Summit - Tax & Business Accountants, Melbourne

The easy guide to the tax reforms - what's in, what's out and what's still to come

The Government's tax reforms, in response to the the much anticipated Henry review, turned out to be a little anti-climactic. From the 1000 page document, containing more than 130 recommendations, the Government has decided to only act on a handful of recommendations and left the major part of the review untouched. The main worry with that is that we're not sure which further reforms will be introduced following the election.

However, while the more aggressive reforms recommended by the Henry Review have not been announced, the reforms do deliver major benefits to small business, without containing hidden nasties.

What's in?

However before you start getting too excited, the Government has one major obstacle between their reforms on paper and their reforms reaching all off us in small business land. The plan is that the funding for all the positive reforms (such as the company tax changes, small business depreciation changes, and the extension of the concessional contribution caps) will come from the Resource Super Profits Tax (RSPT). The Government  is planning to capitalise on the current resource boom to the tune of $9 billion. However, if the Government cannot pass this new resources tax through Parliament, the small business reforms may never see the light of day.

The key changes explored

Reduction in the company tax rate

The Government is reducing the company tax rate down to 28%, despite the fact the Henry review recommended reducing the company tax rate to 25%. For small businesses with a turn over of less than $2 million, the company tax will reduce to 28% from 1 July 2012. For other businesses, the reduction will be a two-step process with rates reducing to 29% from 1 July 2013, then down to 28% from 1 July 2014.

Instant asset write off for small business

Small businesses with a turnover of less than $2 million will be able to:

• immediately write off assets valued at under $5,000. This is increased from the current $1000 limit, and
• write off all other assets (except buildings) in a single depreciation pool at a rate of 30%. Currently there are two different depreciation pools. (Essentially, the current long-life pool is being removed.)

So what does this mean for you?  From 1 July 2012 (if introduced) a small business cafe which purchases a display fridge for $4000 will be able to claim a $4000 deduction in the first year. Under current rules, the cafe would be able to claim $600 in the first year.

Superannuation guarantee rate to increase to 12%

Starting from 1 July 2013, the rate will gradually increase by 0.25% for the 2013/2014 and 2014/2015 financial years and 0.5% for each additional financial year until reaching 12% in 2019/2020.

The issue of interest for employers will be the impact of the increased superannuation guarantee on salary packages.

Superannuation guarantee limit increased to 75

This reform increases the age limit for the superannuation guarantee from 70 to 75, starting from 1 July 2013. This means for the first time, workers aged between 70 and 74 will be eligible to have superannuation guarantee contributions made on their behalf.

'Catch up' concessional contribution caps

In an effort to increase soon to be retiree's super amounts, transitional contribution caps have bbeen in place. These caps allow people to put more pre-tax money into their super fund and benefit from concessional tax rates. The current contribution caps expire on 30 June 2012.

Under this reform, permanent 'catch up' concessional contribution caps will be put in place for those aged 50 or over. These concessions, though, will only apply to those with less than $500,000 in super.

40% profits tax on non-renewable resources (Resource Super Profits Tax of RSPT)

This is the Government's funding vehicle for the other reforms. The Government intends to introduce a 40% profits tax on the non-renewable resources sector on 1 July 2012. The RSPT will be payable on the realised value of resource deposits, measured as the difference between the revenues generated from resource extraction and associated costs.

The Government also introduced an exploration rebate to try and stimulate further development in this sector. In addition, $700 million per annum of the tax generated is set aside for the States, with a weighting towards the resource rich states.

What's yet to come?

The Henry Review lists 137 recommendations to the tax system.  Some of the recommendations not ruled out as yet include:

• Tightening of personal service income rules so any owner/manager earning a significant portion of their income from their own personal efforts would be denied a series of business deductions (10)
• Tightening up deductions so they have to be directly related to income production (11)
• Removing and tightening a series of CGT small business concessions (17)
• Removal of the tax on superannuation in the fund and instead tax employer contributions at marginal tax rates (18)
• Halving tax on superannuation fund earnings to 7.5% (19)
• Super guarantee to be paid at the same time as wages (23)
• Immediate write offs for assets valued at less than $1000 for non-small business entities (28)
• Increase to the small business entity turnover test to $5m (it’s currently $2m) (30)
• Give companies the ability to carry back a revenue loss to offset it against the prior year’s taxable income (31)
• A flow through entity regime for closely held companies and fixed trusts – this would mean that from a tax perspective, there would be no difference between a company, trust or partnership structure (38)
• Remove the broad exemptions for foreign employment income (8b)
• Limiting access to the child care rebate for parents who do not work (99c)
• Removal of the FBT exemption for employer sponsored child care facilities (101)
• Removal of the medical expenses tax offset (7a)
• Simplification of car fringe benefits to a rate of 20 cents per km (9b)
• Fringe benefits readily attributed to the employee to be taxed through the PAYG system not FBT (9)

What was ruled out?

Certain recommendations in the Henry report have been ruled out. These include:

• applying land tax to the family home (this has been ruled as a State decision)
• toughening up the welfare system for parents, including making parents work once their youngest child reaches 4 years of age, and tightening up the means testing
• removing FBT benefits for not-for-profit sector, and increasing the threshold for donation deductibility from $2 to $25
• reducing the CGT discount or changing grandfathering arrngements
• introducing a wealth tax
• removing dividend imputations
• changing how alcohol is taxed (while we're in the midst of a wine glut)
• removing the medicare levy
• abolishing luxury car tax.

Quote of the month

The point to remember is that what the government gives it must first take away.

John S. Coleman