Budget 2004-05

1-Income tax cuts and a boost to family payments the Budget's core

2-Budget generosity leaves small surplus

3-Tax simplified for small business

4-Corporate tax changes

5-CGT eased for investors

6-Increased funds for FRC; increased compliance for ATO

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Income tax cuts and a boost to family payments the Budget's core

Tax cuts for middle and high income earners and payments for families are the core of the Howard Government's ninth Budget.

Changes to income tax thresholds announced by Treasurer Peter Costello will offset the effects of bracket creep, ensuring that people on average earnings remain in the 30 per cent tax bracket.

The Government will raise the threshold at which the 42 per cent personal tax rate cuts in from $52,001 to $58,001 from 1 July 2004, and to $63,001 a year later.

The income level for the 47 per cent threshold will be raised from $62,501 to $70,001 from 1 July 2004, and to $80,001 a year later.

The Family Tax Benefit (FTB) (A) will be increased by $600 to $1695 per child, with the additional amount paid at the end of each financial year, starting in the current 2003-04 financial year. The income test for this benefit will be eased.

The income test threshold for Family Tax Benefit (B) will increase, so a second earner in a family can earn $4,000 a year (up from $1,825) before the benefit is reduced. Mothers returning to work after the birth of a child will not have a reduction in FTB (B) payments made earlier in the year after they go back to work.

The Government will introduce a new universal Maternity Payment, incorporating the existing Maternity Allowance and Baby Bonus. The payment is $3,000 for each new born child from 1 July 2004, rising to $4,000 from 1 July 2001 and to $5,000 from 1 July 2008.

Current tax threshold
Income range($) New tax threshold
from 1 July 2004($) New tax threshold
from 1 July 2005($) Tax rate%
0 - 6,000 0 - 6,000 0 - 6,000 0
6,001 - 21,600 6,001 - 21,600 6,001 - 21,600 17
21,601 - 52,000 21,601 - 58,000 21,601 - 63,000 30
52,001 - 62,500 58,001 - 70,000 63,001 - 80,000 42
62,501+ 70,001+ 80,001+ 47

Budget generosity leaves small surplus

Spending is tipped to rise by $11 billion and revenue to rise by $9 billion, delivering a slender surplus in 2004-05 of $2.4 billion, down from $4.6 billion in the current year, the Budget papers show.

The cash surplus of 0.3 per cent of national output (GDP) is small considering the forecast economic growth of 3.5 per cent.

The small surplus contrasts with the Government's 'medium-term fiscal strategy' to maintain Budget balance, on average, over the course of the economic cycle.

2003-04
Budget Government Forecast
Dec 2003 2004-05
Budget
Budget Outcome (Cash) 2003-04 $2.2 billion $4.6 billion $4.6 billion
Government Revenue 2004-05 $185.0 billion $188.8 billion $194.2 billion
Government Expenditure 2004-05 $178.0 billion $178.9 billion $191.8 billion
Budget Outcome (Cash) 2004-05 $1.3 billion $3.8 billion $2.4 billion

Even a small slippage in economic growth compared with the forecast will reduce revenue and send the Budget into deficit, as occurred in 2001-02, after the November 2001 Federal election.

Since the Mid-Year Economic and Fiscal Outlook estimated revenue for 2004-05 has risen $4.3 billion, thanks to the impact of stronger economic growth on company, superannuation and income tax, offset by a fall of $1.8 billion in revenue, primarily from the decision to cut income tax. Spending estimates have increased $6.2 billion, partially offset by savings of $1.5 billion.

Superannuation Co-Contribution boosted

The Government will raise its superannuation co-contribution payment for lower income earners to $1.50 for every $1 of voluntary contributions.

The co-contribution will also be extended, so that the maximum co-contribution will be paid to people earning up to $28,000 (rather than $27,500 previously) and will phase out at $58,000, rather than at $40,000 as at present.

This is the third increase in the superannuation co-contribution, which was passed by the Senate in December. During initial negotiations with the Democrats before its passage, the co-contribution was extended up the income scale and in March the Government announced it would be extended further to people who fell below the Superannuation Guarantee income threshold of $450 a month.

The maximum co-contribution will now be $1,500 and will reduce by 5c for each extra dollar of income to phase out at $58,000. The Budget also includes $8.2 million for an advertising campaign to publicise the changes to the co-contribution.

The Budget foreshadows that the Superannuation Surcharge will be reduced to 12.5 per cent for 2004-05 (currently 13.5 per cent), 10 per cent for 2005-06 (12.5 per cent) and 7.5 per cent in 2006-07 and subsequent years (currently 12.5 per cent). However the Senate last December rejected the Government's attempts to reduce the surcharge below the current levels and the Government will struggle to get the proposed new surcharge reduction through the Senate, where it lacks a majority.

In other Budget measures affecting superannuation:

The Government will crack-down on tax minimisation using small superannuation funds and involving forfeiture of benefits, contributions to reserve accounts and use of defined benefit schemes;

There will be increased measures to locate "lost" superannuation members;
The ATO will undertake increased audits of self-managed superannuation funds and increased superannuation surcharge compliance through Tax File Number matching;
APRA will receive increased funding, partly for "fit and proper person" requirements; and

Automatic CGT roll-over relief will be granted to superannuation funds that merge as a result of new trustee licensing requirements.

