Federal Budget 2005

Personal income tax cuts

From 1 July 2005, the lowest personal income tax rate will be reduced from 17% to 15%. The 42% tax rate threshold will be increased from $58,001 to $63,001 (as announced in the 2004/05 Budget). The 47% threshold will be raised from $70,001 to $95,001 (as opposed to $80,001 as announced in the 2004/05 Budget).

From 1 July 2006, the 42% threshold will be raised to $70,001. The 47% threshold will be raised to $125,001.

The new tax scales will be as follows:

Current tax thresholds  Income range ($)	Tax rate %	New tax thresholds from 1 July 2005  Income range ($)	Tax rate %	New tax thresholds from 1 July 2006 Income range ($)	Tax rate %
0 - 6,000	0	0 - 6,000	0	0 - 6,000	0
6,000 - 21,600	17	6,000 - 21,600	15	6,000 - 21,600	15
21,601 - 58,000	30	21,601 - 63,000	30	21,601 - 70,000	30
58,001 - 70,000	42	63,001 - 95,000	42	70,001 - 125,000	42
70,001 +	47	95,001 +	47	125,001 +	47

As a result, taxpayers eligible for the full low income tax offset will not pay tax until their annual income exceeds $7,567(up from $7,382 currently).

Taxpayers who receive the Senior Australians Tax Offset will be able to have taxable incomes up to $21,968 for singles (up from $20,500) and $36,494 for couples (up from $33,612 and depending on the income earned by each member of the couple).

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

Abolition of the superannuation surcharge

The surcharge payable on individuals' surchargeable contributions and termination payments will be abolished with effect from 1 July 2005. As a result, the surcharge will not apply in respect of superannuation benefits that accrue, contributions made or termination payments received from that date.

Currently, the surcharge is payable on individuals' surchargeable contributions where their adjusted taxable income exceeds $99,710. The termination payments surcharge is also payable on parts of certain employment-related termination payments that are not rolled over into a superannuation fund. The surcharge rate for 2004/05 is 12.5%. The Government previously announced an intention to reduce the surcharge rate to 10% in 2005/06 and to 7.5% in 2006/07. However, the Government has now decided to abolish the surcharge rather than continue to phase it down to reduce compliance and administrative costs.

International tax reform -- foreign income exemption for temporary residents

The Government will reintroduce a foreign income exemption for temporary residents. This measure will assist Australian companies to access international skilled labour to top up their skills base, maintain efficient domestic operations and compete internationally. The availability of labour is also a crucial factor in retaining and attracting regional headquarters and service centres.

The measure includes a four-year exemption for temporary residents for most foreign source income that will:

• exempt foreign source income of temporary residents for four years;
• ensure that no capital gain or loss would arise on the disposal of foreign assets by temporary residents for four years;
• remove interest withholding tax obligations of temporary residents for four years; and
• extend the existing four-year exemption from the foreign investment fund rules for temporary residents.

Under current arrangements, Australian tax payable may be greater than the foreign tax temporary residents would otherwise have paid if they had stayed in their home country. Should this be the case, the additional tax expense is often borne by Australian employers (who often indemnify for additional tax paid), increasing the cost of doing business in Australia. These reforms will significantly respond to the tax disincentives foreign expatriates face and are consistent with approaches other countries take.

This measure will generally have effect from the first income year after the date of Royal Assent of the enabling legislation.

International tax reform -- CGT and non-residents

Reforms to the CGT treatment of non-residents will bring Australia's CGT rules and tax treaty practice into line with international standards. Australia's current broad approach deters non-residents from investing in Australia or from using Australia as a regional base.

Under the proposed rules, non-residents will be subject to CGT on real property and the business assets of Australian branches of a non-resident. "Real property" for these purposes will be consistent with our treaty practice, extending to other Australian assets with a physical connection with Australia, such as mining rights and other interests related to Australian real property.

In addition, an interposed entity rule will protect the integrity of these rules by applying CGT to non-portfolio interests in interposed entities (including foreign interposed entities), where the value of such an interest is wholly or principally attributable to Australian real property. The proposed interposed entity rule will reinforce Australia's rights to tax Australian real property held by non-residents.

The changes will apply to relevant CGT events occurring on or after the date of Royal Assent to the relevant legislation. The Government intends to introduce this legislation before the end of the 2005/06 financial year.

