Budget 2013: Medical expense tax offset to be phased out

The Government intends to phase out the out-of-pocket medical expense tax offset. Currently, a 20% tax offset can be claimed for eligible out-of-pocket medical expenses in excess of $2,060 per annum. For general medical expenses, only taxpayers who claim the offset for the 2013 income year will be eligible to claim in future years.

Individuals who have expenses relating to disability aids, attendant care or aged care will continue to qualify for an offset up to 2019.

Budget 2013:Medicare Levy increase affects small business

The increase in the Medicare levy from 1.5 per cent to 2 per cent, will effectively bring the top marginal tax rate to 47 per cent. This will not only impact on individual taxpayers but will have a flow on effect to small businesses. A number of tax laws that businesses regularly comply with apply the top marginal income rate as a penalty rate of tax.

As a result, the following common tax items will be subject to tax of 47 per cent, up from the previous 46.5 per cent:

–          Fringe Benefits Tax (FBT)

–          TFN and ABN Withholding Tax

–          Family Trust Distributions Tax

–          Trusts, where Section 99A applies to retained income

–          Excess non-concessional contributions to super (with tax on excess concessional contributions to increase to 32%)

Budget 2013: Medical expense tax offset to be phased out

The Government intends to phase out the out-of-pocket medical expense tax offset. Currently, a 20% tax offset can be claimed for eligible out-of-pocket medical expenses in excess of $2,060 per annum. For general medical expenses, only taxpayers who claim the offset for the 2013 income year will be eligible to claim in future years.

Individuals who have expenses relating to disability aids, attendant care or aged care will continue to qualify for an offset up to 2019.

Budget 2013: Changes to franking credit benefits

Various measures have been introduced by the Government to close the loophole that enables sophisticated investors to engage in double claiming from franking credits.

Under the proposed changes that are due to come into effect from 1 July 2013, the Government will ensure that when an investor sells shares ‘ex-dividend’, and then immediately buys equivalent shares which still carry the dividend entitlement (known as ‘cum-dividend’ shares), the investor will only be able to claim one set of franking credits.  The investor will not be able to claim franking credits otherwise available in respect of one of the two dividend entitlements.

The proposed changes will focus on tightening the 45 day ‘holding period rules’, and on the basis of these changes will not affect small investors with annual franking credit entitlements that do not exceed $5,000.

Changes to thin capitalisation rules expected in Budget

With the Federal Budget being released next week, many are speculating that the Government will be cracking down on business concessions with thin capitalisation rules being targeted. The rules which affect large, multinational companies may have unintended consequences for small businesses. For example, if a big business is forced to downsize it could hit smaller suppliers in a domino effect, possibly resulting in closures and creating struggling businesses.  There were expectations by the business community that any changes to thin capitalisation would be offset with a company tax cut; however, this has been ruled out by the Treasurer in light of deficit concerns.

Furthermore, the proposition to change thin capitalisation rules hint at an increase in the capital gains tax which would have far reaching consequences for the entire business community.

Changes to thin capitalisation rules expected in Budget

With the Federal Budget being released next week, many are speculating that the Government will be cracking down on business concessions with thin capitalisation rules being targeted. The rules which affect large, multinational companies may have unintended consequences for small businesses. For example, if a big business is forced to downsize it could hit smaller suppliers in a domino effect, possibly resulting in closures and creating struggling businesses.  There were expectations by the business community that any changes to thin capitalisation would be offset with a company tax cut; however, this has been ruled out by the Treasurer in light of deficit concerns.

Furthermore, the proposition to change thin capitalisation rules hint at an increase in the capital gains tax which would have far reaching consequences for the entire business community.

Inflation remains under control

Official inflation figures released for the March quarter show consumer prices for goods and services remain under control.

The inflation figure from the Bureau of Statistics came in at 0.4 per cent, with the annual rate of consumer price increases at 2.5 per cent, slightly up from the 2.2 per cent level in the previous December quarter. The Consumer Price Index (CPI) was within the Reserve Bank’s forecast of between 2-3 per cent and was below market expectations, leaving some to wonder whether this will give scope for further interest rate cuts.

The figures released showed a 7.6 per cent rise in the average price of pharmaceutical products, a 6.5 per cent increase in tertiary education costs, 3.7 per cent rise in the price of tobacco and a 1.2% increase in the price of fuel.

However, the cost of household goods and services decreased 1.3 per cent, with furniture and textiles falling to 6.8 and 6.7 per cent respectively. Clothing and footwear was also down 3.9 per cent compared to the previous quarter in December.

As a result of the low inflation figures, the Australian dollar is poised to remain around the US $1.05 through to mid next year.

Increase in Australian business fraud

Australian businesses have lost $373 million dollars due to major fraud in the past 2 years, a three-fold increase in the past 15 years, yet are lagging behind addressing fraudulent behaviour as a serious issue.

There has also been an 82% increase in individual cases of fraud exceeding $1 million, with the finance sector hit the worst, according to an Australia wide survey on fraud conducted by KPMG.

Despite evidence of its continuing problem, only 15% saw fraud as a key risk in their business.

Those most likely to commit fraud tend to have been with the company for a long time, with 91% having a known history of fraud and 82% earning close to $100,000.

The survey also addressed the time it takes fraud to be detected, with an average of 665 days passing before an incident is reported or identified by a business.

The most common fraud methods, according to the survey, included false invoicing, theft of cash and fraudulent tendering. But technology is also playing a bigger part in fraud cases as hackers become more adept at cyber attacking company networks.

RBA may take measures to deal with high dollar

The Reserve Bank has warned it may have to cut interest rates in order to ‘counterbalance the pressures’ of the strong Australian dollar according to a senior official at the RBA.

However, the RBA shed doubt on whether it would intervene in a ‘somewhat’ overvalued dollar by selling the currency, and would instead look at other responses. The central bank also warned that cutting interest rates too far could also create problems for the economy- forcing up the prices of assets and generating excess credit expansion.

Guy Debelle the RBA’s assistant governor noted that the RBA’s interest rate cuts had less of an impact on mortgage rates over the years, due to higher banking costs such as competitive pressures in the deposit market.

Submissions for 2013 tax reforms

The Tax Institute has put forward a number of suggestions to the Federal Government in its 2013 budget submission paper. Among the suggestions are reforms in state tax, calls for a new small business entity and tax deductions for childcare.

One of the key proposals is to make childcare costs fully tax deductible, as opposed to the current 30% rebate. The proposed scheme would encourage mothers to return to the workplace.

The Tax Institute also put forward an idea for a new class of small businesses, which would take the best structures of all small businesses, such as a company, or trust, and create a new classification known as a ‘small business entity’.

There were also suggestions to address “the low level and inflexibility of contributions caps” in regards to Superannuation, especially as media reports continue to suggest the Government will be targeting super funds for revenue.