Tax simplified for small business

The Budget introduces simpler and more flexible tax arrangements for small business.

The changes affect Goods and Services Tax (GST), Pay as You Go (PAYG), the Simplified Tax System (STS), the Simplified Imputation System, Fringe Benefits Tax (FBT), family trust and interposed entity elections and non-commercial loan rules.

Industry groups including the National Institute of Accountants (NIA) have been lobbying the Australian Taxation Office (ATO) for improvements to family trust and interposed entity elections and the Budget extends the concession announced by the ATO in April. Under the latest change, family trust elections will be allowed at any time for earlier income years, subject to certain conditions.

Under the GST changes, small businesses and non-profit organisations, that are not required but voluntarily register for the GST, will be allowed to report and pay GST annually instead of quarterly. Those with an annual turnover of $2 million or less will be allowed to apportion annually the private and business use of assets, such as cars, instead of quarterly or monthly. And taxpayers wishing to continue with the GST instalment option will no longer be required to re-elect this choice each year.

Taxpayers who become ineligible for annual PAYG payments (for example because they are registered for GST) will be allowed to commence paying quarterly instalments in the first quarter of the following income year.

In other measures:

Optional roll-over relief for STS depreciating asset pools will be extended.
The dividend imputation system will be simplified for some companies in their first year of profit.
Private companies will have until the due date of lodgement of their tax return to repay non-commercial loans or put them on a commercial footing.

Corporate tax changes

The Budget has a variety of changes affecting larger businesses, including tougher compliance by the Australian Taxation Office (ATO), a new tax incentive for offshore petroleum exploration, abolition of the land transport tax offset scheme and new withholding taxes for foreign residents.

The ATO gets a $216 million increase in funding over four years to improve tax compliance. Businesses with turnover between $2 million and $100 million will be targeted.

Measures for larger businesses include:

Spending on petroleum exploration in remote offshore areas will be allowed an immediate 150 per cent deduction against Petroleum Resource Rent Tax (PRRT).
No new projects will be approved under the Land Transport Facilities Borrowings Tax Offset Scheme.
Funding for the Australian Securities and Investment Commission is increased, to improve enforcement and surveillance and the Australian Competition and Consumer Commission also win increases.

FBT - new exemptions and reporting concessions

The Budget contains a range of new Fringe Benefits Tax exemptions, mainly benefiting armed services and police personnel.

It also includes a new grants program for state, territory and local government organisations who recently lost their concessional FBT status as a result of court decisions and an ATO review.

The changes remove anomalies in the FBT exemption for the relocation benefits for employees; ensure that FBT treatment of benefits under the new Military Rehabilitation and Compensation Scheme are no less generous than under the old scheme; and extend the FBT reporting exemptions for police officers and armed forces personnel.

The FBT exemption for benefits provided to employees who are relocated by their employer will be extended to cover the purchase of a new home even where their old home has not yet been sold. The exemption applies from 1 April 2004.

Other FBT changes include:

Police officers will be exempted from some FBT reporting requirements.
Defence force personnel will be exempted from FBT for child tuition assistance.
Extension of an exemption from FBT on benefits of up to $17,000 gross-up taxable value per employee for not-for-profit and public ambulance services;
Extension of the FBT transitional arrangements for payments into employee entitlement funds; and
An increase in the FBT threshold for exempt long-service leave benefits.

CGT eased for investors

The Budget reduces Capital Gains Tax on shares and other securities to make it easier for investors to realise the capital loss on worthless investments.

However another change will prevent the use of GST input tax credits to offset Capital Gains Tax.

All insolvency practitioners will now have the power to declare shares and other securities to be worthless for CGT purposes. Currently only a liquidator can declare them worthless. The measure means shareholders do not need to create a trust over shares and other securities to claim a capital loss.

Input tax credits are to be quarantined from the CGT cost base and reduced cost base for all CGT events on or after 20 February 2004. Currently input tax credits can in some cases be used in the CGT tax base.

The Budget also grants automatic CGT roll-over relief for superannuation funds that merge as a result of new trustee licensing requirements.

Increased funds for FRC; increased compliance for ATO

The Budget increases funding for the Financial Reporting Council (FRC). But it also contains new tax and superannuation compliance measures including ones specifically targeting tax agents.

The FRC will receive an additional $3.4 million in 2004-05 to enable it to expand its role in oversighting auditor independence and audit standard setting arrangements as a result of CLERP 9.

The funds will also be used to establish a Financial Reporting Panel (FRP) and to reconstitute the Auditing and Assurance Standards Board. The FRP will provide a non-binding mechanism to resolve disputes between the Australian Securities and Investments Commission and companies over the application of accounting standards. The Auditing and Assurance Standards Board will be reconstituted to provide a statutory basis for audit standards-setting.

New Australian Tax Office (ATO) compliance measures include:

Increased resources for employer compliance with PAYG withholding, Superannuation Guarantee and fringe benefits tax;
Increased tax performance reviews and follow-up audits for businesses with a turnover between $50 million and $100 million, focusing on complex financial arrangements;
Increased activity in relation to individual Capital Gains Tax and rental property investments;
Compliance aimed at tax agents identified as claiming high levels of work-related expenses for clients; and
Increased audits of self-managed superannuation funds; increased efforts to reunite people with lost superannuation entitlements; and increased superannuation surcharge compliance through Tax File Number matching.

Sources from
"National Institute of Accountants"