Australian Government, 2006–07 Budget

Treasury

Anti-avoidance amendment period — clarify six-year amendment period for income tax assessments prior to 2004-05 income year
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - - -

The Government will make a technical correction to clarify that the six-year amendment period for taxpayers involved in tax avoidance arrangements is repealed only for the 2004-05 and later income years, in line with the Government's original announcement.

An oversight in the recent legislation giving effect to a range of improvements to income tax self assessment resulted in the reduced amendment period for tax avoidance cases applying to income tax amended assessments issued from 19 December 2005, irrespective of the income years to which they relate.

This measure will ensure that the law operates in accordance with the Government's announced policy of the new four-year amendment period applying to assessments involving tax avoidance, for the 2004‑05 and later income years.

Beneficiary tax offset — extend to Interim Income Support Payments
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -1.0 -1.0 -1.0 -1.0

The Government will extend eligibility for the beneficiary tax offset to taxpayers in receipt of Interim Income Support Payments, with effect from the 2005-06 income year.

This will ensure consistent treatment with Exceptional Circumstance Relief Payments so that Interim Income Support Payments qualify for the beneficiary tax offset.

Business incorporation fee — reduction
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Securities and Investments Commission(a) -50.7 -52.9 -55.2 -57.6
Related expense ($m)
Department of Industry, Tourism and Resources - - - -
Department of Employment and Workplace Relations - - - -
Total - - - -
  1. Non-tax revenue.

The Government will reduce the Australian Securities and Investments Commission's one-off incorporation fee from $800 to $400 from 1 July 2006. This will benefit businesses that wish to incorporate.

The Department of Employment and Workplace Relations (DEWR) and the Department of Industry, Tourism and Resources (DITR) will also conduct an education campaign for small businesses on the costs and benefits of incorporation. The cost of the education campaign will be met from within the existing resources of DEWR and DITR.

Capital gains tax — Commonwealth Superannuation Scheme restructuring roll-over
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - - -

The Government has provided a capital gains tax roll-over for the transfer of assets from the Commonwealth Superannuation Scheme (CSS) to the PSS Investments Trust as part of a restructure of the CSS.

Civil penalty regime to deter the promotion of tax avoidance and tax evasion schemes
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - - -

The Government has deferred the application date for the new civil penalty regime to deter the promotion of tax avoidance and tax evasion schemes to ensure that the new civil penalty regime does not apply retrospectively. The new regime will now apply to schemes promoted on or after 6 April 2006, rather than 1 July 2004 as originally announced.

This measure was reported as taken but not announced in the Mid-Year Economic and Fiscal Outlook 2005‑06. The impact of this measure (-$25 million in 2006-07, -$20 million in 2007-08, -$10 million in 2008‑09 and a nil impact in 2009-10) is already included in the forward estimates.

Further information can be found in the press release of 16 February 2006 issued by the Minister for Revenue and Assistant Treasurer.

Employee share schemes — extending current concessions to stapled securities
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -10.0 -20.0 -20.0 -20.0

The Government will extend the employee share scheme and related capital gains tax provisions to stapled securities that include an ordinary share and are listed on the Australian Stock Exchange, with effect from 1 July 2006.

Currently, employees participating in an employee share scheme can choose the tax-deferred or the tax-upfront concession on any discount they receive from acquiring shares or rights below their market value, subject to certain conditions. One condition is that shares must be ordinary shares, and that rights must be rights to acquire ordinary shares.

Currently, these concessions do not fully apply to stapled securities that are created when an ordinary share and another security, such as a unit in a unit trust, are contractually bound together so that they cannot be sold separately.

This measure will increase the accessibility of employee share schemes to employers with stapled securities, and decrease the complexity and cost associated with providing certain stapled securities to their employees.

Family trusts — increasing flexibility
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -8.0 -8.0 -8.0

The Government will make changes to the family trust election rules to increase flexibility for family trusts. This measure will have effect from the income year in which the enabling legislation receives Royal Assent.

A family trust election allows a trust to receive concessional treatment under the trust loss, company loss and imputation rules. A company, trust or partnership is required to make an interposed entity election if it is to be included as part of the family group specified under the family trust election. These elections are generally irrevocable.

