Budget 2009: Unlocking the business tax change secrets

While the Government’s decision to increase the small business tax break has grabbed the attention of small businesses, a number of other tax changes could affect the way you run your company. Tax expert Terry Hayes and the team from Thomsons Reuters explain the major changes.

Use of non-commercial losses restricted for holiday homes and hobby farms

The Government will tighten the application of the rules on the use of non-commercial losses to prevent high income individuals from offsetting excess deductions from non-commercial business activities against salary and other income.

Taxpayers with an adjusted taxable income of over $250,000 will only be able to deduct expenses from non-commercial business activities against the income from those activities.

Any excess deductions will be quarantined to the business activity. This will restrict the ability of taxpayers with adjusted taxable income greater than $250,000 to claim losses for non-commercial activities that are more likely to be in the nature of lifestyle choices or hobbies.

Taxpayers will still be able to apply to the Tax Commissioner for relief from the rules if there are exceptional circumstances, or because the nature of the activities means that a taxpayer is temporarily carrying on an uncommercial business, but the activities they are undertaking are nonetheless independently assessed as commercially viable.

This measure will apply from the 2009-10 income year.

Entrepreneurs’ offset income test delayed

The proposed income test for the entrepreneurs’ tax offset, announced in the 2008 budget, will be deferred for 12 months to the start of the 2009-10 income year.

As originally announced, the proposed income test will limit access to the offset by restricting eligibility for singles from $75,000 annual adjusted taxable income and for families from $120,000 annual adjusted taxable income. The Government has said in this year’s budget that it will consult on the form of the income test.

There were conflicting statements in last year’s budget whether the relevant adjusted taxable income amount for singles would be $70,000 or $75,000. Treasury has confirmed to Thomson Reuters that the correct figure is $75,000.

CGT; limited rollover relief for fixed trusts

The Government will introduce a limited CGT rollover for assets transferred between fixed trusts – that is, trusts that have the same beneficiaries with the same entitlements and no material discretionary elements.

Typically, the transfer of assets from one trust to another will trigger a CGT taxing point. As a result of this measure, trustees of eligible trusts will be able to defer the CGT consequences of the asset transfer until the receiving trust subsequently deals with the asset. This will allow eligible trusts to restructure without immediate CGT consequences.

The measure will be accompanied by appropriate integrity rules.

The Government will proceed with the abolition of the “trust cloning” exception to CGT events announced in October last year. This new measure will provide limited rollover relief for fixed trusts. All these amendments will be combined into one set of amendments – exposure draft legislation will be released in the coming weeks.

The rollover relief will apply from 1 November 2008.

Division 7A to apply to the use of assets

The Government has proposed to tighten the rules relating to the taxation of benefits provided by a private company to its shareholders or their associates.

The division 7A deemed dividend rules will be extended to payments by way of a licence or right to use real property and chattels, such as cars, boats and real estate. This will reduce the scope for private companies to allow their shareholders or associates to use such company assets for free, or at less than their arm’s length value, without paying tax.

This measure will provide greater equity in treatment between the shareholders of private companies on the one hand, and employees more generally, as the same use of the asset by an employee would attract FBT.

The Government also said that other technical amendments will be made to strengthen division 7A, including to ensure that corporate limited partnerships cannot be used to circumvent its operation.

This measure will apply from the 2009-10 income year.

Changes to employee share scheme rules

The Government has announced significant changes to the rules governing the taxation of shares and options acquired under an employee share scheme. The changes will apply from budget night.

Under the present arrangements, employees (or their associates) who acquire shares or rights to acquire shares (options) under an employee share scheme are required to pay tax on any discount on the full value of the shares or options.

If the shares or options are qualifying shares or options, the employee can elect to be assessed in the income year the shares or options are acquired. If so, the employee can access an upfront tax exemption of up to $1000 on discounts received each year.

If an election is not made, taxation of the discount is deferred until a later time (such as when the employee disposes of the shares or options).

In comparison, if the shares or options are non-qualifying shares or options, the employee is taxed on the discount when he or she acquires the shares or options. This means they do not enjoy the tax benefits associated with qualifying employee share schemes.

Under the new arrangements announced in the budget, all discounts on shares and options provided under an employee share scheme, whether qualifying or non-qualifying, will be assessed in the income year in which they are acquired.

In other words, employees acquiring shares or options under qualifying employee share schemes will no longer be able to elect to defer taxation on their discount to a later time. This will ensure that all forms of remuneration are taxable in the year the remuneration is received.

The Government will also limit access to the $1000 upfront concession. The $1000 upfront tax exemption will be limited to those employees with an adjusted taxable income of less than $60,000 (that is, after taking into account reportable fringe benefits, salary sacrifice arrangements and net investment losses).

These measures will apply to shares and options acquired after 7.30pm AEST on 12 May 2009. The measures will not affect shares or options already held by employees.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.