With this years budget surplus the Federal Government has promised to deliver personal tax cuts to the tune of $36.7 billion dollars over the next 4 years, effective from July 2006.

So what does this mean for you?

As is always the case, people who fall under the highest tax bracket, will reap the most benefits from this years budget with an annual saving of $6200 for a taxable income of $150,000.  Whereas an individual with a taxable income of $35,000 will save $710 annually-only 2% of their salary compared to the whopping 4.13% saving for their friend on $150,000.

Trusts

Family trusts

In order to increase the flexibility of trusts, the government has introduced a number of changes to family trust provisions.

Under certain circumstances, family trust elections and interposed entity elections (which are currently irrevocable) will now be revokable.  However the circumstances under which these conditions apply are not clear.

Moreover, a family trust election can now comprise a larger number of family members using the definition of “family group”.   This permits a family trust to extend its distributions to former spouses of family members, and widows/widowers of deceased family members where the widow/widower has a new spouse.  Linear descendents will also be included in the family group.

Non resident trustees

At present, a resident trustee is required to pay tax on trust distributions which it makes to non resident individuals and companies that are beneficiaries in the Australian trust. The non resident individual or company would then be required to lodge and Australian income tax return, and claim a credit in that return for taxes already paid by the Australia trustee on their behalf.

These requirements were not applicable to non resident trustees given that the non resident trust was a beneficiary of the Australian trust.  Thus making it possible for some income to escape tax in Australia, where the beneficiaries of that trust failed to declare the distributions received from the Australian trust.   Changes to the taxation of trusts means that the Australian Trustee will be required to deduct income tax from the distributions made to the non resident trustees in the same manner that currently applies to non resident individuals and companies.

Ultimate beneficiary rules

Trustees of closely held trusts are presently required to identify the ultimate beneficiaries of their trust when the trust makes distributions. In many cases, it was difficult for the trustee to trace through these interposed trusts and entities. In recognition of these difficulties the government has announced an amendment to the reporting requirements for ultimate beneficiaries. Trustees will now only be required to disclose the identity of the first-tier trusts, that is, the immediate beneficiary in chain of trusts interposed between the trust and its ultimate beneficiaries. 

Fringe benefits tax

The fringe benefits tax rate will be reduced from 48.5% to 46.5% as of 1 April 2006.  This reduction has been synchronised with the reduction of the highest personal income tax rate, against which the FBT rate was benchmarked.

 Under new legislation, the threshold for in house fringe benefits will be raised from $500 to $1000.  In house fringe benefits are goods and services provided to employees which are similar to the goods and services which the employer provides to the public in the ordinary course of its business. 

Changes to the minor benefits and reportable fringe benefits exclusion thresholds, have seen these lifted to $300 & $2000 from their respective thresholds of $100 & $1000.
 
The current pooled development fund (PDF) programme will be replaced with the early stage venture capital limited partnership (ESVCLP) investment vehicle, which will provide a flow through tax treatment and complete tax exemption for income and capital gains for both domestic and foreign limited partners. 

To qualify, the ESVCLP must have a maximum fund size of $100m and total assets of investee companies not exceeding $50m immediately prior to investment by the ESVCLP.  The ESVCLP must divest itself of any holdings once the total assets of the investee company exceed $250m.

For full CPA update, visit CPA Australia site.