This measure will allow family trust elections and interposed entity elections to be revoked or varied in certain limited circumstances. The definition of a family group will be broadened to include lineal descendants of family group members. In addition, trust distributions to former spouses, and to widows or widowers of family group members with new spouses, will also be exempted from family trust distribution tax.

Fringe benefits tax — broadening the definition of remote where the shortest practicable route involves travel over water
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -1.0 -1.0 -1.0

The Government will broaden the fringe benefits tax (FBT) definition of remote where the shortest practicable route involves travel over water, with effect from 1 April 2007.

The FBT definition of a remote location is based on the distance via the shortest practicable surface route between the remote location and the nearest population centre. This measure will broaden the FBT definition of remote by halving the required distance between a location and the nearest population centre, where the shortest practicable route involves travel solely over water. Where the shortest practicable route involves travel over both land and water, the broadened FBT definition of remote will allow for apportionment.

This will ensure that the FBT remote area concessions, such as those for certain housing related fringe benefits, recognise the special circumstances of employees who work in locations isolated from populated areas by a body of water.

Fringe benefits tax — increasing the in-house fringe benefits tax-free threshold
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -10.0 -10.0 -10.0

The Government will increase the in-house fringe benefits tax-free threshold from $500 to $1,000, with effect from 1 April 2007.

An in-house fringe benefit is a good or service provided to an employee that is identical or similar to those that the employer supplies to the public in the ordinary course of the employer's business.

This measure will result in employers not paying fringe benefits tax on the value of in-house fringe benefits provided to employees that do not exceed the new $1,000 threshold.

Fringe benefits tax — increasing the minor benefits exemption threshold
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -3.0 -1.0 -2.0

The Government will increase the minor benefits exemption threshold from $100 to $300, with effect from 1 April 2007.

The minor benefits exemption is provided to ensure that small and infrequently provided benefits to employees are not subject to fringe benefits tax (FBT). Increasing the minor benefits exemption threshold will increase the value of benefits that are exempt from FBT to include all benefits valued at less than $300 and will reduce compliance and record-keeping costs for employers who infrequently provide benefits that do not exceed $300.

Further information can be found in the joint press release of 7 April 2006 issued by the Prime Minister and the Treasurer.

Fringe benefits tax — increasing the reportable fringe benefits exclusion threshold
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - -2.1 -2.1
Related expense ($m)
Australian Taxation Office - .. .. ..

The Government will increase the reportable fringe benefits exclusion threshold from $1,000 to $2,000, with effect from 1 April 2007.

Increasing the reportable fringe benefits exclusion threshold from $1,000 to $2,000 will enable employers to reduce their compliance and record-keeping costs by not having to report fringe benefits for employees who receive no more than $2,000 worth of grossed-up fringe benefits in the fringe benefits tax year.

Further information can be found in the joint press release of 7 April 2006 issued by the Prime Minister and the Treasurer.

Fringe benefits tax — reduction in rate
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -260.0 -195.0 -205.0 -210.0

The Government will reduce the fringe benefits tax (FBT) rate from 48.5 per cent to 46.5 per cent, with effect from 1 April 2006.

This change will ensure that the FBT rate aligns with the top personal income tax rate (including the Medicare levy).

For further details on the personal income tax package see the related revenue measure Personal income tax cuts in Budget Paper No. 2 under the Treasury portfolio.

Income tax collection — distributions of net income by Australian managed funds and custodians to non-residents
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office 10.0 15.0 15.0 20.0

The Government will change the tax collection arrangements for income (other than dividends, interest or royalties) distributed to non-residents by Australian managed funds and custodians. This measure will have effect from 1 July following the date of Royal Assent of the enabling legislation.

In its response to the Review of International Taxation Arrangements, the Government announced in the 2003‑04 Budget that it would set the rate of tax on net rental income distributed by Australian property trusts to non-residents at the company tax rate.

To remove uncertainty and simplify existing tax collection arrangements, all Australian managed funds and custodians will withhold tax at the company tax rate regardless of the identity of the non-resident. Non-resident recipients of the income affected by this measure will be able to lodge an Australian tax return and claim a credit for tax withheld under these arrangements.

