Scott Morrison’s third budget is headlined by $140 billion in tax cuts over the next decade, immediate tax relief of up to $1,060 a year for middle-income households and a fundamental reform of the tax system.
Taxation
Personal income tax savings
Date of effect: From 1 July 2018
Low and middle income earners will benefit from tax savings of up to $530 per person (or $1,060 per couple), via a series of changes to be implemented over seven years.
Personal income tax thresholds
The income threshold at which the 32.5% marginal tax rate applies will progressively increase to $200,000 by 1 July 2024.
Personal tax offsets
A Low and Middle Income Earners Tax Offset of up to $530 will apply from 1 July 2018 to 30 June 2022.
From 1 July 2022, the Low Income Tax Offset will increase from $445 to $645.
Personal tax savings
Table 2 below illustrates the tax payable in future financial years (and the potential tax savings compared to 2017/18) for a range of taxable incomes. These figures take into account the proposed personal income threshold and tax offset changes.
Changes affecting business taxpayers
Extension of instant asset write off
Date of effect: From 1 July 2018
Extending the $20,000 immediate write-off for small business The Government will extend the $20,000 immediate write-off for small business by a further 12-months to 30 June 2019 for businesses with aggregated annual turnover less than $10 million.
Small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2019. Only a few assets are not eligible (such as horticultural plants and in-house software).
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool (the 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 (including existing pools).
Further to this, the current ‘lock out’ laws for the simplified depreciation rules (preventing small businesses from re-entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2019.
Removing tax deductibility of payments where withholding obligations have been disregarded
Date of effect: 1 July 2019
From 1 July 2019, businesses will no longer be able to claim a deduction for the following payments:
Payments to their employees such as wages where they have not withheld any amount of PAYG from these payments (i.e., despite the fact the PAYG withholding requirements apply).
Payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (despite the withholding requirements applying).
Introduction of an economy-wide cash payment limit
Date of effect: 1 July 2019
From 1 July 2019, the Government will introduce a limit of $10,000 for cash payments made to businesses for goods and services. Currently, large undocumented cash payments can be used to avoid tax or to launder money from criminal activity. This measure will require transactions over a threshold to be made through an electronic payment system or cheque. Transactions with financial institutions or consumer to consumer non-business transactions will not be affected.
Expanding the contractor payment reporting system
Date of effect: 1 July 2018
The contractor payment reporting system was first introduced in the building and construction industry and extended to the cleaning and courier industries from 1 July 2018. Under the contractor payment reporting system, businesses are required to report payments to contractors to the ATO. This brings payments to contractors in these industries into line with wages, which are reported to the ATO.
The Government has announced it will further expand the contractor payment reporting system to the following industries:
security providers and investigation services;
road freight transport; and
computer system design and related services.
Businesses will need to ensure that they collect information from 1 July 2019, with the first annual report required in August 2020. A new online form will make the reporting process easier.
Alienating rights to partnership income (Everett assignments)
From 7:30PM (AEST) on 8 May 2018, partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights.
The small business CGT concessions assist owners of small businesses by providing relief from CGT on the disposal of assets related to their business. However, some taxpayers, including large partnerships, are able to access these concessions in relation to their assignment of a right to the future income of a partnership to an entity, without giving that entity any role in the partnership.
Changes affecting companies
Division 7A changes
Date of effect: 1 July 2019
From 1 July 2019, the Government will ensure that unpaid present entitlements (‘UPEs’) come within the scope of Division 7A of the ITAA 1936. This will apply where a related private company is made entitled to a share of trust income as a beneficiary but has not been paid. This measure will ensure the UPE is either required to be repaid to the private company over time as a complying loan under S.109N of the ITAA 1936 or is subject to tax as a dividend.
The Government also announced that it will defer the start date of the Ten Year Enterprise Tax Plan — targeted amendments to Division 7A measure that was announced in the 2016-17 Budget from 1 July 2018 to 1 July 2019. Under this plan, the Government intends to make targeted amendments to improve the operation and administration of Division 7A of the ITAA 1936, including:
a self-correction mechanism for inadvertent breaches of Division 7A;
appropriate safe-harbour rules to provide certainty;
simplified Division 7A loan arrangements; and
a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.
Reforms to combat illegal phoenixing
The Government will reform the corporations and tax laws and provide the regulators with additional tools to assist them to deter and disrupt illegal phoenix activity. The package includes reforms to:
extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts;
expand the ATO’s power to retain refunds where there are outstanding tax lodgements;
introduce new phoenix offences to target those who conduct or facilitate illegal phoenixing;
prevent directors improperly backdating resignations to avoid liability or prosecution;
limit the ability of directors to resign when this would leave the company with no directors; and
restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator.
