The 2018-2019 Federal Budget, handed down on 8 May 2018, focused on personal taxation, business taxation, superannuation, and measures to assist older Australians. Here, highlights are explained with tables to help calculate savings or changes to previous circumstances as the Budget 2018-2019 measures are brought into effect.
Personal tax rates – staged 7-year reform plan starting 2018-19
In the 2018-19 Budget, the Government announced staged tax relief for low and middle-income earners. The Government is proposing a major 7-year, 3-step plan to reform personal income tax:
- Step 1 will see a new non-refundable Low and Middle Income Tax Offset from 2018-19 to 2021-22, designed to provide tax relief of up to $530 for each of those years. The offset will be delivered on assessment after an individual submits their tax return and will be in addition to the existing Low Income Tax Offset (LITO).
- The Low and Middle Income Tax Offset will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. Between $37,000 and $48,000, the value of the offset will increase at a rate of 3 cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. From $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar. The benefit of the Low and Middle Income Tax Offset is in addition to existing Low Income Tax Offset.
- Step 2 will increase the top threshold of the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018. In 2022-23, the top threshold of the 19% bracket will increase from $37,000 to $41,000 and the LITO will increase from $445 to $645. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667. The top threshold of the 32.5% bracket will increase from $90,000 to $120,000 from 1 July 2022.
- Step 3 – from 1 July 2024, the top threshold of the 32.5% bracket will increase from $120,000 to $200,000, removing the 37% bracket completely. Taxpayers will pay the top marginal tax rate of 45% from taxable incomes exceeding $200,000 and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000.
Minors and testamentary trusts: Concessional tax rates limit
The concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from deceased estates 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 able to inappropriately obtain the benefit of this lower tax rate by injecting assets unrelated to the deceased estate into testamentary trusts. This measure will clarify that minors will be taxed at adult marginal tax rates only in relation to income of a testamentary trust that is generated from assets of a deceased estate (or the proceeds of the disposal or investment of these assets).
Taxation of income for high profile individuals
The Government will ensure that high profile individuals will no longer be able to take advantage of lower tax rates by licensing their fame or image to another entity.
Currently, high profile individuals such as sportspeople or actors can license their fame or image to another entity (a related company or trust), and the income derived goes to the entity that holds the licence. This creates opportunities to take advantage of different tax treatments. This measure will ensure that all remuneration (including payments and non-cash benefits) provided for the commercial exploitation of a person’s fame or image will be included in the assessable income of the individual. This measure will apply from 1 July 2019.
PERSONAL TAXATION THRESHOLDS
From 1 July 2018
$20,000 instant asset write-off for SBEs extended by 12 months
The Government will extend the current instant asset write-off ($20,000 threshold) for small business entities (SBEs) by 12 months to 30 June 2019. This applies to businesses with aggregated annual turnover less than $10 million.
The threshold amount was due to return to $1,000 on 1 July 2018. As a result of this announcement, SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are acquired between 1 July 2017 and 30 June 2019 and first used, or installed ready for use by 30 June 2019 for a taxable purpose. Only a few assets are not eligible for the instant asset write-off (or other simplified depreciation rules), eg horticultural plant and in-house software.
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business pool (the pool) and depreciated at 15% in the first income year and 30% 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 for simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt out) will continue to be suspended until 30 June 2019.
The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2019.
R&D tax incentive overhaul
The Government will amend the research and development (R&D) tax incentive in response to the recommendations of the 2016 Review of the R&D Tax Incentive. The changes will apply for income years starting on or after 1 July 2018.
For companies with an aggregated annual turnover of $20 million or more, the government will introduce an R&D premium that ties the rate 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 claimant’s company 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.
For companies with an 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 from the refundable R&D tax offset will be capped at $4 million per annum. R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years.
Deductions disallowed for holding vacant land
The Government will disallow deductions for expenses associated with holding vacant land. Where the land is not genuinely held for purpose of earning assessable income, expenses such as interest costs will be denied. It is hoped this measure will reduce the tax incentives for land-banking which limit the use of land for housing or other development.
The measure will apply to land held for both residential and commercial purposes. However, the “carrying on a business” test would generally exclude land held for a commercial development. It will not apply to expenses associated with holding land that are incurred after:
- A property has been constructed on the land, it has received approval to be occupied and available for rent; or
- The land is being used by the owner to carry on a business, including a business of primary production.
Disallowed deductions will not be able to be carried forward to use in later income years. Expenses for which deductions will be denied could be included in the cost base if it would ordinarily be a cost base element (i.e. borrowing costs and council rates) for CGT purposes. However, if the denied deductions are for expenses would not ordinarily be a cost base element, they cannot be included in the cost base. This measure applies from 1 July 2019.
No tax deduction for non-compliant PAYG and contractor payments
Measures will be enacted to ensure that taxpayers will not be able to claim deductions for payments to their employees such as wages where they have not withheld any amount of PAYG from these payments, despite the PAYG withholding requirements applying.
Similarly, the Government intends to remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (again despite the withholding requirements applying).
This was recommended by the Black Economy Taskforce. The measure will commence on 1 July 2019.
