Federal Budget 2009–10 summary

The impacts of the Federal Budget 2009–10  for employers, research and development (R&D), and expatriates are reviewed.

What it means for employers

Freehills’ Employee Relations and Head Office Advisory teams highlighted a number of matters within the Federal Budget which are relevant to employers.

Taxation and employee share-base remuneration

Major changes to the taxation of employee share-based remuneration will make employee equity a much less attractive form of executive remuneration. ‘The Federal Budget included some surprise measures which will have a significant impact on the structure of executive remuneration,’ said Justine Turnbull, Partner, Employee Relations. ‘From now on, cash is king.’

Priscilla Bryans, Partner, Head Office Advisory, commented on the Federal Government’s announcement on the abolishment of the deferral of tax on the upfront discount for employee share schemes for shares and options. ‘Whilst the announced changes are conditional upon the budget legislation being passed by Parliament (the wording of which is not yet clear), they will (if passed) significantly restrict the viability of most employee share and option plans (including performance rights plans),’ said Ms Bryans.
 
‘The changes will have the effect that all employee shares and options will be taxed in the year of acquisition, regardless of vesting conditions and sale restrictions, and subject only to the (now restricted) $1,000 exemption. The $1,000 exemption will be available only to employees with less than $60,000 taxable income, which for some companies will significantly impede their ability to implement a broadly based share offer in future.
 
‘Companies will need to review their remuneration strategies to see whether they can continue with a viable employer equity component,’ concluded Ms Bryans.

Parental leave

For the first time in Australia, government-funded paid parental leave will be offered for primary carers of a child born or adopted after 1 January 2011. It will be available to primary carers earning less than $150,000 who have been engaged in work for at least 10 of the previous 13 months, for an average of one day per week. The scheme will cover employees, including casual workers, contractors and self employed people. The government will pay 18 weeks paid at minimum wage or $543.78 per week. In most cases the payment will be made through the employer. And in most cases, employees receiving paid parental leave will not be eligible for the baby bonus or family tax benefits during the period.

The scheme is based largely on the recommendations of the Productivity Commission. ‘Australia has never had legislated paid parental leave and the Federal Budget’s announcement is a reasonable starting point,’ said Ms Turnbull.

Cap reduction in employer superannuation contributions

Positive signs for business with R&D Tax Credit

Despite dire economic conditions, the Federal Government’s announcement of an R&D Tax Credit is good news for product designers, product development managers, engineers and R&D professionals.

An R&D Tax Credit will be introduced for the 2010–11 income year. It is a broad-based, market-driven package to replace the R&D Tax Concession with a tax credit system. It offers a 45 per cent refundable tax credit for Australian companies turning over up to $20 million per annum which is equal to 15 cents in the dollar of R&D spend.

‘This is outstanding for R&D at a time where people are tightening their purse strings. Start-up companies are big winners,’ said Greg Noonan, Partner, Intellectual Property.

The R&D Tax Credit is also available for companies with tax losses because they will be able to use the R&D Tax Credit when lodging their income tax return. For example, if a company spends $1 million they will get back $450,000.

In the meantime there is an interim measure, whereby the Federal Government will increase the R&D expenditure threshold for the R&D Tax Offset to $2 million for 2009–10 and provide a tangible demonstration of increased government support for eligible small companies.

What it means for expats

The Federal Budget’s announcement of changes to existing exemptions on the taxation in Australia of income earned by Australians while overseas has caused widespread concern among the expat community. ‘While the changes, as part of the Federal Budget, are significant for those that are affected by them, those who are not residents of Australia for tax purposes will not be impacted by the changes at all,’ said John Dick, Managing Partner, Singapore.

Overview of changes

Under current law, foreign earnings derived by an Australian resident taxpayer through at least 91 days of continuous employment in a foreign country are generally exempt from Australian tax, regardless of the rate of tax paid in the country in which they are employed. From 1 July 2009 the exemption will only apply to income earned as an aid worker, a charitable worker, under certain types of government employment or on projects that are in the national interest.

For other workers, the system will be changed to a credit-based system, such that, if the expat is still considered to be an Australian tax resident:

• any foreign employment income will form part of their Australian taxable income, and
• they will receive a credit for any foreign tax paid on that income.

The ultimate impact being that the rate of tax paid on these earning will now be equal to the Australian tax rates. This is clearly a significant change for those working in low tax jurisdictions, including in many Asian countries and the Gulf States.

These changes do not affect an expat who is no longer an Australian tax resident.

A full account of the Federal Budget 2009–10 is available online.¹

Endnotes

1. Federal Budget 2009–10

More information

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