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Unpaid Present Entitlements

A draft ruling was issued in December 2009 by the Commissioner of Taxation dealing specifically with unpaid present entitlements to companies. The ruling seeks to apply the existing Division 7A rules to amounts of income distributed by trusts to Corporate Beneficiaries that are not subsequently paid. In effect, any amounts not paid to the Company and not subject to a loan agreement meeting the requirements of Division 7A, would be treated as a deemed dividend.

This draft ruling is open for comment from interested parties until February of this year. As the ruling represents a significant change in the way in which these rules are applied in practice the industry bodies are to submit a combined response to the ruling. Once a final ruling has been issued, we will advise further on the impact this may have on your existing circumstances. In the meantime, it is relevant to consider alternative taxation strategies for the 2010 and future years where a Corporate beneficiary has been utilised in the past if the Trust does not have sufficient income to make the required repayments or to transfer the entitlements in full.

Henry Review

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Henry Review Update

Dr Henry delivered his report on the tax system to Treasurer Wayne Swan in December 2009. Mr Swan has indicated that he will release the report before the May budget. As a result, the commentary below is merely speculation based on information reported in the press which has not been confirmed by government. Once the report is made public, we will provide a full in-depth analysis of the implications should any of the measures be adopted by the government.

Not for Profit / Charity Sector

Some workers could be stripped of salary sacrifice fringe benefits worth up to $30,000.
Potential Clawback to affect 60,000 organisations.
FBT concessions have been slammed in the review as being too complex and open to abuse.
A system of direct grants to charities is considered to be a better option.
Hardest hit will be the hundreds of thousands of workers on modest wages between $40,000 and $60,000 who get top up payments via concessionally taxed fringe benefits to pay their mortgage, vehicle and other private expenses.

Mining Industry

It has been speculated that, in order to obtain a larger share of profits from mineral wealth leaving Australia, the removal of State-based royalty taxes on mining projects should be replaced with a uniform national resource rent tax.
The tax is rumoured to be set at 40% and levied on products including crude oil and natural gas.
The resource rent will not be levied until all the exploration and development costs associated with the project have been paid for and would be levied only in years in which the project made a profit.
The proposed tax would be tax-deductible for the purposes of calculating company tax.

Company Tax

It is argued that Australia’s company tax rate is now higher than other OECD countries and this adversely effects Australia’s ability to attract international investment. The company tax rate is tipped to be cut to between 25 and 30 percent. It currently appears unlikely that the rate will be cut to the lower end of this scale.
Whilst the public outcry in submissions to the Review Committee appear to have resulted in the likely recommendation that no changes be made to the imputation system in the short term, it has been indicated that the time has come to consider whether alternative measures be introduced in the medium to long term.

Superannuation

Key areas of reform identified (not exhaustive):

Retaining the “three-pillar” retirement income system comprising a means tested age pension, compulsory savings through Superannuation Guarantee (SG) and voluntary saving for retirement.
Maintaining the current levels of SG at 9%, with no additional extension to the self employed.
Improving the ability of people to use their superannuation to manage longevity risk. One possibility is to give retirees an option to exchange their superannuation for a government-provided guaranteed lifetime income stream.
Gradually increasing the age pension age to 67 years. The government has already implemented this recommendation.
Gradually aligning the preservation age with the 67 pension age. The government has yet to respond to this recommendation.
Possible introduction of one age pension means test, and improved incentives to work beyond retirement age.
Improving the ‘fairness’ of tax concessions for superannuation contributions, including broadening access to them and considering whether the current cap on concessions is appropriate. The government has already responded in part to this recommendation by halving of the concessional contributions cap from 1 July 2009. Further changes can be expected to encourage lower-income earners to make contributions and possibly reduce the tax benefits high income earners can achieve by making contributions.

Capital Gains Tax

The Henry tax review has recommended the government overhaul capital gains tax concessions for investors and small businesses to simplify the tax system and encourage long-term investment decisions.
The report is believed to recommend that the 50% capital gains tax discount for assets held for longer than a year should be thrown out and that options such as a uniform flat rate on capital gains (across different classes of investments), and a longer tenure-of-holding rule be considered.
There was also speculation that the report favoured introducing indexation - effectively scrapped about 10 years ago - to address the impact of inflation on capital gains.
Dr Henry said however that there was "almost no logical reason for taxing income at the same rate as labour" (source: The Australian, 22 January 2010).
Taxing income from capital gains in the same way as other income would have an economic rationale as well as recovering some of the revenue to be lost from the potential lowering of company taxes - the federal government loses $10 billion a year as a result of the 50% tax concession on capital gains.

CGT Small Business Concessions

The small business CGT concessions operate as a separate regime to reflect the fact that many small business owners effectively see their business as their superannuation.
With over 1.89 million businesses in Australia (out of a total of 2 million businesses) having an annual turnover of less than $2million, there is a strong argument for retaining the existing concessions. These concessions may also provide a much needed incentive for individuals to pursue self-employment and establish strong and successful small businesses which are arguably the ‘engine-room’ of the economy.
Currently, a range of tax rules apply to small firms based on business structure, length of ownership and the sale value of the business. The Henry report proposes streamlining these complex rules.

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The contents of this Bulletin are general in nature. We therefore accept no responsibility to persons acting on the information herein without first consulting us.