Archive for the ‘Featured’ Category

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.

The global economy is continuing its expansion, led by very strong growth in the Asian region. The recent disaster in Japan is having a major impact on Japanese production, and some effects on production of manufactured products further afield. Commodity prices, including oil prices, have generally continued to rise over recent months, pushing up measures of consumer price inflation in many countries. A number of countries have been moving to tighten their monetary policy settings. Overall, though, financial conditions for the global economy remain accommodative. Uncertainty remains over the prospects for resolution of the banking and sovereign debt issues in Europe.

Australia’s terms of trade are reaching higher levels than assumed a few months ago, and national income is growing strongly. Private investment is picking up, mainly in the resources sector, in response to high levels of commodity prices. In the household sector thus far, in contrast, there continues to be caution in spending and borrowing, and a higher rate of saving out of current income.

The natural disasters over the summer have reduced output in some key sectors and the resumption of coal production in flooded mines is taking longer than initially expected. It is likely this caused a decline in real GDP in the March quarter. Production levels should, however, recover over the months ahead, and there will be a mild boost to demand from the rebuilding efforts as they get under way. Over the medium term, overall growth is likely to be at trend or higher.

Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest further growth in employment, though most likely at a slower pace than in 2010. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.

Overall credit growth remains quite modest. Signs have continued to emerge of some greater willingness to lend, and business credit has resumed growth after a period of contraction. Growth in credit to households, on the other hand, has softened recently, as have housing prices in several cities. The exchange rate has risen further and, in real effective terms, is at its highest level in several decades. This, if sustained, could be expected to exert additional restraint on the traded sector.

Recent data on inflation show the effects of production losses due to the floods and Cyclone Yasi. The affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring. The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the year ahead.

Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course. While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected.

At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.

The Federal Budget contained no surprises beyond the previously announced Henry Review responses but continued the incremental changes of the tax system. The changes were mostly positive and aimed at simplification and competitiveness. A noted increase in Treasury funding for work on the Henry Review suggests we haven’t yet seen the end of the many recommendations.

The major Budget announcements were:

Individuals

• Lower tax on savings

  50% tax discount on up to $1,000 of interest income (including interest income earned directly on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products, and indirectly via a trust or managed investment scheme) from 1 July 2011.

• Optional standard deduction for work-related expenses and the cost of managing tax affairs

  This has been set at $500 from 1 July 2012 (increasing to $1,000 from 1 July 2013) to simplify tax return preparation.

• Increase in Medicare levy low-income thresholds

  From 2009-10, this will be increased to $18,488 for singles and $31,196 for families. The additional amount of threshold for each dependent child or student will also increase to $2,865. The Medicare levy low-income threshold for single pensioners below Age Pension age will be increased to $27,697 from 1 July 2009. This increase will ensure that pensioners below Age Pension age do not pay the Medicare levy while they do not have an income tax liability.

• Increase in medical expenses rebate threshold

  From 1 July 2010, it will increase from $1,500 to $2,000 and will be indexed annually. The offset currently permits taxpayers to claim a 20% rebate of net unreimbursed eligible medical expenses above $1,500.

• Amendment to calculation of rebate threshold for Senior Australians Tax Offset (SATO)

  The threshold will be amended to include the effect of the low income tax offset and will take effect from 1 July 2010. Currently, the formula for calculating the rebate threshold fails to reflect the fact that the low income tax offset is reduced when taxable income exceeds $30,000.

• Amendments to First Home Savers Account (FHSA) scheme

  The proposed changes allow FHSA monies to be paid into an approved mortgage before the end of the four (4) year period (but after the end of a minimum qualifying period), rather than requiring it to be paid to a superannuation account. Currently, FHSA holders must keep their savings in an FHSA for four (4) financial years before they are able to use those savings to buy a home. If an account holder buys a home before the end of that four (4) year period, the balance of their FHSA must be transferred to their superannuation.

