The 2018 Federal Budget appears to be very much a pre-election budget featuring Scott Morrison’s first move in the battle for votes.
- Reward the “lifters” – personal tax cuts (for two election cycles’ time…);
- Attack the avoiders – targeted enforcement of cash economy, employer obligations and phoenixing activities;
- Reform of R&D – requiring bigger businesses to spend more; and
- Rewarding baby boomers – some positive superannuation tinkering (finally).
Read our full Budget Summary below:
1. PERSONAL MEASURES
Reductions in individual tax rates will occur slowly over the coming years.
A new Middle and Low Income Tax Offset will come into operation from 1 July 2018 until 30 June 2022. This will provide a maximum benefit of $530 for those with taxable incomes up to $125,333, and will operate in addition to the existing Low Income Tax Offset (“LITO”). LITO will increase to a maximum benefit of $645 from 2022-23 onwards.
As previously outlined by the Government, the plans to increase the Medicare Levy have been scrapped. Hence, the levy will remain at 2% for the foreseeable future.
The changes to tax brackets and rates will be as follows:
Tax rates and thesholds
|Rate||2017-18||2018-19 to 2021-22||2022-23 and 2023-24||2024-25 onwards|
|0%||$0 – $18,200||$0 – $18,200||$0 – $18,200||$0 – $18,200|
|19%||$18,201 – $37,000||$18,201 – $37,000||$18,201 – $41,000||$18,201 – $41,000|
|32.5%||$37,001 – $87,000||$37,001 – $90,000||$41,001 – $120,000||$41,001 – $200,000|
|37%||$87,001 – $180,000||$90,001 – $180,000||$120,001 – $180,000||N/A|
The annual income tax savings as compared to the 2017-18 year are as follows:
|Taxable income||2018-19 to
2. MORE MONEY FOR AUDIT AND CORPORATE COMPLIANCE ACTIVITY
As per the past few budgets, the Government will yet again increase expenditure on taxation compliance and review activity. This time focussing on the black economy, employer obligations and corporate phoenix activities. Whilst the themes are not a surprise, some of the notable areas of budget spend include:
- $318.5 million will be spent over four years to implement new strategies to combat the black economy. These strategies are listed to include initiating new “mobile strike teams”, an increased audit presence, the inception of a Black Economy Hotline that will allow the community to report activity, improved data analytics and additional educational activity. $3 billion is expected to be raised from this measure.
- $133.7 million provided to allow the ATO to increase tax debt collection activity, including staff superannuation obligations.
- $130.8 million will be provided to the ATO to increase compliance activities targeting individual taxpayers and their tax agents.
In the arena of tax reform, the following is expected to be effective from 1 July 2019:
- Measures will be in place to deny tax deductions for payments made by employers to employees where the employer has failed to withhold the required PAYG from the payments made. Similarly, where a contractor fails to provide a valid ABN, a deduction will be denied for the payment unless withholding requirements are met.
- There will also be a limit of $10,000 for cash payments made to businesses for goods or services. Payments above the limit will be required to be undertaken electronically.
- Similar to the 2017 budget, the taxable payments reporting system will be broadened, requiring businesses in more industries to report on the payments made to contractors. From 1 July 2019, security providers and investigation services, road freight transport and computer system, design and related services are caught in the net. This will mean increased reporting and compliance requirements for certain businesses in these industries.
Perhaps most concerning of all, the government has announced that it intends to introduce reforms to corporation and tax laws, introducing new mechanisms for deterring and disrupting so called “illegal phoenix activity”. This is said to include:
- Extending the Director Penalty Regime to include GST, Wine Equalisation Tax and luxury car tax, thereby expanding the class of corporate debts for which directors can be made personally liable.
- Expanding the ATO’s ability to withhold refunds where there are outstanding tax lodgements.
- Introducing new offences to those conducting or facilitating illegal phoenixing.
- Restricting the resignations of directors in certain circumstances.
3. BUSINESS MEASURES
Research & Development (R&D) Tax Incentive changes
Changes are proposed in the world of the R&D Tax Incentive for income years commencing on or after 1 July 2018, which will impact all entities undertaking R&D activities, from start-ups to the top-end of town. These changes constitute a re-focusing of the R&D Tax Incentive as the offset will now be calculated based on the relevant company tax rate. The R&D expenditure threshold will also be increased from $100 million to $150 million.
In short, these changes are designed to encourage R&D activities in small and medium companies, and to push the top-end of town to invest more heavily in R&D by implementing an increasing concession based upon the proportion of R&D expenditure to total company expenses.
Refundable R&D offset
For the smaller players in the R&D space (aggregated turnover below $20 million), the new rate of the tax offset will be set at 13.5 percentage points above the respective company tax rate.
