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Federal Budget Update

Federal Budget Update

Reward for work was the dominant theme in the 2018-19 Federal Budget.

The seven year personal income tax plan initially targets low to middle income earners before making significant changes to the tax brackets.

Innovation continues to be an area of Government focus, including dedicating a total of $1.3 billion to fund genomic research projects investigating medicines that can be tailored to individual patients, clinical trials of new drugs and development of new medical technologies.

As you would expect from an election budget, there is not a lot of bad news or serious cuts in this Budget.

There are a number of tax changes to close loopholes and while not presented in the budget, the Treasurer has flagged the release of a discussion paper that will explore options for taxing digital business in Australia.

Key initiatives

  • $20k accelerated depreciation extended until 30 June 2019
  • Research & development incentive shake-up
  • Black economy – new initiatives and more industries rolled into the taxable payments system
  • Introduction of a 3-year cycle for SMSF audits for compliant funds
  • Seven year personal tax cut plan
  • Major innovation funding

For Business

$20,000 Accelerated Depreciation Extended

The ability for small business entities to claim an immediate deduction for assets costing less than $20,000 has been extended until 30 June 2019.

From 1 July 2019, the immediate deduction threshold will reduce back to $1,000.

There are no limits to the number of times you can use the immediate deduction assuming your cashflow supports the purchases.

If your business is registered for GST, the cost of the asset needs to be less than $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price.  If your business is not registered for GST, it is the GST inclusive amount.

Second hand goods are also deductible.  However, there are a number of assets that don’t qualify for the instant asset write-off as they have their own set of rules.  These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.

If you purchase assets costing $20,000 or more, the immediate deduction does not apply but small businesses have the ability to allocate the purchase to a pool and depreciate the pool at a rate of 15% in the first year and 30% for each year thereafter.

Research & Development Incentive Shake-Up

Applying to income years starting on or after 1 July 2018, the way the research and development (R&D) tax incentive applies will change to focus on ‘more intensive’ R&D activities, particularly in medical and clinical development.  The changes attempt to refocus the incentive on activities that go well beyond what companies would normally do to improve.

Companies under $20m

For companies with an aggregated annual turnover less than $20 million:

  • An annual $4 million cap will be introduced on cash refunds for R&D claimants. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;
  • Clinical trials will be excluded from the $4 million cap on cash refunds, to encourage development in this area; and
  • The refundable R&D tax offset will be amended and will become a premium of 13.5 percentage points above the company’s tax rate for that year.

Companies over $20m

For companies with aggregated annual turnover of $20 million or more, an R&D premium will be introduced that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.

The marginal R&D premium will be the company’s tax rate plus:

  • 4 percentage points for R&D expenditure between 0% to 2% R&D intensity;
  • 5 percentage points for R&D expenditure above 2% to 5% R&D intensity;
  • 9 percentage points for R&D expenditure above 5% to 10% R&D intensity; and
  • 5 percentage points for R&D expenditure above 10% R&D intensity.

The R&D expenditure threshold – the maximum amount of R&D expenditure eligible for concessional R&D tax offsets – will be increased from $100 million to $150 million per annum.

The ATO has expressed concerns in recent years that many claims are being made under the R&D tax incentive for expenditure that does not meet the strict conditions for the tax offset. For example, the ATO’s view is that some companies have been claiming the R&D tax offset in connection with normal business activities rather than experiments being undertaken for the purpose of generating new knowledge. In addition to the changes outlined above, additional resources will be provided to the ATO and Department of Industry, Innovation and Science to undertake greater enforcement activity and provide more guidance for those seeking to make claims.

No More Salary & Wage Tax Deductions for Late Paying Employers

Employers who do not keep up with their PAYG obligations will not be able to claim a tax deduction for payments to employees (such as wages).

Businesses will also lose the ability to claim deductions for payments made to contractors where the contractor does not provide an ABN and the business does not withhold PAYG.

$10,000 Limit on Cash Transactions

A limit of $10,000 will be introduced for cash payments made to businesses for goods and services from 1 July 2019. Payments above the threshold will need to be made through an electronic payment system or by cheque.

The measure does not impact on transactions with financial institutions or non-business consumer to consumer transactions. But, if you run a business, from 1 July 2019 you will not be able to accept cash transactions above $10,000.

