Australia: Key Tax and Superannuation Changes in the 2012-2013 Federal Budget

While a number of key budget tax and superannuation measures were leaked prior to budget night, hidden behind the Government's headline spending measures are some very important tax changes that affect businesses in a number of ways. This is not just because previously announced tax concessions have been taken off the table, including the reduction in the company tax rate, higher concessional superannuation contribution caps for persons over 55 and lower tax rates on interest.

As with many budget announcements, much of the practical detail of the Government proposals is yet to see the light of day, but some of the budget changes that will have practical impacts on businesses and business owners include:

• carry-back of company losses
• superannuation tax increases
• changes to how foreign employees and executives will be taxed in Australia
• new limits on Employment Termination Payment tax rebates
• increased tax rates for non-residents investing to Australia
• increased funding for the Taxation Commissioner to chase GST compliance, offshore transactions and to collect outstanding tax debts more quickly.

Company loss carry-back

Under the existing tax losses regime, a company which makes losses in Year 1 can offset those losses against income earned in Year 2. However, if a profit is made and tax paid in Year 1, losses incurred in Year 2 are carried forward to later years, triggering a real cash flow problem.

The new rules will allow a company to receive a refund of tax previously paid, when losses are incurred in a later year. For the 2012-2013 financial year the proposed rules will allow a one-year carry-back provision so that a loss incurred in the year ending 30 June 2013 can be applied against income earned and taxed in the year ending 30 June 2012. From the 2014 financial year the loss carry-back rules will allow losses to be applied to the two previous income years.

The losses that can be carried back will be capped at $1 million for each year of profit, so that the maximum cash benefit of the new rules will be $300,000 per year (at the prevailing company tax rate of 30%). Given that it seems likely the loss carry-back may only be claimed against the company's franking credit account, the loss carry back may not be available in respect of past year profits if they have already been distributed as franked dividends.

The detail of the new regime is yet to be worked out, however the Government has made it clear that the carry back rules will not apply to capital gains and losses, or to businesses carried on through trusts.

Non-residents and managed funds

The Budget announced changes that will have a material impact on the attractiveness of many inbound investments to Australia. This includes the doubling of the withholding tax rate applicable to non-resident investments in Australian Managed Investment Trusts to 15%, and removing the 50% CGT discount for non-resident capital gains. Coming as it does so soon after the implementation of the MIT withholding regime, these changes will need to be carefully considered by Australian fund managers that are reliant on offshore fundraising.

Superannuation

The Government has deferred its previous proposal to increase the concessional contribution limit for persons over 55 with superannuation balances of less than $500,000. This will mean that, from 1 July 2012, the standard $25,000 concessional contribution limit will apply to all taxpayers. Given the very large number of excess contribution tax cases that the Australian Taxation Office has pursued, these contribution limits must be carefully monitored.

The budget also formally introduced a change to the concessional taxation treatment of contributions to superannuation funds. Under the existing rules, concessional tax contributions (which are subject to strict caps limiting the amount that can be contributed) are taxed at the rate of 15% on receipt by a superannuation fund. The Government will double the contribution tax (from 15% to 30%) for taxpayers with taxable incomes of more than $300,000.

Given the relatively low concessional caps that apply and the deferral of the increase in contribution caps for persons over 55 the impact of the change may not be all that significant in terms of government revenue. It will however add a considerable cost to many super fund members and add further complexity to what is already a very difficult compliance regime.

It is important to keep in mind that these new rules will apply to everybody with income over the threshold, not just superannuation fund members who derive substantial salary income. For example, the income threshold will include "one off" amounts such as capital gains on a rental property or shares left to a beneficiary of a deceased estate, notwithstanding that the beneficiary might otherwise have a much lower level of salary income.

Employment taxes

Living away from home allowance (LAFHA)

The existing LAFHA regime rules operate so that foreign nationals working in Australia may be able to receive significant amounts (referable to living expenses) tax free, on the basis that they have a home somewhere other than Australia.

The new rules will require that the residence a person is living away from must be in Australia and will provide that the living away from home concession will only be available for 12 months. The Government has announced a carve out from the 12 month requirement for fly in fly out arrangements.

Employment termination payments (ETP)

Currently, employment termination payments may be taxed concessionally (15% or 30%, determined by the age of the recipient) up to $165,000. This concessional taxation applies regardless of the level of recipient's other income.

The new rules will now take into account the recipient's taxable income and will give access to concessional tax rates for as much of an ETP that brings the taxable income up to $180,000. In other words, if the employee already has other taxable income of $180,000, there will be no concessional tax treatment for the ETP.

As employers have PAYG Withholding obligations with respect to ETP's, considerable care will need to be taken to make sure these new rules are properly understood and correctly applied.

The fine print

The budget provides additional funding to allow for the Commissioner to pursue his GST compliance program, targeting under-reporting of GST liabilities, failure to lodge GST returns and failure to pay GST debts on time. The Treasury expects to receive a return of almost $1 billion on the additional funding of the ATO GST compliance program.

The government is also providing additional funding for the Commissioner to continue with his Project Wickenby activities, targeting offshore transactions (and perhaps most famously, Paul Hogan) and the more vigorous pursuit of overdue tax debts.

Outside the budget process there are also significant changes to other taxation rules that impact on business generally, including amendments to the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936, major changes to the taxation of trusts and a significant expansion of the Director Penalty Notice rules to include Superannuation Guarantee amounts and to make it easier for the Commissioner to pursue directors personally for company tax debts.

Given the collapse in Government tax collections post GFC, in practical terms businesses can expect the Commissioner will put his new funding to good use and pursue a more hard line approach to compliance and overdue tax liabilities than has previously been the case. As with most tax matters, advanced tax planning and engaging with the Commissioner may help avoid unexpected surprises.

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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.