In his first budget since the new Labor government took office, Australian Treasurer Wayne Swan announced on Tuesday evening a number of measures designed to elevate Australia's position as a leading financial centre, and rewarded voters with almost AUD50bn (USD46.6bn) in personal income tax cuts.
Perhaps the flagship measure in the government's strategy to establish Australia as a major financial hub was Swan's decision to slash the rate of withholding tax on certain distributions from Australian managed investment trusts (MITs) to foreign resident investors, from a non-final rate of 30% to 7.5%, making Australia's withholding tax rate one of the most competitive in the world.
The arrangements aim to ensure that Australian property trusts (which will be primarily affected by the new arrangements) are well placed to attract future foreign investment now and in the future.
Australia is internationally recognised as one of the major markets for managed funds. The Australian funds management industry manages more than AUD1.4tn in assets. The industry is expected to continue its strong growth, with assets under management estimated to exceed AUD2.5tn by 2015. The Australian property trust sector is a key part of the industry.
In spite of Australia's strong regulatory regime and reputation for fund management, less than 3% of industry fees are derived from exports - that is, from foreign residents investing in Australian managed funds.
Industry has reportedly advised that this is in part due to the existing non-final withholding tax rate - predominantly applying to rental income and capital gains from taxable Australian property - which is higher, on average, than the withholding rates imposed by other countries.
In order to enhance the industry's export ability, the government will introduce a new withholding tax regime, with effect from the first income year after the date of Royal Assent of the enabling legislation.
The new withholding tax regime will apply to fund payments that are distributions of Australian source net income (other than dividends, interest and royalties) of Australian MITs to foreign residents. It will cover distributions made directly from MITs to foreign residents as well as distributions made through other intermediaries (including custodians).
Distributions of dividends, interest and royalties will continue to be covered by the existing final withholding tax arrangements.
However, to support the integrity of the arrangements, and in keeping with the government's commitment to minimise international tax evasion and avoidance, the nature of the new withholding tax regime will vary depending on whether the foreign investor is resident in a jurisdiction with which Australia has effective exchange of information (EOI) arrangements on tax matters.
Residents of such jurisdictions will be subject to:
For the first income year, as an interim measure, investors resident in EOI jurisdictions will be eligible to claim a deduction for expenses relating to fund payments. The net amount will be subject to tax at a new rate of 22.5%.
The list of jurisdictions with which Australia has effective EOI will be specified in regulations.
Residents of other jurisdictions will be subject to a 30% final withholding tax, with effect for fund payments of the first income year in which the enabling legislation receives Royal Assent.
Other highlights from Swan's budget included measures affecting:
Personal Income Tax
Swan announced that the 2008 budget will deliver tax relief worth AUD46.7bn over the next four years.
The tax relief package is focused squarely on low- and middle-income families. Taxpayers on incomes above AUD180,000 will benefit from the tax cuts; however, the reduction in the top marginal tax rate announced in the Mid Year Economic and Fiscal Outlook 2007-08 will be deferred until beyond 2010-11. The savings from this deferral will be redirected to the government's other priorities, including the Education Tax Refund, to help parents with the cost of educating their children.
Under the personal tax cut programme announced by the Treasurer:
From 1 July 2008:
From 1 July 2009:
From 1 July 2010:
These tax cuts are in addition to the 2007-08 Budget measure to increase the 40% threshold from AUD75,001 to AUD80,001 and the 45% threshold from AUD150,001 to AUD180,001 from 1st July 2008.
Entrepreneurs' Tax Offset (ETO)
As a result of the budget, the government will apply a family income test to the eligibility criteria for the entrepreneurs' tax offset (ETO) to more appropriately target the offset towards genuine small, micro and home-based businesses.
Currently, the ETO is claimed by many taxpayers for whom business is not a primary source of income and who have other, more significant, forms of income. The family income test will restrict access to the ETO for businesses with high alternative sources of household income.
