The tax and revenue changes flowing from Scott Morrison’s 2017 Federal Budget may be described as uninspired.
The measures include:
- An extension (in both time and accessibility) to the generous small business instant asset write-off which will be cheered by owner managed businesses.
- A raft of measures focussed on addressing housing affordability, with international investors bearing most of the cost. These will have limited impact on the taxation of residential property investments, but will have far wider reach when it comes to creating a red tape and risk burden for those buying affected properties.
- An interesting superannuation concession to baby boomers in an attempt to encourage downsizing of their homes that appears contrary to the last twelve months of superannuation debacle.
- Changes to higher education costs that will make such education more expensive for some, and increase the repayments of HELP debts for many.
- A handful of other measures aimed at specific behaviours and industries that continue successive governments’ agendas of outsourcing tax collection and risk to the community.
The increased red tape and complexity these changes bring will not be welcomed by the business community, particularly in light of the continued funding and government emphasis on tax audit activity.
Businesses need to ensure their systems are redesigned to contain the risks that these new red tape measures attract.
Please contact Murray Howlett of Pilot Partners’ tax team to discuss how these measures will impact you.
Further analysis of these key five takeaways follows:
1. Good news for small business, probably…
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 2018.
This is actually a small understatement. The existing, currently legislated, concession allows entities carrying on a business and with an aggregated turnover less than $2 million to claim an immediate deduction for the acquisition of a new eligible business asset costing less than $20,000. The extension requires an asset to be installed and ready for use by the 30 June 2018 deadline for the concession to be allowed. Further, assets costing $20,000 or more for these same entities may be entered into a pool which allows a 15% depreciation write off in the year of acquisition and 30% thereafter. These are generous incentives for businesses to invest in plant and equipment.
Now the confusion kicks in. After almost a year of wrangling with the Senate, they have agreed to increase the turnover test for eligibility of the small business concessions to $10 million. This was achieved before parliament last went into recess. For this increase to be enacted, the lower house needs to pass the changes negotiated in the upper house. Although this will probably occur before 30 June, businesses with a turnover between $2 million and $10 million should be wary of investing in new equipment too soon. The extension of time, combined with the increased turnover threshold means that this is a significant incentive that will assist many businesses.
What is my turnover?
Turnover is an increasingly relevant term in ensuring entities appropriately deal with their tax liabilities. For example:
However, the tested turnover is generally the turnover from the prior year, and so may not reflect the current position of an entity.
Unfortunately, the government’s continued desire to limit concessions to businesses based upon their scale, and inconsistency from one initiative to the next, adds significant complexity and risk to the tax system.
2. Addressing housing affordability – High complexity for low results?
While the budget boasts of measures designed to increase housing affordability, in our view there appears to be more political game playing than likely tangible results from the proposed changes. What is certain is that the red tape and bureaucracy will increase. If any of the following items apply to you, things may just get a bit more convoluted.
Foreign Resident Property Withholding tax
The property withholding tax regime is yet to celebrate its first birthday. While the wrinkles in this significant change have not yet quite been ironed out, the net is already being widened. From 1 July 2017 the withholding tax is set to increase to 12.5% (up from 10%) and the threshold below which no withholding is required decreases to $750,000 (down from $2 million).
This places more property purchasers in the position of doing the ATO’s job of collecting tax at their own risk and increases the penalty for getting it wrong. Not to mention the increased administration and red tape merry-go-round required to comply. Beware: this is not just applicable to foreign residents. All purchasers, including Australian residents, are required to reasonably assess whether the seller is a foreign resident and pay the withholding tax to the ATO.
So, more red tape for more property holders, but does this really affect housing affordability? We think probably not…
Main Residence Exemption Removed
The budget has announced the removal of the CGT main residence exemption for foreign and temporary tax residents. It appears that the existing legislation covering this simplest of concessions (which is almost 10,000 words long already) was not complex enough.
The proposed changes do not include much detail and the answers to many questions remain unclear:
- Will there be any apportioning for part periods of Australian tax residency?
- Will those ceasing to be Australian residents receive an uplift to market value upon departure?
- Is it really the intention that New Zealand citizens living in Australia, and generally classified as temporary residents, miss out on the exemption going forward?
These rules are proposed to apply from budget night for new property acquisitions, however, for those who already have a main residence in Australia, the proposed impact does not commence until 30 June 2019.
The already dubbed “Ghost Tax” is to be charged from budget night to foreigners who make a new foreign investment application for Australian residential property. The tax is to apply when a residential property is not occupied or genuinely available on the rental market for at least six months per year. The aim of this measure is to increase the number of properties available for rent, but there are a lot of details that are currently unclear.
As with the other brand new measures proposed this year, watch this space for more details over the coming months.
Travel Expenditure Deductions Denied
From 1 July 2017, the Government is proposing to remove tax deductions for travel costs incurred in relation to visiting rental properties. This will be the only instance in our tax law where travel costs are specifically denied when incurred to produce assessable income.
Rental Property Capital Allowances Limited
Depreciation on plant & equipment will now be limited to those assets actually purchased by investors of residential real estate properties. This will remove the ability to continue depreciating existing assets in your newly acquired rental property. Although the Budget papers refer to smaller items such as dishwashers and ceiling fans, this change potentially defers thousands of dollars of deductions on significant items such as lifts, air conditioners, garage doors, and common property in unit blocks until the property is sold.
A significant question here is just what is a “residential real estate property”? The term is not presently defined in our income tax laws and similar distinctions in Australia’s 17 year old GST laws still give rise to debate.
Additionally, will the first owner of a new property be deemed to have directly purchased and therefore be eligible to claim depreciation on lifts, air conditioners and other items or not?
