The “debt tax” has flow-on effects for businesses

The announcement from the Federal Budget of a three year Temporary Budget Repair Levy on high income individuals (2% in excess of $180,000 — see our Budget report for details) will result in the top marginal tax rate increasing from 47% to 49% (inclusive of the Medicare levy).
However there are a number of other taxes that are based on calculations that include the top personal tax rate, and so it is expected that these will also be increased for the same period that the debt levy is in place — from July 1, 2014 until June 30, 2017 (a different two year period applies for the increase in the FBT rate; see below).

Businesses which may be affected will need to plan accordingly in order to not be caught on the back foot — for example, the increase in the Medicare levy from the 2013-14 Federal Budget (from 1.5% to 2%) caught many off guard in that there were consequential effects to other tax rates that, then as now, relied on the top marginal tax rate as a basis for calculation.

There are some income tax rates that are automatically linked to the top marginal rate. For example, trust income to which no beneficiary is made “presently entitled” would be taxed at 49% for the relevant income years to which the debt levy applies.

Based on the explanatory memorandum to the relevant Budget bills, the taxes that follow the top marginal rate are summarised in the table that appears on the next page.

FBT rate increase

The debt levy will also affect the fringe benefits tax (FBT) rate, but over two years, not three. FBT will increase from 47% to 49% from April 1, 2015 until March 31, 2017 to align with the FBT income year. The government states that this is to prevent high income earners from utilising fringe benefits to avoid the levy (by way of salary sacrifice arrangements).

Both political parties are guilty of increasing the FBT rate over the last several years by boosting the top marginal tax rate.

First the former Labor government increased the top tax rate from 46.5% to 47% due to the 0.5% Medicare levy increase in the 2013-14 Federal Budget (to pay for the National Disability Insurance Scheme). Now the current government’s debt levy adds another 2% to the top marginal rate.

Consequently, the gross-up rates for FBT calculations will also be affected, and this will ultimately change the grossed-up taxable value of benefits provided. Gross-up rates for 2013-14 will remain at 2.0802 for Type 1 benefits and 1.8868 for Type 2 benefits, but for 2015-16 and 2016-17, they will be 2.1463 and 1.9608 respectively. Note also that the change in Type 2 gross-up rate will also affect reportable fringe benefit amounts calculated.

As a general rule, reportable fringe benefits are required to be disclosed in an employee’s PAYG payment summary where the taxable value of certain fringe benefits provided to the employee exceeds $2,000.

Tax rates affected Changed from 47% to 49%
Ordinary income tax rates Income tax

  • trustees liable to taxation under s99A of the Income Tax Assessment Act 1936 (ITAA36) – applies to trust income that is not allocated to beneficiaries
  • trustees liable to taxation under subsection 98(4) ITAA36 – applies to foreign resident individual beneficiaries, and
  • the share of the net income of a partnership attributable to a partner not having control and disposal of that income

Superannuation

  • non-complying superannuation funds
  • the non-arm’s length component of the taxable income of a complying superannuation fund
  • the non-arm’s length component of the taxable income of an approved deposit fund, and
  • the non-TFN contributions income of a superannuation fund or retirement savings account provider
Other tax rates Income tax

  • Family Trust Distribution Tax
  • Fringe Benefits Tax (see above for details)
  • Income Tax (Bearer Debentures)
  • First Home Saver Accounts Misuse Tax
  • Tax File Number Withholding Tax – Employee Share Schemes
  • Trustee Beneficiary Non-disclosure Tax
  • Untainting tax – Division 197 of the Income Tax Assessment Act 1997, and
  • Trust Recoupment Tax

Superannuation

  • Superannuation (Departing Australia Superannuation Payments Tax), and
  • Superannuation (Excess Non-concessional Contributions Tax)
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