The latest Federal Budget was announced last night, Tuesday, 8 May 2018 by the Treasurer Mr Scott Morrison. The government is proposing measures which focus on strengthening the economy as well as taking further steps to repair the budget over the medium term.
Whilst there was no substantial tax reform of any variety, it is clear that the government see this as an election Budget given the overhaul to personal income tax rates and brackets over the medium term. This includes removing the current 37% rate band as well as various other simplification measures.
For the first time in almost a decade, superannuation came out relatively unscathed. Some minor wins for the SMSF space and concessions for those wanting to contribute to super after age 65 were the highlights.
It is also clear that the government has a continued focus on the collection of tax and has provided substantial funding to regulators to clamp down on non-compliance and unpaid taxes.
Detailed below is a selection of some of the key Budget announcements which are likely to be of interest to many taxpayers.
1. Proposed Medicare Levy Increase Retracted
The 2017/18 Federal Budget measure which proposed to increase the Medicare levy (from 2.0% to 2.5% of taxable income) will not proceed. The Medicare levy is to remain at 2%.
2. Seven-Year Personal Income Tax Plan
It is proposed that a seven-year personal income tax plan will be implemented. This will encompass three steps:
• The introduction of a low and middle-income tax offset;
• Measures to provide relief from so called ‘bracket creep’; and
• The removal of the 37% personal income tax bracket by the target years of 2024/25.
A summary of the proposed tax rates and thresholds for 2018-19 onwards is as follows:
Tax rates and thresholds
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 2019 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.
2. Capital Gains Tax (“CGT”) – Small Business Concessions
The CGT small business concessions will no longer apply to partners alienating rights to future partnership income. This measure is applicable from 7.30pm on 8 May 2018.
3. Payments to Contractors and Employees
From 1 July 2019, payments to employees and contractors will no longer be deductible where amounts that are required to be withheld have not been withheld.
1. Significant Global Entities (“SGEs”)
From 1 July 2018, the definition of a SGE will be broadened to include more large and multinational groups. These measures will ensure the definition of an SGE will include members of large multinational groups headed by private companies, trusts, partnerships and investment entities.
This is a material change from the previous definition which was restricted to groups that were headed by public or private companies required to prepare consolidated financial statements. This measure will increase the scope of the Australian multinational integrity rules. These rules include the Multinational Anti-Avoidance Law (“MAAL”) and Diverted Profits Tax (“DPT”). It is also proposed that increased penalties will apply where relevant.
The broader definition will also require a widening of the scope of the country-by-country reporting requirements. This increases the likelihood of additional entities being required to prepare general purpose financials statements where this had not previously been the case.
2. Thin Capitalisation
From 1 July 2019, the thin capitalisation rules will be amended to require entities to align the value of their assets for these purposes with the values included in their financial statements. Additionally, the thin capitalisation rules will be amended to require entities to treat certain consolidated groups as both outward and inward investment vehicles for thin capitalisation purposes. This aligns the treatment of such entities under the worldwide gearing test.
These changes are designed to remove existing rules allowing taxpayers to advantageously adjust their debt / equity ratios via the use of asset revaluations. There have been incidences of taxpayers revaluing assets as a result of recent reductions in the ‘safe harbour’ ratio. These changes will prevent the use of this option.
These measures will be combined with a previously announced measure which will commence on 1 July 2018. This measure provided for the lowering of the associate entity threshold from fifty per cent to ten per cent for the purposes of thin capitalisation.
3. Withholding Tax
From 1 January 2019, the list of countries whose residents are eligible to receive certain distributions from Australian Managed Investment Trusts (“MITs”) at a reduced withholding tax rate of 15% will be updated. This is the first time that the list has been updated since 2012 and will include 56 new countries which have entered into information sharing agreements.
4. Stapled Structure Concessions for Foreign Investors
The stapled structure measures had been previously announced and the Budget has confirmed the government’s intention to proceed. These measures address concerns that stapled structures were used to convert active income into passive rental income and thereby lowered the applicable tax rate from 30% to 15%.
TAX INTEGRITY MEASURES
1. Phoenix Activity
It is proposed that the corporation and tax laws be will be revised in order to deter and penalise illegal phoenix activity. These measures are expected to have a broad application.
2. Taxable Payments Reporting System (“TPRS”) extended
From 1 July 2019, the taxable payments reporting system will be extended to security services, road freight transport and computer system design industries.
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.
3. Tax Compliance of Individuals
The ATO will be provided with additional funds from 1 July 2018 to extend compliance activities with particular reference to individual taxpayers and their tax agents.
4. Family Trusts
It is proposed to introduce anti-avoidance provisions in respect of those Family Trusts engaging in ‘circular’ trust distributions. In such cases, tax will apply at the top marginal rate plus the Medicare levy.
