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Budget 2015 Wrap up – Tax administration, Superannuation and International Tax

Tax administration

Serious Financial Crime taskforce

The government announced that it will provide $127.6 million over four years to a “serious financial crime taskforce” for  investigations and prosecutions that will address superannuation and investment fraud, identity crime and tax evasion.

The aim of the taskforce is to maintain integrity and community confidence in Australian financial markets and regulatory systems. The taskforce includes eight federal agencies, including the Tax Office.

Increase in value of penalty unit

The value of all Commonwealth penalty units will increase from $170 to $180 from July 31, 2015. The government will also  introduce ongoing indexation of penalty units based on the CPI. Indexation will occur on July 1 every three years, with the first indexation occurring in 2018.

Goods and services tax

GST on imported digital products and services

The government intends to extend the application of the GST to cross border supplies of digital products and services imported by Australian consumers (such as a Netflix Australia subscription).

Under the current GST law, these imports are not subject to the GST. According to the government, this places domestic businesses, which generally have to remit GST on the digital products and services they provide, at a tax disadvantage compared to foreign businesses.

This measure will result in Australia being an early adopter of guidelines for business-to-consumer supplies of digital products and services being developed by the OECD as part of the OECD/G20 base erosion and profit shifting project. The proposed measure will apply from 1 July 2017.

Note: This change will require the unanimous agreement of the states and territories prior to the enactment of legislation.

Fringe benefits tax

Cap for salary sacrificed meal entertainment and entertainment facility leasing expenses

The government will introduce a separate single grossed up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses (meal entertainment benefits) for employees.

Meal entertainment benefits exceeding the separate grossed up cap of $5,000 can also be counted in calculating whether an employee exceeds their existing FBT exemption or rebate cap. All use of meal entertainment benefits will become reportable.

Currently, employees of public benevolent institutions and health promotion charities have a standard $30,000 FBT exemption cap (this will be $31,177 for the first year of the measure, due to the Temporary Budget Repair Levy) and employees of public and not for profit hospitals and public ambulance services have a standard $17,000 FBT exemption cap (this will be $17,667 for the first year).

In addition to these FBT exemptions, these employees can salary sacrifice meal entertainment benefits with no FBT payable by the employer and without it being reported. Employees of rebatable not for profit organisations can also salary sacrifice meal
entertainment benefits, but the employers only receive a partial FBT rebate, up to a standard $30,000 cap ($31,177 for the first year). This measure will apply from April 1, 2016.

Superannuation

In the 2015-16 federal budget, the government reiterated that it will not introduce any new superannuation taxes during this term of government. Accordingly, no new superannuation measures were announced, including any changes to the limited
recourse borrowing arrangements.

The budget does however include certain marginal measures that were previously advised:

  • Early super access for terminal illness: For those with a terminal medical condition, from July 1, 2015 the life expectancy period for full access to superannuation benefits to be extended from 12 to 24 months.
  • Defined benefit super schemes: Commencing January 1, 2016 a 10% cap will be applied to the deductible amount of defined benefit income streams for the social security income test.
  • Supervisory levies: These will be increased to allow full cost recovery from 2015-16.
  • Lost and unclaimed superannuation: The reporting obligations will be streamlined from July 1, 2016.

Pensions

The budget confirmed a number of measures affecting pensions that were previously announced.

(i) Rebalance asset test thresholds and taper rate
The government intends to increase the asset test thresholds and the withdrawal rate at which pensions are reduced once the threshold is exceeded.

Asset test thresholds

The assets test threshold (“assets free area”) will be increased:

  • for single home owners – from $202,000 to $250,000
  • for couple home owners – from $286,000 to $375,000.
  • Pensioners who do not own their own home will also see an increase in their threshold to $200,000 more than homeowner pensioners:
  • for single non-home owners: $450,000, and
  • for couple non-home owners: $575,000.

The government will also reduce the maximum value of assets that can be held to qualify for a part pension. For couples, this is currently up to $1,151,500 plus the family home. Under the proposed changes, this threshold will decrease to $823,000 plus the family home.

Note however that pensioners who lose pension entitlement on January 1, 2017 as a result of these changes will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card for those under Age Pension age.

Taper rates

The proposal will reverse changes to the “taper rates” introduced in 2007. From 1993 to 2007 a $3 taper rate was in place where for every additional $1,000 in assets above the minimum threshold for a full pension, fortnightly payments were reduced by $3. In 2007, this was changed to a $1.50 taper rate.

Taxpayers impacted by these changes will be able to maintain their current level of income by drawing down less than 1.84% on their additional assets ($574,000 for a single homeowner), in a worst case scenario. These measures will apply from 1 January 2017.

(ii) Improve integrity of social security income test arrangements

The government will improve fairness and equity in social security payments by ensuring that a larger proportion of a superannuant’s actual defined benefit income is taken into account when applying the relevant social security income test.

Under this measure, the proportion of income that can be excluded from any income test (the deductible amount) will be capped at 10% from January 1, 2016.

Under current arrangements, some defined benefit superannuants are able to have a large proportion of their superannuation income excluded from the pension income test.

Recipients of Veterans’ Affairs pensions and/or defined benefit income streams paid by military superannuation funds are exempt from this measure.

(iii) Not proceeding with elements of the measure to maintain eligibility thresholds for Australian Government payments for three years

The Government will not proceed with elements of the 2014 15 Budget measure Maintain eligibility thresholds for Australian Government payments for three years that relate to the pension income test free areas and deeming thresholds.

The pension income test free areas and deeming thresholds will continue to be indexed annually by the CPI. Major pension related payments include the Age Pension, Carer Payment, Disability Support Pension, and the Veterans’ Service Pension.

(iv) Pension indexation to CPI will not proceed

The government announced that it will not proceed with the 2014-15 budget measure to constrain increases in the pension to the CPI.

Pension and pension equivalent payment rates will continue to be indexed under current arrangements —  by the higher of the increases in the CPI or the Pensioner and Beneficiary Living Cost Index and benchmarked against Male Total Average Weekly Earnings.

International tax

Tax residency rules for temporary working holiday makers

The government intends to change the tax residency rules so that most people who are temporarily in Australia for a working holiday as non-resident for tax purposes, regardless of how long they are in Australia, will continue to be taxed as a non-resident.

As a result, affected taxpayers will be taxed at 32.5% from their first dollar of taxable income.

Under the current tax residency rules, a working holiday maker can be treated as a resident for tax purposes if they satisfy the residency tests; typically, that they are in Australia for more than six months.

This means that currently these taxpayers are able to access resident tax treatment, including the tax-free threshold of $18,200, the low income tax offset and the lower marginal tax rate of 19% for taxable incomes between $18,201 and $37,000. The measure will apply from July 1, 2016.