The much anticipated Henry Review of the tax system has delivered 138 wide ranging recommendations to the Government. The formal response of the Government on 2 May 2010 addressed only a small percentage of the recommendations with some being adopted, some rejected and the majority left in abeyance. It is possible; however, that some may be dealt with in the upcoming Federal Budget.
The Prime Minister and Treasurer in a joint announcement indicated the recommendations which will not be implemented, included:
- Reducing the CGT discount
- Limiting negative gearing deductions
- Changing the grandfathering provisions for pre-CGT assets
- Removing the benefits of the imputation system
- Including the family home in means testing calculations
- Making changes to the tax system that would be disadvantageous to the not for profit sector
- Abolition of the luxury car tax
- Reducing indexation of the aged pension
- Introduction of a bequests tax
- Reducing the levels of family and youth assistance, and
- Introducing a land tax on the family home.
The announcement also contained the confirmation that the Government 'will never increase the rate or broaden the base of the GST or remove tax free superannuation payments for the over 60's which were both ruled out of the AFTS Terms of Reference.'
To view the 138 Henry Review recommendations in summary form click here.
Company and small business tax recommendations
- The Government has proposed a company tax rate of 29% from 2013-14 and 28% from 2014-15.
- For small business, the company tax rate will reduce in a single step to 28% and be implemented from 2012-13.
- In addition, for small business, the Government has also proposed, under the capital allowances system:
- An immediate write-off of assets valued at less than $5,000 (instead of the $10,000 amount as recommended). Currently, small business taxpayers are able to write-off assets under $1,000
- Allowing small business to write-off all other assets (except buildings) in a single depreciation pool at a rate of 30%. At present, there are two asset pools, namely the long life asset pool and general business pool for Small business entity taxpayers.
- The Government has indicated that these measures will apply from 1 July 2012.
In keeping with their intention to deliver a boost to retirement savings in order to help prepare for Australia’s ageing population, the Government has announced a number of changes to the superannuation regime.
Superannuation Guarantee (SG) to be increased (not a Henry Review recommendation)
The Superannuation Guarantee (SG) charge is to be increased to 12% commencing with a 0.25% increase in 2013-14 and 2014-15, followed by 0.5% increments until the SG reaches 12% by 2019-20. The three year lead time recognises that employers and employees need to factor this into future wage negotiations.
Superannuation Guarantee age limit to be raised
From 1 July 2013, the SG age limit will be raised to 75, which for the first time means workers aged from 70 to 74 will be eligible to have SG contributions made on their behalf. This matches the age limit for voluntary contributions and contributions by the self-employed.
A new low income earners Government contribution
A low income earners Government contribution will be introduced from 1 July 2012. The Government will provide a contribution of up to $500 annually into the superannuation account of workers on adjusted taxable incomes of up to $37,000. This will provide a reward for savings for low income earners by ensuring no tax is paid on SG contributions. The Government will also retain the co-contribution scheme.
Concessional superannuation contribution caps for those nearing retirement
From 1 July 2012, workers aged 50 and over with superannuation balances below $500,000 will be able to make up to $50,000 in annual concessional superannuation contributions. This measure extends the transitional contribution cap which was to end on 30 June 2012.
In response to the Henry Review recommendations in relation to the land and resources taxes in Australia from 1 July 2012, the Government intends to introduce a 40% Resources Super Profit Tax (RSPT) on Australian non-renewable resources.
Under the current taxing arrangements royalties are levied irrespective of the cost of exploration and production. According to the Government the RSPT will be profit based which will assist resource development and reduce the risks to resource companies and thereby encourage greater investment and employment in the resources sector. It would be surprising if the sector viewed the new tax in that light.
How will the Resource Super Profits Tax operate?
The RSPT will be charged at a rate of 40 per cent of assessable resource profits (assessable revenue less deductible expenses including an allowance for capital expenditure) in accordance with the review recommendation.
Read more on how the RSPT will operate...
The majority of the Henry Review recommendations have been deferred by the Government.
The joint media release issued by Prime Minister Kevin Rudd and Treasurer Wayne Swan indicated that particular reform areas considered by the Review, which do not form part of the suite of currently accepted proposals, will be considered by the Government in the upcoming months and years as part of its second term agenda.
The key areas for which reform implementation will be deferred are the personal taxation system, improving incentives to save and enhancing the governance and transparency of the tax system.
Personal Taxation
The Government has indicated that the whole area of personal tax in general will be considered as part of future reform.
- The key Review recommendations in the area of personal taxation for future Government consideration are:
- Increase the tax-free threshold to $25,000 and enable a constant marginal rate for most individuals by reducing the number of marginal rate bands to two: 35% for taxable incomes of $25,001 to $180,000 and 45% for taxable incomes above $180,000.
- Retain the individual as the primary unit of personal taxation but consider optional couple assessment for couples of late retirement age.
- Restrict the availability of subsidies for dependants through the tax system; in particular, replace the various existing dependency tax offsets with a single tax offset in certain circumstances.
- Tax-exempt status for all income support payments and supplementary payments, including government payments of an income support nature such as scholarships.
- Structural tax offsets (the low income, senior Australian, pensioner tax and beneficiary tax offsets) should not be separate components of the tax system but should be incorporated into the personal tax rates scale.
- A health levy (such as the current Medicare levy) could be applied as a proportion of net tax payable instead of the current proportion of taxable income.
- Streamline, simplify and improve the effectiveness of concessional offsets. The offsets earmarked for review include the various dependency offsets, the zone tax offset, the mature age worker offset, the primary producers averaging tax offset and the offset for special professionals.
- Remove the medical expenses tax offset and review the Medicare levy surcharge. Any assistance for purchasing private health insurance should be provided as a premium reduction rather than provided through the personal tax system.
- All forms of wages and salaries should be taxable on an equivalent basis and without exemptions.
- Fringe benefits that are readily valued and attributable to individual employees should be taxed in the hands of the employees rather than their employers. Employers will retain the FBT obligations for any other fringe benefits.
- Simplification of the scope of taxable fringe benefits.
- Extension of the Personal Services Income regime to all entities that earn a significant proportion of income from personal services and introduce an arm's length rule to deductions in respect of payments to associates.
- Simplify the personal tax system for many individuals by introducing optional standard work-related deductions and deductions for the cost of managing tax affairs.
- Introduce a tighter nexus between the deductibility of an expense and the derivation of income.
Savings Income
The Review recommends, as part of its suite of personal tax reform proposals, that a 40% savings income discount should be introduced for specific types of non-business related investment income: net interest income, net residential rental income, capital gains and losses and interest expenses related to investments in listed shares.
The Review leaves open the potential for the extension of the discount to other forms of savings income as part of the Government's consideration of the company income tax and dividend imputation reform proposals.
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