The centrepiece in the Government’s 2017 Budget is around housing affordability. This includes the introduction of various measures to attract sophisticated investors and managed investment trusts to invest in affordable housing for the benefit of low income earners by providing new tax incentives. Unfortunately, the Government did not take the opportunity to reduce red tape or bring genuine simplification to the tax system for businesses. It was pleasing that the Government has refrained from further changes to superannuation.
The key tax measures announced in the Budget included:
- Reaffirming a commitment to previously announced company tax cuts to cover all companies
- A raft of tax and superannuation measures intended to relieve pressure on housing affordability
- An increase to the Medicare Levy by 0.5% to 2.5% from 1 July 2019
- An extension of the instant asset write-off to 30 June 2018 for small business
- A major bank levy to be introduced from 1 July 2017
- A tightening of the ability of non-residents to obtain various benefits from owning Australian real property.
Information regarding these measures are provided in more detail below.
1. Key personal tax measures
- Income tax rates – No changes were announced in the federal Budget in relation to personal income rates.
- Temporary Budget Repair levy – From 1 July 2017, this levy of 2% of taxable income in excess of $180,000 will no longer apply. Therefore, excluding the impact of the Medicare levy, from 1 July 2017, the top marginal tax income tax rate will be 45 per cent. However, the Leader of the Opposition is calling for this levy to continue past 30 June 2017.
- Medicare levy increase – From 1 July 2019, the Medicare levy will increase from 2% to 2.5 %. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also increase. The Leader of the Opposition however wants the 0.5% increase only to apply to taxpayers earning more than $87,000.
- Medicare levy low-income thresholds – the thresholds for singles, families, and seniors and pensioners will increase from the 2016/17 income year.
- Higher education loan program (HELP) – A new set of repayment thresholds and rates under the HELP program will be introduced from 1 July 2018. The minimum repayment income for the 2018-19 income year will be $51,956, up from the presently stated $41,999. Maximum student contributions will rise by 1.8% for 4 years from 2018, resulting in a total 7.5% increase from 2021. The first increase will take effect from 1 January 2018 and will apply to all students including those who are currently enrolled.
2. Extension of immediate $20,000 write-off for small business
Affected clients: Businesses with an aggregated annual turnover of up to $10 million.
Impact: The increase in the accelerated depreciation write-off threshold to $20,000 will be of great assistance to businesses matching the timing of cashflow to tax obligations. Business owners should be pleased with this outcome; it allows businesses the ability to buy new equipment and in doing so reinvest in their operations tax effectively. This combined with increasing the eligibility from a turnover of $2M to $10M extends the offer to a larger number of businesses.
Effective date: Availability of concession to be extended until 30 June 2018
In brief: Small businesses will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 provided they are first used, or installed ready for use, by 30 June 2018.
Depreciating assets valued at $20,000 or more (which cannot be immediately deducted) must be placed into the general small business pool (the pool) and depreciated at 15% in the first income year, and 30% for each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
The current “lock out” laws from the simplified depreciation rules will continue to be suspended until 30 June 2018. These rules prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out.
From 1 July 2018, the immediate deductibility threshold, and the balance at which the pool can be immediately deducted, will revert to the previous $1,000 limit.
We welcome this extension, given the lengthy delays in the prior year announcements still being experienced before being passed as law, leaving little time before 30 June 2017 to act with absolute certainty.
3. Residential rental properties
Affected clients: Investors in residential rental properties
Impact: There was no amendment to deny negative gearing. However, there will now be no deductions available for certain travel expenses incurred in respect to a residential rental property and plant and equipment depreciation deductions limited to outlays actually incurred by investors
Effective date: 1 July 2017
In brief: Investors will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent on a residential rental property. This measure will affect all taxpayers, resident and non-residents who receive rental income form residential rental properties. Investors who engage third party property managers to manage their property, including carrying out inspections, can continue to claim tax deductions for the fees paid.
Depreciation deductions on plant and equipment will be limited to expenses actually incurred by investors in residential rental properties, so the investor must purchase the depreciable plant themselves. This means that when a subsequent investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions for those pre-existing items that they inherit with the property.
Typically this was currently being achieved by the purchaser engaging a qualified expert to survey the property and provide a formal report outlining the depreciable value attributable to the plant acquired together with the property. Alternatively, where the purchaser allocated part of the purchase price of the property to the plant as part of the contract of sale, this cost was depreciated.
Going forward it is now proposed that the value or cost of items of existing plant and equipment will be reflected in the cost base of the property for CGT purposes. For existing investments at 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017), plant and equipment forming part of residential rental properties will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
These measures are intended to apply solely to residential properties. Investors who own commercial rental properties will not be affected by these measures.
