The Federal government released its 2008 /2009 budget in the face of rising inflationary pressures and market volatility. The budget is considered by most observers as tough but economically responsible in the face of the current economic reality.  

The measures aimed at reforming the taxation regime affecting property trusts is welcomed by business as are some of the Capital Gains Tax changes including alleviating the disruption caused to the Australian capital markets, by the previously announced changes to the consolidation rules following certain CGT roll-overs. 
  
There has also been a reversal of the changes to the family trust election rules which is seen as a disappointing aspect of the budget
 
Government has also announced a tax review with an intended release of a discussion paper by July 2008. The terms of reference of the review includes  tax treatment of the proposed emission trading system.
 
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The Government will amend the rules dealing with the taxation of capital protected borrowings entered into after 7.30 pm (AEST) on 13 May 2008. A typical capital protected borrowing is a limited recourse loan facility to fund the purchase of listed shares. The investor is protected from a fall in the price of the shares by a capital protection feature. This feature gives the investor the right to transfer the shares back to the lender for the amount outstanding on the loan if the value of the shares falls below that amount.

The benchmark interest rate in the capital protected borrowing rules will be changed to the Reserve Bank of Australia's indicator variable rate for standard housing loans. Interest expense on a capital protected borrowing in excess of this level will be treated as the cost of capital protection and not deductible if on capital account. The amendment will provide a more appropriate basis for apportioning the expense in capital protected borrowings between interest on a borrowing without capital protection and the cost of capital protection.

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The Government will introduce legislation to improve the integrity of prescribed private funds (PPFs), with effect from 1 July 2009. A PPF is a trust to which businesses, families and individuals can make tax deductible donations, for the purposes of disbursing funds to a range of deductible gift recipients.

The Government will improve transparency and provide the trustees of PPFs with greater certainty of their philanthropic obligations by amending and legislating the PPF guidelines. The changes will, among other things, ensure regular valuation of assets at market rates, increase the size of compulsory distributions, and give the Australian Taxation Office greater regulatory powers.

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Taxation of Financial Arrangements (TOFA) Stages 3 and 4. The Treasurer also announced plans to proceed with amendments and regulations relating to TOFA Stages 1 and 2.

TOFA Stages 3 and 4
The TOFA Stages 3 and 4 measures, will introduce new tax rules for accruals/realisation, fair value, retranslation, reliance on financial reports and hedging. The rules cover tax treatments for certain financial arrangements which will achieve compliance cost savings by allowing eligible taxpayers to make use of particular aspects of the accounting standards to determine their taxable income from financial arrangements.

The legislation will apply for income years commencing on or after 1 July 2009. The elective commencement date of 1 July 2008 contained in Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 (the 2007 TOFA Bill) will not apply. Given the complexity and extensive nature of the measures a commencement date of 1 July 2009 will give taxpayers time to plan for the commencement of the measures and to raise issues in consultation with the Treasury. This period will allow appropriate adjustments to be made, including interactions with other parts of the tax law, prior to the commencement date. These measures are a continuation of the debt/equity tax reform, legislated in 2001and  the foreign currency tax reform in 2003.

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The Rudd Government will provide funding of $16 million over three years to set up an optional superannuation clearing house facility .Where employees can choose their own superannuation fund an employer may be required to pay superannuation into a large number of different funds. The optional superannuation clearing house will allow an employer to pay their contributions to a single location. The clearing house will then distribute them to the relevant superannuation funds as selected by their employees.The facility will be available from 1 July 2009.

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Reversing of two of the family trust changes introduced by the previous Government The change in the definition of family in the family trust election rules limit lineal descendants to children or grandchildren of the test individual or of the test individual's spouse. This change will have effect from 1 July 2008. Family trusts will also no longer be able to make a once off variation to the test individual specified in a family trust election (other than in relation to a marriage breakdown). This change will have effect from the 2007-08 income year.

Other changes introduced in Tax Laws Amendment (2007 Measures No 4) Act 2007 that enhanced the flexibility of family trusts and addressed problems with the operation of the system will be retained.

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With effect from 7.30 pm 13 th May 2008, the current exemptions under the FBT law for eligible work-related items and property consumed on an employer's premises will be tightened to limit the exemption to items used primarily for work-related purposes.

Affected items include: laptop computers, personal digital assistants, briefcases, and tools of trade.

In a related measure, the Government will also disallow employees from claiming a deduction for depreciation of such items. This will end a double benefit that was previously available. The FBT exemption for property consumed on an employer's premises will be amended to remove 'meal card arrangements' from the exemption.

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The Government has announced it will substantially reduce the level of withholding tax from a non-final rate of 30 per cent to a final rate of 7.5 per cent on certain distributions from Australian managed investment trusts (MITs) to foreign resident investors. These arrangements will make Australia's withholding tax rate one of the most competitive in the world, and provide a significant boost to Australia's ability to compete globally. The arrangements will ensure Australian property trusts (which will be primarily affected by the new arrangements) are well placed to attract future foreign investment now and into the future. This will provide a major boost to Australia's goal of becoming a financial hub in the Asia-Pacific region and goes beyond the commitment made during the election.

The new regime cover distributions made directly from MITs to foreign residents as well as distributions made through other intermediaries (including custodians). Distributions of dividends, interest and royalties will continue to be covered by the existing final withholding tax arrangements.

The new regime will vary depending on whether the foreign investor is resident in a jurisdiction with which Australia has effective exchange of information (EOI) arrangements on tax matters. Residents of such jurisdictions will be subject to rates ranging from 22.5 – 7.5%.

Residents of other jurisdictions will be subject to a 30 per cent final withholding tax with effect for fund payments of the first income year in which the enabling legislation receives Royal Assent.

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