International tax reform -- abolition of foreign loss and foreign tax credit quarantining

The Government will simplify the foreign source income rules by removing foreign loss and foreign tax credit quarantining. This will allow foreign losses to be deducted from domestic income and will eliminate the need for foreign tax credits and revenue losses of CFCs to be quarantined into separate classes.

The measure will reduce tax complexity and compliance costs for Australian multinationals, regional headquarters, managed funds, and small businesses expanding offshore. It will also assist taxpayers, particularly smaller firms and individuals, by not taxing their domestic income when they suffer an overall (worldwide) loss.

The current foreign loss and FTC quarantining rules prevent taxpayers from applying foreign losses against domestic income and allow taxpayers to elect to apply domestic prior-year losses against foreign income. They also prevent taxpayers from receiving credit for foreign tax in excess of the Australian tax payable on assessable foreign income. Instead, they require taxpayers to carry forward these foreign losses and excess FTCs to be applied against future assessable foreign income of the same class.

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

Foreign losses and (excess) FTCs that arise before the commencement of this measure will continue to be treated under the current rules. It is expected that these losses and credits will be used before those arising after commencement. Ultimately, the old rules may be removed from the tax law.

In addition, taxpayers that earn "attributable income" through CFCs will no longer need to quarantine the revenue losses of their CFCs into separate classes. Listed country CFCs will no longer have tainted capital losses excluded from the calculation of eligible designated concession income. However, a CFC's tainted capital losses will continue to be quarantined from its other income. Also, CFC losses will continue to be quarantined in the CFC that incurred them.

Deduction for "blackhole expenditure"

Certain blackhole expenditure incurred on or after 1 July 2005 will be deductible on a straight line basis over 5 years. The new treatment will comprise:

• permitting deductions for capital expenditure incurred by businesses that are carried on for a taxable purpose;
• providing deductions for certain pre-business expenditures incurred by existing businesses; and
• recognising 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.

Furthermore, 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.

Effective life deduction for film copyright

Film copyright will be brought into the effective life depreciation regime, with application to expenditure on film copyright taken out on or after 1 July 2004. This will apply to film copyright that does not currently qualify for concessional treatment under Div 10B and 10BA of the ITAA 1936. Taxpayers will then be able to rely on the Commissioner's effective life determination or self-assess the effective life of the copyright.

Exclusion of purely cosmetic procedures from the medical expenses tax offset

Purely cosmetic procedures will be excluded from the medical expenses tax offset with effect from the 2005/06 income year. The offset is currently available to resident taxpayers at a rate of 20% of any net medical expenses above the $1,500 threshold in an income year. The Government will amend the definition of "medical expenses" in ITAA 1936 s 159P to restrict access to the offset so that taxpayers will no longer be able to claim it in relation to purely cosmetic procedures. Taxpayers claiming the offset in respect of cosmetic procedures for legitimate medical need, such as skin grafts or reconstructive surgery, will not be affected.

Tax exemption for seniors' concession allowance and utilities allowance

The Government has announced an income tax exemption for the seniors' concession allowance (the first $100 instalment having been paid in December 2004) and the utilities allowance (the first instalment having been paid in March 2005).

General deductible gift recipient (DGR) categories

Five new general DGR categories will be established with effect from 1 July 2006. Organisations that meet the criteria for DGR status under the new categories may be considered under the consistent framework provided by the general categories and, where they meet the criteria, may be endorsed as DGRs under the tax law.

The five new categories extend DGR support to the following approved organisations and funds:

• funds established for the reconstruction and critical repair of eligible war memorials;
• public funds established principally to relieve or prevent distress caused by natural or man-made disasters or assist in disaster reconstruction in Australia and developed countries;
• charitable funds whose principal purposes are the provision of care to maltreated animals;
• charitable funds that undertake a combination of activities under existing DGR categories; and
• charitable funds that are established solely for the purpose of providing scholarships (and such) to promote education at all levels.

Superannuation Guarantee Measures

The Government has announced two new superannuation measures.

• Superannuation guarantee arrangements will be extended to payments of salary or wages made after the quarter in which the relevant employment relationship ceased. The arrangements will apply to back payments of salary or wages made on or after the commencement of the first full quarter following Royal Assent of the enabling legislation.
• Employers will be able to offset late superannuation guarantee contributions (made within 30 days of the SG due date) against the portion of any SG charge for the quarter that relates to that employee. Employees will still receive their full superannuation shortfall plus interest. The arrangements will apply to late payments of contributions made on or after 1 January 2006.

