The latest Federal Budget was announced last night on Tuesday, 9 May by the Treasurer Mr Scott Morrison. The government is proposing to address the housing affordability crisis with a package of tax, superannuation and other measures. Additionally, the Budget contains measures intended to ensure the integrity of the tax and superannuation system.
Following is a selection of some key Budget announcements which are likely to be of interest to many taxpayers.
1. Medicare levy to increase from 2.0% to 2.5%
From 1 July 2019, the Medicare levy will be increased from 2.0% to 2.5%. Other tax rates linked to the top personal tax rate, such as the fringe benefits tax rate will also be increased.
Relief from the Medicare levy through low income thresholds for singles, families, seniors and pensioners will continue to be received by low income earners. There will also be no changes to the current Medicare levy exemptions.
2. Medicare levy low income thresholds to increase
From 1 July 2017, the Medicare low-income thresholds for singles, families, seniors and pensioners will increase.
The family threshold for seniors and pensioners will increase from $46,966 to $47,670 and the child-student component of the income threshold for all families will increase from $3,306 to $3,356.
3. New Higher Education Loan Program (‘HELP’) repayment thresholds and rate to be introduced
From 1 July 2018, a new set of repayment thresholds and rates under HELP will be introduced.
These changes see the minimum repayment rate change from 4% to 1% and the maximum repayment rate from 8% to 10%.
1. Instant asset write-off extended for 12 months
The government will extend the instant asset write off for eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2018 for small business tax payers with an aggregated annual turnover of less than $10m.
Assets such as in-house software remain ineligible.
Small business tax payers can continue use general small business pools for assets valued at $20,000 or more where an asset is depreciated in 15% in the first year and 30% each income year following. Where the balance of the pool is less than $20,000 during this period it can be immediately deducted in full.
From 1 July 2018, the instant asset write off threshold and the balance at which the pool can be immediately deducted will drop back to $1,000.
The current rules that prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt out will also continue to be suspended until 30 June 2018.
HOUSING AFFORDABILITY CRISIS – AUSTRALIAN RESIDENTS
1. Access to superannuation for first home deposit
From 1 July 2017, individuals will be able to make voluntary contributions into their existing superannuation fund of up to $15,000 per year and $30,000 in total, to be withdrawn subsequently for a first home deposit. The contributions must be made within an individual’s existing contribution caps.
From 1 July 2018, the individual will be able to withdraw these contributions and their associated deemed earnings for a first home deposit. The withdrawals will be taxed at an individual’s marginal tax rate, less a 30% tax offset. Under this new scheme, both members of a couple can withdraw and pool their savings to buy their first home together.
2. Super contributions from downsizing
From 1 July 2018, a person aged 65 or over can make a non-concessional contribution into superannuation of up to $300,000 from the proceeds of selling their main residence. They must have owned their main residence for at least 10 years, and the measure is available to both members of a couple for the same home.
These contributions are in addition to existing rules and caps and are exempt from the age test, work test and the $1.6m total superannuation balance test for making non-concessional contributions.
3. Travel expenses related to residential rental properties disallowed
From 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential property will be disallowed.
This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.
4. Depreciation deductions limited for residential properties
From 9 May 2017, plant and equipment depreciation deductions will be limited to outlays incurred by investors in residential real estate properties.
Currently, when an investor acquires an existing residential rental property from a former investor, the plant and equipment forming part of the property continues to be depreciated over the effective life of the asset. The depreciation gives rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
The new measures will see that any existing plant and equipment in an existing residential rental property will be reflected in the cost base for capital gains tax purposes and will no longer give rise to depreciation deductions for the successive investor.
Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will still be able to claim a deduction over the effective life of the asset, however, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.
5. Managed Investment Trusts (“MITs”) investing in affordable housing
From 1 July 2017, MITs will be able to acquire, construct or redevelop affordable housing, allowing investors to receive concessional tax treatment.
MITs allow investors to pool funds to invest in primarily passive investments and cannot carry on or control an active trading business. Resident investors are taxed at marginal rates and their capital gains are eligible for the Capital Gains Tax (“CGT”) discount.
To be eligible for the scheme, the MIT must satisfy a number of conditions primarily involving affordable housing measures.
6. CGT discount increased for affordable housing investments
From 1 July 2018, the CGT discount will be increased from 50% to 60% for Australian resident individuals investing in quality affordable housing.
The conditions to access the 60% discount are:
• The housing must be provided to low to moderate income tenants;
• Rent must be charged at a discount below the private rental market rate;
• The affordable housing must be managed through a registered community housing provider, and;
• The investment must be held for a minimum period of three years.
HOUSING AFFORDABILITY CRISIS – FOREIGN RESIDENTS
1. CGT main residence exemption removed for foreign and temporary residents
From 9 May 2017, foreign or temporary tax residents will no longer have access to the CGT main resident exemption.
