November 2009:

Australia Tax Update

Introduction

According to most respected economic and financial analysts, economies around the world will be experiencing prolonged periods of negative growth and will be in recession at some point during the 2009 year. The Australian Government has sought to handle the Global Financial Crisis through the release of its Nation Building Recovery package which is principally designed to stimulate the economy and prevent the Australian economy falling into recession.

The main parts of the Nation Building Package include proposed infrastructure spending on schools, defence homes, roads and local community projects. In addition tax concessions have been made available for spending by businesses on eligible assets and tax bonus payments have been paid to eligible Australian workers.

Below is a discussion of some of the key measures announced in the Federal Budget which will be of relevance to international readers. In addition included in this Australia Tax Update are some brief comments regarding the current review of the Australia’s future tax system, known as the “Henry Review” and which will be of particular importance in these somewhat uncertain economic times.

Federal Budget

In response to the Global Financial Crisis, on 12 May 2009, the Australian Federal Government handed down the Federal Budget for the 2009-2010 fiscal year by unveiling its largest deficit on record and forecasting a decade of debt. In  fact, for the 2008-2009 fiscal year the Budget deficit was approximately $33 billion and this is expected to grow to approximately $58 billion for the 2009-2010 fiscal year.
Of particular interest to international readers will be Budget announcements relating to:

Personal Taxation

Below are the personal tax rates for residents and non residents for the 2009-2010 fiscal year.  Clearly the changed economic environment has in all likelihood curtailed the prospect of the original aspirational marginal tax rates of 15%, 30% and 40% previously announced by the Federal Government that were targeted to occur in the 2013-2014 fiscal year.

Other key measures announced in the Budget include, increasing  the low income tax offset, increasing  the income threshold relating to the Medicare Levy, changing  the tax offset rules relating to private health insurance, increasing the Medicare Levy surcharge for certain high earning taxpayers, the tightening of non commercial loss rules, amendments to the family tax benefit system and the introduction of paid parental leave scheme system.

Business Taxation

As part of the Government’s stimulus package, the Federal Government has provided a clear incentive to business for acquiring eligible assets.  In particular, for small business (with an annual turnover of less than $2 million ),  a bonus deduction of 50% will now be available for eligible assets acquired between 13 December 2008 and 31 December 2009 and installed ready for use by 31 December 2010.  For all other businesses an additional deduction of 30% will be available for eligible assets acquired between 13 December 2008 and 30 June 2009 and installed ready for use by 31 June 2010.  Other businesses that acquire eligible assets between 1 July 2009 and 31 December 2009 and have the asset ready for use by 31 December 2010 will be eligible for an additional a deduction at the rate of 10%.
Other key business tax measures announced in the Budget include the extension of the deemed dividend rules for private companies, changes to off market share buy backs, and  changes research and development tax concession rules.

International Taxation

Under new measures announced by the Federal Government, from 1 July 2009, Australian residents working overseas for over 90 days will no longer be eligible for a general income tax exemption in respect of their foreign earnings. This will have implications for countries in the Asia-Pacific region such as Hong Kong and Singapore which traditionally have been able to attract Australian expatriates to work abroad given  the lower personal income  tax rate available in these countries coupled with  the added benefit that the foreign employment income would also not subject to Australian income tax under the existing rules.

Therefore from 1 July 2009 it will be necessary for employers operating in the Asia-Pacific region interested in hiring Australian expatriates to work abroad to consider alternative modes of remuneration or salary packaging techniques bearing in mind the loss of the existing foreign earnings  tax exemption for Australian tax residents.

Other key international tax measures announced by the Government include the repealing and re-drafting of the controlled foreign company (“CFC”) and foreign investment fund (“FIF “) rules. It is expected that the new rules will be less complex and are they are intended to improve the integrity and effectiveness of Australia’s international tax system.

Australian Tax Reform – The Henry Review

In the midst of the Global Financial Crisis, the Australian Government has taken the view that now is an opportune time to be considering major reforms to the Australian tax system to deal with demographic to deal with demographic, social, economic and environmental challenges of the 21st Century.

The review of Australia’s future tax system is  known as the Henry Review and will review all Australian taxes including State Taxes, except GST. The review will be conducted in several stages.  The review panel will provide a final report to the Treasurer by the end of 2009.

Current impact of Australian Tax Changes

Encouragingly for the Australian economy, the March 2009 National Account for Australia revealed that GDP had grown by 0.4% at a time when most OECD countries have experienced negative growth over the same period.

The Australian Government has credited some of this growth due to its tax bonus payment which have been received by Australian workers and their families. 

It is hoped that the tax reforms being  considered as part of the Henry Review along with the Budget measures will assist in the revival of the Australian economy but the Government also readily acknowledges that  Australia is still not out of the woods yet and believes that the full impact of the Global Financial Crisis may still have some way to run.