The design of the legislation will be subject to consultation with the business community.

Indirect tax concessions for diplomatic and consular missions
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Customs Service .. .. .. ..
Australian Taxation Office .. .. .. ..
Total .. .. .. ..

The Government will provide refunds and exemptions for certain indirect taxes to certain countries' diplomatic and consular representation under the Indirect Tax Concession Scheme. This will take effect from the time provided in the implementing instruments issued by the Minister for Foreign Affairs.

Fourteen countries' missions and consulates will receive new or upgraded benefits as a result of this decision. The countries are Algeria, Cyprus, the Former Yugoslav Republic of Macedonia, Ghana, Italy, Jordan, Kuwait, Morocco, Papua New Guinea, Peru, Serbia and Montenegro, Switzerland, Syria and Uganda.

The Government will also provide related concessions for GST — see the related item GST concessions for diplomatic and consular missions in Appendix A of Budget Paper No. 3.

International tax — ensuring consistent tax treatment of foreign dividends
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office * * * *

The Government will ensure that there is consistent tax treatment of foreign dividends received by Australian companies, whether the dividends are received directly or indirectly through a controlled foreign company (CFC). This measure will have effect from the date of Royal Assent of the enabling legislation.

Recent changes to the tax law made all foreign dividends paid to Australian companies with significant ownership levels (that is, non-portfolio dividends) not assessable. While this treatment is intended to be restricted to non-portfolio dividends, the current law allows portfolio dividends to be treated in the same way where they are derived indirectly through a CFC.

The Government will remove this inconsistency, together with making some consequential amendments to the definition of non-portfolio dividend, including aligning it with economic ownership concepts.

International tax — modifications to foreign income tax exemptions for temporary residents
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -7.0 -7.0 -8.0

The Government has removed the time limits on foreign income exemptions for temporary residents and aligned the treatment of their capital gains with that of non-residents, with effect from the 2006‑07 income year.

The Government announced in the 2005-06 Budget that it would re-introduce legislation to provide an exemption from tax for the foreign income and foreign capital gains of temporary residents, for four years. Previous efforts to implement legislation for the exemption had failed to pass the Senate.

The changes to the foreign income exemption measure, as legislated, removed the four-year limitation on the exemption and several other time limits applying to people temporarily resident in Australia. The other major change is to treat temporary residents as non-residents for capital gains tax purposes, so that most capital gains on shares in Australian companies or units in Australian unit trusts are ignored. Despite the latter change, some of the gain on employee shares or rights related to employment in Australia remains taxable.

Further information can be found in the press release of 16 February 2006 issued by the Treasurer.

Personal income tax cuts
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -6,385.0 -9,205.0 -9,830.0 -10,435.0

The Government will provide tax cuts worth $36.7 billion (including the reduction in the fringe benefits tax rate) over four years. This is in addition to the $21.7 billion worth of tax cuts announced in last year's budget.

Changes to the personal tax rates and thresholds from 1 July 2006 are as follows:

  • the 30 per cent threshold will rise from $21,601 to $25,001;
  • the 42 per cent marginal tax rate will be cut to 40 per cent and the threshold will rise from $63,001 to $75,001; and
  • the top marginal tax rate will be cut from 47 per cent to 45 per cent and the threshold will rise from $95,001 to $150,001.

In addition, the Low Income Tax Offset will increase from $235 to $600 and will begin to phase-out from $25,000. The Medicare levy phase-in for low income earners will also be reduced from 20 per cent to 10 per cent.

Table: New tax thresholds from 1 July 2006

The tax cuts will increase disposable incomes for all Australian taxpayers, provide further incentives to participate in the workforce and improve the international competitiveness of Australia.

Over 80 per cent of taxpayers will face a top marginal tax rate of no more than 30 per cent over the forward estimates period with taxpayers needing to earn $121,500 to pay an average tax rate of 30 per cent.

Reducing the top marginal tax rate and significantly increasing the top threshold will improve our competitiveness compared with other OECD countries. In 2006-07, the top marginal tax rate will apply to around 2 per cent of taxpayers.

