The 2018 Federal Budget was released last night, with a focus on personal income tax cuts for lower and middle income earners. There are measures to guarantee essential services such as aged care, health care and infrastructure, as well as changes to superannuation accessibility. This budget has also introduced a range of integrity measures to clamp down on the black economy and strengthen the rules of the system. Once again there is little done for business tax relief apart from extend another year the $20,000 immediate deduction for eligible assets for business with <$10M annual turnover. As with each year, it is important to note that these changes are proposed, and still need to pass through parliament before becoming law.
Let’s see how these changes impact you.
Small Business Thresholds & Concessions:
- The SBE instant asset write-off concession on assets costing less than $20,000 will be extended by 12 months to 30 June 2019:
- Applies to businesses with an aggregated annual turnover of less than $10M.
- From the 1 July 2019, the immediate deductibility threshold, and balance at which the pool can be immediately deducted will revert to $1,000.
- The small business CGT concessions will continue to be available to small business taxpayers with an annual turnover of <$2M or business assets of less than $6M.
- Rules around the Research and Development tax incentive will be adjusted. Companies turning over more than $20 million will have an R&D premium that links the tax offset to increases in R&D as a proportion of total expenditure. Cash refunds will be capped at $4 million per year.
- Measures directed at re-employing older Australians (over 50 years) include wage subsidies of up to $10,000 for employers as well as $2,000 grants for skills and training of existing older employees.
- From 1 July 2019 tax deductions will be denied for expenses related to holding vacant residential or commercial land, excluding entities that carry on a business such as primary production. Expenses associated with holding the land can be included in the cost base of the land for Capital Gains purposes.
- This budget has delivered measures to enhance the integrity and fairness of the system in the hope of rewarding businesses that do the right thing.
- From 1 July 2019, businesses will not be able to claim tax deductions for wages and other payments where PAYG has not been withheld according to their obligations. (This also applies to other payments such as to contractors that don’t supply an ABN.)
- A limit of $10,000 for cash payments will be introduced to combat tax avoidance and money laundering. Payments above $10,000 will need to be made through electronic means from 1 July 2019.
- The contractor payment reporting system currently requires the construction industry to report to the ATO on their payments to contractors. This was extended to include the cleaning and courier industries from 1 July 2018. The government has announced that from 1 July 2019 this will now also include the following industries:
- Security providers and investigation services
- Road freight transport
- Computer system design and related services
- Illegal Phoenixing will be targeted with a range of new measures. There will be new powers for the ATO to prosecute directors. They will have more power to retain refunds where there are outstanding lodgements. A director’s ability to resign will be restricted if this could leave the company without a director. The Director Penalty regime will also be extended to GST, luxury car and wine equalisation taxes making directors more personally liable for the company’s debts.
- From 1 July 2019 unpaid present entitlements (UPEs’) will come within the rules of Division 7A, ensuring that UPEs are required to be repaid to the private company in cash or via a dividend.
- From 1 July 2019 the concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from the deceased’s assets. This will prevent tax benefits being obtained by injecting assets that are unrelated to the deceased estate into the testamentary trust.
- The government has proposed changes to personal income tax rates that will be rolled out over seven years. The aim is to combat bracket creep and ensure that the nation’s tax as a proportion of GDP doesn’t rise over time.
- The government will introduce the Low and Middle Income Tax Offset (in addition to the already existing Low Income Tax Offset) to Australian residents for the 2019 financial year which will be worth up to $530 per year. The offset will start to phase out for taxpayers with incomes over $90,000.
- The government has proposed the following personal income tax bracket changes:
- From 1 July 2018 the 32.5% tax bracket top threshold will increase from $87,000 to $90,000.
- From 1 July 2022 the 19% tax bracket threshold will increase from $37,000 to $41,000 and further increase the 32.5% bracket from $90,000 to $120,000.
- From 1 July 2022 the Low Income Tax Offset will be increased from $445 to $645.
- From 1 July 2024 the 37% tax bracket will be removed, meaning the 32.5% bracket will apply to incomes from $41,000 up to $200,000.
- The Medicare levy was due to increase by 0.5% to 2.5% from 1 July 2019 however the government has announced that this will no longer be changed, and the levy will remain at 2%.
- The Medicare Levy low-income thresholds for singles, families, seniors and pensioners will increase slightly from the 2018 financial year.
- From 1 July 2019 the audit requirements will be reduced for SMSFs with a good history of compliance. The measure will allow for an audit to be done every three years instead of annually. To be eligible, SMSFs must have three consecutive years of clear audit reports and must also lodge their tax returns on time.
- From 1 July 2019 the work test for voluntary contributions to superannuation will be relaxed. People aged 65-74 with balances below $300,000 will be able to make voluntary contributions in their first year of retirement.
- From 1 July 2019 SMSFs will be allowed a maximum of six members, up from four, providing flexibility for larger families in particular.
- From 1 July 2018 Individuals whose income is above $263,157 will be able to elect to have their wages from secondary employers to be not subject to the super guarantee. This will help individuals avoid breaching the $25,000 annual concessional contributions cap.
- From 1 July 2019 Superannuation funds will be banned from charging exit fees on all superannuation accounts. Insurance will become opt-in rather than opt-out for some younger members. Fees charged to small accounts will also be capped.
- Extra funding has been allocated to the ATO to develop new compliance models and undertake more debt collection activity. There is funding for more audits and prosecution as well as data matching programs to detect foreign source income.
ConclusionWe welcome changes to the flexibility and simplicity of administering SMSFs as well the pursuit of tax integrity. We also welcome the extension of the changes to assist businesses with turnovers <$10M, as they will allow greater access to concessions for many small businesses. This budget is a step towards delivering the Government’s agenda of jobs and growth, guaranteeing essential services, addressing cost of living pressures and living within its means. Time will tell if this Government will achieve these goals.
For more information on how this budget affects you and your business, please contact our professional accounting team at Sullivan Dewing.