The Australian Budget of May 8, 2012 included several provisions of note. In previous updates, we highlighted the changes to superannuation plans and the uncertain CIT rate (which will not, after all, be reduced from 30% to 29%). Here are a few other items worth attention:
Removal of Capital Gains Tax (CGT) Discount for Foreign Residents
The Government will remove the 50% CGT discount for foreign residents on taxable capital gains accrued after May 8, 2012, a measure which will impact foreign investment in non-exempt assets such as Australian real estate and the assets of a "permanent establishment" (e.g. branch) in Australia. Currently, foreign investors are entitled to a 50% reduction in capital gains in respect of such assets, provided they have held the asset for at least 12 months. Under the announcement, this reduction will be removed, thereby increasing the tax cost for foreign residents on the sale or disposal of such assets. There has also been a slight increase in the personal tax rates for foreign residents. Managed Investment Trust (MIT) withholding tax for non residents will also increase from 7.5% to 15% as of July 1.
Changed Limited Loss Carry Back Rules
Also as of July 1, 2012, companies will be able to carry back up to $1 million worth of tax losses each year and get a refund on tax paid in the previous year. As of July 1, 2013, the carry back period will be extended to two years, so that companies will be able to apply their tax losses against the taxable income of the previous two years and get a corresponding tax refund. This will be subject to the company having a positive franking balance – which may impact the timing of dividend distributions.
Changes to Tax Treatment of Employee Termination Benefits
The Government will amend the taxation treatment for employment termination payments (ETPs), which are presently taxed at a maximum rate of 15% for those over preservation age (55 to 60) and 30% for those under preservation age up to an indexed cap of $165,000.
FBT - LAFH Changes
As previously announced, the government changes to the living away from home allowances have significantly reduced the attractiveness as an employment incentive. Under the new rules, LAFH will be treated as part of an employee's assessable income rather than as a fringe benefit (meaning that it will therefore fall within the meaning of Ordinary Times Earnings (OTE) for Superannuation Guarantee purposes).
Under the new rules, access to these tax concessions is limited to employees who maintain a home in Australia for their own personal use and enjoyment at all times while required to live away from home for their work, and for a maximum period of 12 months in respect of an individual employee for any particular work location.
These reforms are aimed at preventing employers from being able to give the tax concession to employees who are not maintaining a second home, or are maintaining two homes indefinitely.
An employee who meets the requirements outlined above will be eligible to claim a deduction for food and drink and accommodation expenses incurred while living away from their usual place of residence. The expenses can only be deductible to the extent they are reasonable.
Reasonable is now defined as food and drink expenses over $110 (previously $42) in relation to a seven day period for each individual of 12 years of age or older and $55 (previously $21) in relation to a seven day period for each individual under the age of 12 for the 2012-13 income years. These amounts will be indexed and documentation of such expenditures must be retained for five years.
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