• Proposed capital protected borrowings amendments

  The benchmark interest rate on capital protected borrowings will be the Reserve Bank of Australia (RBA) indicator rate for standard variable housing loans plus 100 basis points (instead of the RBA indicator rate for standard variable housing loans previously announced in last year’s Budget). The measure will apply to capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008. The transitional arrangements for capital protected borrowings entered into at or before 7:30 pm (AEST) 13 May 2008 from the previously announced date of 13 May 2013 to 30 June 2013 will be extended.

• Cuts in personal tax rates and increase in low income tax offset for 2010-11 year

  There were no changes announced to those already legislated. The low income tax offset will be increased from $1,350 to $1,500 and the resident tax rates for the 2010-11 year are as follows:

Superannuation

• The co-contribution matching rate has been permanently reduced to 100%. The previously announced increases in the matching rate to 125% for 2012-13 and 2013-14 (and 150% for 2014-15 and later years) will not proceed.
• The income threshold at which the maximum superannuation co-contribution begins to phase out will be frozen at $31,920 for the 2011 and 2012 income years.
• A deduction will be available for funds paying terminal medical condition benefits. This measure will be back dated to be effective from 16 February 2008.

Companies and trusts

• Capital gains tax (CGT) – look-through treatment for earnout arrangements

  All payments under a qualifying earn-out arrangement to be treated as relating to the underlying business asset. The measure will have effect from the date of Royal Assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007. Currently, an earn-out right is treated as a separate CGT asset. This measure provides welcome relief although the extent of the relief will not be known until the detailed provisions are provided.

• CGT – other

  Proposed to apply to CGT events happening after 7.30 pm (AEST) on 11 May 2010:

  • Rollover relief for certain business restructures – improving the ability of businesses to restructure.
  • Extend the CGT rollover for the conversion of a body to an incorporated company – CGT rollover to apply to Indigenous incorporated bodies converting to a company incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act).
  • Make the share sale facility exclusion more broadly available for CGT rollovers – Australian interest holders will be able to access a broader range of CGT rollovers where an entity restructures using a share or interest sale facility for foreign interest holders.
  • Allow CGT demerger relief for certain demerger groups that currently cannot access the relief.
• Non-commercial loan rules

  From 1 July 2009, where a private company provides a dwelling that it acquired prior to 1 July 2009 to the shareholder of the private company or their associate, for use as their main residence, a deemed dividend will not arise under the non-commercial loan rules.

• Consolidations

  There were a raft of modifications to correct technical deficiencies and improve and simplify the tax consolidations regime.

• Debt/equity taxation provisions

  Regulations have been registered to treat certain term subordinated notes as debt interests and not equity interests. Also, the debt/equity transitional provisions for Upper tier 2 capital instruments will be extended to 1 July 2010.

• Reduction in Interest Withholding Tax (IWT) rate

  This will apply to borrowings of local subsidiaries from overseas parents and will be reduced from 10% to 7.5% in 2013-14 and to 5% in 2014-15. The IWT rate for borrowings by any bank branch from its overseas head office will be reduced from 5% to 2.5% in 2013-14 and to zero in 2014-15.

• Qualifying instalment warrants

  Amendments will be introduced to provide certainty for investors by treating them as the owner of the underlying asset for income tax purposes, with effect from 1 July 2007.

GST Measures

• The ATO are to be given further funding to fund additional activities to promote voluntary GST compliance. This measure will significantly impact small business who should review their current compliance levels.
• The financial supply provisions will be reformed to clarify their operation and reduce compliance costs. The changes, to apply from 1 July 2012 include:

• • The financial acquisition threshold input tax credit will be increased from $50,000 to $100,000. More small business will now be able to avoid the provisions.
  • Hire purchase agreements will now be treated as one supply and the full supply will be taxable. Transactions will no longer have to be broken up in to taxable and input taxed parts.
  • Those expenses for which a reduced input tax credit are available will be expanded.
• The margin scheme will be reformed to clarify and simplify its application. The provisions will be restructured to clarify the main principles and objects.
• The GST provisions relating to Australian taxes, fees and charges will be replaced with a principle based exemption. It is proposed that the changes will provide greater certainty for taxpayers and Government agencies.
• Various recommendations from the Board of Taxation regarding the administration of GST, previously announced as applying from 1 July 2010, will now apply from 1 July 2011.
• The ATO are to be given further funding to fund additional activities to promote voluntary GST compliance.
• The period in which a recreational boat can be used in Australia GST free before it must be exported has been increased from 60 days to 12 months.
• The Government will implement from 1 July 2012 all of the recommendations of the Board of Taxation from its Review of the application of GST to cross-border transactions. The recommendations significantly reduce the number of non-residents drawn into the Australian GST system. Parts of the package will require State and Territory agreement as they will change the GST base.