Low Income Tax Offset

To assist low income earners, from 1 July 2006 the Low Income Tax Offset will increase from $235 to $600 per year. In addition, the income threshold at which the offset begins to reduce will increase from $21,600 to $25,000. As a result of both of these changes, the income limit up to which some offset can be claimed will increase from $27,475 to $40,000. Taxpayers with annual incomes between $21,600 and $40,000 will benefit from both the increase in the 30 per cent threshold to $25,001 and the increase in the Low Income Tax Offset.

Those eligible for the full Low Income Tax Offset will not pay tax until their annual income exceeds $10,000 (up from $7,567 currently).

Senior Australians

Senior Australians eligible for the Senior Australians Tax Offset currently pay no tax up to an annual income of $21,968 for singles and $36,494 for couples (depending on the income earned by each member of the couple). The effect of the tax cuts is to lift these income levels up to $24,867 for singles and $41,360 for couples.

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

Consequential changes

The top marginal tax rate is the rate applicable in a number of cases in different parts of the tax law. For example, it is applied to contributions and earnings of non-complying superannuation funds, the unearned income of minors and the net income of a trust estate to which no beneficiary is presently entitled. Generally, rates of tax that reflect the top marginal rate will also be reduced to 45 per cent.

See also the related revenue measure Fringe Benefits Tax — reduction in rate in Budget Paper No. 2 under the Treasury portfolio.

Personal income tax — increasing the Medicare levy low-income thresholds
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -39.0 -20.0 -19.0 -18.0

The Government will increase the Medicare levy low-income thresholds to $16,284 for individuals and $27,478 for families, with effect from 1 July 2005. The additional amount of threshold for each dependent child or student will also be increased to $2,523. The increase in the thresholds takes into account movements in the Consumer Price Index and ensures that low-income families and individuals are exempt from paying the levy.

The Medicare levy low-income threshold for pensioners below age pension age will also be increased. From 1 July 2005, the threshold will rise to $19,583. This will ensure that pensioners below age pension age do not pay the Medicare levy while they do not have an income tax liability.

Personal income tax — opening of Operation Palate II for taxation purposes
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - - -

The Government has opened 'warlike' status of Operation Palate II for taxation purposes, with effect from 27 June 2005 (the date on which the operation commenced). This means that the pay and allowances received by Australian Defence Force members deployed on Operation Palate II will be exempt from income tax.

Operation Palate II is Australia's contribution to the United Nations Assistance Mission in Afghanistan. 'Warlike' operations occur where the application of force is authorised to pursue specific military objectives and there is an expectation of casualties.

This measure also has a negligible impact on revenue in 2005-06.

Personal income tax — remove the part-year tax-free threshold for students ceasing full-time education for the first time
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -2.0 -2.0 -2.0

The Government will remove the part-year tax-free threshold for taxpayers ceasing full-time education, with effect from the 2006-07 income year.

Currently, taxpayers who cease full-time education for the first time are not eligible for the full tax‑free threshold of $6,000. For the year in which a taxpayer first ceases full-time education, the reduced tax‑free threshold is calculated by multiplying the number of months in the income year that the taxpayer was not studying full-time by the monthly equivalent of the tax-free threshold ($500). If a taxpayer derives income during the income year in which the taxpayer was a full-time student, the reduced threshold is increased by the amount of income derived up to the standard tax-free threshold for the year.

This measure will extend the full tax-free threshold of $6,000 to all resident taxpayers that cease full‑time education for the first time. This will reduce compliance costs for taxpayers who have finished full‑time education for the first time by removing the requirement for these taxpayers to calculate a part‑year tax‑free threshold and will end the requirement for taxpayers to isolate income (and any deductions) attributable to the period during which a taxpayer was engaged in full-time study.

Philanthropy — allow tax deductibility for the donation of certain publicly listed shares
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -10.0 -11.0 -11.0

The Government will allow taxpayers to claim a tax deduction for the donation to a deductible gift recipient (DGR) of publicly listed shares that have been held for at least 12 months and are valued at $5,000 or less. This measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.

