Revealed: Last-minute legislation introduces SME tax changes

feature-gillard-cash-200Federal Parliament has ended for the year, but its last sitting week saw the introduction of legislation that will make some significant tax changes.

The changes are included in a Bill that will not be debated until next year, but they will have effect from dates in 2012, so there is an element of retrospectivity in the changes.

So what are the changes? They concern the removal of FBT concessions on in-house benefits, and the means testing of the medical expenses tax offset.

FBT and in-house benefits

Under the current law, the first $1,000 of the aggregate of the taxable values of “in-house” fringe benefits and airline transport fringe benefits provided to an employee during a year is exempt from FBT.

So called “in-house” fringe benefits arise if an employer provides to an employee free or discounted goods or services of a kind that are provided to the employer’s customers or clients. The exemption applies in respect of the total benefit provided to each employee and her or his associates in a particular year.

The exemption applies to the taxable value of benefits, rather than the market value of the goods or services provided. For example, in the case of a retailer, a fringe benefit is only provided to an employee if the goods are provided at below cost. This means that goods to a value greatly in excess of $1,000 can be provided to an employee at a discount from the retail price without the $1,000 figure being breached.

The legislation introduced in Parliament last week proposes that the concessional FBT treatment for in-house fringe benefits accessed by way of salary packaging arrangements will be removed, with effect from 22 October, 2012, the date the Government announced the changes.

The Government said the FBT concessions in the law were not intended to allow employees to access goods and services by agreeing to reduce their salary and wages (through salary packaging arrangements) in order to buy goods and services out of pre-tax income. As a result of expansion in the availability of salary sacrifice arrangements, employees are increasingly accessing concessionally taxed fringe benefits under these arrangements and receiving tax-free non-cash remuneration benefits for goods and services.

In comparison, the Government said other employees or self-employed persons who acquire these items are required to pay for them out of their after-tax income. Hence, it deemed that changes were necessary.

In particular, the proposed amendments would:

  • Remove the concessional taxable value calculation method for particular benefits;
    • The concession associated with the valuation of particular in-house expense payment benefits, in-house property benefits or in-house residual benefits would no longer apply where the benefit is accessed by way of a salary packaging arrangement;
    • Instead, the taxable value of the benefit will be based on the “notional value” of the benefit. The “notional value” of an in-house property fringe benefit accessed through a salary packaging arrangement means the amount that the employee could reasonably be expected to have been required to pay to obtain the property from the provider under an arm’s length transaction (that is, market or fair value);
  • Remove the FBT exemption that applies for residual benefits that are provided for transport from home to work (for employers in the transport business) and accessed through a salary packaging arrangement; and
  • Remove the annual $1,000 reduction of aggregate taxable value in respect of in-house fringe benefits where they are provided under a salary packaging arrangement.

However, it is proposed that the amendments would not affect the concessions relating to in-house benefits provided by employers where those benefits are provided outside of a salary packaging arrangement or are paid for out of after-tax income.

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