For the third time in 10 days the government has announced a raft of tax measures, following on from the release of the Henry Review on 2 May and the Board of Taxation Report on Managed Investment Trusts (MITs) on 7 May.

Superannuation changes

Co-contribution reductions

The matching rate for the superannuation co-contribution will be retained at 100% (instead of increasing to 125% and then 150% as previously announced) and the maximum co-contribution that is payable on an individual's eligible personal non concessional superannuation contributions will be retained at $1,000. Also, the indexation applied on the income threshold above which the maximum co-contribution begins to phase down and then cut out will freeze for 2010/11 and 2011/12 at $31,920 and $61,920 respectively.

Extension of superannuation fund merger loss transfer relief

The government will extend transitional superannuation fund merger loss transfer relief ‘to mergers into new funds’ with effect from its implementation date on 24 December 2008. The relief is already available where two funds merge to create a new fund, provided that at least one of the existing funds had five or more members. Details were not provided in the government announcement, but presumably the relief will be extended to the situation where the merging funds had fewer than five members, but the new merged fund has five or more.

Deductions for personal contributions to successor funds

The government has announced that it will permanently allow a claim for deductions for eligible contributions made to successor funds with effect from 2010/11. Currently deductions for personal contributions to successor funds are limited to a situation where the successor fund qualifies for the transitional superannuation fund merger loss transfer relief, and a choice is made to transfer losses.

Exercise of the Commissioner’s discretion to disregard excess contributions or reallocate them to another year

The government has announced that with effect from the 2010/11 income year the Commissioner will be allowed to exercise his discretion to disregard concessional and non-concessional superannuation contributions or reallocate them to another year before an excess contributions tax assessment is issued to the member. Currently an affected member can only make an application for the exercise of the discretion after receiving an excess contributions tax assessment.

Costs of providing terminal medical condition benefits

With effect from 16 February 2008 the legislative environment permitted a complying superannuation fund to pay benefits to a member with a terminal medical condition. Superannuation funds may have paid insurance premiums to effect cover to provide these benefits. The announcement makes clear that the cost of this cover will be deductible to the trustee of the affected fund.

Increase the time limit for deductible employer contributions made for former employees

This announcement, as with a number of the superannuation measures, is short on detail. Currently superannuation contributions in respect of former employees are, broadly, deductible where made to satisfy an employer’s super guarantee obligation, but otherwise are deductible on a quite limited basis. Presumably, and it is not clear to what extent, the government will be addressing this issue, by broadening the basis of deduction.

Reiteration of Henry Review response

The government reiterated its announcements from Sunday 2 May that it will implement a staged increase in the Superannuation Guarantee rate and an equity measure for low income earners in the form of a government contribution of up to $500.

Other changes

Other announced minor changes include:

  • clarifying the due date of the shortfall interest charge for the purpose of excess contributions tax, and
  • providing new arrangements to public sector defined benefit schemes which fund benefits through last minute contributions.

First Home Saver Accounts

The government has announced changes to the First Home Saver Account (FHS Account) scheme, which are designed to increase the flexibility and use of the accounts. To date, the take-up rate of FHS Accounts has been very low – seemingly because of the restrictions and complexity of the rules.

FHS Accounts were originally announced in the Rudd Government’s 2007 election campaign, and have already been ‘refined’ in the 2008 Federal Budget. In brief, under the existing model:

  • the government provides a co-contribution of 17% on the first $5,000 (indexed) contributed to the account each year
  • personal contributions to the account are allowed until the total balance reaches $75,000 (indexed), and
  • earnings on the account balance are taxed at 15% and withdrawals are tax free where they are used to purchase a first home.

The above concessions will continue to apply. However, the government has now announced that FHS Account holders will be allowed to withdraw their FHS Account balance after an (unspecified) minimum qualifying period and subject to conditions. The withdrawal must be in order to buy a first home, and the balance of the account must be transferred to an approved mortgage. This is more flexible than the existing rules, which (somewhat bizarrely) require any withdrawal within four financial years of the account being established to be transferred to a superannuation fund, rather than being used to reduce a mortgage. Consultation on the details is to occur.

Instalment warrants

The government has re-iterated its announcement on 10 March 2010 to amend the income tax treatment of ‘traditional instalment warrants’ and the treatment of the limited recourse borrowings of complying superannuation funds.

Traditional instalment warrants

An instalment warrant is a derivative that usually involves an investor borrowing to invest in an asset, such as a share (the underlying asset). In its simplest form, a ‘traditional instalment warrant’ involves the investor making an upfront payment, which will usually include prepaid interest and borrowing fees. The underlying asset is held on trust for the investor during the life of the loan. Once the investor has paid the required future instalment(s), the trustee transfers the underlying asset to the investor.

On a technical reading of the current law, the trustee owns the underlying asset in the trust. As a result, there is a CGT taxing point when the investor pays the final instalment (CGT event E5). However, the ATO has issued a number of product rulings for traditional instalment warrants that effectively ignore the trust and treat the investor as the owner of the underlying asset. Under this practice, there is not a CGT event on payment of the final instalment and transfer of the underlying asset. The law will now be amended to align with the ATO practice.

Non-traditional instalment warrants

‘Non-traditional instalment’ warrants include instalment warrants over real property. These have primarily been used by self managed superannuation funds to borrow to invest in commercial and residential property without contravening the borrowing restrictions of the SIS Act. The proposed amendments will see a superannuation trustee who enters into a non-recourse borrowing arrangement for the purpose of purchasing an asset, as permitted under subsection 67(4A) of the SIS Act, treated as the owner of the asset for income tax purposes.

GST – Financial supplies

The government is maintaining the current regime, including the reduced input tax credit (RITC), subject to targeted measures to commence from 1 July 2012:

  • the list of services for which RITCs can be claimed will be expanded to include acquisitions related to supplies of life insurance by super funds, and
  • amending the trustee and responsible entity RITC items to prevent the ability to bundle other services and claim an RITC.

This article was adapted, with permission, from a Tax Brief prepared by Greenwoods & Freehills Pty Limited.1