We summarise below the key changes to the taxation of individuals, families, small businesses and superannuation. Please note that there is no certainty that all of the changes proposed below will be passed by Parliament.

FBT: Statutory formula reforms for car fringe benefits

Over the next four years, the existing statutory fractions ranging from 7% to 26% applied when working out the taxable value of a car fringe benefit using the "statutory formula" method will be phased out and replaced by a flat rate of 20%. Under the "statutory formula" method, the taxable value of a car fringe benefit depends on the relevant statutory fraction applied to the cost of the car.

Currently, this statutory fraction decreases as the distance travelled by the vehicle increases. The new flat rate of 20% will apply regardless of the distance travelled during the year, removing the incentive for people to drive more than necessary to access higher tax concessions.

The 20% flat rate will only apply to new vehicle contracts entered into after 7:30pm (AEST) on 10 May 2011, and will be phased in over four years as shown in the table below.

Please note that the operating cost method, which bases FBT on a vehicle’s actual business use as determined by a logbook, will continue to be available unchanged.

Refund of excess concessional superannuation contributions

Eligible individuals will be provided with the option of having excess concessional contributions taken out of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

The measure will apply where an individual has made excess concessional contributions of up to $10,000 (not indexed) in a particular year. It is only available for breaches in respect of 2011/12 or later years, and only for the first breach.

Excess contributions tax is incurred where an individual exceeds their concessional contributions cap. Concessional contributions include compulsory superannuation guarantee payments, salary sacrifice contributions, and other deductible contributions. Excess concessional contributions are taxed at 31.5 per cent, in addition to 15 per cent tax when contributions are made to the fund.

This measure makes the superannuation system fairer by allowing those who have breached the cap for the first time, by $10,000 or less, the option to have these contributions refunded and taxed at their potentially lower marginal tax rate rather than the 46.5% effective excess contributions tax rate.

Unfortunately, these measures still do not go far enough as they do not address excess non-concessional contributions.

New reporting obligations - payments to contractors

In an effort to improve tax compliance, certain businesses will be required to annually report payments to contractors in the building and construction industry from 1 July 2012.

Reduction in minimum payment amounts for account-based pensions in 2011/12

The government will phase out the pension drawdown relief that has been provided over the last three years and which halved the minimum payment amounts. Minimum payment amounts for account-based, allocated and market linked (term allocated) pensions will be reduced by 25 per cent for 2011/12, i.e. the reduction will change from the current 50% to 25%, with the reduction removed completely in 2012/13 as follows:

Dependent spouse rebate

The dependent spouse rebate will be phased out for taxpayers with a dependent spouse born on or after 1 July 1971. This measure aims to remove the tax concession for taxpayers with a non-working spouse and no children and to encourage work participation.

Taxpayers with an invalid or permanently disabled spouse, supporting a carer, or people who are eligible for the zone, overseas forces and overseas civilian tax offsets will not be affected by this change.

Low income tax offset brought forward

From 1 July 2011, the amount of the low income tax offset (LITO) that is delivered to low and middle income earners through their regular pay during the year will be increased from 50% to 70% of their total entitlements. The remaining 30% of their LITO benefit will still be paid as a lump sum on assessment of income tax returns. This measure will reduce the tax refunds many individuals receive upon lodgement of their annual income tax returns as more of the LITO benefits will be paid out throughout the year.

Minors to lose low income tax offset

The government will limit the ability of children under 18 years of age to access the low income tax offset (LITO) on their unearned income (such as dividends, interest, rent, royalties and other income from property) with effect from 1 July 2011. This measure will discourage income splitting between adults and children, particularly through the use of discretionary family trusts, by vastly reducing the amounts children can receive tax-free. Income earned by minors from work will still be eligible for the full benefit of the LITO.

HECS discount

From 1 January 2012, the following discounts applying to HECS payments will be reduced:

• the discount available to students electing to pay their student contribution up-front will be reduced from 20% to 10%, and
• the bonus on voluntary payments to the Tax Office of $500 or more will be reduced from 10% to 5%.

Those taxpayers who are making HECS repayments may wish to consider timing their payments to fall before 1 January 2012 in order to take advantage of the higher concessions before they are reduced.

PAYG Instalments

The GDP adjustment factor for PAYG instalment taxpayers who use the GDP adjustment method will be reduced from 8% (which is the rate that would apply for the 2011/12 income year under the current law) to 4% for the 2011/12 income year. We note that this “concession” is still a significant increase from the rate of 2% which applies in the current financial year.

The GDP adjustment factor for the PAYG instalment taxpayers increases the previous year's adjusted taxable income by the previous year's nominal GDP growth, to determine the tax instalments to be paid in the next income year.

Higher superannuation contribution caps for over 50s

The government will set the higher concessional superannuation contributions cap for eligible individuals aged 50 and over with total superannuation balances of less than $500,000, due to apply from 1 July 2012, to $25,000 above the general concessional cap. The general concessional contribution cap is set at $25,000. When it increases due to indexation, the higher cap will increase by the same dollar amount. This measure will allow those eligible Australians over 50 to contribute $25,000 more per year than other workers.

Superannuation information on payslips

Employees will receive information on their payslips about the amount of superannuation actually paid into their account; and employees and employers will receive quarterly notification from their superannuation fund if regular payments cease, with effect from 1 July 2012.

Immediate write-off on motor vehicles for small businesses

Small businesses will be able to claim up to $5,000 as an immediate deduction for the purchase of motor vehicles for vehicles acquired from 1 July 2012. The remainder of the value of any vehicle purchased to which the $5,000 immediate deduction applies would be included in a general business pool (depreciated at 15% in the first year then 30% thereafter).

This measure follows other small business reforms (previously announced by the government) which apply from 2012-13, including increasing the immediate deduction threshold for depreciating assets from $1,000 to $5,000.

50% discount for interest income

From 1 July 2011, the Government will provide individuals with a 50% tax discount on up to $1,000 of interest earned, including interest earned on term deposits, bonds, debentures, annuity products and interest earned indirectly, such as via a trust or managed investment scheme.