5. Testamentary Trusts
The concessional tax rates available in respect of income derived by minors from a testamentary trust will no longer be available for trust assets unrelated to the deceased estate. Income received by minors from testamentary trusts is currently taxed at normal adult tax rates than the higher tax rates normally applicable to minors.
6. Tendering for Australian Government Contracts
From 1 July 2019, those businesses seeking to tender for Australian government contracts above $4m (including GST) will be required to provide a statement that they have complied with their tax obligations.
7. Cash Payments Above $10,000
From 1 July 2019, it will no longer be possible for businesses to receive cash payments above $10,000 for goods and services.
8. Tobacco Duties
It is proposed to introduce measures to address the avoidance of tobacco duties and taxes. This will include measures to collect tobacco duties and taxes at the time of tobacco importation.
GOODS & SERVICES TAX (“GST”)
1. Offshore Sellers of Hotel Accommodation
From 1 July 2019, offshore sellers of hotel accommodation in Australia will be required to calculate their GST turnover in the same was as local sellers. This measure is designed to ensure that Australian operators are not disadvantaged compared to foreign competitors.
1. Maximum Number of Allowable Members
From 1 July 2019, the maximum number of allowable members in Self-Managed Superannuation Funds (“SMSFs”) and small APRA funds will increase from four to six.
2. Annual Audit Requirements
In a welcome reduction in the compliance requirements for SMSFs, it is proposed that the annual audit requirements will be amended to a three-yearly requirement for those funds with a history of good record keeping and compliance. It is proposed that funds with a clear compliance history for three consecutive years will be able to take advantage of this concession.
3. Superannuation Guarantee (“SG”)
From 1 July 2018, where an individual has income exceeding $263,157 and multiple employers, it will be possible for the individual to nominate that their wages from certain employers are not subject to the SG. This is designed to ensure concessional contributions don’t exceed the annual cap of $25,000 thus avoiding excess contributions tax.
4. Notice of Intent Claims
From 1 July 2018, individuals will be required to include in their income tax return a declaration that they have complied with the “notice of intent” requirements in respect of their personal superannuation contributions. The “notice of intent” is a declaration made to the superannuation fund in the required form notifying the fund of an individuals’ intent to claim a tax deduction.
5. Work Test
From 1 July 2019, an exemption from the work test for voluntary contributions to superannuation will be introduced. This will apply for people aged 65-74 with superannuation balances below $300,000 in the first year that the work test requirements are not met.
A 3% annual cap will be introduced for passive fees charged on accounts with balances below $6,000. Further, exit fees on all superannuation funds will be banned.
OTHER TAX CHANGES
1. Company Tax Rate
The government has confirmed its commitment to progressively lower the company tax rate in future years. The Budget does not contain any new measure to reduce the corporate tax rate.
Legislation is in for consideration to progressively extend the 27.5% corporate tax rate for all companies by the 2023-24 income year. It will then progressively drop to 25% by 2026-27 and later income years.
2. Luxury Car Tax
From 1 January 2019, the luxury car tax on cars will be abolished for cars re-imported into Australia after refurbishment overseas.
3. Research & Development (“R & D”) Tax Incentive
For income years beginning on or after 1 July 2018. It is proposed that there will be significant changes to the calculation of the R & D tax incentive. In addition, a maximum cash refund will apply for designated entities.
For companies with aggregated annual turnover below $20 million, the refundable R&D offset will be a premium of 13.5 percentage points above a claimant’s company tax rate. Cash refunds will be capped at $4 million per annum with residual balances carried forward as non-refundable tax offsets to future income years.
For companies with aggregated annual turnover over $20 million the benefit of R&D activity will be subject to incremental activity. This replaces the flat R&D tax offset currently in place. The changes seek to tie the R&D offset to the incremental intensity of the expenditure by reference to the total expenditure for an income year.
The marginal R&D premium will be the claimant’s company tax rate plus:
The maximum amount of R&D expenditure eligible for concessional R&D tax offsets will be increased to $150 million per annum.
4. Division 7A Provisions
From 1 July 2019, it is proposed that a range of measures will be introduced to enhance the rules applying to Unpaid Present Entitlements (“UPEs”). The commencement of targeted amendments to Division 7A had been postponed from 1 July 2018 and will now commence on 1 July 2019. The details are still unclear at this stage.
5. Managed Investment Trusts (MITs)
From 1 July 2019, it is proposed that the 50% capital gains discount for MITs and Attribution MITs (“AMITs”) will be removed at the trust level.
6. Vacant Land
Tax deductions for expenses associated with holding vacant land where the land is not considered to be genuinely used to derive assessable income will be denied.
This proposal is designed to increase housing affordability by dis-incentivising land banking. Disallowed deductions will not be able to be carried forward for use in later income years, however, they may be available as a cost base item in certain circumstances.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.