Thin Capitalisation Rules Tightened

The thin capitalisation rules are designed to place a limit on the level of interest and other debt deductions that can be claimed in Australia when Australian operations are heavily funded by debt rather than by equity.  The thin capitalisation rules apply where total debt deductions (e.g., interest expenses) for the taxpayer and its associates exceeds $2 million.

These rules will be tightened by requiring entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.

This measure will apply to income years commencing on or after 1 July 2019 and all entities must rely on the asset values contained in their financial statements for thin capitalisation purposes. Valuations made prior to 7.30PM (AEST) on 8 May 2018 may be relied on until the beginning of an entity’s first income year commencing on or after 1 July 2019.

Partnerships and the Small Business CGT Concessions

This measure seeks to close a loophole that provides access to the small business CGT concessions by partners in large partnerships.

Partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership (often referred to as Everett assignments) will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights.

The small business CGT concessions assist owners of small businesses by providing relief from CGT on the disposal of assets related to their business. However, some taxpayers, including large partnerships, are able to access these concessions in relation to their assignment of a right to the future income of a partnership to an entity, without giving that entity any role in the partnership. Partly this is due to the fact that there is no minimum percentage interest that needs to be held by partners in a partnership to access these concessions, unlike the 20% threshold that normally applies to shareholders of a company or beneficiaries of a trust.

This has been an area of concern for the ATO for some time and in recent years the ATO has indicated that the general anti-avoidance rules can potentially apply to some of these arrangements. It appears that the Government has decided to simply take away some of the concessions in the tax system which make these arrangements attractive.

Division 7A and Unpaid Present Entitlements

Unpaid present entitlements will come directly within the scope of Division 7A.

An unpaid present entitlement arises where a trust appoints income to a corporate beneficiary but this amount has not actually been paid to the company. The measure seeks to ensure that the unpaid present entitlement is either required to be repaid to the private company over time as a complying loan or will be subject to tax as a dividend.

While Division 7A can currently apply to some arrangements involving unpaid present entitlements owed to companies, they are treated differently to loans and in some cases receive preferential treatment compared with loans. While the Government has not released much detail on this proposed change, presumably the changes will ensure that the treatment of unpaid present entitlements is more closely aligned with the current treatment of loans. However, we will have to wait and see whether the changes only apply to newly created entitlements or whether existing unpaid entitlements will be affected.

The Division 7A reforms announced in the previous budget have been delayed to include this latest measure as a consolidated package.

Regulators Target Phoenix Activity

Corporation and tax laws will be reformed in an attempt to target phoenix activity. The reforms:

  • Introduce new phoenix offences to target those who conduct or facilitate illegal phoenixing;
  • Extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts;
  • Expand the ATO’s power to retain refunds where there are outstanding tax lodgements;
  • Prevent directors improperly backdating resignations to avoid liability or prosecution;
  • Limit the ability of directors to resign when this would leave the company with no directors; and
  • Restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator.

The current Director Penalty Regime includes unpaid superannuation guarantee and PAYG withholding amounts but does not include GST liabilities. These proposed changes will ensure that directors become personally liable in situations where the company has not satisfied its GST obligations as well as luxury car tax and wine equalisation tax liabilities.

Individuals & Families

Personal Income Tax Cuts

The anticipated personal income tax cuts will be delivered as part of a seven year plan culminating in the removal of one tax bracket from 1 July 2024.  The Government states that the end result will be that around 94% of taxpayers will be subject to a marginal tax rate of 32.5%.

The current focus is the low and middle tax income brackets with changes to the tax brackets and the introduction of the Low and Middle Income Tax Offset.

 

  Tax thresholds
Tax rate Current From 1 July 2018 From 1 July 2022 From 1 July 2024
0% $0 – $18,200 $0 – $18,200 $0 – $18,200 $0 – $18,200
19% $18,201 – $37,000 $18,201 – $37,000 $18,201 – $41,000 $18,201 – $41,000
32.5% $37,001 – $87,000 $37,001 – $90,000 $41,001 – $120,000 $41,001 – $200,000
37% $87,001 – $180,000 $90,001 – $180,000 $120,001 – $180,000
45% >$180,000 >$180,000 >$180,000 >$200,000
Low and middle income tax offset Up to $530
LITO Up to $445 Up to $445 Up to $645 Up to $645

 From 1 July 2018:

  • The top threshold of the 32.5% personal income tax bracket will increase from $87,000 to $90,000.

