Bell & Bell 2003 Budget Review

[1] 2003-04 FEDERAL BUDGET - MAJOR TAX CHANGES ANNOUNCED

On Tuesday, 13 May 2003 , the Federal Treasurer, the Hon Peter Costello, handed down the 2003-04 Federal Budget, his 8th Budget. From a taxation point of view, this Budget is a MAJOR EVENT. It is NOT the tax non-event that has characterised recent Budgets, and is the first Federal Budget since 1998 to contain a range of major tax measures. First and foremost, individual income tax cuts will apply from 1 July 2003 - this will be done by increasing the upper limits of the taxable income bands. As well, the low income tax offset will be raised from $150 to $235. As expected, the Government announced its much anticipated response to the Board of Taxation's review of Australia 's international tax regime. Major tax reforms are in store here, particularly concerning the CFC and FIF regimes.

In what will no doubt be to the great annoyance, to say the least, of tax practitioners, the Budget Papers repeated the Government's December 2002 announcement to introduce, with effect from 12 December 2002 , provisions to replace s 109UB ITAA 1936 dealing with distributions from trusts. However, the Budget provided NO FURTHER DETAILS of this major tax measure.

On the economic front, the Treasurer said an underlying cash surplus of $2.2bn is expected in 2003-04, "with surpluses in the 3 following years". The Budget Papers predict economic growth to be 3 1/4% in 2003-04, and the Government expects inflation to ease to 2 1/4% through the year. The Government expects the unemployment rate to remain steady at around 6%.

REVENUE MEASURES

In summary, revenue measures announced in the Budget include:

* personal tax rate cuts from 1 July 2003 ;

* the Government announces the outcome of its review of Australia 's international taxation arrangements;

* low income tax offset increased;

* Medicare levy low income thresholds increased;

* excess personal services income deductions allowed to be used against other income;

* imputation system changes - carry forward of surplus exempting credit balances allowed;

* HECS system changes.

[2] OVERHAUL OF AUSTRALIA 'S INTERNATIONAL TAX SYSTEM - DETAILS ANNOUNCED

The Government has announced a significant overhaul of Australia 's international tax arrangements, which will "involve complex legislative change". The reforms are in response to the Board of Taxation's review of international tax, provided to the Treasurer on 28 February 2003 . The Treasurer released Vols 1 and 2 of the Board's report on Budget night (available at http://www.taxboard.gov.au), while Vol 3 is considered confidential and will not be released.

Broadly, the reforms are intended to:

* reduce the costs of complying with the CFC rules;

* reduce tax on foreign "active" business income; and

* reduce foreign taxes by "modernising" Australia 's tax treaties.

[3] CHANGES TO OTHER INTERNATIONAL COMPANY TAX

The Government will introduce a range of measures to "improve the ability of Australian companies to compete offshore" by reforming the taxation of foreign active business income and gains. These changes are complementary to the reforms to the CFC regime announced in this Budget.

[4] TAX TREATMENT OF FOREIGN EXPATRIATES

The Treasurer noted that the Government's measures to provide a 4-year exemption to first-time temporary residents for most foreign source income including capital gains are currently before Parliament [in Taxation Laws Amendment Bill (No 2) 2003 (formerly Taxation Laws Amendment Bill (No 7) 2002)]. Concerning temporary residents, the Treasurer said the Government had accepted the following measures from the Board of Taxation's Review of Australia's international tax regime:

* working towards eliminating double taxation of employee share options by consulting on possible changes to the domestic law, and through treaty negotiations;

* not proceeding with the Review of Business Taxation (RBT) proposal to secure deferred CGT liabilities of departing residents;

* establishing an ATO specialist cell to provide comprehensive advice to employers n tax administration issues concerning their foreign expatriates.