Importantly, cash refunds from the refundable offset will be limited to $4 million per annum. Any amount refundable above the $4 million limit will be able to be carried forward as a non-refundable R&D offset which will be able to be used in future years, subject to the carried forward loss rules.
Non-refundable R&D offset
For those entities with aggregated turnovers exceeding $20 million, there will be a new focus on the intensity of the “R&D spend” undertaken by the entity. The R&D intensity (i.e. the R&D expenditure compared to total expenditure) will determine the extent of the non-refundable R&D offset. In basic terms, the greater the proportion of expenditure on R&D activities, the greater the non-refundable offset. The rate of the non-refundable offset will be the relevant company tax rate plus:
|R&D intensity||R&D premium
(added to company tax rate)
|0% – 2%||4 percentage points|
|2% – 5%||6.5 percentage points|
|5% – 10%||9 percentage points|
|Above 10%||12.5 percentage points|
There will be increased funding to AusIndustry to undertake more enforcement activity in this space and the ATO will be given the power to publicly disclose details of the claimants and the extent of their claims. This implies further risk for any borderline claims.
Extension of $20,000 instant asset deduction for small business
The Treasurer announced that the existing instant asset write-off threshold for small businesses has been extended a further twelve months to 30 June 2019.
This allows entities carrying on a business and with an aggregated turnover less than $10 million to continue to claim an immediate deduction for the acquisition of a new eligible business asset costing less than $20,000 (installed and ready for use by the 30 June 2019).
This concession has been in place for a couple of years now and is well understood by many small businesses.
Digital White Paper
The Treasurer has announced that a discussion paper is to be issued within weeks to explore the options for taxing digital businesses in Australia. The Digital White Paper is being prepared in increased efforts by the Government to ensure that multinationals pay their “fair share of tax”.
After several years of significant changes, no major changes were announced to superannuation in this year’s budget (hear! hear!). However, several small changes, all of which are relaxations rather than restrictions, have been proposed:
- Individuals who have multiple employers and whose income exceeds $263,157 per annum will be eligible to nominate that their wages from certain employers are not subject to superannuation guarantee from 1 July 2018. This will help ensure that the concessional superannuation contribution cap of $25,000 is not unavoidably breached, resulting in excess contributions tax and shortfall interest, merely because the individual has multiple employers. Employees who make use of this will be able to take the amounts that would have been paid to superannuation as additional wages, ensuring they are no worse off.
- An exemption to the ‘Work Test’ (requirement to hold gainful employment for at least 40 hours in a 30 day period) for those aged between 65 and 74 who wish to make a superannuation contribution after 1 July 2019, provided their superannuation balance is below $300,000.
- Increasing the maximum number of members in a Self-Managed Superannuation Fund (SMSF) from 4 to 6 people from 1 July 2019. This may help with intergenerational wealth transfer within superannuation and alleviate the impact of Labor’s proposal to remove franking credit refunds.
- From 1 July 2019, SMSFs who have a clean compliance history for 3 consecutive years will only require an audit every 3 years instead of annually.
5. OTHER MEASURES
A handful of miscellaneous measures were also proposed in last night’s budget, including the following:
If it’s your income, it’s your income
- From 1 July 2019 high profile individuals will be stopped from licensing their fame or image to another entity, ensuring that any income earned will be taxed in their own hands. This will impact upon entertainers and sports people in particular.
- Partners in partnerships that seek to transfer their interest in the partnership’s future income to others who will not play a role in the partnership will be denied access to small business CGT concessions. This change is proposed to apply for changes taking place after budget night.The ATO has been uncomfortable with participants in professional practices restructuring their affairs for some years but has struggled to gain any real traction in changing behaviours. These laws will make restructures less palatable for many and reinforce the need to get your structure right from the outset. Remember restructures are risky.
Empty land no longer tax write-off
- The Government announced the intention to disallow deductions from 1 July 2019 for holding costs where vacant land is not genuinely held for the purpose of earning assessable income. Land banking property developers in particular should be aware of these proposed changes.At its simplest, the rules will not apply from the point where a property has been built and is available for rent, or where a primary production business is being carried on. However we expect that “genuinely held for the purpose of earning assessable income” may be up for some interpretation.Deductions that will be denied include common expenses such as interest on loans, borrowing costs, rates (council, water and sewerage), insurance and land tax. These deductions will not be able to be carried forward to future years, however may be able to be included in the cost base of the land, subject to the existing cost base rules.This new measure purports to increase revenue by $50 million over the budgeted forecast.
A win for craft brewers (and drinkers)
- Brewers will be able to access the 60% alcohol excise refund scheme up to a $100,000 per annum cap on kegs that are 8 litres or greater from 1 July 2019 (the current alcohol excise refund scheme cap is $30,000 and only available to beer sold in kegs exceeding 48 litres). This will open access to the scheme to smaller brewers.