Tax reform tinkering
What it means for you
While the Government has previously signalled that the Budget would contain some “base broadening” of the tax system, the measures announced today really only amount to a modernisation of outdated tax credit rules, and some expected “repairs and maintenance” of the tax system.
In fact, two of the key Budget 2012 tax measures were originally announced in 2011, have been the subject of explict private sector consultation, with the latest announcements simply confirmation that the Government is continuing with its reforms following that consultation with taxpayers over the past 12 months.
Budget 2012 confirmed the following initiatives (with the following fiscal implications):
- Changes to the taxation of mixed use assets (holiday homes, boats and aircraft), to explicitly address the deductibility of costs associated with those assets (anticipated to save $109 million over the next four years)
- That the Government will address flip flopping between the herd and national standard cost scheme for livestock valuation elections (saving an estimated $184 million over the next four years)
- Removing three tax credits that no longer fit the purpose for which they were established (saving an estimated $117 million over the next four years)
While objectively minor, the above measures will have a real (and possibly material) impact on certain taxpayers.
Taxpayers currently claiming tax deductions for mixed use assets (such as holiday homes) are likely to find those deductions will decrease materially as the Government moves to align the ability to claim deductions with the actual business use of the asset.
Originally flagged in Budget 2011, the new rules will require mixed-use asset owners to apportion their deductions based on the actual income earned and private use of the asset. For example, owners who rent out their holiday home for 30 days in a year and use it themselves for 30 days in a year will be able to claim a deduction for 50 per cent of their general costs. Currently, the taxpayer in this example can claim a deduction for the 335 days in the year when they are not using the holiday home privately.
The current taxation of mixed use assets is not a “loophole”, and the changes will simply provide clarity on the extent of deductions able to be taken. That said, the devil will be in the detail, and it is important that the apportionment rules set out in legislation are clear and that they are easy to apply.
The Government is estimating savings of $109 million from this measure over the next four years.
Similarly, the ability for farmers to use the livestock valuation regime to their advantage will be closed down. Again, this measure was flagged in Budget 2011, and details announced earlier this year, following consultation with taxpayers. The reforms have retrospective effect from 18 August 2011. The concern is that current high livestock values have created a tax planning opportunity for farmers using the herd scheme to value their livestock – the opportunity being to exit the herd scheme by 31 March 2012 and revalue livestock under the national standard cost scheme. The Government estimates that the fiscal cost of not making the change would be a $184 million decrease in operating revenue over four years.
The three tax credits being removed are the income-under-$9,880 tax credit, the childcare and housekeeper tax credit, and the tax credit for the active income of children. The changes will have effect from the 2012-13 and later income years.
The tax credits are being removed, as the Government considers that they no longer serve their original policy intent. For example:
- The income-under-$9,880 tax credit was put in place in 1986 to protect full-time workers on low wages;
- The childcare and housekeeper tax credit has been superseded by other government support, such as Working for Families;
- The tax credit for children will be replaced by a limited exemption to ensure that children will not be required to file a tax return if they earn small amounts of ‘in the hand’ income that would not usually be taxed at source.
Given the amount of water that has gone under the bridge since the establishment of these tax credits, including the establishment of Working for Families, we agree with the Government that the removal of these credits is simply a “modernisation” – this is not a material or substantive reform to our tax credit rules.
Budget 2012 Analysis
- Introduction - between a rock and a hard place
- Budget at a Glance
- The Nation’s Bank Account
- Mixed ownership model
- Public sector developments
- Tax reform tinkering