2017 Federal Budget
Scott Morrison’s 2017/18 Federal Budget promises a slightly reduced deficit of $29.4 billion in 2017/18 and a path to surplus in four years’ time.
The key revenue measures for comprise:
No changes to personal tax rates
An increase in the Medicare Levy to 2.5% from 1 July 2019
A number of measures intended to improve housing affordability for Australian citizens and permanent residents
Increased taxes on working visas
Continued crackdown on multi-national tax avoidance
It is important to remember that what follows is a series of proposals that must be passed by Federal Parliament before they become law. The closely balanced Federal Parliaments with a number of minor parties may make implementation of some Budget measures more difficult.
PERSONAL TAX MEASURES EXCLUDING SUPERANNUATION
No Change to Personal Tax Rates – 2% Budget Deficit Levy Ceases 30 June 2017
In general there are no changes to the personal tax rates.
The 2% budget deficit levy on incomes (as defined) over $180,000 ceases on 30 June 2017. As a result the top marginal tax rate for non-resident individuals with incomes over $180,000 will fall from 47% to 45%.
Medicare Levy to Rise to 2.5%
From 1 July 2019 the Medicare Levy will rise by 0.5% from 2.0% to 2.5% to help fund the National Disability Insurance Scheme.
There will be the usual adjustments to the low income thresholds.
Higher Education Loan Program (HELP) Changes
The rate at which (former) university students are required to repay their HELP debts will be accelerated as follows from 1 January 2018:
The repayment threshold drops from $51,957 to $42,000 (to be indexed for movements in CPI) with a new lower repayment rate of 1%
The 2% repayment rate will apply from $47,191
The maximum repayment rises from 8% (incomes over $107,214) to 10% (incomes over $119,882)
BUSINESS TAXATION CHANGES
Higher Small Business Instant Asset Write Off Period Extended
From 1 July 2016 a “small business” is a business with aggregated 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 2018.
Businesses to Pay Levy on Skilled Visa
From March 2018:
Businesses with a turnover under $10 million will be required to make an up front payment of $1,200 per visa per year for each Temporary Skill Shortage visa and a one off payment of $3,000 for each permanently sponsored employee
For larger businesses the amounts are $1,800 and $5,000 respectively
Taxable Payments Reporting System Extended to Couriers and Cleaners
From 1 July 2018 the Taxable Payments Reporting System will be extended to cleaners and contractors. Currently it applies in the building and construction industry.
A number of minor changes included:
Additional funding to the Australian Taxation Office (“ATO”) to combat the black economy and serious and organised crime
Digital currencies to be treated as money for GST purposes
Purchasers of newly constructed residential premises to pay the GST to the ATO on settlement
A 0.06% levy on the major banks’ liabilities
Extension of multi-national anti-avoidance law to negate the use of foreign trusts and partnerships in corporate structures and other international tax avoidance measures
Prohibition on the distribution or use of electronic point of sale sales suppression software
REAL ESTATE GENERALLY INCLUDING RELATED SUPERANNUATION MEASURES
A number of significant measures were announced that are intended to improve “housing affordability” for home owner occupiers who are Australian tax residents (other than temporary residents).
In general the measures reduce the tax deductions for all property investors; enhance the capital gains tax collection mechanism for real property sold by non-residents; allow first home buyers access to a special superannuation contribution account to fund a deposit; allow older taxpayers “downsizing” to make additional contributions to superannuation; and provide additional tax concessions for investment in affordable housing. Related measures seek to limit the amount of new housing that is available to foreign investors and to encourage them not to leave properties vacant.
Associated non-revenue measures are aimed at increasing supply.
First Home Super Saver Scheme
From 1 July 2017 voluntary contributions (subject to limits below) to superannuation made by first home buyers will be able to be withdrawn for a first home deposit, along with associated deemed earnings. Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30 per cent offset. Combined with the existing concessional tax treatment of contributions and earnings, this will provide an incentive that will enable first home buyers to build savings more quickly for a home deposit.
Under the measure, up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Contributions can be made from 1 July 2017. Withdrawals will be allowed from 1 July 2018 onwards. Two or more people can take advantage of this measure to buy their first home together.
Contributing the Proceeds of Downsizing to Superannuation
People aged 65 or over will be able to make a non-concessional (ie non-deductible) superannuation contribution of up to $300,000 from the proceeds of selling their home. These contributions will be in addition to those currently permitted under existing rules and caps. The contributions will be exempt from the existing age test, work test and the $1.6 million balance test for making non‑concessional contributions.
This measure will apply to sales of a principal residence owned for the past ten or more years and both members of a couple will be able to take advantage of this measure for the same home.
No More Tax Deductions for Travel Expenses to Visit Residential Investment Properties
From 1 July 2017 landlords owning residential properties will not be entitled to tax deductions for their own travel expenses related to inspecting, maintaining or collecting rent for their investment properties.
Payments for property management services provided by third parties such as real estate agents will remain tax deductible.
Restrictions on Residential Depreciation Deductions – Properties Bought After 9 May 2017
From 1 July 2017 plant and equipment depreciation deductions will be limited to outlays actually incurred by “new” investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as ovens, dishwashers and ceiling fans etc.
Where an investor contracts to buy a residential property after 7:30pm on 9 May 2017 the cost of existing plant and equipment items in that property will be reflected in the cost base for capital gains tax purposes.
Plant and equipment forming part of residential investment properties owned as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) 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.
Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.
Increased Capital Gains Tax Discounts for Investments in Affordable Housing
From 1 January 2018 an additional ten percentage points capital gains tax discount, increasing the long term CGT discount from 50% to 60%, to resident individuals (other than temporary residents) who elect to invest in qualifying affordable housing.
To qualify for the higher discount, housing must be provided to low to moderate income tenants, with rent 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 held for a minimum period of three years.
Managed Investment Trust (“MIT”) Investments in Affordable Housing
From 1 July 2017 MITs will receive additional tax concessions where they invest in affordable housing (see above) and those properties are held for at least ten years. Rents from affordable housing must comprise at least 80% of its assessable income.
Resident investors will be taxed at their marginal tax rates on MIT income with the 60% CGT discount applying to long term capital gains.
Non‑resident investors are generally subject to a 15 per cent final withholding tax rate on fund payments from the MIT. The withholding tax rate rises to 30% where less than 80% of the MIT’s income is from affordable housing.
SUPERANNUATION MEASURES APART FROM HOUSING
After last year’s major changes to the superannuation contribution and pension systems there were no dramatic changes apart from those associated with home affordability (see above).
Integrity of Limited Recourse Borrowing Arrangements and the Pension Cap
From 1 July 2017, the use of limited recourse borrowing arrangements (LRBA) will be included in a member’s total superannuation balance and transfer balance cap. This measure will apply to both new and existing LRBAs.
The Government is concerned that LRBAs can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap. The outstanding balance of a LRBA will now be included in a member’s annual total superannuation balance and the repayment of the principal and interest of a LRBA from a member’s accumulation account will be a credit in the member’s transfer balance account.
This proposal could have a significant adverse impact on SMSFs in pension mode with a LRBA.
Tightening of Anti-Avoidance Rules Regarding Investment Income
From 1 July 2018 opportunities to artificially boost a member’s superannuation savings will be reduced by applying an arm’s length standard to related party expenses. The non‑arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.
Extended Tax Relief for Merging APRA Regulated Superannuation Funds
The current tax relief for merging APRA regulated superannuation funds will be extended until 1 July 2020. This relief allows qualifying superannuation funds to transfer capital and revenue losses to a new merged fund, and to defercal taxation consequences on gains and losses from revenue and capital assets.
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