On 1 May 2013, the Government announced that it would increase the Medicare levy by half a percentage point from 1 July 2014 and that the revenue from this increase would be directed to a new fund, the DisabilityCare Australia Fund.
Importantly, a number of other tax rates that are linked to the Medicare levy will also increase. On 13 May 2013, the Government released exposure draft legislation and explanatory material to implement the rate increase, including draft legislation that provides for an increase in various other tax rates.
The 'domino effect'
Particularly significant for employers is the proposed increase to the rate of tax in respect of the fringe benefits taxable amount of an employer.
Currently, the tax rate under the Fringe Benefits Tax Act 1986 (Cth) is 46.5 percent. The Government has released exposure draft legislation that, if the proposed reforms become law, would result in the tax rate increasing to 47 percent. The new tax rate would apply from 1 April 2014.
It will be important for employers to review their remuneration packaging arrangements for employees and determine the financial cost, if any, of the proposed increase in the tax rate. The tax increase may also impact employees where the contractual arrangements enable the employer to pass on the cost of the provision of fringe benefits to the employer. In this case, it would be prudent for an employer to advise its employees of any increase in the amounts that they may be liable to pay.
An increase in the Medicare levy will also impact the PAYG withholding obligations for employers and payers of employment termination payments (ETPs). The Commissioner of Taxation has published a withholding schedule in accordance with the Taxation Administration Act 1953 (Cth) to provide guidance on the PAYG withholding obligations that apply to ETPs. As the withholding rates for ETPs include the Medicare levy, any increase in the levy will have a corresponding effect on the PAYG withholding obligations for ETPs.
Fringe benefits tax – under the spotlight
The proposed increase in the tax rate in respect of fringe benefits follows on from a number of recent changes and proposed reforms in the fringe benefits tax landscape including:
- the significant reforms to the living away from home allowance that came into effect in October 2012;
- the proposed changes to the concessional treatment for in-house fringe benefits accessed under a salary sacrifice arrangement, that are currently before the Senate; and
- the ongoing focus on the fringe benefits tax concessions available to certain charities and not-for-profit organisations.
Further reforms may also be announced in the Federal Budget to be released tonight. In terms of tax reforms for employers, it is definitely a matter of watch this space!
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