The gift provisions already allow a tax deduction to be claimed where property that meets certain criteria is donated to a DGR. This measure will extend that treatment to publicly listed shares donated to a DGR that have been held for at least 12 months and are valued at $5,000 or less.

Taxpayers will still be required to pay capital gains tax, or will be able to claim a capital loss, on any donated shares.

Philanthropy — changes to prescribed private funds
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -15.4 -50.6 -53.6 -10.3

Since the Mid-Year Economic and Fiscal Outlook 2005-06 there have been 29 funds approved for prescription as Prescribed Private Funds (PPFs), and one declaration that a fund is no longer a PPF.

PPFs allow businesses, families and individuals to establish and donate to a charitable trust of their own, for the purposes of disbursing funds to a range of other deductible gift recipients. At present, there are 340 PPFs.

Philanthropy — enhanced community support through the Foundation for Rural and Regional Renewal
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - -1.2 -1.3

The Government will broaden the scope of the Foundation for Rural and Regional Renewal (FRRR) to allow it to receive tax deductible donations from regional community foundations and to use these funds exclusively for projects in those regions, with effect from 1 July 2007.

The FRRR will remain responsible for assessing all community-funded projects against the established FRRR criteria, and for ensuring that funded projects fall within the scope of the FRRR purposes.

Philanthropy — providing Australian Business Numbers to certain prescribed private funds and public ancillary funds
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office .. .. .. ..

The Government will allow non-charitable prescribed private funds and non-charitable public ancillary funds to obtain an Australian Business Number (ABN), with effect from 1 July 2005.

Currently, such funds may be eligible to obtain deductible gift recipient (DGR) status but are unable to receive endorsement as a DGR unless they hold an ABN. This measure will allow these funds to obtain an ABN and therefore receive endorsement to obtain DGR status and an income tax exemption, where applicable.

The Government is also providing goods and services tax concessions to these entities — see the related item Change in GST treatment of certain public ancillary and prescribed private funds in Appendix A of Budget Paper No. 3.

Philanthropy — remove gift fund requirements for certain deductible gift recipients
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - - -

The Government will streamline the gift fund arrangements for deductible gift recipients (DGRs) that are currently required to hold more than one gift fund, with effect from the first income year after the date of Royal Assent of the enabling legislation.

This measure will lower administrative costs for DGRs. An entity whose activities are endorsed or listed under multiple DGR categories will be able to consolidate these under a single gift fund. However, any activities of the entity not eligible for DGR status must remain in a separate fund.

DGRs would retain the option to continue with separate funds, although adequate accounting records would need to be maintained to demonstrate that gifted amounts are only used for the principal purpose for which DGR status was granted.

Philanthropy — standardise compliance for deductible gift recipients
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - - -

The Government will extend the power of the Commissioner of Taxation to review the activities of specifically listed deductible gift recipients (DGRs) against the terms of their DGR status. This will take effect from the first income year after the date of Royal Assent of the enabling legislation.

This measure will make specifically listed DGRs subject to the same review provisions as DGRs endorsed under the general DGR categories. The Government and the Parliament will retain the power to approve (or revoke) the status of specifically listed DGRs.

Philanthropy — updating the list of deductible gift recipients
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -0.6 -0.7 -0.3 -0.4

Since the Mid-Year Economic and Fiscal Outlook 2005-06, the Government has announced that qualifying gifts of $2 or more to the following organisations have been made tax deductible:

  • Ranfurly Library Service;
  • Bowral Vietnam Memorial Walk Trust, extending gift deductibility status to 15 August 2006;
  • Dunn and Lewis Youth Development Foundation, extending gift deductibility status to 31 December 2006;
  • St Mary's Cathedral Restoration Commission, for a period of 12 months; and
  • St Michael's Church Restoration Fund, extending gift deductibility status to 23 February 2007.

In addition, since the Mid-Year Economic and Fiscal Outlook 2005-06 there have been:

  • nine admissions to the Register of Environmental Organisations;
  • four admissions to the Register of Harm Prevention Charities; and
  • four admissions to the Overseas Aid Gift Deduction Scheme.

