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Budget 2009: Improving fairness and integrity in the tax system.
JOINT PRESS RELEASE WITH THE HON CHRIS BOWEN MP ASSISTANT TREASURER
MINISTER FOR COMPETITION POLICY AND CORPORATE LAW
IMPROVING FAIRNESS AND INTEGRITY IN THE TAX SYSTEM
The Rudd Government today announces important new measures to improve the integrity of the tax system and protect Commonwealth revenues needed to support jobs and invest in nation-building in the face of the global recession.
The new measures will save around $880 million in extra revenue over the forward estimates and will help ensure everyone pays their fair share of tax.
Firstly, the Rudd Government will close a tax loophole that allows a relatively small number -around 11,000 - of mostly high wealth individuals to exploit parts of the tax system to unfairly minimise or avoid their tax obligations.
Specifically, the Government will remove the ability for high income individuals to deduct losses from unprofitable business activities against their own income.
The Government will do this by tightening the rules in the income tax law applying to the use of non-commercial losses.
In certain circumstances, where expenses exceed income earned from non-commercial business activities, salaried employees can reduce their salary income with these excess expenses. Many of these activities do not have a commercial purpose or character and are no more than hobbies or lifestyle choices.
This can mean that unfair personal income tax deductions can be claimed against salary, wage and other income for activities like running hobby farms that don't have a commercial purpose and may not ever make a profit.
To address this loophole, from 1 July 2009, taxpayers with adjusted taxable incomes of over $250,000 will only be able to deduct those expenses against the income from the non-commercial business activity.
The Government will also tighten the rules relating to the taxation of benefits provided by a private company to its shareholders or their associates. The measure removes the scope for private companies to allow company assets - such as real estate, cars and boats - to be used for free, or at less than their arm's length value without paying tax.
By contrast, the same use of the asset by an employee - rather than a shareholder - would attract fringe benefits tax.
Media Release of 12/05/2009
Page 1 of 4 Press Release - Improving Fairness and Integrity in the Tax System [12/05/2009]
However from 1 July 2009 the Government will remove this inconsistent treatment, helping to ensure that shareholders pay their fair share of tax.
Both of these measures will apply from the beginning of the 2009-10 income year.
The Government will also take steps to prevent taxpayers from avoiding paying tax on distributions from closely-held trusts - which are trusts that generally have fewer than 20 beneficiaries.
From 1 July 2010, closely-held trusts will need to withhold amounts from trust distributions at the top marginal tax rate where taxpayers have not provided a tax file number to the trustee. Such arrangements are already widely applied elsewhere in the tax law, including to bank accounts and other trust distributions.
This will ensure that taxable distributions to a beneficiary of a closely-held trust, including a family trust, are included in the beneficiary's tax return.
Full details of the changes are contained in the Attachments.
Tightening access to non-commercial business losses
The Government is closing a tax loophole that allows a relatively small number (around 11,000) of predominantly high wealth individuals to exploit parts of the tax system to unfairly minimise or avoid tax.
The loophole effectively allows individuals to claim tax deductions for non-commercial business activities against their other income. It operates as follows: