Australian Federal Budget 2010 – Business Tax Changes

Summary of business tax changes in the Australian Federal Budget 2010…

• Tax rate for “small” business to be reduced to 28% from 1 July 2012 and the rate for all business also reduced to 28% from 1 July 2014
• New, more favourable, depreciation treatment for small business from 1 July 2012
• A number of capital gains tax reliefs for business have been broadened

Main details…

Corporate Tax Rates

The main item of interest for businesses is the proposed reduction in tax rates from the current 30% as follows:

“Small Business” relates to companies with a turnover of less than $2m per annum.

New Small Business Tax Concessions

As well as the reduction in the company tax rate for small business to 28% from 1 July 2012, the government is proposing to introduce the following concessions for small business:

• Depreciating assets costing less than $5,000 can be written off straight away.
• Other depreciating assets to be written off at a rate of 30%

These changes would take effect from 1 July 2012.

CGT Changes

The government has announced the broadening of a number of capital gains tax (“CGT”) reliefs for business:

It is proposed that the following changes will take effect immediately (applying to CGT events occurring after 7:30pm (AEST) on 11 May 2010):

• Australian interest holders will be given access to a broader range of CGT roll-overs where an entity restructures using a share or interest sale facility for foreign interest holders.  This amendment facilitates the use of roll-overs where the existence of foreign interest holders makes it impractical or expensive to comply with existing rules.
• CGT demerger relief provisions will be amended.  Demerger groups which currently include a corporation sole (a company with no shareholders) as the head entity, or, where the head entity would breach regulatory provisions if it demerged its interests in a demerger group (for example, a complying superannuation fund), will be able to benefit from the CGT demerger roll-over by allowing another member of the demerger group to qualify as the head entity.
• CGT roll-over relief is extended so as to allow indigenous incorporated bodies to convert to a company incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 without immediate CGT consequences.

Treasury has released a proposals paper outlining these changes and requesting written submissions on the design.

A new CGT measure has been announced to allow all payments under a qualifying earnout arrangement to be treated as relating to the underlying business asset.  This measure will remove the previous treatment that required the earnout right to be treated as a separate asset for CGT purposes.  The new approach will apply with effect from the date of Royal Assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007 (that is, when the previous treatment came into effect).

Other minor CGT changes (some of these have been announced previously):

• Refinement of the 2009-2010 Budget measure providing limited CGT roll-over relief for fixed trusts
• CGT roll-over for the transfer by the proposed Commonwealth Superannuation Corporation of assets from the Military Superannuation Benefits Scheme to the Australian Reward Investment Alliance investment trust.
• Relaxation of the scrip for scrip roll-over rules so as to make it easier for takeovers and mergers regulated by the Corporations Act 2001 to qualify.
• Extension of the CGT roll-over relating to water entitlements

Tax Consolidation Refinements

The government has announced refinements to the tax consolidation regime dealing with the collection (joint and several liability) provisions for income tax liabilities of consolidated and multiple entry consolidated (“MEC”) groups.  The refinements will ensure that:

• An entity leaving a consolidated or MEC group can, prima facie (and provided the relevant clear exit payments are made), leave the group clear from any further liability, with effect from the 2004-05 income year.
• Certain technical deficiencies relating to the application of the collection rules to MEC groups are corrected.
• Unpaid PAYG liabilities can effectively be recovered by the Commissioner of Taxation.

Climate Change Measures

With the savings arising from the deferral of the Carbon Pollution Reduction Scheme until at least 2012, the government has announced it will provide $652 million over 4 years to establish a Renewable Energy Future Fund.  This Fund will form part of the government’s expanded $5.1 billion Clean Energy Initiative previously announced in the 2009-10 Budget.

This Fund reflects the increased focus by the government on renewable energy.  The government recently expanded the deduction for exploration expenditure to include geothermal energy expenditure and announced a new resource exploration rebate.

Film Finance

The Budget announces changes to the eligibility requirements for film tax offsets.  The expenditure threshold for the post, digital and visual effects (PDV) offset will be reduced from $5 million to $500,000.  The requirement for films with expenditure between $15 million and $50 million to have at least 70% of the film’s total production expenditure in Australia will be removed.