The Register of Environmental Organisations can be found on the Department of Environment and Heritage website at www.deh.gov.au. The Register of Harm Prevention Charities can be found on the Department of Families, Community Services and Indigenous Affairs website at www.facs.gov.au. The list of overseas aid relief funds on the Overseas Aid Gift Deduction Scheme can be found on the AusAid website at www.ausaid.gov.au.

Simplified imputation system — franking credits available to life tenants
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -5.0 -5.0 -5.0 -5.0

The Government will exclude certain income beneficiaries of testamentary trusts from the franking credit holding period rules, with effect from 1 July 2002, the commencement date of the simplified imputation system.

The franking credit holding period rules prevent franking credit trading by denying franking credits and associated tax offsets to taxpayers who have not held shares at risk for more than 45 days.

This measure will assist beneficiaries of testamentary trusts who have a vested interest in the dividend income of the trust but do not have a current beneficial ownership of the underlying shares (such as life tenants) by excluding them from the franking credit holding period rules.

Further information can be found in the press release of 20 March 2006 issued by the Minister for Revenue and Assistant Treasurer.

Simplified tax system — extending depreciating asset roll-over relief
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -6.0 -7.0 -5.0

The Government will extend optional roll-over relief available under the uniform capital allowance (UCA) regime to situations where a sole trader, trustee or a partnership in the simplified tax system (STS) disposes of all of the assets in an STS pool to a wholly-owned company, and to where an STS pool is transferred as a result of a court order upon a marriage breakdown. This measure will have effect from the income year following the date of Royal Assent of the enabling legislation.

Providing roll-over relief in these situations will provide more flexibility for STS taxpayers wishing to restructure their business and ensure that roll-over relief available under the UCA regime is also available in relation to STS depreciating asset pools.

Small business — aligning definitions in the tax laws
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -1.0 -55.0 -71.0

The Government will simplify and improve alignment of various small business tax relief arrangements contained in the tax laws, including the simplified tax system (STS), capital gains tax (CGT), goods and services tax, fringe benefits tax and pay as you go (PAYG) instalments. This measure will apply from the start of the 2007-08 income year.

This measure will:

  • increase the STS annual turnover threshold from $1 million to $2 million;
  • remove the $3 million depreciating assets test from the STS eligibility requirements;
  • increase the net assets threshold for the CGT small business concessions from $5 million to $6 million; and
  • allow STS taxpayers to be eligible for the CGT small business concessions without having to satisfy the net assets threshold and to pay quarterly PAYG instalments on the basis of GDP-adjusted notional tax.

See also the related item Small business — aligning definitions in the tax laws in Appendix A of Budget Paper No. 3.

Small business — capital gains tax amendments
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -92.0 -97.0 -101.0

The Government will implement all but one of the recommendations of the Board of Taxation's post‑implementation review of the small business capital gains tax (CGT) concessions.

The amendments will ensure that the concessions are simpler, clearer and fairer. They will also reduce compliance costs for small business.

The Government will improve the operation of the small business CGT concessions by making changes to the maximum net asset value test, the active asset test, the 15-year exemption, the retirement exemption, the small business roll-over, and how the concessions apply to partnerships.

In addition to these amendments, the Government will provide improved access to the concessions by replacing the current 50 per cent controlling individual test with a more generous 20 per cent significant individual test. The significant individual test will be able to be satisfied either directly or indirectly through one or more interposed entities.

These measures will apply to CGT events that happen in the 2006-07 and later income years.

Superannuation — ensuring appropriate use of pre-1 July 1988 funding credits
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office 150.0 150.0 150.0 150.0

The Government has become aware of arrangements whereby some public sector superannuation schemes are inappropriately applying pre 1-July 1988 funding credits to reduce tax on contributions made to fund benefits that accrued after 1 July 1988.

The Government will ensure that pre-1 July 1988 funding credits will be able to be used by superannuation schemes to reduce their taxation liability on contributions made after 1 July 1988 only if those contributions were made to fund benefits that accrued before 1 July 1988. This measure will take effect from 9 May 2006.

This ensures equity with funded superannuation schemes that pay tax on contributions from 1 July 1988.