4. Super incentives for downsizing
Affected clients: Australians aged 65 or above who are looking to ‘downsize’ their home
Impact: A higher super cap for downsizers
Effective date: 1 July 2018
In brief: 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 principal residence. They must have owned their principal residence for at least 10 years. This measure will apply from 1 July 2018 and is available to both members of a couple for the same home (i.e. up to $600,000 per couple).
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.
This is a welcome announcement following the unprecedented tightening of contribution limits in last year’s Budget, which seemed to contradict the intent of the super regime and erode people’s ability to provide for their own retirement.
5. First home super saver scheme
Affected clients: Individuals saving to buy their first home
Impact: First home deposit savings boosted at least 30% (compared to a standard deposit account)
Effective date: 1 July 2017
In brief: This scheme is intended to provide an incentive to enable first home buyers to build savings faster for a home deposit, by accessing the tax advantages of superannuation.
Up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Both members of a couple can take advantage of this measure to buy their first home together.
From 1 July 2018 onwards, an 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.
The First Home Super Saver Scheme on first reading appears to be an attractive measure but upon closer inspection, the relative saving of only paying tax at the super fund rate on the relevant contributions has marginal savings to first home buyers who are likely to be on lower income tax rates in any event.
6. Expansion of the foreign resident CGT withholding regime – impact for Australian vendors of property
Affected clients: Australian resident and foreign resident vendors
Impact: All transactions involving Australian real property with a market value of $750,000 or above will need the vendor and purchaser to consider if a clearance certificate is required.
Effective date: 1 July 2017
In brief: Where a foreign resident disposes of certain taxable Australian property (for example, real estate, or shares in land rich companies), the purchaser is required to withhold an amount from the purchase price and pay that amount to the ATO. Under this announcement, the applicable foreign resident CGT withholding rate will be increased from 10% to 12.5%. A clearance certificate is required to be provided by Australian resident vendors to satisfy the purchaser that no withholding is required.
Currently, the foreign resident CGT withholding obligation applies to Australian real property and related interests valued at $2 million or more. This threshold will be reduced to $750,000 from 1 July 2017, greatly increasing the range of properties and interests that will come within this obligation.
The impact for Australian residents is that a larger number of Australian resident vendors (i.e. anyone selling property with a market value of $750,000 or more) will need to apply for a clearance certificate from the ATO to ensure amounts are not required to be withheld from the sale proceeds. Where a valid clearance certificate is not provided by settlement, the purchaser is required to withhold 12.5% of the purchase price and pay this to the ATO.
7. Non-residents and Australian housing
Affected clients: Non-residents buying, holding and selling Australian real estate
Effective date: From 7.30pm (AEST) on 9 May 2017
Summary of key measures:
- The CGT main residence exemption will be removed for foreign and temporary residents.
Existing properties held before this date will be grandfathered until 30 June 2019.
- 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. The annual levy will be equivalent to the relevant foreign investment application fee imposed on the property when it was acquired.
- A 50% cap on foreign ownership in new developments will be introduced through a condition on new dwelling exemption certificates.
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.
- An integrity measure for foreign resident CGT regime will be applied intended to ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property.
The principal asset test, which is relevant in determining whether a foreign resident’s asset is a taxable Australian property will now be applied on an associate inclusive basis for foreign tax residents with indirect interests in Australian real property.
8. Access to small business CGT concessions to be refined and limited
Affected clients: Small business taxpayers with aggregated turnover of less than $2 million or business assets of less than $6 million.
Impact: Business owners will have to be more careful than ever when declaring assets for CGT concessions
Effective date: 1 July 2017
In brief: Access to small business CGT concessions will be limited to deny eligibility for assets which are unrelated to the small business.
The concessions currently assist owners of small businesses by providing relief from CGT on assets related to their business which helps them to re-invest and grow, as well as contribute to their retirement savings through the sale of the business. However, some taxpayers are able to access these concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.
Limited information is currently available in relation to this measure however it appears to be targeted at the application of the maximum net asset value test and the small business entity eligibility requirements.
While the definition of small business for many measures has been lifted for those with an aggregated turnover of less than $10 million, the Government has left the turnover threshold for the small business CGT concessions at less than $2 million. This will lead to confusion by business owners as to what concessions they have access to.
9. LRBAs included in super balance and transfer balance cap
Affected clients: Members who use new limited recourse borrowing arrangements (LRBA) within their super fund from 1 July 2017
Impact: A reduction in the ability for a member to obtain an advantage by using a LRBA within their super account.