*** PERSONAL TAXATION ***

[5] TAX CUTS ANNOUNCED: NEW TAX THRESHOLDS FOR 2003-04 - INDIVIDUALS

The Treasurer announced that tax cuts would apply from 1 July 2003 . In summary, from that date:

* the upper income limit for the 17% rate will rise from $20,000 to $21,600;

* the upper income limit for the 30% rate will rise from $50,000 to $52,000; and

* the upper income limit for the 42% rate will rise from $60,000 to $62,500.

The changes to the thresholds will also be reflected in the thresholds that apply to non-residents. The tax-free threshold remains at $6,000. The Treasurer said that taxpayers on an income of $35,000pa will have a reduction in tax of $208 per year. For those on $55,000, the tax reduction will be $448 per year, and for those on $75,000, the reduction will be $573 per year.

[6] LOW INCOME TAX OFFSET INCREASED

The low income tax offset will be increased from $150 to $235 per year with effect from 1 July 2003 . In addition, the income threshold at which the offset begins to reduce will be increased from $20,700 to $21,600. As a result of both of these changes, the income limit up to which the offset can be claimed increases from $24,450 to $27,475. The effect of this measure is that those eligible for the full low income tax offset will not pay tax until their annual income exceeds $7,382. At present, they pay tax when their annual income exceeds $6,882.

[7] MEDICARE LEVY: INCREASE IN LOW INCOME AND OTHER THRESHOLDS

With effect from 1 July 2002 , the Medicare levy low-income thresholds will be increased as follows:

* for individuals, from $14,539 to $15,062;

* for families, from $24,534 to$25,417; and

* for pensioners below pension age, from $16,570 to $17,164.

The additional amount of threshold for each dependent child or student will also be increased from $2,253 to $2,334.

[8] SENIOR AUSTRALIANS: SATO AND MEDICARE THRESHOLDS RISE

Senior Australians eligible for the Senior Australians Tax Offset (SATO) and the low income tax offset currently pay no tax up to an annual income of $20,000 for singles and $32,612 for couples (depending upon the income earned by each member of the couple). The effect of the $85 increase in the low income tax offset is to lift these income levels to $20,500 for singles and up to $33,612 for couples. These changes mean that senior Australians may not have to lodge a 2003-04 income tax return where there incomes are less than $20,500 for singles and $16,806 for a member of a couple. The Treasurer said the Medicare levy thresholds that apply 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.

[9] NEW STUDENT LOAN SCHEMES ANNOUNCED

From 2005, the Government will introduce 2 new income-contingent loan schemes - FEE-HELP for full fee-paying students and OS-HELP for Australians studying abroad as part of their course. These schemes are intended to complement the Higher Education Contribution Scheme (to be renamed HECS-HELP) arrangements. Existing HECS debts and debts accrued under HECS-HELP will continue to be indexed to the CPI. Debts accrued under FEE-HELP and OS-HELP will be indexed to the CPI plus 3 1/2 percentage points each year for a maximum of 10 years. After that, they will be indexed to the CPI only. Repayment thresholds will be the same as for HECS.

[10] HECS THRESHOLD INCREASE

The current threshold income at which HECS repayments are required to commence will be increased from of $24,365 to $30,000 from 2005. However, HECS will remain indexed to the CPI.

[11] UNIVERSITY FEES AND HECS - FULL FLEXIBILITY IN SETTING GIVEN TO UNIVERSITIES

The Treasurer announced that, from 2005, universities will have flexibility in setting fees for Commonwealth supported places. This means they can cut them and, EXCEPT for teaching and nursing, they can increase them to a maximum of 30% above HECS. Institutions will be allowed to increase their intake of fee-paying students from 25% to 50% of total domestic undergraduate students in a course.

[12] STUDENT FINANCIAL SUPPLEMENT SCHEME TO BE REPEALED

The Government will repeal the Student Financial Supplement Scheme (SFSS) from 1 January 2004 in response to "increasing levels of bad and doubtful debt and reduced take-up of loans under the scheme". The Government said the take-up rate for the scheme has declined by 28% over the past 3 years. This has followed the introduction of Youth Allowance and increased access to alternative commercial loan products and opportunities for students to supplement their income. The Government currently expects that that more than one half of loans under the SFSS are never likely to be repaid. Repeal of the scheme will not affect entitlements for Youth Allowance, Austudy, Abstudy or Pensioner Education Supplement. The scheme previously required students to trade in part of their entitlements in order to access loans under the scheme.