New Medicare levy thresholds

In order to ensure that low-income families and individuals are exempt from paying the Medicare levy, the following thresholds will apply:

• from the 2004/05 income year, the Medicare levy low income threshold will increase to $15,902 for individuals and $26,834 for families. The additional amount for each dependant child or student will be $2,464; and
• from 1 July 2004, the threshold for pensioners below age pension age will be $19,252.

Medicare levy surcharge and lump sum payments in arrears

Concessional treatment will be provided for lump sum payments in arrears in determining a taxpayer's liability for the Medicare levy surcharge from the 2005/06 income year. Therefore certain taxpayers who are eligible for the lump sum payments in arrears tax offset and have a Medicare levy surcharge liability may receive a reduction in their surcharge liability. The reduction will be based on calculations similar to those used in calculating the offset.

Franking deficit tax offset rules

The franking deficit tax offset rules will be amended to remove some unintended consequences. Firstly, the franking deficit tax offset penalty will apply only for those income years in which a corporate entity franks a distribution during the income year for which the franking deficit arises. Secondly, any franking debits arising as a result of the application of a penalty provision in the income tax law will be disregarded when determining the amount of an entity's tax offset arising from its franking deficit tax liability. Thirdly, the full franking deficit tax offset will be allowed where, broadly, events that caused excessive franking were outside of the company's control or were unanticipated, and did not involve any broader exploitation of the imputation system.

These changes will be legislated as soon as possible and will have effect from 1 July 2002.

Extension of tax-timing hedging rules

The Government has announced that it will extend the scope of previously announced tax-timing hedging rules to all taxpayers with audited financial accounts. Thus, the proposed new rules will be extended to taxpayers in all industries (rather than only applying to taxpayers in the gold and cotton industries). The new rules will have effect from the commencement of Stage 3 and 4 of the taxation of financial arrangements reforms.

Consolidation loss rules

The consolidation loss rules will be modified to allow entities that would have an available fraction of nil, due to rounding, to round to the nearest significant digit. This change is intended to overcome concerns that, where a joining entity with a relatively small market value joins a much larger consolidated group, the current rounding rule can cause the joining entity's available fraction to be nil. This effectively cancels the losses of the joining entity. The modification maintains the intent of the original policy.

Legislation to implement this measure will be introduced as soon as possible and will have effect from 1 July 2002 (the commencement of the consolidations regime).

Extending the marriage breakdown CGT roll-over relief

The capital gains tax roll-over relief available in ITAA 1997 on marriage breakdown will be extended to assets transferred to a spouse or former spouse under:

• a binding financial agreement under the Family Law Act 1975 or a similar agreement under a corresponding foreign law;
• an arbitral award under the Family Law Act or a corresponding award made under a corresponding state, territory or foreign law; and
• a written agreement under a state, territory or foreign law relating to de facto marriage breakdowns where the agreement is similar to a binding financial agreement.

Under the current law, a compulsory same-asset roll-over happens if a CGT event involves an individual disposing of an asset to, or creating an asset in, his or her spouse or former spouse because of: (a) a court order under the Family Law Act or a corresponding foreign law, (b) a court-approved maintenance agreement or a similar agreement under a foreign law, or (c) a court order under a state, territory or foreign law relating to de facto marriage breakdowns.

Binding financial agreements, arbitral awards and written agreements allow spouses to settle property issues without involving the courts. Extending the scope of the CGT roll-over relief is intended to encourage separating couples to settle their own affairs, avoiding potential costly and protracted litigation.

Two related amendments will also be made.

The first will ensure that the CGT main residence exemption interacts more appropriately with the marriage breakdown roll-over. It will apply where the transferor spouse acquired the dwelling (or relevant interest in the dwelling) on or after 20 September 1985 and a marriage breakdown roll-over is available to the transferor. The amendment will take into account the way in which both the transferor and transferee spouses use the dwelling when determining the transferee spouse's eligibility for the main residence exemption.

The second amendment will ensure that marriage breakdown cash settlements do not give rise to CGT liabilities.

The amendments will apply to CGT roll-overs, and CGT events relating to cash settlements, taking place after the date of Royal Assent of the enabling legislation.

GST and the vouchers provisions

The GST rules will be amended to clarify that all prepaid phone products are eligible vouchers for the purposes of Div 100. While some have adopted this view since the introduction of GST, the Tax Office has not applied the view for all such products. The proposed amendment, which will apply retrospectively from 1 July 2000, is intended to ensure consistency of treatment and reduce compliance costs associated with revising Business Activity Statements.

