Scott Morrison’s 2018/19 Federal Budget promises a significantly reduced deficit of $18.2 billion next financial year and a path to surplus in 2019/2020.
The key revenue measures comprise:
- Staged reductions in personal income tax rates
- Medicare Levy to remain at 2.0%
- No significant changes to the taxation of superannuation
- Various changes designed to make superannuation more “user friendly”
- Continued crackdown on multi-national tax avoidance
PERSONAL TAX MEASURES EXCLUDING SUPERANNUATION
Seven Year Personal Income Tax Cut Plan
The income tax rates for resident individuals will be progressively lowered over 7 years to minimise bracket creep and simplify the personal tax rates scale.
Step 1 – Low and Middle Income Tax Offset
From 1 July 2018 a non-refundable annual tax offset of up to $530 will be available for resident individuals. The benefit will be calculated as follows:
Taxable income up to $37,000 - $200
Taxable income $37,000 to $48,000 - increases at 3 cents per dollar
Taxable income $48,000 to $90,000 - $530
Taxable income $90,000 to $125,333 - phases out at 1.5 cents per dollar
The offset will not be incorporated into the Pay As You Go Withholding tables, instead it will be paid as a lump sum on the annual income tax assessment.
Step 2 – Protection from Bracket Creep
From 1 July 2018 the point at which the personal income tax rate increases from 32.5% to 37% will rise from $87,000 to $90,000. This equates to an annual tax cut of $135 for those with incomes over $90,000.
From 1 July 2022 the Government will:
- Increase the existing Low Income Tax Offset from $445 to $645 – an annual saving of $200 for those on incomes up to $37,000 – above this the offset phases out at 6.5 cents per dollar on incomes up to $41,000 after which it phases out at 1.5 cents per dollar and ceases at $66,667
- Extend the 19% personal income tax bracket from $37,000 to $41,000
- Increase the top threshold of the 32.5% tax rate from $90,000 to $120,000
From 1 July 2024 the Government will:
- Increase the top threshold of the 32.5% tax rate from $120,000 to $200,000
- Eliminate the 37% marginal tax rate
- The threshold at which the current 45% top marginal tax rate commences to apply will increase from $180,000 to $200,000
Medicare Levy to Remain at 2%
Overturning a previous Budget proposal, the Medicare Levy will remain at 2.0% and the National Disability Insurance Scheme will be funded from other sources.
There will be the usual indexation of the Medicare Levy low income thresholds.
Tighter Scrutiny on Children Receiving Income from Testamentary Trusts
From 1 July 2019 the concessional tax rates applying to minors who receive income from testamentary trusts will be limited to income derived from assets that are transferred to the trust from a deceased estate or the proceeds on the disposal or investment of those assets. Income from assets injected into a testamentary trust will no longer qualify for concessional tax treatment.
Image Rights Tax Schemes to Stop
Currently high profile individuals, such as sportspeople and actors, can split income by selling their “image rights”. This practice will cease from 1 July 2019.
Other Personal Tax Measures
- From 1 July 2019, the first $300 of fortnightly income from employment will not count against age pension entitlements. The current limit is $250
- Additional funding to the Australian Taxation Office of $131 million to enable it to further combat tax avoidance by individuals and their tax agents
- Tax exemption for certain Veteran Payments from 1 May 2018
- Introducing an anti-avoidance rule designed to prevent tax avoidance opportunities from “circular” trust distributions.
After significant changes in recent years, the core tax rules governing superannuation contribution limits, taxation of superannuation income including assets supporting pension income and the taxation of pensions remained unchanged. This provides welcome certainty for superannuation fund members. The key changes announced comprised:
Increasing Maximum Self Managed Superannuation Fund Membership from 4 to 6 Individuals
This will provide increased flexibility for larger family groups.
Partial Work Test Exemption for Recent Retirees
From 1 July 2019, a partial exemption from the work test for voluntary superannuation contributions by people aged 65 to 74 with superannuation balances below $300,000 will apply in the first year they do not meet the work test requirements.
Currently the work test restricts the ability to make voluntary superannuation contributions for individuals aged 65-74 to those who self report as working a minimum of 40 hours in any 30 day period in the financial year.
High Earners with Multiple Employers can Partially Opt Out of SGC Contribution Rules
From 1 July 2018, individuals whose income exceeds $263,157 and who have multiple employers will be able to nominate that their wages from certain employers are not subject to the 9.5% superannuation guarantee charge contribution rules. This will help ensure that their $25,000 concessional contributions cap is not exceeded.
Three Year Audit Cycle for Some SMSFs
The current annual audit requirement for SMSFs will be extended to a three year cycle for SMSF’s with a good history of record keeping and compliance. This measure will commence from 1 July 2019.
