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2002 BUDGET

Budget Overview
The Federal Budget was handed down on the evening of 14 May 2002. For the 2002/03 financial year, the major estimates by the Gov-ernment were as follows:
?    $2.1 billion cash surplus;
?    economic growth of 3.75%;
?    unemployment to decrease to 6%; and
?    a current account deficit increase to 4% of GDP.
The Budget includes:
?    an additional $1 billion for defence;
?    an additional $1.3 billion to upgrade security within Australia (over five years);
?    $1.9 billion cutback in the Pharmaceutical Benefits Scheme; and
?    an additional $1.5 billion to the ATO (over four years).
Significant taxation announce-ments are outlined below.
Tax Grouping Rules
Tax consolidation rules are to commence from 1 July 2002. While consolidation will be optional, the current grouping provisions concerning capital gains tax rollovers, loss transfers and dividend rebates will not be available to non-consolidated groups.
Following significant lobby-ing, the Treasurer has announced that these grouping rules will now be retained until 1 July 2003 (or the equivalent substituted accounting period in some cases).
The consolidation rules currently include two con-cessional rules available only to groups that consolidate during the first year (ending
30 June 2003).
These represent critical planning opportunities con-cerning asset cost bases and carry forward tax losses.
It is unclear whether these concessions will now be extended to taxpayers who choose not to consolidate in the first year.
Losses and Same Business Test
Some entities have not been able to prove that they have failed the continuity of ownership (COT) test, so that they can rely on the same business test to carry forward losses.
Effective from the 1997/98 income year, amendments will allow companies to assume a date on which the COT was failed so that they can take advantage of the same business test.
Deferral of Tax Reform Agenda
The Government has ceded to pressure (or common sense) and revised plans to implement the following items:
?    Tax Value Method (TVM) ? deferred at least until 1 July 2005.
?    International arrange-ments ? the implement-ation of measures to provide franking credits for foreign dividend with-holding tax have been deferred.
?    Non-resident withholding tax ? new measures are to be introduced from
1 July 2003.
?    Taxation of financial arrangements (TOFA) ? the remaining TOFA reforms will be imple-mented in stages over the next two years. We are likely to see changes regarding foreign currency gains and losses by October 2002.
Tax Relief for Demergers
New ?demerger rules? will apply to corporate and trust reconstructions from 1 July 2002, offering relief from tax where an entity divests itself of shares or membership interests.
The new rules will apply to listed companies, private companies and other entities, including fixed trusts (but not discretionary trusts) divesting at least 80% of their ownership interests in the demerged entity after 1 July 2002, where the underlying ownership has not changed.
CGT rollover relief will be available at both the owner level and the entity level for capital gains/losses arising under the demerger. In both cases, the pre-CGT status of ownership interests will be maintained.
A transitional rule for demerg-ers commenced prior to 1 July 2002 will also be introduced.
Superannuation Measures
The Government confirmed the following superannuation measures that will, from 1 July 2002:
?    allow deductible contribut-ions (but not superannuat-ion guarantee) to continue to age 75;
?    increase the fully deduct-ible amount for contribut-ions by self-employed persons from $3,000 to $5,000;
?    reduce the superannuation and termination payments surcharge rates to 13.5% for 2002?03, 12% in 2003?04 and 10.5% in 2004?05 and future years;
?    reduce the tax rate on excessive eligible termin-ation payments;
?    replace the rebate for low income earners? personal undeducted superannuation contributions with a Government co-contribut-ion up to a maximum of $1,000 per year;
?    allow parents and other relations to make contributions on behalf of a child;
?    allow persons eligible for the baby bonus, who are not otherwise able to contribute to superannuat-ion, to be eligible to make contributions; and
?    enable temporary residents to access their super-annuation following their departure from Australia.
From 1 July 2003 the measures will:
?    require superannuation guarantee contributions to be made quarterly; and
?    permit the splitting of superannuation contribut-ions between couples.
The 12-month Rule ? Retrospective Change for Wholly Owned Groups
From 1 July 2000, in order to access the inter-corporate dividend rebate (ICDR), a company paying the dividend must be a member of the same wholly owned group for at least 12 months prior to the payment of the dividend for which the ICDR is sought (as opposed to the whole of the income year).
GST
Substantial additional funding will be provided to boost the Australian Taxation Office?s compliance capabilities to generate additional GST revenue.
The major focus of the additional activity will be small business field audits and compliance reviews.
Maintaining the Benefit of the Franked Dividend Rebate
From 1 July 2002, the rebate available to companies regarding franked dividends will not ?waste? current year losses.
The announcement refers to current year losses but not prior year losses.
Miscellaneous Announcements
?    Diesel fuel rebate scheme ? minor changes for certain retail and hospitality businesses.
?    New Medicare levy thresholds
Individuals     $14,539
Families        $24,534
Additional
   Dependant    $2,253
Pensioners        $16,570
?    20% medical expenses rebate ? for net medical expenses above $1,500 (increased from $1,250) in an income year.



22nd-May-2002