The Federal Treasurer Scott Morrison delivered his third Budget on 8 May 2018. In the shadows of the Royal Commission into the Australian Banking system and Opposition rhetoric about removing refundable franking credits, Mr Morrison promised tax relief, and to further strengthen Australia’s economy. That would be achieved via five areas:
- Providing tax relief;
- Backing businesses to build, particularly Small to Medium Enterprises (SME’s);
- Guaranteeing essential services for Australians (Medicare, schools, infrastructure);
- Keeping Australia and Australian’s safe by enhancing our border protection;
- Living within the Government’s means.
Mr Morrison indicated that the Budget was the strongest Budget since the Howard Government (some ten plus years ago), with a deficit of $18.2B, and would return to a surplus of approximately $2B by 2019/2020, increasing to a $16B surplus by 2022. This would enable the Government to repay debt, with the aim of reducing Government debt to 3.8% of GDP by 2028/2029. The fiscal responsibility undertaken by the current government has enabled Australia to maintain is AAA credit rating, one of only 10 countries in the world to have.
We outline below some of the key announcements that will impact taxation and spending.
- Personal Tax Rate Cuts
- Other Personal Tax Considerations
- Business / Entity Taxation
- Taxation Compliance
- Superannuation (Don’t Worry, There’s Not Much….and They’re Not Too Bad)
- Social Security
1. Personal Tax Rate Cuts
The Government announced a seven-year tax plan that would involve:
- Middle to low income earners
- a further non-refundable tax offset from 2018/2019 through to 2021-2022, in addition to the current Low Income Tax Offset.
- This will be as follows:
- In recognition of wage and inflation growth, removing bracket creep by:
- Increasing the 32.5% tax threshold from $87,000 to $90,000 from 1 July 2018, with a further increase to $120,000 from 1 July 2022.
- Increasing the 19% tax threshold from $37,000 to $41,000 from 1 July 2018.
- Increasing the Low Income Tax Offset from $445 to $645 from 1 July 2022.
- Abolishing the 37% tax bracket entirely from 1 July 2024, where income between $120,000 to $200,000 will be taxed at 32.5%
The following table shows how the rates and thresholds will phase in over time:
2. Other Personal Tax Considerations
In addition to the above, the following have also been tabled:
- The Medicare Levy will remain at 2%, and will not need to be increased to 2.5% from 1 July 2019, as previously announced in the 2017/18 Budget, in order to fund the NDIS.
- Putting in place integrity measures such that minor children can only receive concessional tax treatment on distributions from testamentary trusts on assets that were part of a deceased estate, or the proceeds if those assets are sold. That is, the concessional tax treatment wouldn’t apply where the trust borrowed funds to also invest;
- Extra funding to enable four data matching programs to continue to be used by the ATO to ensure there is no revenue leakage (particularly for overseas investments held by high net wealth individuals);
- Higher profile Australians will no longer be able to license their image to another entity to take advantage of differing tax rates. This is a common structure for sportspersons and public profiles engaged for promoting products or brands.
3. Business / Entity Taxation
Tax initiatives that will impact businesses and entities include:
Small Business Entities
- Extending the instant asset write-off for another year for businesses with aggregated turnover of less than $10M pa up to $20,000 per asset (due to expire on 30 June 2018). This will revert to $1,000 from 1 July 2019. Although the extension of the instant asset write off is welcome, cashflow or financing is required to permit a business to acquire such an asset.
- Partners that create, assign or otherwise deal with future rights to partnership income / distributions will be unable to utilise the CGT small business concessions;
- The Government will clarify the operation of Division 7A as it applies to Unpaid Present Entitlements (UPEs), so that UPEs fall within the scope of Division 7A. This means that UPEs will either need to have a complying agreement in place, or be subject to tax as a dividend;
- However, amendments to Division 7A such as self corrective measures and safe harbours that may benefit taxpayers that were due to commence on 1 July 2018, as announced in the 2016/2017 Budget would be deferred until 1 July 2019, together with the new measures above. As Division 7A is a significant area for private groups, we would hope that the Government introduce draft law for consultation sooner than later, to give private groups more certainty by the proposed 1 July 2019 start date;
- From 1 July 2019 the Government will put in place some integrity measures to ensure that closely held trusts can’t round-robin distributions, with the outcome that no tax is payable on a distribution;
- Where vacant land is not genuinely held for the purpose of earning assessable income, deductions with respect to that vacant land (for example, interest on a borrowing) will be disallowed after 1 July 2019. Further, disallowed deductions won’t be able to be carried forward for use in the future, and may be unavailable to add to the assets’ cost base if they would not ordinarily be included in the cost base for CGT purposes. Whilst not intended to impact vacant land used in business, this may impact those taxpayers who hold vacant land to construct rental properties.