From 1 July 2022:

  • The top threshold of the 19% personal income tax bracket will increase from $37,000 to $41,000.
  • The top threshold of the 32.5% personal income tax bracket will again increase from $90,000 to $120,000.
  • The Low Income Tax offset will increase from $445 to $645. The increased Low Income Tax Offset will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667.

From 1 July 2024:

  • The 37% tax bracket will be removed.
  • The top threshold of the 32.5% personal income tax bracket will again increase from $120,000 to $200,000.

Low and Middle Income Tax Offset

The Government has introduced the Low and Middle Income Tax Offset (LIMITO) from the 2018-19 income year. Applied as a non-refundable tax offset after an individual lodges their income tax return, the tax offset provides:

Table income Low and Middle Income Tax Offset (LIMITO)
$0 – $37,000 Up to $200
$37,000 – $48,000 Offset increase of 3 cents per dollar up to $530
$48,000 – $90,000 Up to $530
$90,001 to $125,333 Offset phases out at a rate of 1.5 cents per dollar

Assuming that the amending legislation passes Parliament, the offset is intended to be available for the 2018-19 to 2021-22 income years.

The Low and Middle Income Tax Offset is in addition to the existing Low Income Tax Offset.

Changes to Testamentary Trusts

The concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.

Currently, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors. The Government is concerned that some taxpayers are inappropriately obtaining the benefit of this lower tax rate by injecting assets unrelated to the deceased estate into the testamentary trust.

While the rules already contain some integrity provisions that are aimed at limiting the scope for inappropriately boosting the income earning capacity of testamentary trusts, the measure clarifies that minors will be taxed at adult marginal tax rates only in respect of the income a testamentary trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).

Crackdown on Family Trust ‘Round Robin’ Arrangements

Family trusts will be subject to a specific anti-avoidance rule that applies to other closely held trusts that engage in circular trust distributions.

Currently, where family trusts act as beneficiaries of each other in a ‘round robin’ arrangement, a distribution can be ultimately returned to the original trustee – in a way that avoids any tax being paid on that amount.

The measure would enable the ATO to impose tax on these distributions at a rate equal to the top personal tax rate plus the Medicare levy.

Medicare Levy Low Income Threshold Increase

The Medicare levy low income thresholds for singles, families, seniors and pensioners will increase from the 2017-18 income years.

  2016-17 2017-18
Singles $21,655 $21,980
Families $36,541 $37,089
Single seniors and pensioners $34,244 $34,758
Family threshold for seniors and pensioners $47,670 $48,385
Each dependent child or student (increase to family threshold) $3,356 $3,406

Encouraging Pensioner Financial Independence

A range of measures seek to encourage pensioner financial independence:

  • Pension Work Bonus increase from $250 to $300 per fortnight – allowing pensioners to earn up to $7,800 each year without impacting their pension. This is in addition to the income free area, which is currently $168 a fortnight for a single pensioner and $300 a fortnight (combined) for a pensioner couple. A single person with no other income will be able to earn up to $468 a fortnight from work and get the maximum rate of Age Pension.
  • Pensioners will also continue to accrue unused amounts of the fortnightly Work Bonus, which can exempt future earnings from the pension income test. The maximum accrual amount will increase to $7,800.
  • The pension work bonus will also be expanded to allow self-employed retirees to earn up to $300 per fortnight without impacting their pension.
  • Amendments to the pension means test rules – new Age Pension means testing rules will be introduced for pooled lifetime income streams. The rules will assess a fixed 60% of all pooled lifetime product payments as income, and 60% of the purchase price of the product as assets until 84, or a minimum of 5 years, and then 30% for the rest of the person’s life.
  • Expansion of the pension loan scheme – the scheme, enabling Australians to use the equity in their homes to increase their incomes, will be extended to everyone over Age Pension age. The maximum fortnightly income stream will increase to 150% of the Age Pension rate.

The material and contents provided are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone.

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