2018/2019 Federal Budget Summary
The Federal Treasurer, Mr Scott Morrison, handed down the 2018-2019 Federal Budget on 8 May 2018. A number of changes were announced that are likely to have an impact on your current tax affairs.
As expected, the centrepiece of the Budget is a staged reduction of personal tax rates. While significant, the impact is somewhat diminished by the extended period over which it will be delivered. If the proposed changes are delivered intact, the Government projects that around 94% of all taxpayers will have a marginal tax rate of 32.5% or less in 2024-25.
1. $20,000 instant asset write-off for Small Business Entities (SBEs) has been extended by 12 months
- Currently SBEs with aggregated annual turnover of less than $10 million are able to immediately deduct purchases of eligible depreciating assets costing less than $20,000. This concession was due to expire on 30 June 2018 but has been extended to 30 June 2019.
- Eligible depreciating assets are assets acquired and first used or installed ready for use by 30 June 2019. Only a few assets are not eligible for the instant asset write-off such as horticultural plants and in-house software.
2. The Government will amend the research and development (R&D) tax incentive for income years starting on or after 1 July 2018
- For companies with 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, but refundable R&D tax offsets from R&D expenditure on clinical trials will not count towards the cap. R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years.
- For companies with aggregated annual turnover of $20 million or more, the Government will introduce an R&D premium that ties the rates of the non-refundable R&D tax offset to the ‘incremental intensity’ of the R&D expenditure. 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
- 6.5 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
- 12.5 percentage points for R&D expenditure above 10% R&D intensity.
3. Application of Division 7A to unpaid present entitlements (UPEs)
- The Government is proposing measures to clarify the scope of Division 7A to ensure that UPEs come within the scope of the law. A UPE arises where a related private company becomes entitled to a share of trust income as a beneficiary but has not been paid that amount.
- This measure will ensure the UPE is either required to be repaid to the private company over time as a complying loan or subject to tax as a dividend.
- Draft legislation on these measures has not yet been released.
4. Contractor Payment Reporting expanded
- The Taxable Payments reporting regime will be expanded. Currently it applies to the building industry and will expand to the cleaning and courier businesses from 1 July 2018. It is now proposed to also apply to the security, road freight and computer contactor industries from 1 July 2019.
5. Director Penalty Regime extended
- The director penalty regime currently can make a company director liable for a company’s unpaid employee PAYG withholding and superannuation guarantee requirements. This is proposed to be extended to GST, luxury car tax and wine equalisation tax also as part of the Government’s continuing effort to prevent Phoenix activities.
6. Previously Announced reduction in company tax rates
- The Government is committed to passing the previously announced reduction in company tax rates over time to 25%.
1. The Government has announced a 7-year 3-step plan for the reduction of the personal tax rates for low and middle income earners
Step 1: Low and Middle Income Tax Offset
- From 2018-19 to 2021-22, a new Low and Middle Income Tax Offset will give individuals who earn up to $90,000 a non-refundable tax offset of up to $530. For individuals who earn between $90,001 and $125,333, the offset will phase out at a rate of 1.5 cents per dollar. This offset is in addition to the existing Low Income Tax Offset (LITO).
Step 2: Reduction of marginal tax rate and increase of LITO
- From 1 July 2018, the Government will progressively increase the top threshold of the 19% and 32.5% tax brackets, with a view to removing the 37% tax bracket by 2024-2025.
- From 2022-23, the LITO will also increase from $445 to $645 for individuals earning up to $37,000. The increased LITO will phase out at a rate of 6.5 cents per dollar for incomes between $37,000 and $41,000, and at a rate of 1.5 cents per dollar for incomes over $41,000.
Step 3: Removal of 37% tax bracket
- From 1 July 2024, the top threshold of the 32.5% bracket will increase from $120,000 to $200,000, removing the 37% tax 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.
2. Deductions disallowed for holding vacant land
- From 1 July 2019, the Government will deny deductions for expenses associated with holding vacant land. This is to address concerns that deductions are being improperly claimed for expenses where the land is not genuinely held for the purpose of earning assessable income.
- Some holding costs that you are no longer able to claim may be added to the cost of the property and claimed against capital gains tax when the property is sold.
- This measure only applies to vacant land that is not being used to carry on a business. If there is a property constructed on the land and it is available for rent, you will still be able to claim these deductions. If you are carrying on a business on the land (including primary production) or you are holding the land for commercial development, you should still be able to claim deductions for holding costs.
3. Medicare Levy Increase removed
- The previously announced increase in the Medicare Levy from 2 – 2.5% will now not occur.
- The Medicare Levy Threshold will increase for singles to $21,980 and for couples to $37,089.
4. Increased tax compliance activities and new anti-avoidance rules
- The ATO will receive extra funding to help them detect incorrect reporting of income and deductions, such as undeclared foreign source income of high wealth individuals and over-stated work-related expenses. The funding will also allow for new compliance activities including additional audits and prosecutions
- High profile individuals will no longer be able to take advantage of lower tax rates by licensing their fame or image to another entity.
- The Government will extend specific anti-avoidance rules that applies to other closely held trusts that engage in circular trust distributions to family trusts.
Self-managed superannuation funds
1. Member limit to increase from 4 to 6
- The maximum number of allowable members in new and existing self-managed superannuation funds (SMSFs) will be expanded from 4 to 6 members from 1 July 2019.
- All the members of the fund will still need to be either trustees in their own right or directors of the trustee company
2. SMSF audits only required every 3 years for funds with good compliance history
- From 1 July 2019, the annual audit requirement for SMSFs will be extended to a 3-yearly cycle for SMSF trustees that have a history of 3 consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.
Need further help?
To discuss the implications of the federal budget for you and your business, please contact your Marsh & Partners advisor.
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