Since 1 July 1988 most contributions to superannuation schemes have been subject to a 15 per cent tax. Unfunded superannuation schemes have access to pre-1 July 1988 funding credits so that contributions made after 1 July 1988 in order to fund benefits that accrued prior to 1 July 1988 are not taxed.

Tax compliance — high wealth individuals and associated entities
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office 65.0 145.0 190.0 215.0
Related expense ($m)
Australian Taxation Office 12.7 18.3 23.6 27.0

The Government will provide the Australian Taxation Office (ATO) with additional resources to maintain tax compliance by high wealth individuals and their associated entities.

This measure will allow the ATO's High Wealth Individual Taskforce to cover the increase in the number of high wealth individuals in recent years. The additional resources will enable the ATO to improve the timely identification of tax compliance risks for the increased number of high wealth individuals and to undertake additional audit activity for all identified high risk cases, including closely-held private company groups.

Since its inception in 1997, the Taskforce has collected over $1.3 billion in additional revenue from audits of high wealth individuals. Indications are that this activity has also improved voluntary compliance by this sector.

Tax deductions — treatment of boat hire arrangements
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -5.0 -6.0 -6.0

The Government will allow taxpayers who cannot demonstrate that they are actually carrying on a business using a boat to claim deductions for the costs associated with hiring out their boats. This measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.

The current income tax law imposes a strict test for allowing deductions that are related to income-earning activities associated with the use of boats. A taxpayer must be actually carrying on a business using the boat and not merely generating passive income. Currently, where carrying on a business cannot be demonstrated, all receipts from the activity must be returned as income and no expenses can be set off against that income.

This measure will allow taxpayers who are hiring out a boat to deduct expenditure relating to their boating activity against the income derived for hiring which is also taxable. Taxpayers will be allowed to carry forward any excess deductions and deduct them against income generated from that boating activity in future years.

This measure will ensure that where taxpayers generate an income stream using their boat they are not unfairly taxed, while maintaining the restrictions on using the tax system to subsidise private use of boats.

Taxation of trusts — distributions to non-resident trustees
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - 250.0 270.0 280.0

The Government will enhance the integrity of the tax system by requiring resident trustees to pay tax on distributions to non-resident trustee beneficiaries. This measure will have effect from 1 July 2006.

Currently, a resident trustee is liable to pay tax on distributions to non-resident individuals and companies. In these cases, the non-resident is also assessed on the distribution with a credit for tax already paid by the resident trustee. These arrangements currently do not apply to distributions to non-resident trustees.

This measure will ensure that trust distributions to non-resident trustees are taxed in the same way as distributions to other non-resident beneficiaries.

Taxation of trusts — simplifying the ultimate beneficiary rules
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office * * * *

The Government will simplify the reporting requirements under the ultimate beneficiary rules by requiring that trustees of closely-held trusts need identify and report only first-tier trustee beneficiaries in receipt of trust distributions. This measure will have effect from the taxpayer's first income year after the enabling legislation receives Royal Assent.

Currently, the ultimate beneficiary rules require trustees of closely-held trusts to trace through chains of trusts to identify the ultimate beneficiaries of distributions from the trust.

Under this measure, the Australian Taxation Office will be able to use the better targeted information provided by trustees and data matching to trace trust distributions to beneficiaries. This measure will reduce compliance costs for trustees and will be more effective in attributing trust distributions to beneficiaries than current arrangements.

Uniform capital allowance — diminishing value rate
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -500.0 -900.0 -1,100.0 -1,200.0

The Government will increase the diminishing value rate for determining depreciation deductions from 150 per cent to 200 per cent for all eligible assets aquired on or after 10 May 2006.

This measure will more accurately align depreciation deductions for tax purposes with the actual decline in the economic value of assets. It will increase the incentives for Australian business to undertake the investment in new plant and equipment that is necessary for them to keep pace with new technology and to remain competitive.

In 2001, the Government introduced the uniform capital allowance (UCA) regime which calculates depreciation deductions based on the expected effective life of a depreciating asset. This measure will enhance the operation of the UCA regime.