This measure is proposed to apply prospectively with no changes to current rental property owners.
3. One more for the baby boomers! (or, serial superannuation shenanigans)
The major talking point from last year’s budget was the significant redefining of Australia’s superannuation system and restrictions to superannuation concessions as a result. The centrepiece of these changes being the legislated $1.6 million tax-free pension cap for all individuals and restrictions on non-concessional contributions once this limit is achieved.
In light of this, the 2017 budget’s change to allow those aged 65 and over to make additional non-concessional contributions from the proceeds of the sale of their home from 1 July 2018 is downright confusing.
To access the downsizing concession the following conditions must be met:
- The property must have been your principal place of residence and owned for at least 10 years;
- $300,000 of proceeds from the sale of the property may be contributed to superannuation as non-concessional contributions;
- The concession is available for each person, meaning that couples are able to use this provision to contribute a total of $600,000 to superannuation from the same sale;
- No work test applies; and
- No other restrictions or limitations apply to the contributions.
4. Higher cost for higher education
Significant measures have been announced proposing to increase the cost of higher education from 2018. These are in addition to the previously announced measures requiring individuals working overseas to repay their HELP debt from 1 July 2017 based on their worldwide income (with payments commencing after 30 June 2018). There are currently in excess of $52 billion of student loans outstanding and the Government is clearly moving to ensure these are repaid earlier and faster.
The newly announced proposals are as follows:
- Lowering the threshold at which repayments to Higher Education Loan Program (“HELP”) debts commence to $42,000 from 1 July 2018 with a repayment of 1% of an individual’s HELP repayment income (taxable income adjusted for investment losses, reportable fringe benefits and reportable employer superannuation contributions). The bottom threshold is currently $54,869 above which payments of 4% of an individual’s HELP repayment income commence.
- Increasing the maximum repayment rate to 10% (currently 8%) from 1 July 2018 of an individual’s HELP repayment income for those with HELP repayment incomes exceeding $119,882 (currently $101,900).
- Limiting Commonwealth Supported Places (“CSPs”) from 1 January 2018 to students who:
a) Undertake an ‘approved’ sub-bachelor course;
b) Have not completed another higher education qualification; and
c) Attend a public university.
Students with a CSP pay approximately 40% of the qualification’s cost with the Government contributing the balance. For students who can no longer access a CSP (fee-paying students) the cost of tuition will more than double. The proposal does not announce which sub-bachelor courses will be considered ‘approved’ courses, however, it will enable to Government to influence the areas of study undertaken by future students.
- Withdrawing access to Commonwealth subsidies for most Australian permanent residents and New Zealand citizens, resulting in those individuals becoming fee-paying students.
Prior to the release of the budget, there was speculation that the repayment of HELP debts would be based on a family’s income (opposed to an individual’s) and that HELP debts would be recovered from deceased estates (as flagged in last year’s budget). Neither of these changes have been mentioned in the current proposal.
5. Other measures of note
Personal tax rates
Perhaps the biggest surprise in this year’s budget was that the government stood behind the “temporary” nature of the temporary budget repair levy and will let it expire on 30 June this year.
The only other change is the proposal to increase the Medicare levy, set to rise by 0.5% to 2.5% from 1 July 2019. This will have a flow-on impact to other rates including the Fringe Benefits Tax rate (which will fall to remain in line with the top marginal tax rate of 47% on 1 April 2018 and increase again to 47.5% on 1 April 2020).
Overall, a 2% reduction in the top marginal tax rate now and a 0.5% increase to the Medicare levy (and associated rates) in two years’ time will see the Government raise an estimated $8.2 billion over the forward estimates period without much political backlash.
Back to the future for first home buyer savings incentives
The government will reintroduce a form of first home owner saving incentives from 1 July 2017. The last such measures only being repealed from 30 June 2015. Under these new provisions, people saving for their first home will be able to voluntarily contribute up to $15,000 per annum and $30,000 in total to their superannuation accounts via concessional contributions which may later be withdrawn to assist with buying their first home.
The contributions and their ‘deemed earnings’ will be able to be withdrawn to be used as a deposit on a property. Although the withdrawals will be taxable, a 30% offset will reduce the tax payable
The benefits arising from this scheme appear to be marginal for most. It is difficult to see this incentive being used by many.
GST on new residential property
From 1 July 2018 purchasers of new residential property and new subdivisions will be required to remit the GST arising from such sales directly to the ATO rather than to the developer as is presently the law.
This change will create a significant cash flow hole for developers who presently get to collect the GST from their customers and are only required to remit it to the ATO, net of GST paid on their costs, at the end of the month or quarter.
Further, questions arise regarding how the purchaser is to determine the GST payable. What if the margin scheme is being applied? It appears that purchasers and their advisors will be required to determine the correct GST amount and wear the risk of getting it wrong.
Contractor payment reporting
Contractors in the courier and cleaning industries will be subject to the taxable payments reporting system (TPRS) from 1 July 2018. This system has been in place in the construction industry for a few years now and requires hirers of contractors in these industries to record details, and advise the ATO, of all payments made to their contractors.
This measure adds a compliance burden to these industries in an attempt to add to the data the ATO tracks annually and uses for cross-checking tax compliance. We anticipate that this measure will be continue to be rolled out into further industries in the future.
Digital currency changes
The Government has flagged that it is intending to change the tax treatment of digital currencies such as Bitcoin. Currently digital currencies are effectively taxed twice due to their treatment as property, rather than a currency. By aligning the GST treatment of digital currencies with money from 1 July 2017, this double taxation will be eliminated.
The big question here will be just what is the definition of a digital currency and how broad will its application be?