MKT’S TOP 10 THINGS YOU NEED TO KNOW ABOUT THE 2018/19 FEDERAL BUDGET
Last night the Government handed down the Federal Budget for the 2018-19 year. The key theme this year is “Lower, Fairer and Simpler taxes” and the Government proposes to deliver this by adjusting personal tax rates over the next 6 years. Coupled with the existing and proposed corporate tax rate reductions, the Personal Income Tax Plan and the Enterprise Tax Plan appear to be as far as this Government will go now and over the next 6 years in tackling tax reform. That said, any reduction in tax rates should be welcomed.
Whilst there are a number of tax measures mentioned, none could be considered tax reform, rather a package of measured personal tax cuts (to add to the corporate tax cuts currently stalled in the Senate) and the usual tinkering around the edges to tighten up compliance and close some perceived loopholes.
Whilst you have no doubt been swamped by commentary and summary on the Federal Budget, here is MKT’s Top Ten Things you need to know about last night’s Budget for your SME clients.
1 THE PERSONAL INCOME TAX PLAN
This Plan will be delivered in 3 steps, with the first step generating immediate tax relief for low and middle income earners from 1 July 2018, effectively providing a tax offset of up to $530 per year. The offset begins at $200 for those earning up to $37,000, increasingly incrementally up to $48,000 per annum, with those earning between $48,000 and $90,000 entitled to the maximum offset of $530. The benefit then reduces to zero for those earning over $125,000.
The second step also applies from 1 July 2018 and increases the 32.5% tax bracket from $87,000 to $90,000, then from 1 July 2022 increases the 19% tax bracket from $37,000 to $41,000 AND increases the 32.5% tax bracket from $90,000 to $120,000.
The third step is by far and away the most beneficial by removing the 37% tax bracket entirely, meaning those earning between $41,000 and $200,000 are subject to 32.5% tax, with the top tax bracket of 45% kicking in from $200,000. Unfortunately we will have to wait over 6 years (and at least 3 elections) for this measure to apply!
2 INCREASED ATO COMPLIANCE OF TAX AGENTS
Fresh from the Commissioner’s warnings to tax agents who claim work related expenses for their clients without sufficient evidence or substantiation, the Government has provided a further $131 million to the ATO to increase its compliance activities to individuals and their tax agents. Data matching programs to identify and deter over claiming of expenses by certain tax agents from 1 July 2018 as well as more money for audits and prosecutions will ensure the ATO remain active in this area.
The pleasing aspect of this announcement is that there is no mention of the “Standard Tax Deduction” that has been raised as one method of clamping down on the over claiming of expenses.
3 A REPRIEVE FOR DIVISION 7A CHANGES
The much anticipated “simplification” of Division 7A has been deferred for a year from 1 July 2018 to 1 July 2019.
As a result, the recommendations of the Board of Taxation in 2014 to simplify Division 7A, but also to include pre 1997 loans and pre 2009 UPE’s within the new Division 7A will be put back for another year.
The Government also announced that they will ensure that all UPE’s come within the scope of Division 7A for 1 July 2019. These changes will be progressed as part of one consolidated legislative package on changing Division 7A.
Whilst the further delays are frustrating to those that have prepared for and welcome simplicity, they do provide relief for those who have not yet identified or put in place strategies to ensure their clients can benefit from the simplicity and not be penalised by the proposed “all in rules”.
4 TIGHTENING THE RULES ON CLAIMING R & D CONCESSIONS
These amendments arise as a result of the 2016 Review of the R & D Tax Incentive and are split between companies with an aggregated annual turnover of less than $20 million, and those companies with an aggregated annual turnover in excess of $20 million.
For those companies with turnover of less than $20 million:
- The Refundable R & D Offset is set at a premium of 13.5% points above their respective company tax rate [Meaning qualifying companies receive refunds of 41% of their R & D Spend, down from 43.5% previously]
- A cash refund cap of $4 million per annum per company will be set; and
- R&D refunds above this cap will be carried forward as non-refundable tax offsets for future years.
For this companies with turnover of $20 million or more:
- The Non-refundable R & D Offset increase from 4% above their tax rate, then 6.5%, then 9% and finally to 12.5% depending upon their R & D “intensity”, which is the percentage of their R & D expenditure as compared to the company’s total expenditure. R & D Offsets will be staggered across each expenditure threshold. The new R & D Offset is therefore staggered from 34% up to 42.5% compared to the current flat 38.5% non-refundable tax offset.
These changes will also be coupled with greater scrutiny on those that claim R & D Offsets to ensure the tax incentive is correctly targeted.
5 EXTENSION OF THE <$20,000 INSTANT ASSET WRITE-OFF
Small Business Entities (SBEs) will be able to claim an immediate deduction for depreciating assets costing less than $20,000 for another 12 months to 30 June 2019. The threshold will revert to $1,000 on 1 July 2019.
