Federal Budget 2008-2009

Federal Budget 2008

• The Forecast Budget Surplus for the 2008/2009 year is $21.7 Billion. This is up from $16.8 Billion in the 2007/2008 year.
• Economic Growth is forecast to slow to just 2.75% of GDP in 2008/2009 compared to 3.5% in 2007/2008. This clearly reflects the impact rising interest rates and inflation are having on our economy.
• Inflation is forecast to fall from its current level of above 4% to 3.25%.
• A Building Australia Fund is to be established with $20 Billion to fund road, port and rail infrastructure projects.
• An Education Fund is to be established with $11 Billion to fund future education capital costs.
• A Hospital & Health Fund is to be established with $10 Billion to fund future capital expenditure.
• Individual Marginal Tax Rates will be cut as follows:

The table below indicates the income tax payable at selected income levels ignoring the Medicare Levy and any tax offsets.

• The government also stated its goal was to reduce by 2013-2014 the number of marginal tax rates to three – being 15%, 30% and 40% only.

• Family Trust changes introduced last year have been reversed. No longer can the beneficiaries under your family discretionary trust include former spouses, widows or relatives.

The definition of family in the family trust election rules will be restricted to the children and grandchildren of the trust’s test individual.

In addition, you will no longer be able to make a one-off variation to the test individual specified in the family trust election.

• Capital Protected Loans traditionally used to acquire shares have been reviewed and the deductible component of the interest has been reduced from 14% to 9.35%. This rate change will move in line with the Reserve Bank of

Australia’s indicator variable rate and accordingly reduces the attractiveness of this type of investing.

Capital protected loan providers typically are charging about 20% these days, hence leaving 10.65% (20%-9.35%) non deductible.

• The Low Income Tax Offset is to be increased in accordance with the following table

Accordingly if you earn less than $30,000 in any particular year you receive the maximum offset / rebate. The amount received then declines as your taxable income approaches the Upper Threshold.

• The Senior Australian Tax Offset (SATO) has effectively improved with the changes to marginal tax rates outlined above.

A ccordingly senior Australian’s who qualify for the SATO have new “effective tax free thresholds” as follows:

• The Medicare Levy Surcharge thresholds will increase from July 1, 2008. The threshold will increase to a taxable income of $100,000 for singles and $150,000 for couples before the 1% surcharge kicks in.

• The Baby Bonus will increase from July 1, 2008 from $4,258 to $5,000, and indexed by CPI annually.

However from January 1, 2009 the bonus will only be available to families whose adjusted taxable income is less than $150,000. In addition the bonus will be paid in 13 fortnightly installments from January 1, 2009.

• An Education Tax Refund will be introduced from July 1, 2008 and will be available to families who are eligible for Family Tax Benefit Part A.

Basically a refund of 50% of eligible expenditure for education costs for children will be available.

For a primary school child a refund of 50% of up to $750 spent on each child is available – hence a maximum refund of $375 per child per annum.

For each secondary school child a refund of 50% of eligible expenditure up to $1500 is available – hence a maximum refund of $750 per child per year.

Eligible education expenses include laptops, home computer and associated costs, home internet connection, printers, education software, student school books and stationery.

The refund will be claimed as part of your annual income tax return.

• First Home Saver Accounts will be introduced from October 1, 2008.

Contributions into these accounts can be made up to $75,000 in total. The government will contribute 17% of the first $5,000 contributed by each person each year. That is, you put in $5,000 and the government will put in $850.

Earnings on the account will be concessionally taxed at 15%.

Tax free withdrawals from the account to purchase or build a first home can be made after contributions of at least $1,000 have been made in each of the prior 4 financial years.

The original proposal to be able to contribute from pre tax salary and wages via salary sacrifice has been scrapped.

• Same Sex Couples and their children will be treated as any other couple under Commonwealth Laws. The majority of changes in the areas of superannuation, social security, veterans entitlements, workplace relations, workers compensation, taxation, health, immigration and citizenship will take effect from July 1, 2009.

• The Child Care Tax Rebate will increase from 30% to 50% from July 1, 2008. As part of this measure the maximum out of pocket expenses claimable will increase from $4,354 to $7,500 per child per year.

• Family Tax Benefit Part B will be income tested from July 1, 2008. The primary income earner must have an adjusted taxable income of $150,000 or less.

The adjusted taxable income includes net rental property losses as well as tax free pensions or benefits.

The income test will be indexed annually.

• Medicare Levy Low Income Thresholds will be increased from $16,740 to $17,309 for singles and from $28,247 to $29,207 for couples.