Currently, a taxpayer can use either the diminishing value or the prime cost (straight-line) method for depreciating assets. The diminishing value method uses a fixed proportion (determined by the diminishing value rate and the effective life) of the asset's written down value to establish its annual decline in value. This reflects that the asset's value declines more rapidly in the initial years in which the asset is held. Under the prime cost method, the asset is written off in equal instalments over the asset's effective life. Generally, a taxpayer can choose between the two methods.

The current 150 per cent diminishing value rate does not fully reflect the true change in value of many depreciating assets. This results in depreciation rates that are generally too low for most plant and equipment. By increasing the diminishing value rate to 200 per cent, this measure will ensure that tax depreciation rates more closely align with economic depreciation.

Uniform capital allowance — treatment of mining, petroleum and quarrying rights
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - - - -

The Government will amend the way mining, petroleum and quarrying rights (mining rights) are dealt with under the uniform capital allowance (UCA) regime to ensure such rights are treated consistently with other depreciating assets. This measure will apply to mining rights acquired since the commencement of the UCA regime on 1 July 2001.

The current law treats mining rights differently to other depreciating assets, which was not the intended outcome when mining rights were brought into the UCA regime. Under the current law, the effective life of a mining right is taken to be the whole life of the right without regard to prior use. In addition, holders of rights are required to assess the life of the right annually.

This measure will allow a person who acquires a mining right to take account of the prior use of the mining right by former owners when calculating the remaining effective life of the right. Also, holders of mining rights will not be required to make an annual assessment of the life of the right.

Venture capital — improving taxation treatment
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office - -1.0 -4.0 -10.0
Related expense ($m)
Department of Industry, Tourism and Resources 0.3 0.3 0.3 0.3

The Government will introduce a new investment vehicle called an early stage venture capital limited partnership (ESVCLP) which will, from 1 July 2006, progressively replace the existing pooled development funds (PDF) arrangements. The Government will also make changes to the existing venture capital limited partnership (VCLP) regime.

The ESVCLP will provide flow-through tax treatment to domestic and foreign partners with the income, both revenue and capital, received by the partners being exempt from taxation. As the income will be exempt from tax, the investor will not be able to deduct investment losses.

To qualify for the tax exemption: the ESVCLP fund size cannot exceed $100 million; an individual investment in any one company cannot exceed 30 per cent of the ESVCLP fund's committed capital; the total assets of the investee company cannot exceed $50 million prior to the investment; the ESVCLP must divest its assets in the investee company once the total assets of the investee company exceed $250 million; and the ESVCLP must meet certain regulatory and reporting requirements. The existing pooled development fund programme will be closed to new registrations after 31 December 2006.

The existing VCLP regime will be enhanced by: removing restrictions on the country of residence of investors; reducing the minimum partnership capital required for registration to $10 million; allowing investment in unit trust and convertible notes as well as shares; allowing appointment of auditors for investee companies to occur at the end of the financial year of the investment; and relaxing the requirement that 50 per cent of assets and employees must be in Australia for 12 months after the making of the investment.

The Government will provide $0.3 million per annum on an ongoing basis from 2006-07 to the Department of Industry, Tourism and Resources to implement and administer the new arrangements.

See also the related expense measure Venture capital — Innovation Investment Fund — new funding round in the Industry, Tourism and Resources portfolio.

Wine Equalisation Tax — increase in producer rebate
Revenue ($m)
2006-07 2007-08 2008-09 2009-10
Australian Taxation Office -25.0 -33.0 -33.0 -35.0

The Government will enhance the wine equalisation tax (WET) producer rebate scheme, with effect from 1 July 2006.

Currently, the WET producer rebate scheme provides a WET rebate of up to $290,000 to each wine producer (or group of producers) each financial year. From 1 July 2006, each wine producer (or group of producers) will be able to claim an increased maximum rebateable amount of $500,000 each financial year.

The enhanced assistance will effectively exempt up to around $1.7 million of domestic wholesale wine sales from WET each year per wine producer (or group of producers), compared to $1 million a year under the current scheme.

The eligibility rules for claiming a WET rebate under the producer rebate scheme will not change.

 

Miscellaneous