There are a number of items scattered through the budget that will have an impact on the market and investors and some of us in business.
We already know of the alcopops tax, the changes to the Medicare levy, the moves to boost taxation compliance and the higher tax on luxury cars above $57,000.
But there're others, starting with the largest new tax change: the move to scrap a tax exemption on light crude oil extracted from natural gas.
This has no doubt been sparked by the surge in world oil prices to well over $US120 a barrel in recent days.
That will boost government revenue by $2.5 billion over the next four years.
The tax will apply from midnight last night.
Condensate, which is used to make gasoline and diesel, will be taxed at the same rate as crude oil.
Companies such as Woodside Petroleum and BHP Billiton are among six companies that produce the raw material on the North West Shelf and which will be impacted to varying degrees.
As well condensate gathered from onshore fields will also be affected.
The Government said in its announcement last night that under the new arrangements, "all condensate production from petroleum fields located in the North West Shelf Project area and onshore Australia will be subject to the Crude Oil Excise. This excise is levied as a percentage of the value of crude oil produced from a petroleum field.
"Condensate will be subject to the same excise rates as crude oil from petroleum fields discovered after 18 September 1975. Under these arrangements, the top Crude Oil Excise rate (which applies once annual production reaches just over 5 million barrels in a year) is 30 per cent.
"The first 4,767.3 megalitres (or 30 million barrels) of crude oil produced from a field is exempt from Crude Oil Excise. Past production of condensate from a petroleum field will contribute towards meeting this threshold before the Crude Oil Excise becomes payable.
"As part of this measure, the Australian Government will provide the Western Australian (WA) Government with ongoing compensation for the loss of shared Offshore Petroleum Royalty revenue resulting from imposing the Crude Oil Excise on condensate. This arises because Crude Oil Excise payments are a deductible expense for calculating the Offshore Petroleum Royalty.
"An initial payment of $80 million will be paid to the WA in 2007-08, with payment in subsequent years adjusted to equal the impact of removing the condensate exemption on royalty payments to Western Australia. This is estimated to cost $406.6 million over the forward estimates period."
And a move that will benefit Australian property trusts will see the Federal Government cutting the amount of tax overseas investors pay on dividends from managed funds to 7.5 percent to encourage investments in real estate trusts.
The move will enhance the attractiveness of Australian property trusts, such as Westfield, to foreign investors. It could also improve the prospects of the troubled Centro finding buyers overseas for its Australian shopping malls. The new measure won't apply to investors living in countries not a party to a tax information exchange arrangements. That means investors many tax havens will miss out.
The tax, currently 30 percent, will be cut to 22.5 percent in the year starting July 1; 15 percent the following year; and 7.5 percent the year after that, according to last night's budget papers.
Treasurer Wayne Swan said in his first budget “these arrangements will make Australia's withholding tax rate one of the most competitive in the world. The arrangements will ensure Australian property trusts are well placed to attract foreign investment.''
"This will provide a major boost to Australia's goal of becoming a financial hub in the Asia-Pacific region and goes beyond the commitment made during the election.
Mr Swan said that "Australia is internationally recognised as one of the major markets for managed funds. The Australian funds management industry manages more than $1.4 trillion in assets. The industry is expected to continue its strong growth, with assets under management estimated to exceed $2.5 trillion by 2015. The Australian property trust sector is a key part of the industry.
"In spite of Australia's strong regulatory regime and reputation for funds management, less than three per cent of industry fees are derived from exports - that is, from foreign residents investing in Australian managed funds.
"Industry has advised this is in part due to the existing non-final withholding tax rate, predominantly applying to rental income and capital gains from taxable Australian property, which is higher, on average, than the withholding rates imposed by other countries.
"In order to enhance the industry's export ability, the Government will introduce a new withholding tax regime, with effect from the first income year after the date of Royal Assent of the enabling legislation.
"The new withholding tax regime will apply to fund payments that are distributions of Australian source net income (other than dividends, interest and royalties) of Australian MITs to foreign residents.
"It will cover distributions made directly from MITs to foreign residents as well as distributions made through other intermediaries (including custodians). Distributions of dividends, interest and royalties will continue to be covered by the existing final withholding tax arrangements.
"However, to support the integrity of the arrangements and in keeping with the Government's commitment to minimise international tax evasion and avoidance, the nature of the new withholding tax regime will vary depending on whether the foreign investor is resident in a jurisdiction with which Australia has effective exchange of information (EOI) arrangements on tax matters.
Residents of such jurisdictions will be subject to:
* A 22.5 per cent non-final withholding tax for fund payments of the first income year after the enabling legislation receives Royal Assent;
* A 15 per cent final withholding tax for fund payments of the second income year; and
* A 7.5 per cent final withholding tax for fund payments of the third and later income years.
"For the first income year, as an interim measure, investors resident in EOI jurisdictions will be eligible to claim a deduction for expenses relating to fund payments. The net amount will be subject to tax at a new rate of 22.5 per cent.
"The list of jurisdictions with which Australia has effective EOI will be specified in regulations.
"Residents of other jurisdictions will be subject to a 30 per cent final withholding tax, with effect for fund payments of the first income year in which the enabling legislation receives Royal Assent."