In addition to reaffirming their commitment to reduce the corporate tax announced in the 2017/18 Budget, the Government announced the following measures:
- Overhauling the Research and Development (R&D) tax incentive by introducing an R & D premium above the company’s tax rate, depending on:
- Their aggregated turnover;
- The proportion of total expenditure of a business that relates to R&D; and
- The R&D refundable offset will also be capped at $4M, with any offset that can’t be refunded being able to be carried forward for a future year.
- Ensuring that digital businesses in Australia pay their fair share of tax (discussion paper to be released at a later date);
- The thin cap rules will be amended to ensure that entities align the valuation of their assets for thin cap purposes with what is disclosed in their financial statements, whilst also reducing the associate entity threshold from 50% to 10% in a measure to protect the corporate tax base of stapled securities;
- Managed Investment Trusts (MITs) and Attribution MITs will be prevented from applying the 50% CGT discount at the trust level, to ensure that these entities operated as genuine flow through investment vehicles;
- Measures announced in the 2017/18 budget to reduce the scope of the Taxation of Financial Arrangements (TOFA) provisions, to reduce compliance costs to taxpayers, has been deferred, in order to allow time for the simplified rules to be designed, to ensure the savings will be realised.
4. Taxation Compliance
To ensure that the collection of taxation revenue occurs efficiently and that everyone is paying their fair share, the Government will provide additional funding to enable the regulators to:
- Identify, monitor and provide enforcement to those who don’t pay the superannuation or tax for their employees;
- Disallow tax deductions on salary and wage and contractor payments where the employer has not withheld PAYG;
- Tackle the black economy;
- Monitor and disrupt phoenix activity;
- Ensure that where a business tenders for a Government project, they will have to provide a statement from the ATO that they are compliant with their tax obligations.
With the biggest changes to superannuation in a decade announced in the 2015/2016 Budget, and the industry and taxpayers still grappling with the impact, it was comforting to see that changes to superannuation were limited, and introduced to maintain integrity in the system (and also no doubt some Royal Commission findings having an impact):
- SMSF members able to increase from four to six from 1 July 2019. Now allowing for a SMSF to become a family SMSF. Although that sounds like a good idea, it will then require six directors of the corporate trustee, or six individual trustees, all of who will be required to sign various documents on a regular basis, and may make the administration of an SMSF more cumbersome;
- It is speculated that such an arrangement may thwart Labor’s dividend imputation policy, where SMSFs would be ineligible to receive a franking credit refund (unless there was a member in receipt of a Government pension). By having more members means that there is the potential for one of those members to be in receipt of a Government pension, or where the excess franking credits could be used to manage the tax liability on superannuation contributions for the six members;
- Introduce integrity measures to ensure that the ability for a taxpayer to claim a tax deduction for a personal contribution to superannuation is undertaken correctly, by way of further ATO compliance and debt collection activity;
- An exemption will apply from the work test for individuals who are aged between 65 and 74 who wish to make a contribution to superannuation in the first year that they don’t meet the work test. This will apply where their total superannuation balance is less than $300,000;
- Many high-income earners with multiple employers are inadvertently breaching their concessional contribution limit (currently $25,000 per taxpayer) due to the superannuation guarantee requirements imposed upon their employers. The Government has announced that they will provide an opt-out for those taxpayers impacted, so that they can nominate that wages from particular employers are not subject to SG. Although this is a positive measure, it will be important that it is implemented correctly to ensure that taxpayers are not missing out on their superannuation contributions or overall remuneration entitlements;
- From 1 July 2019 SMSFs with a clean compliance history for the past three years and who lodge in a timely manner will only have to be audited once every three years, delivering cost savings to the SMSF. Consultation will be undertaken to ensure that this is applied correctly and implemented smoothly;
- A retirement covenant will be introduced into the SIS Act to require superannuation fund trustees to formulate a retirement income policy.
6. Social Security for Older Australians
The Government will introduce a range of measures from 1 July 2019 to enhance the standard of living of older Australians:
- Increase the Pension Work Bonus from $250 to $300 per fortnight (ie $7,800 a year) and extend the Bonus to self-employed retirees who will be able to earn up to $300 per fortnight without impacting their pension;
- Provide means test exemptions to encourage retirees to consider lifetime income products to protect against longevity risk. This will also encourage product providers to develop such products; and
- Enable more senior Australians to access the equity in their homes to increase their incomes by expanding the Pension Loans Scheme to everyone over Age Pension age and the maximum fortnightly income stream will be increased to 150% of the Age Pension rate.
There have been a number a new initiatives announced combined with amendments to the current law. As always, the devil is often in the detail, and also whether any of the above changes are in fact passed through Parliament. Given the current back-log of legislation, some of the timing above may not be achievable. We will await the release of the law for some of the above measures to ascertain their full impact, and what may be required in order to comply with any new requirements, or be eligible for any new concessions / offsets.