Australia as a financial services centre

• The Government has responded to the Report of the Australian Financial Centre Forum entitled Australia as a financial centre: Building on our strengths. Also known as the ‘Johnson’ Report, it was released in November 2009. The Government has provided in-principle or direct report for nearly all 19 recommendations. The intention is to position Australia as a financial services centre, and the phasing down of the IWT is one measure aimed at achieving this objective.

Business name registration to be nationalised

• The Government will establish a national business name register. Administration will be transferred from the States to the Australian Securities and Investments Commission (ASIC).

A simplified system for businesses borrowing from retail investors

• ASIC will now allow listed entities meeting certain criteria to issue bonds to retail investors using a simplified process. This will involve a shorter prospectus which provides relevant information without unnecessary detail which may confuse investors.

Henry is not dead

The Government has provided $65m over four (4) years for Treasury to develop and implement the Government’s response to the Henry Report. $38.5m will be provided over two (2) years to inform the community of the Government’s tax reform agenda.

Henry tax review measures announced in the Budget

A number of the measures announced as part of the Government’s response to the Henry Review were confirmed in the Budget:

• The 40% resources super profits tax (RSPT) will apply to the profits of non-renewable resource projects, after allowing for extraction costs and recoupment of capital investment. Mining companies will not pay RSPT until after they provide shareholders with a normal return on capital investments. Mining companies can reduce their RSPT liability by claiming a credit for mining royalties paid to State and Territory governments. This new tax will apply from 1 July 2012.
• A refundable resource exploration rebate will be provided to companies, set at the prevailing company tax rate, for exploration expenditure carried out in Australia from 2011-12.
• The company tax rate will be reduced from 30% to 28% – small companies will benefit from 1 July 2012 while other companies will access the 28% rate gradually (29% from 1 July 2013 and 28% from 1 July 2014). Companies should consider the impact this change will have on franking credit balances. In the past changes to the tax rates resulted in reductions in effective franking credit balances so companies with low tax rate shareholders should consider their dividend policy and potential share buy backs.
• From 1 July 2012, small businesses will be able to claim an immediate deduction for assets valued at under $5,000.
• The super guarantee rate will be gradually increased to 12% by 2019-20.
• Super guarantee extended to workers aged between 70 and 75.
• Government co-contribution of $500 for workers earning up to $37,000 from 1 July 2012.
• Workers aged 50 and over with super balances below $500,000 to be allowed to double concessional superannuation contributions to $50,000 from 1 July 2012

Employers will be required to increase their superannuation contribution from 9 per cent to 12 per cent by 2019-20.

The changes, which are the Government’s response to the Henry tax review, will be phased in over seven years starting in 2013, and will give employees who are aged 30 an extra $108,000 in super savings, the Government estimates.

The announcement is part of a “first wave” of tax reform which focuses on super, company tax and superannuation, which were recommendations in the review.

The Government has been criticised for proposing just four key changes to the taxation system, despite Treasury secretary Ken Henry making 138 recommendations in his long-awaited report.

Prime Minister Kevin Mr Rudd said the four areas the Government was addressing were the core issues.

“You can do a mechanical count of the numbers of technical recommendations, and some of those you wouldn’t touch with a barge pole,” he said today.

“But I’ve got to say the core ones to do with … keeping our government finances strong, protecting the future of the Australian economy, ensuring working families and small business get their fair share … I think this is a good start, but of course there’s more to do.”

Experts and commentators have called it a missed chance to fix the country’s tax system.