In addition the threshold will be increased from $2,594 to $2,682 for each dependant child or student.

The threshold for pensioners below Age Pension age will also increase from $21,637 to $22,922.

• Employee Share Scheme taxation arrangements have been amended to clarify the nature and timing of the benefits derived therefrom and to reduce the flexibility associated with current arrangements.

• No Change To Superannuation with respect to:

a) tax free lump sums and pensions for those 60 years of age and over.

b) Transition to Retirement pensions for those over age 55 years.

c) The current strategy of borrowing within superannuation to acquire property or shares as introduced last year.

• Salary Sacrificed amounts into superannuation will be counted as “income” for the purposes of determining whether a person is eligible for certain government support payments and the superannuation co-contribution.

Reportable fringe benefits will also be counted.

• The Terminally Ill have had it confirmed that they will still be able to access tax free lump sums from superannuation and that this will be back dated to July 1, 2007.

• The Fringe Benefits Tax (FBT) exemption for in-house employer cafeterias will be removed.

The FBT exemption for work related items such as laptop computers, personal digital assistants, briefcases and mobile phones will be tightened to ensure only those provided by an employer to an employee for work purposes qualify.

The exemption will be limited to one item of each type per employee per FBT year.

Income tax law will also be amended to disallow employees from claiming depreciation for the work related percentage of FBT exempt items.

• A Senior Bonus of $500 will be paid to all those in receipt of the Age Pension, Veteran Pensions, Widow

B Pensions, Wife Pension, Senior Concession Allowance, Mature Age Allowance, Widow Allowance or Partner A llowance.

• A Carer Bonus will be paid prior to June 30, 2008. Those in receipt of Carers Payment will receive a tax exempt payment of $1,000 and those in receipt of Carer Allowance will receive $600 for each eligible person in their care.

Asset Protection for Business Owners

This is always an important issue often overlooked until it is too late. The trick to asset protection is to do it early when there are no storm clouds on the horizon. Transactions designed to avoid creditors at the last minute are often “clawed back”. Unfortunately tax effectiveness and asset protection are often at different ends of the planning spectrum and a trade off is inevitable. Recently we produced an asset protection guide/checklist for business owners which covers almost 50 areas to consider. We have listed a few below:

• Spouse Directorships are common because when you establish your business often both husband and wife are shareholders. Directors however become personally liable in a multitude of circumstances. Why not resign one spouse as a director to limit your exposure. That spouse would of course still maintain their shareholding.

• Ownership/Structure of assets held is critical. Business assets should be held separately to investment style assets. Family and Unit Trusts are often used to effect this security.

• Shareholders/Unitholder Agreements are often complex, time consuming and costly. Without an effective agreement in place you have not protected possibly the main asset you have, or the value at which you can exit the business or the terms and conditions associated therewith.

• Supplier and Bank Guarantees are often given but rarely reviewed. Do you really need to supply these years after the initial transaction?

• Insolvent Trading results in directors being personally liable. If your trading close to the wind maybe sit back and take stock before continuing to trade. Maybe take some advice to see if you are trading insolvently or not.

• Inheritances are growing in value and often people do not ask their parents to protect these assets. Rather than bequeath the assets to a Testamentary Trust business owners running considerable risks unfortunately often receive significant assets in their own names.

• Gifting Cash or Non Market Transactions with family members is dangerous and a simple “loan” document and/or mortgage can protect all concerned.

• Divorce does not invalidate a prior Will. Many could be bequeathing assets to the ex spouse unknowingly. Similarly leaving your nest egg to the ex spouse so they can look after the kids has not protected the kids position at all and places them at risk from a number of perspectives. A testamentary trust can be used in such circumstances to great effect from an asset protection and tax effective prespective.

Also you might just check who owns the life insurance policy you took out 10 years ago as well as who the nominated beneficiary of your superannuation fund is. You might find it’s the ex spouse!

• Leased Premises for a business also has potential asset protection issues. Some premises are not zoned for

the current business usage or alternatively the length of the lease and the renewal options attached (or lack thereof) can materially effect the sale value of a business.

Once again planning early helps protect the assets we strive so hard to build.

• Inter-Company or Family Loans are often overlooked in asset protection planning. You may have placed some of your assets in a trust for peace of mind but that will be ineffective if the trust has a loan to you equal to the value of the assets.

• Cashflow Planning is critical to asset protection as the structure in which assets are held could be in jeopardy if the surrounding cashflows indicate effective ownership is elsewhere.

Advice

Should you or a friend or colleague require some advice on these or any other matter please feel free to make an appointment.