of Family Tax Benefit Part A is being extended to families with an annual income of up to $40,000 (currently $33,361) from 1 July 2006.
The Large Family Supplement of $248 a year will be extended to eligible families with 3 children from 1 July 2006.
A one-off payment of $102.80 will be provided by 30 June 2006 to each household eligible for the Utilities Allowance and to each self-funded retiree eligible for the Seniors Concession Allowance.
Eligibility for the Utilities Allowance and the one-off payment is being extended to Mature Age Allowance, Partner Allowance and Widow Allowance recipients.
A $1,000 one-off payment will be made to recipients of the Carer Payment and a $600 one-off payment will be made to recipients of the Carer Allowance by 30 June 2006.
SUPERANNUATION
The Federal Government has announced sweeping changes to the taxation of superannuation. If the changes are legislated as announced, the Government will have effectively managed to reduce the overall taxation of superannuation without introducing such complexities as grandfathering and significant transitional rules making superannuation easier to understand. In addition, the Government will have removed the current superannuation contribution inequities facing self-employed persons and removed the need for some Australians to seek financial planning advice.
The key announcements, to be effective from 1 July 2007, cover:
- contributions including the deductibility and taxation of contributions;
- benefit payments; and
- the taxation of benefits including employer termination payments and death benefits.
Tax rules for contributions
- removal of the age-based deduction limits for employers and self-employed individuals;
- taxation of contributions in the hands of superannuation funds based on a $50,000 deductible amount per individual per year (transitional provisions will apply for those aged 50 and above), with contributions over the limit being taxed at the top marginal rate;
- capping of additional undeducted contributions into superannuation funds; and
- the eligibility for the Government co-contributions for self-employed individuals.
Changed rules for benefit payments
- eliminating requirements to withdraw benefits from the superannuation system; and
- simplification of the rules relating to pensions and the minimum pension payments.
New tax treatment of benefits
- abolition of the reasonable benefit limits (RBLs);
- tax exempt lump sum benefits and pensions received on or after age 60 from a taxed superannuation fund. Special rules will apply where the benefits are paid from an untaxed superannuation fund;
- simplified taxation of benefits received by members under age 60;
- modification of the taxation rules relating to employer eligible termination payments; and
- modifications to the taxation of death benefits including reversionary pensions.
SMALL BUSINESS CGT AMENDMENTS
The Treasurer has announced that the Government will implement all but one of the recommendations of the Board of Taxation's post implementation review of the small business capital gains tax (CGT) concessions.
The Treasurer said that the amendments will ensure that the concessions are simpler, clearer and fairer. They will also reduce compliance costs for small business.
The Government will improve the operation of the small business CGT concessions by making changes to the maximum net asset value test (from $5m to $6m), the active asset test, the 15-year exemption, the retirement exemption, the small business roll-over, and how the concessions apply to partnerships.
In addition to these amendments, the Government will provide improved access to the concessions by replacing the current 50% controlling individual test with a more generous 20% significant individual test. The significant individual test will be able to be satisfied either directly or indirectly through one or more interposed entities.
These measures will apply to CGT events that happen in the 2006-07 and later income years.
FRINGE BENEFITS TAX REFORM
Extension of the in-house benefit concession
As of 1 April 2007, the in-house benefit concession which allows for up to $500 in taxable value to be treated as exempt from FBT will be increased to $1,000. This will result in no FBT liability arising for inhouse fringe benefits where the taxable value does not exceed the new $1,000 threshold.
Minor fringe benefits exemption
From 1 April 2007 the exemption threshold which applies for the provision of minor fringe benefits will increase from $100 to $300. There will still be a requirement to ensure such benefits are provided on an infrequent and irregular basis.
Changes to the reportable fringe benefits exclusion threshold
From 1 April 2007 the threshold for reportable fringe benefits will increase from $1,000 to $2,000. However, there appears to be some clarity required around these measures as the Budget papers report that the new threshold of $2,000 applies to 'grossed-up fringe benefits' rather than $2,000 in taxable value of fringe benefits.
Reduction in FBT rate
As of 1 April 2006, the FBT rate will be reduced from 48.5% to 46.5% in order to align with the reduction in the highest marginal income tax rate which applies from 1 July 2006. There will therefore be a three month period in which the FBT rate will not align to the highest marginal income tax rate.
One aspect of the budget that is likely to disappoint corporate Australia is that there is no reform of fringe benefits tax in relation to the limited exemption for child care, which has constrained the manner in which employers could support parents returning to the workplace. Extending the FBT exemption for child care would have provided a tool for employers to provide child care as a fringe benefit, thereby supporting their employees. It would also have made child care more affordable for working parents, providing them with the opportunity to salary package child care, by paying for the cost from pre-tax salary.
FAMILY TRUST ELECTIONS
Changes will be made allowing family trust elections to be revoked or varied in certain limited circumstances. The Treasurer said that as there is currently no provision for family trust elections to be revoked, this will increase flexibility. The definition of the family group will be broadened to include lineal descendants, and certain changes in family circumstances will be recognised for the purposes of exempting distributions from family trust distribution tax. This measure complements the changes made by the Government in the 2004-05 Budget which also increased the flexibility of family trust elections.
SALARY PACKAGING STRATEGIES
The decrease in the top marginal tax rate and the increase in the threshold from which it applies to $150,000 will decrease the benefit of current salary packaging arrangements for many employees who will no longer be taxed at the top marginal tax rate from 1 July 2006.
Even concessionally treated benefits such as cars will become less attractive to employees no longer taxed at the highest marginal rate. If employers wish to continue to offer attractive salary packaging arrangements, they may want to consider implementing FBT contribution approaches which allow employees to effectively pay FBT at their marginal tax rate.
Should you require any further information or assistance in relation to any of the above Budget announcements please do not hesitate in contacting either Michelle Pearce or Kathryn Norris on (02) 9555 1309.
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