One columnist was even more scathing. In his analysis of the reform, Herald Sun expert Terry McCrann wrote: “Kevin Rudd is running scared – clammy palms, hair bristling on the back of his neck, whole body shivering: scared, scared, scared.”

Rather than release flagged changes on savings tax and simplifying tax returns, the Government has saved those changes to release later in the year, most likely to use in the run-up to this year’s federal election.

The new measures will cost about $2.4 billion over the next four years, and are dependent on the mining tax being brought into effect.

Changes announced yesterday:

* Super contributions to rise to 12 per cent by 2020

* New tax takes 40 per cent of big miners’ profits

* Company tax to be cut to 28 per cent in 2013/14

* Small business to benefit a year earlier

* “First wave” of reform only – more details to be released later

* Workers who earn under $37,000 will get up $500 a year from the Government, effectively cancelling out any tax these workers pay on their super contributions.

* Changes on savings tax, personal tax to be revealed “in coming months”

So, what’s in the Henry review for me?

The release of the Government’s “first wave” of reform doesn’t include the expected changes to tax on savings accounts or making tax returns easier.

But those changes are in the review, and Mr Swan told a media pack yesterday that the Government is “strongly in favour” of the recommendations around making tax time easier for working Aussies.

Here are the main points the Henry review has recommended, which the Government is expected to take up in some form later this year – most likely as part of its election platform.

Easier tax returns

The review recommends workers receive a “default return” from the ATO, which would only need the taxpayer’s tick of approval. In order for this to come into effect, the review recommends the scrapping of work deductions.

Basically, a deduction is money spent throughout the year on work-related expenses, which is then refunded by the Government when you submit your tax return. The Henry review proposes that most work-related deductions be scrapped, to be replaced by a standard rate “linked to the level of income from work”.

A standard deduction would cut the need to keep receipts. However to ensure workers with a high amount of deductions are protected, you would still be able to claim “substantiated expenses”.

Taxing income from savings

The review proposes a 40 per cent discount on all income from savings, as well as on all residential rental income and losses, and capital gains.

These recommendations were widely flagged prior to yesterday’s announcement, with critics saying the current system doesn’t give enough incentives for workers to put money in savings accounts.

Currently, interest earned on all savings accounts and term deposits is taxed at a worker’s top marginal rate.

It is far less generous than the tax treatment of other investments such as shares and property, which the review says encourages investors to take on too much debt.

What the Government won’t pick up

While the report was released yesterday, the Treasurer was quick to list certain parts of the review the Government definitely won’t be implementing, in the “interests of business and community certainty”.

So basically – these are the more out-there recommendations that the Government definitely won’t be using.

* Requiring parents to work when their youngest child turns four

* Hit single-income families

* Restrict eligibility to rent assistance for families

* Abolish the luxury car tax

* Change alcohol tax

* Ask states to charge market rents to people in public housing

* Reduce pay for those in defence forces

* Remove the Medicare levy

Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates). In particular, advances, loans and other payments or credits to shareholders (or their associates) are, unless they come within specified exclusions, treated as assessable dividends to the extent that the private company has a distributable surplus.

The dividend is taken to be paid out of the private company’s profits to the recipient as a shareholder in the private company. However, no dividend is taken to be paid for withholding tax purposes.

In Division 7A there are rules relating to payments and loans made through interposed entities and guarantees. There are also provisions dealing with the interaction with fringe benefits tax (FBT), imputation and the prevention of double taxation.

Division 7A also includes rules designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to a private company without paying it and then distributing the underlying cash to a shareholder (or their associate) of the company. The trust is treated as a notional company and the general Division 7A provisions are modified to determine the amount to be included, as if it were a dividend, in the assessable income of the shareholder (or their associate). These rules are explained in the four fact sheets on trust amounts treated as dividends.

Division 7A has been amended on a number of occasions. The amendments with effect for the income year in which 1 July 2006 has occurred and for later years are highlighted in a table in this fact sheet. These latest amendments were made to reduce the extent to which taxpayers can trigger a deemed divided inadvertently and also to reduce compliance costs.

Division 7A operates automatically and the Commissioner of Taxation is not required to make a determination

For more information please contact our office.