Effective date: 1 July 2017
In brief: The Government is concerned that LRBAs may be used to circumvent contribution caps, as well as transfer assets from the accumulation phase to the retirement phase when repayments are made, that are not captured by the transfer balance cap. As an integrity measure, the balance of an outstanding loan in respect to an LRBAs by a super fund will be included in a member’s total superannuation balance, and any repayment of the principal and interest of an LRBA from a member’s accumulation account that increases the amount in the retirement phase for a member, will be a credit in the member’s transfer balance account for the purposes of the $1.6 million transfer balance cap.
10. Related party transactions SMSF integrity measures announced
Affected clients: Members who have related party transactions in their SMSFs
Impact: Reduced opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.
Effective date: 1 July 2018
In brief: Currently the rules essentially provide that income derived by a super fund must be generated on an arm’s length basis. The non-arm’s length income provisions will be amended to ensure expenses associated with generating that revenue must also be calculated on an arm’s length basis. A super fund’s non-arm’s length income (also known as “special income”) is taxed at 47% instead of the 15% concessional rate.
The Government has said this measure is aimed at ensuring the 2016-17 superannuation reform package operates as intended, accordingly any non-commercial transactions, particularly in light of restructuring for the super reforms, will need to properly considered.
11. Increased CGT discount for the provision of affordable housing
Affected clients: Resident individual taxpayers investing in affordable housing
Impact: An additional 10 per cent CGT discount (i.e. 60%), however this benefit somewhat negated by reduced rental returns during course of ownership of investment.
Effective date: 1 January 2018
In brief: The CGT discount will be increased from 50% to 60% for Australian resident individuals investing in qualifying 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.
The 60% discount will flow through to resident individuals investing in affordable housing via managed investment trusts as part of the tax measure enabling such trusts to invest in affordable housing (see below).
This initiative could be a very attractive proposition, with the overall effect of this measure increasing the effect of negative gearing as rental income will be limited but investment costs will likely stay the same with a reduced taxable capital gain on disposal.
12. Affordable housing incentives for MITS
Affected clients: Private sector and foreign investors in managed investment trusts (MITs) that invest in affordable housing
Impact: Concessional tax treatment for investors
Effective date: 1 July 2017
In brief: Investors in MITs that invest in affordable housing will receive concessional tax treatment, provided certain conditions are met, including that the properties are let as affordable housing for at least 10 years and that at least 80% of the income is derived from affordable housing in an income year.
A concessional 15% final withholding tax rate on investment returns, (including income from capital gains) is available for non-resident investors (from countries with which Australia has a recognised exchange of information arrangement) who invest in these MITs.
Resident investors in these MITs will continue to be taxed on investment returns at their marginal tax rates. Income from capital gains will be eligible for the increased CGT discount of 60 per cent, where applicable.
13. Purchasers of new residential properties to remit GST
Affected clients: Purchasers and developers of new residential properties
Impact: Administration burden imposed on purchasers, and vendors will need to consider cashflow and financing.
Effective date: 1 July 2018
In brief: Purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO at settlement. This is a significant change from current practice, whereby the vendor remits the GST as part of their ordinary business reporting, and typically purchasers (being primarily private consumers) of newly constructed residential premises do not report or pay GST in their own right.
The Government are concerned as to the number of developers that have collapsed and been wound up, prior to setting liabilities owed to creditors and the ATO.
It appears that the Government expects that settlement agents will manage this payment as part of the settlement process. However, this view may be somewhat over simplified given that developers may choose to use the margin scheme to calculate the GST liability and this underlying calculation and detail would not be known to purchasers or settlement agents.
Furthermore, builders and developers will need to consider the impact that this announcement will have on their cash flow and financing arrangements.
14. Major bank levy
A major bank levy will be introduced from 1 July 2017, however the full impact of the Government’s projected $6.2 billion levy on the big four banks and Macquarie at this stage is largely unknown.
It is likely the levy will affect the entire banking system and a major levy on bank liabilities may ultimately be covered by consumers, whether through interest rates and account fees, however that being said, the banks will be under close scrutiny from ACCC not to pass on the levy to consumers. At this stage and as demonstrated by the recent drop in the banking sector, shareholders (and super funds) will most likely feel the effect through reduced share prices and profits.
15. Other measures announced
- Extension of Contractor taxable payments reports (TPRS) to the courier and cleaning industries with effect from 1 July 2018.
- From 1 July 2017, the GST treatment of digital currency (such as Bitcoin) will be aligned with that of money to remove the double taxation that arises on the purchase and exchange of the digital currency.
- An annual foreign worker levy is to be introduced, with the amount of the levy ranging from $1,200 to $1,800 per worker per year for temporary visas, and a once-off $3,000 to $5,000 per worker for permanent skilled visas. The levies are used to support skills training by way of a new Commonwealth Fund.
If you would like to discuss the budget changes and how they may affect you, please do not hesitate to contact Michelle Saunders, Marissa Bechta, and Jemma Sanderson on (08) 6311 6900.