Cash payments limit: payments made to businesses
The Government will introduce the limit of $10,000 for cash payments made to businesses for goods and services.
This measure will require transactions over a threshold to be made through an electronic payment system or by cheque. Logically it would seem that this threshold amount should be $10,000, but this is not spelled out in the Budget papers or media release.
The rules will not apply to transactions with:
- Financial institutions; or
- Consumer-to-customer non-business transactions.
This measure was recommended by Black Economy Taskforce. It is designed to support other measure designed to counter the black economy. There is no revenue impact associated with it.
The limit will apply from 1 July 2019. The Government will consult further as part of the implementation process.
Reportable payments system extended: security providers, road freight transport, and computer design
The Government will extend the taxable payments reporting system (TPRS) to the following industries:
- Security providers and investigation services;
- Road freight transport; and
- Computer system design and related services.
This will extend the TPRS requirements already applying to the building and construction industry. The TPRS requirements will also be extended, from 1 July 2018, to the cleaning and courier industries under measures contained in the Treasury Laws Amended (Black Economy Taskforce Measures No 1) Bill 2018 (see 2018 WTB 6 ).
The reporting requirements will apply from 1 July 2019, with the first annual report required in August 2020.
Countering illegal phoenix activities
The Government has flagged a package of reforms intended to “deter and disrupt’ phoenix activity. The package includes:
- Introducing new phoenix offences to target those who conduct or facilitate phoenixing;
- Preventing directors improperly backdating resignations to avoid liability or prosecution;
- Limiting the ability of directors to resign when this would leave the company with no directors;
- Restricting the ability of related creditors to vote on the appointment, removal or replacement of an external administrator;
- Extending the Directors Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts; and
- Expanding the Tax Office’s power to retain refunds where there are outstanding tax lodgements.
These reforms are stated to “complement and build on the work of the Government’s Phoenix, Serious Financial Crime and Black Economy taskforces”. They extend other announced reforms such as: (i) the Director Identification Number;, (ii) a combined black economy and illegal phoenixing hotline; and (iv) reforms to address corporate misuse of the Fair Entitlements Guarantee and to tackle non-payment of the Superannuation Guarantee Charge.
For the economists out there, the measures are estimated to have a nil revenue impact of the Commonwealth, although the cost of the Budget of extending the Director Penalty Regime is estimated to be $40 million (over 4 years). The reason for this is that the revenue that is derived from this measure is not counted – as the amount collected is paid to the States. The ability of the Tax Office to retain refunds will have a “small but unquantifiable” gain to revenue.
SMSF member limit to increase from 4 to 6
The Budget confirmed that the maximum number of allowable members in new and existing self-managed superannuation funds (SMSFs) and small APRA funds will be expanded from 4 to 6 members from 1 July 2019.
The proposed increase to the maximum number of SMSF members seeks to provide greater flexibility for large families to jointly manage retirement savings.
Allowing up to 6 SMSF members may assist some SMSFs to implement strategies to guard against Labor’s proposal to end cash refunds of excess franking credits from 1 July 2019. SMSFs in tax-exempt pension phase are expected to feel the brunt of Labor’s proposal, although an exemption was subsequently announced for SMSFs with at least one Government pensioner or allowance recipient before 28 March 2018.
To avoid wasting non-refundable franking credits, Labor’s proposal would create an incentive for SMSFs in pension phase to add additional accumulation phase members (eg adult children) who could effectively make some use of the excess franking credits within the fund. That is, the excess franking credits would be used to absorb some of the 15% contributions tax in relation to the accumulation members.
As noted above, a decision to add additional members to an SMSF may add complexity to the management and control of the fund. This would require professional advice for the specific circumstances of the fund and its members.
SMSF audit cycle of 3 years for funds with good compliance history
The annual audit requirement for self-managed superannuation funds (SMSFs) will be extended to a 3-yearly cycle for funds with a history of good record-keeping and compliance.
The measure will apply to SMSF trustees that have a history of 3 consecutive years to clear audit reports and that have lodged the fund’s annual returns in a timely manner.
This measure will start 1 July 2019.
Work Test exemptions
For recently retired members aged between 65 and 74 and with balances under $300,000, the work test requirement will be relaxed. The relaxation is for the first year they do not meet the normal requirements of 40 hours in a period not more than 30 days. This starts from 1 July 2019.
Personal contribution deductions
From 1 July 2018, individuals will have to tick a box in their tax return to confirm whether they have complied with the notice of intent requirements for claiming personal superannuation contributions.
SOCIAL SECURITY MEASURES
Measures for older Australians
The Government will introduce a range of measures to enhance the standard of living of older Australians:
- Increase the Pension Work Bonus from $250 to $300 per fortnight (i.e. $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;
- Amend the pension means test rules to encourage the development and take up of lifetime retirement income products that can help retirees manage the risk of outliving their savings; and
- Expand the Pension Loan Scheme to everyone over Age Pension age and the maximum fortnightly income stream will be increased to 150% of the Age Pension rate. This will enable Australians to use the equity in their homes to increase their incomes.
These measures will commence 1 July 2019.