Changes to Insurance in Superannuation
From 1 July 2019 insurance within superannuation will move from the current default framework (ie automatic coverage) to an opt in basis for:
- Members with balances of less than $6,000
- Members under the age of 25 years
- Members whose accounts have not received a contribution in 13 months and are inactive
- Requirement for superannuation fund trustees to formulate a retirement income strategy
- Passive fees for small accounts (balances under $6,000) to be capped at 3% from 1 July 2019
- Increased Taxation Office resources to help consolidate inactive small accounts
Higher Small Business Instant Asset Write Off Period Extended Again
From 1 July 2016, a “small business” is a business with aggregated annual turnover of under $10 million.
These businesses can currently immediately write off the cost of plant and equipment costing less than $20,000. The instant asset write off period has now been extended to 30 June 2019.
Clarifying the Operation of the Division 7A Private Company Loan Rules
The Government has announced that it will ensure that unpaid present entitlements from a trust to a related private company will be subject to the Division 7A private company loan rules. The Australian Taxation Office currently asserts the right to bring unpaid trust distributions made after 16 December 2009 within the Division 7A rules. This treatment will now be legislated.
This measure will be added to previously announced Division 7A changes that have been deferred until 1 July 2019 including:
- a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Division 7A with the opportunity to voluntarily correct their arrangements without penalty
- new safe harbour rules, such as for use of assets, to provide certainty and simplify compliance for taxpayers; and amended rules, with appropriate transitional
- arrangements, regarding complying Division 7A loans, including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions.
An Everett Assignment allows partners in professional partnerships to split income by assigning part of their partnership interest to a family trust or other family member. This typically generated a capital gain which was frequently sheltered from capital gains tax by the small business CGT concessions.
Those small business CGT concessions will not apply to assignments made after 7:30pm on 8 May 2018.
Tax Deductions Disallowed for Holding Vacant Land
From 1 July 2019, the Government will deny tax deductions for expenses associated with holding vacant land. This is an integrity measure also designed to reduce tax incentives for land banking.
The measure will not apply to land held for residential or commercial purposes where:
- A building has been constructed on the land and has received approval for occupation; or
- The land is being used to carry on a business including a primary production business but generally not land held for commercial development.
Better Targeting the Research & Development Tax Incentive
From 1 July 2018, the R&D tax incentive will be changed to improve its integrity and fiscal affordability.
For companies with aggregated turnover below $20 million the refundable R&D tax offset will be a premium of 13.5% above the claimant company’s tax rate. Cash refunds will be capped at $4 million and excess offsets carried forward as non-refundable offsets.
For larger companies a non-refundable offset will apply on a sliding scale based on the incremental intensity of the R&D expenditure as a proportion of total expenditure for the year.
Black Economy Measures
The following measures directed against the cash economy will take effect from 1 July 2019:
- Expand the taxable payments report system to:
- Road freight transport
- Computer system design and related services
- Introduce a $10,000 limit for cash payments to businesses for goods and services
- Additional funding for the Australian Taxation Office
- Denying tax deductions for payments to employees and contractors where Pay As You Go Withholding is required but this has not occurred
The Government will extend existing measures to include:
- New offences directed against promoters etc
- Prevent directors backdating their resignations
- Restrict directors ability to resign from a single director company
- Restrict the ability of related creditors to manipulate insolvency proceedings
- Extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts
- Extend the ATO’s ability to retain refunds where there are outstanding tax lodgements
From 1 July 2018, the existing thin capitalisation rules will be tightened by lowering the associate entity threshold from 50% to 10%. This is directed against schemes that seek to convert trading income into interest income subject to a reduced withholding tax rate.
The following changes will take effect from 1 July 2019:
- Apply a final withholding tax at the corporate rate (currently 30%) to distributions from trading income that has been converted to passive income using a Managed Investment Trusts. There is limited scope to exclude significant infrastructure projects
- Limit the withholding tax exemption for foreign pension funds receiving interest or dividends to portfolio interests only – ie interests of less than 10%
- Prevent investments in agricultural land from accessing the 15% MIT withholding tax rate
- Creating a legislative framework for the existing tax exemption for foreign government investments
The definition of Significant Global Entity will be expanded to include Australian companies that are members of a privately owned group with annual global income of A$ 1 billion or more. Significant Global Entities are subject to Country-by Country reporting and enhanced Multinational Avoidance Law and Diverted Profits Tax.
The thin capitalisation measures will be tightened by requiring values reported in the entity’s financial statements to be used in its tax calculations.
From 1 July 2019, the Government will prevent Managed Investment Trusts and Attribution Managed Investment Trusts from applying the 50% capital gains tax discount at the trust level. Qualifying beneficiaries can apply the applicable discount to qualifying capital gains distributed to them. The impact of this will only be felt by those investors that are not eligible to apply the CGT discount.
Goods and Services Tax
No major changes were announced.
As an integrity measure offshore suppliers of Australian hotel accommodation will be required to register for GST where their annual sales of these supplies made on or after 1 July 2019 exceeds A$75,000.
The previously announced measure to apply GST to low value imported goods commences from 1 July 2018.
If you have any questions please contact your client service partner at UHY Haines Norton.
The material contained in this newsletter is in the nature of general comment and information only and neither purports, nor is intended, to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this newsletter without taking appropriate professional advice.