[13] FBT AND ALIENATION OF INCOME - PREVENTING DOUBLE TAXATION

The Government will reduce the taxable value of fringe benefits to avoid double taxation arising under the personal services income provisions, with effect from 1 July 2000 . Under the current provisions, the amount paid to an associate of a service provider for performing ancillary work is not deductible. However, FBT may be payable on the value of the benefit, resulting in double taxation (income tax and FBT). The Treasurer said this measure is designed to ensure that FBT will only be payable on the value of the benefit that is deductible to the provider.

*** SUPERANNUATION ***

[14] APRA STRENGTHENED; SUPER COMPLAINTS TRIBUNAL FUNDING INCREASED

APRA

Regulated financial institutions are charged to recover the funding for the Australian Prudential Regulation Authority (APRA). These charges will be increased to fund APRA's strengthened capabilities in prudential regulation. Funding for APRA is to be increased by $21.9m over 4 years. The rates to be applied to institutions to achieve this revenue will be determined annually by the Treasurer.

SUPER COMPLAINTS TRIBUNAL

The Superannuation Complaints Tribunal's (SCT) financial arrangements are the responsibility of ASIC. While the SCT receives its funding directly from ASIC's annual appropriation, the underlying source of its funding is from charges collected by APRA. Rates are set by a determination by the Treasurer and varied by sector based on institutional assets, subject to a minimum and maximum threshold. In the Budget, the Treasurer announced that the Tribunal's funding will be increased by $6.3m over 4 years to enable it to meet increasing demands on its services.

*** OTHER MEASURES ***

[15] OTHER REVENUE AND RELATED MEASURES

The Budget also announced a number of other revenue and related measures as well as measures of more widespread interest. They include:

* Money laundering and tax evasion: the Government announced an additional $30m funding over 4 years for the Australian Crime Commission (ACC) to investigate money laundering and tax evasion resulting from serious and organised criminal activity. The Minister for Justice said the ACC's intelligence operations and investigations, to be called Operation Midas, will give law enforcement agencies and the ATO the opportunity to investigate the main beneficiaries and recover their "ill-gotten gains".

* Health system changes: From 1 January 2004, individuals or families with concession card holders who spend more than $500 on out-of-hospital services funded by Medicare, including specialist services, will have such out-of-pocket expenses reimbursed at 80 cents in the dollar for the remainder of that year. Also, medical funds will be able to offer 100% cover for out-of-hospital medical services once a threshold of $1,000 per calendar year is reached. From January 2004, it is proposed that insurance will be available for a wide range of specialist consultations out of hospital eg diagnostic tests, x-rays, ultrasound, biopsies.

* Excise and customs duty on petrol: From 1 January 2006, the Government will increase excise (and customs) duty on petrol for a period of 2 years by the amount required to fund grant payments for the production or import of premium unleaded petrol with less than 50 parts per million sulphur. Similar arrangements will also be implemented for diesel with less than 10 parts per million sulphur, from 1 January 2007 . As well, off-road grants for agriculture will be increased from 1 July 2003 to 31 December 2005 .

* Fuel tax reform: The Government will reform the current fuel tax arrangements to bring all currently untaxed fuels into the excise (and customs) duty system from 1 July 2008 . Fuels that will become excisable from 1 July 2008 will include liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed natural gas (CNG), where these fuels are used in internal combustion engines. The Treasurer said final excise rates to apply to fuels will be determined later this year. From 18 September 2003 , the Government will apply excise duty to biodiesel at the same rate as the excise duty on diesel fuel, currently 38.143 cents per litre. Grants will then be provided for production or importation of biodiesel. These grants will be reduced in 5 equal annual instalments from 1 July 2008 to 1 July 2012 .