There are a few depreciating assets that are not eligible, such as horticultural plants and in-house software. Further, assets valued at $20,000 or more can continue to be placed into the Small Business General 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.
The current ‘lock out’ laws for the 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.
This measure confirms the rumour leading up to the Federal Budget and will be welcomed by small businesses. It will hopefully help to improve cash flow for small businesses and encourage investment and business activity in the small business space.
6 NO DEDUCTIONS FOR HOLDING VACANT LAND
Taxpayers will not be able to claim deductions for expenses associated with holding vacant land. This is an integrity measure to address concerns that deductions are being improperly claimed for expenses, such as interest costs, related to holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. This measure is intended to reduce tax incentives for land banking, which deny the use of land for housing or other development.
Denied deductions will not be able to be carried forward for use in later income years. However, they could be included in the cost base if it would ordinarily be a cost base element (e.g. borrowing costs and council rates) for CGT purposes.
The measure will apply to both land held for residential and commercial purposes. However, the “carrying on a business” test would generally exclude land held for a commercial development, where it is clear a business is being carried on. 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.
This measure applies from 1 July 2019.
This measure will effectively shut down arguments using the decision in Steele’s case whereby deductions can be claimed immediately where vacant land is held for future or intended income providing purposes.
7 TACKLING THE BLACK ECONOMY
As part of the recommendations made by the Black Economy Taskforce, the Government has proposed to enact the following measures (among others):
- Taxpayers will not be able to claim deductions for payments to their employees or contractors if PAYG is required to be withheld from the payments (e.g. employee wages or payments to contractors where no ABN provided) but has not been withheld.
- Business transactions over $10,000 will be required to be made through an electronic payment system or by cheque. However, this will not apply to transactions with financial institutions or consumer-to-consumer non-business transactions.
The measures are proposed to apply from 1 July 2019.
The ATO funding will be increased by $318.5 million over 4 years to implement the proposed measures as well as additional strategies to combat the black economy. The funding will commence on 1 July 2018.
These measures form part of the Government plans to crack down on the cash economy, phoenix activities and other tax evasion activities. However, we are concerned that the proposed measures will potentially affect genuine businesses and will add to their list of compliance obligations.
8 AN EXEMPTION TO THE WORK TEST FOR RECENTLY RETIRED AUSTRALIANS
Currently all Australians aged 65-74 are required to meet the “Work Test” in order to make contributions to superannuation at all. This can pose an issue where a member retires after their 65th birthday, sells down some assets and wants to move the monies into their superannuation fund.
The 2018-19 budget proposes an exemption from the work test for voluntary superannuation contributions by individuals aged 65-74 with superannuation balances below $300,000 in the first year that they do not meet the work test requirements, to allow these individuals the ability to make contributions in their first year after retirement.
This measure is slated to commence on 1 July 2019.
Given that one of the 2016-17 budget proposals was to abolish the work test all together before being scrapped this measure appears a step in the right direction, although the abolishment of these tests altogether would seem a logical future decision for government.
9 ABILITY FOR HIGH INCOME EARNERS TO OPT OUT OF SUPERANNUATION GUARANTEE
Currently the only measure available for high income salary earners to avoid breaching the Concessional Contributions Cap on their Superannuation Guarantee contributions is the Maximum Contribution Base of $54,030 per quarter. This offers no relief for high income salary earners who earn an income from multiple sources, such as doctors who may work at multiple medical facilities. These taxpayers will receive Superannuation Guarantee contributions from all of these employers and quite often exceed the Concessional Contributions Cap.
Breaching this cap results in these taxpayers being assessed on excess contributions with an additional interest charge. The process for then withdrawing these funds to pay this tax is filled with red tape.
The 2018-19 Budget proposes to allow these high income salary earners to opt out of receiving Superannuation Guarantee contributions in excess of the $25,000 concessional cap from their employers. Employees who earn over $263,157 and have multiple employers to nominate that their wages from certain employers are not subject to the superannuation guarantee. The Employees can then negotiate to receive these funds as additional salary.
This measure will save these taxpayers from inadvertently breaching the Concessional Contributions Cap and being subject to the additional taxes and red tape to remove these funds.
This measure is proposed to commence 1 July 2018 and will be welcome by many affected taxpayers and their accountants who will no longer be required to fill out the forms requesting funds be released from super due to breaching the caps.
10 THREE YEAR AUDIT CYCLE FOR SMSF’S WITH GOOD COMPLIANCE HISTORY
Under this measure SMSF’s who have a clean compliance history with three clear audit reports and who have lodged their Annual Returns on time for that period, will only need to have an audit completed every three years, rather than the current annual audit.
This will be a very welcome measure for the thousands of SMSF’s who lodge on time every year and have not had any compliance breaches. This measure will not only save trustees money in audit costs each year, but also assist in Annual Returns being lodged earlier as the audit process will be avoided.
This measure is slated to commence on 1 July 2019 with the government engaging in a consultation process as to its implementation prior to this date.