And the budget papers revealed that the Australia's government plans to sell $5.3 billion of bonds in 2008-09, even as it posts a record budget surplus.
The bond sales will be made for the now familiar reason to ensure the functioning of the futures market and to allow investors to obtain interest rate hedge cover.
The Government said in the budget papers that it will sell $3.3 billion of a new June 2014 bond in the year ending June 30, 2009. The government also will sell $2 billion of bonds maturing May 2021, to increase the amount of those bonds on issue to $5 billion.
The Government forecast a surplus of $21.7 billion next financial year, the highest ever and a 9 year high as a percentage of GDP at 1.8%.
Swan's bond-sales program maintains that of the previous administration, where new five-year and 13-year bonds were launched in alternate years. The amount of government bonds on issue will total about A$49.6 billion by June 30, 2009.
And, the Federal Government said it will apply a family income test to the eligibility criteria for the entrepreneurs' tax offset (ETO) to more appropriately target the offset towards genuine small, micro and home-based businesses.
Currently, the ETO is claimed by many taxpayers for whom business is not a primary source of income and who have other, more significant, forms of income. The family income test will restrict access to the ETO for businesses with high alternative sources of household income.
The ETO provides a 25 per cent tax offset on the income tax liability of small businesses that have an annual turnover of $75,000 or less, phasing out from a turnover of $50,000. The family income test will further limit access to the ETO by restricting eligibility for singles from $70,000 and families from $120,000 adjusted taxable income per year.
This measure will apply from 1 July 2008 and has an ongoing gain to revenue which is estimated to be $90.0 million over the forward estimates period.
The measure demonstrates the Government's commitment to finding savings in the Budget to help tackle inflationary pressures. The measure is part of the Government's commitment to ensuring the tax system is as fair and efficient as possible.
And, changes were made last night to the Fringe Benefits Tax.
With effect from 7.30 pm yesterday, the current exemptions under the FBT law for eligible work-related items and property consumed on an employer's premises will be tightened:
The FBT exemption for eligible work-related items will be amended to limit the exemption to items used primarily for work-related purposes.
Affected items include: laptop computers, personal digital assistants, briefcases, and tools of trade.
In a related measure, the Government will also disallow employees from claiming a deduction for depreciation of such items. This will end a double benefit that was previously available.
The FBT exemption for property consumed on an employer's premises will be amended to remove 'meal card arrangements' from the exemption.
These exemptions have allowed some employees to enter into salary sacrifice arrangements to acquire items for private consumption out of their pre-tax income. This is inequitable when compared to other taxpayers who acquire these items from their post-tax income.
As an additional integrity measure, the Government will amend the FBT law to ensure that FBT applies appropriately to employee arrangements involving jointly held investment assets. This will overcome the Federal Court's decision in National Australia Bank Ltd vs. Federal Commissioner of Taxation 93 ATC 4919 that resulted in an anomaly in the FBT law which also gave rise to salary sacrifice opportunities in relation to jointly held investment properties.
These changes will restore the original intent of the FBT law and improve equity in the treatment of employee remuneration.
The combined effect of the measures will raise approximately $1.2 billion over the forward estimates.
The FBT exemption that currently applies to certain work-related items will be tightened to ensure that it only applies to items that are provided by an employer to an employee for work purposes. The list of eligible work-related items currently includes:
* Laptops or similar portable computers;
* Briefcases;
* Calculators;
* Mobile phones;
* Tools of trade;
* Protective clothing;
* Computer software;
* Electronic diaries;
* Personal digital assistants or similar items; and
* Certain portable printers.
The FBT exemption will be limited to one item of each type per employee, per FBT year unless it is a replacement item.
The list of FBT-exempt work-related items will also be clarified to deal with advances in technology. This amendment will extend the exemption to all work-related portable electronic devices, including those with multiple functions.
New technology has resulted in the availability of a number of new work-related electronic items (for example, GPS receivers). There has also been a convergence of technologies (for example, a mobile phone that also has email, internet, diary, photographic and GPS functionality).
New and convergent technologies have resulted in uncertainty for the Australian Taxation Office and industry as to whether electronic devices with multiple functions fall within the FBT exemption.
The changes will restore the original intent of the legislation. The current FBT exemption for eligible work-related items was introduced in 1995 to reduce compliance costs. The relevant Explanatory Memorandum states 'the type of benefits that will be exempt are employment-related and generally any private use of these benefits by employees is incidental to their employment use'.
With the exception of mobile phones, computer software and protective clothing, the current FBT exemption for work-related items is available without any requirement that their actual use be work-related.
Technological advances have dramatically increased access to, and the appeal of, such items for personal use so that, in many cases, personal use is no longer incidental to business use. However, employees have still been able to enter into salary sacrifice arrangements to acquire such items for private consumption out of their pre-tax income.
The changes that disallow depreciation for FBT-exempt items will take effect as follows:
* For items purchased after 7.30 pm (AEST) on 13 May 2008, this measure will take effect from that time.
* For items purchased before 7.30 pm (AEST) on 13 May 2008, employees will be denied depreciation for the 2008-09 and later income years.
Copyright Australasian Investment Review.
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