Foreign and temporary tax residents who hold property on 9 May 2017 can continue to claim the exemption until 30 June 2019.
2. Expansion of foreign resident CGT withholding regime
From 1 July 2017, there will be changes to the foreign CGT withholding regime. Currently, the foreign resident 10% CGT withholding obligation applies to Australian Real Property and related interests valued at $2 million or more.
This new measure increases the CGT withholding rate from 10% to 12.5% and reduces the threshold from $2 million to $750,000.
3. Annual levy for foreign-owned vacant residential properties
From 9 May 2017, foreign owners of vacant residential property, or property that is not genuinely available on the rental market for at least six months per year will be charged an annual levy of at least $5,000. The annual levy will be equivalent to the relevant foreign investment application fee imposed on the property when it was acquired.
The measure will apply to persons who make a foreign investment application for residential property from 9 May 2017.
4. Foreign ownership in new developments restricted to 50%
From 9 May 2017, a 50% cap on foreign ownership in new developments will be introduced through a condition on New Dwelling Exemption Certificates. The cap will be included as a condition for any applications made from 9 May 2017.
New Dwelling Exemption Certificates are granted to property developers and act as a pre-approval allowing the sale of new dwellings in a specified development to foreign persons (without each foreign purchaser seeking their own foreign investment approval). The current certificates do not limit the amount of sales that may be made to foreign purchasers.
Developments must be multi-storey and have at least 50 dwellings.
TAX INTEGRITY MEASURES
1. Multinational anti-avoidance law broadened
From 1 January 2016 retrospectively, the government will extend the scope of the multinational anti-avoidance law to prevent the use of foreign trusts and partnerships in corporate structures to minimise Australian income tax.
The law will be amended so that it applies to:
• Corporate structures that involve the interposition of partnerships that have any foreign resident partners;
• Trusts that have any foreign resident trustees, and
• Foreign trusts that temporarily have their central management and control in Australia.
2. Taxable Payments Reporting System (TPRS) extended to courier & cleaning industries
From 1 July 2018, the taxable payments reporting system will be extended to contractors in the courier and cleaning industries from.
The TPRS is a transparency measure, requiring businesses to report payments they make to contractors (individual and total for the year) to the ATO. Businesses in these industries will need to ensure that they collect information from 1 July 2018, with the first annual report required in August 2019.
Goods & Services Tax (“GST”)
1. Purchasers of new residential properties to remit GST
From 1 July 2018, the Government will require purchasers of newly constructed residential properties or new subdivisions to remit the GST directly to the ATO as part of settlement.
This is designed to capture instances where developers fail to remit the GST to the ATO despite having claimed GST credits on construction costs associated with a project.
1. Use of limited recourse borrowing arrangements (“LRBAs”) included in super balance and transfer balance cap
From 1 July 2017, the use of LRBAs will be included in a member’s total superannuation balance and transfer balance cap.
LRBAs can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap. The outstanding balance of an LRBA will now be included in a member’s annual total superannuation balance.
2. Related party transactions to increase super reduced
From 1 July 2018, opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings will be reduced. The non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.
3. Tax relief for merging super funds extended
The current tax relief for merging superannuation funds will be extended until 1 July 2020.
Since December 2008, tax relief has been available for superannuation funds to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. This tax relief was due to lapse on 1 July 2017. The tax relief will be temporarily extended.
OTHER TAX CHANGES
1. Major bank levy to be introduced
From 1 July 2016, a major bank levy will be introduced for authorised deposit taking institutions (“ADIs”), with licensed entity liabilities of at least $100 billion. The levy will be calculated quarterly which will equate to an annualised rate of 0.06%.
Superannuation funds and insurance companies will not be subject to the levy.
2. Employing foreign workings
From 1 March 2018, a new (Skilling Australians Fund) levy will be introduced, for businesses that employ foreign workers on certain skilled visas. The levy will mean:
• For businesses with turnover of less than $10 million per year will be required to make an upfront payment of $1,200 per visa per year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $3,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
• Businesses with turnover of $10 million or more per year will be required to make an upfront payment of $1,800 per visa per year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $5,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
The levy will replace the current training benchmark financial obligations for employers of workers on Temporary Work (Skilled) (subclass 457) visas, which are being abolished, and permanent Employer Nomination Scheme (subclass 186) Direct Entry stream visas.
3. Tobacco tax
From 1 September 2017, the taxation of “roll your own” (“RYO”) tobacco and other products (e.g. cigars) will be adjusted to match the previously legislated 12.5% tobacco tax increases that apply to manufactured cigarettes. The adjustment will be phased in over four years, from 2017 to 2020.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.