The ETO provides a 25% tax offset on the income tax liability of small businesses that have an annual turnover of AUD75,000 or less, phasing out from a turnover of AUD50,000. The family income test will further limit access to the ETO by restricting eligibility for singles from AUD70,000 and families from AUD120,000 adjusted taxable income per year.
This measure will apply from 1st July 2008 and has an ongoing gain to revenue which is estimated to be AUD90.0mn over the forward estimates period.
Prescribed Private Funds
The government will introduce legislation to improve the integrity of prescribed private funds (PPFs), with effect from 1st July 2009.
A PPF is a trust to which businesses, families and individuals can make tax deductible donations, for the purposes of disbursing funds to a range of deductible gift recipients.
The government will improve transparency and provide the trustees of PPFs with greater certainty of their philanthropic obligations by amending and legislating the PPF guidelines. The changes will, among other things, ensure regular valuation of assets at market rates, increase the size of compulsory distributions, and give the Australian Taxation Office greater regulatory powers.
The details of the changes will be finalised following consultation with relevant stakeholders.
This change will not impact on the ability of taxpayers to give tax deductible donations directly to a deductible gift recipient.
Depreciation Period for Computer Software
The government will increase the depreciation period for expenditure on 'in-house computer software' which is capital in nature from 2.5 years to 4 years.
This measure is expected to bring an ongoing gain to revenue estimated at AUD1.3bn over the forward estimates period.
This measure will apply to expenditure on 'in-house computer software' incurred on or after 7.30 pm (AEST) on 13th May 2008.
Expenditure on 'in-house computer software' is expenditure by the taxpayer on acquiring, developing or having someone else develop computer software which is mainly used by the taxpayer. Expenditure on 'in-house computer software' will continue to be depreciated on a straight line basis.
A 4 year depreciation period for expenditure on 'in-house computer software' is the same period as the Commissioner for Taxation's 'safe harbour' effective life for computer hardware.
Fringe Benefits Tax
The Treasurer announced that the government will make a number of changes to improve the integrity of the FBT law.
With effect from 7.30 pm on the 13th May, the exemptions under the FBT law for eligible work-related items and property consumed on an employer's premises will be tightened.
The FBT exemption for eligible work-related items will be amended to limit the exemption to items used primarily for work-related purposes. Affected items include: laptop computers, personal digital assistants, briefcases, and tools of trade.
In a related measure, the government will also disallow employees from claiming a deduction for depreciation of such items. This will end a double benefit that was previously available.
The FBT exemption for property consumed on an employer's premises will be amended to remove 'meal card arrangements' from the exemption. These exemptions have allowed some employees to enter into salary sacrifice arrangements to acquire items for private consumption out of their pre-tax income.
As an additional integrity measure, the government will amend the FBT law to ensure that FBT applies appropriately to employee arrangements involving jointly held investment assets. This will overcome the Federal Court's decision in National Australia Bank Ltd v Federal Commissioner of Taxation 93 ATC 4919, that resulted in an anomaly in the FBT law which also gave rise to salary sacrifice opportunities in relation to jointly held investment properties.
These changes will restore the original intent of the FBT law and improve equity in the treatment of employee remuneration. The combined effect of the measures will raise approximately AUD1.2bn over the forward estimates.
Employee Share Schemes
The government will make two legislative changes to the taxation treatment of shares or rights acquired under an employee share scheme (ESS).
The first change is to the election requirements to access one of two tax concessions available to taxpayers who acquire qualifying shares or rights under an ESS. This change will improve the integrity of the law by ensuring taxpayers appropriately report income in their tax returns.
The second change is to remove double taxation that arises in relation to certain ESS that use an employee share trust. This change will improve flexibility in the manner shares or rights can be provided to employees under an ESS.
The change to the election requirements will result in a gain to revenue in the order of AUD77mn over the forward estimates. The change to remove double taxation will have no impact on revenue. A comprehensive report in our Intelligence Report series examining Expatriate Taxation and Reward Structures is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report10.asp
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