To remove the uncertainty amongst some taxpayers about whether GST needs to be remitted to the Tax Office on the basis of the face value of the voucher or the consideration actually received, the rules will be amended from 11 May 2005 to clarify that GST should be remitted on the face value at the time a voucher is redeemed, ensuring that any value added along a distribution chain is subject to GST where vouchers are sold at a discount.

Australian film industry concessions

The Government will extend the Film Licensed Investment Company (FLIC) scheme for two years. The extension will allow one licensee to raise concessional capital which will be capped at $10m in each of the two years. The concessional capital raising will begin from the date of issue of the licence and will conclude on 30 June 2007. The FLIC scheme itself allows investors to spread risk by investing in a slate of film projects while receiving a 100 per cent income tax deduction on the funds invested.

In addition, s 79D of the ITAA 1936 will be amended to allow taxpayers in the Australian film industry to deduct foreign losses from domestic income. To achieve this, the measure will remove the foreign loss quarantining rules. The amendment will apply to income years beginning on or after Royal assent of the enabling legislation.

Mature age worker tax offset extended

Eligibility for the mature age worker tax offset will be extended to taxpayers who carry on a business in partnership and meet the other criteria. This is in addition to the other categories of taxpayer who are eligible for the offset, including salary and wage earners, taxpayers with personal services income and taxpayers who carry on a business as a sole trader.

Changes to family assistance

Various changes to family assistance have been announced.

• Increase to Family Tax Benefit Part A income threshold — from 1 July 2006, the amount that a family can earn each year before their FTB(A) starts to be reduced will be increased to $37,500. Once the income of families with dependent children exceeds this threshold, their FTB(A) reduces from the maximum rate at a rate of 20 cents for every extra dollar of income, until the base rate of payment is reached. The threshold is currently $32,485 per annum, rising to $33,361 per annum on 1 July 2005.
• Using tax refunds to offset outstanding debts — from 1 July 2006, the Government will allow tax refunds and family assistance reconciliation top-up payments to offset outstanding family assistance debts related to previous years.
• Maternity payment — the qualifying age limit on adopted children will be extended from 26 weeks to two years. The Maternity Payment will be payable in respect of adopted, overseas-born children where the child arrives in Australia by two years of age and the payment is claimed within 26 weeks of arrival. It will be payable in respect of adopted, Australian-born children up to the age of two years. This measure will be backdated to include children adopted from 1 July 2004.

Non-commercial loans

Previously announced changes to the non-commercial loan rules will be brought forward to the 2004/05 income year. Under the changes, shareholders of private companies have until the lodgement day of the company's tax return to repay a loan or put it on a commercial footing in order to avoid the operation of the non-commercial loan rules.

This measure will now have effect in relation to loans made in the 2004/05 year of income or a later year. This will allow taxpayers earlier access to the reduced compliance costs provided by the measure.

Plantation forestry prepayments

The Government has announced that the "12 month rule" which applies to the forestry prepayments concession will be extended until 30 June 2008 to allow the concession to be reviewed. Under the concession, certain prepaid expenditure that is invested in timber plantation managed investment schemes is excluded from the general prepayment rules. The exclusion allows investors to obtain an immediate deduction for funds contributed in one financial year for agronomic activities undertaken during the following year. Currently, the concession applies if the expenditure: (a) relates to an activity that is not wholly to be completed within the income year in which the expenditure was incurred, and (b) is incurred before 1 July 2006.

Closure of Operation HUSKY for tax purposes

Operation HUSKY was Australia's contribution to the International Military Advisory and Training Team in Sierra Leone. The location of the operation was determined to be "non-warlike" from 15 January 2001, entitling Australian Defence Force members serving in the operation to claim the overseas forces tax offset under ITAA 1936 s 79B. The non-warlike status of the operation will be closed with effect from 28 February 2003 with the result that the offset will no longer be available from this date.

Changes to petroleum resource rent tax

A number of changes will be made to the petroleum resource rent tax (PRRT) from 1 July 2006, one of which is to include PRRT in the self-assessment regime.

Abandoned proposals

The Government has announced that it will not proceed with the following previously announced proposals:

• treating "ceasing to be an Australian resident" as a taxing point for the employee share scheme rules;
• the rationalised treatment for partnerships and joint ventures proposed by the Review of Business Taxation; and
• the generic regime for the taxation of rights and intangible assets proposed by the Review of Business Taxation.

For further details contact your tax professional.