Research and development tax incentive
Date of effect: 1 July 2018
The Government will amend the research and development (R&D) tax incentive to better target the program and improve its integrity and fiscal affordability with effect from 1 July 2018.
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 R&D expenditure as a proportion of total expenditure for the year. 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.
The R&D expenditure threshold — the maximum amount of R&D expenditure eligible for concessional R&D tax offsets, will be increased from $100 million to $150 million per annum.
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. R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years. Refundable R&D tax offsets from R&D expenditure on clinical trials will not count towards the cap.
Other income tax changes
Deductions denied for vacant land
Date of effect: 1 July 2019
From 1 July 2019, the Government will deny deductions for expenses associated with holding vacant residential or commercial land, including interest incurred to finance the acquisition of the land. Deductions for expenses associated with holding the land will be available once a property has been constructed on the land, it has received approval to be occupied and is available for rent.
Denied deductions will not be able to be carried forward for use in later income years, however, denied deductions can be included in the cost base of the land (but only if the expense qualifies as an element of cost base under the usual rules).
This proposed measure is intended to apply to all entities (e.g., individuals, trusts, companies) however an exclusion applies for vacant land that is held by an entity that is carrying on a business, which would include a business of primary production.
Superannuation
SMSF increase in member numbers
Date of effect: 1 July 2019
Self-managed superannuation funds (SMSFs) are limited to having four members. This threshold will increase to six to provide greater flexibility and allow families, for example, to all be members of the same SMSF.
SMSF three-year audit cycle
Date of effect: 1 July 2019
SMSFs with a history of good record-keeping and compliance will move from providing an audit on an annual basis to a three-yearly cycle.
Eligible SMSFs will be those with a history of three consecutive years of clear audit reports and have lodged annual returns on time.
Work test exemption for retirees
Date of effect: 1 July 2019
A person aged 65 to 74 is currently able to make contributions to superannuation if the ‘work test’ has been satisfied (ie they have worked at least 40 hours in 30 consecutive days) in the financial year the contribution is made.
A one year exemption from the work test will apply to older Australians who have less than $300,000 in total super savings. This exemption will apply to the financial year following the last year the work test was satisfied. This will allow an additional period of time for those eligible to contribute to superannuation.
Insurance in super
Date of effect: 1 July 2019
In many super funds, including MySuper and employer funds, insurance is offered as a default option. It’s proposed that members will need to ‘opt-in’ for insurance where they:
have a balance less than $6,000
are new members under age 25, or
have an account which has not received a contribution in 13 months and are considered inactive.
Protection for small super balances
Date of effect: 1 July 2019
Measures will be introduced to reduce the impact of fees on low super balances and focus on returning lost super to members.
Protection will be provided to super accounts by limiting administration and investment fees to a 3% annual cap. This cap will apply to accounts with balances below $6,000.
Exit fees will also be banned on all super accounts.
A $6,000 threshold will apply to inactive accounts. These accounts will need to be transferred to the ATO.
The ATO will increase data matching activities to return amounts to active accounts held by members.
Personal deductions
Date of effect: 1 July 2018
The ATO will develop new compliance processes for taxpayers claiming a deduction for personal superannuation contributions. This includes raising awareness regarding the necessary steps, including lodging a ‘notice of intent to claim a tax deduction’ form with the super fund trustee.
Inadvertent concessional cap breaches
Date of effect: 1 July 2018
Employers are required to pay Superannuation Guarantee (SG) based on an individual employee’s income. For some individuals this means their concessional contribution cap is breached by the total of multiple employers’ compulsory contributions.
Individuals who have a total income exceeding $263,157 pa and multiple employers will have the option to elect to no longer have SG contributions paid on certain income from their employer. This overcomes the inadvertent breach of the concessional contribution cap and associated tax penalties.
Social security
Pension Loans Scheme
Date of effect: 1 July 2019
The Pension Loans Scheme allows eligible individuals to access some of the equity in the home or other property via a Government loan, which is advanced in fortnightly instalments.
This scheme will be available to all Australians over Age Pension age and the maximum loan payments will increase to 150% of the full Age Pension. Eligibility will continue to limited by the value of the property used as loan security.
The following table summarises the payment ranges for singles and couples based on current rates, where the full pension and no pension is available.
Work Bonus
Date of effect: 1 July 2019
Under the Work Bonus, the first $300 per fortnight (currently $250) of employment income will not count when calculating Age Pension entitlements under the income test.
Self-employed retirees will be able to access the scheme for the first time.
A ‘personal exertion test’ will ensure the bonus only applies to income earned from paid work.
Any unused Work Bonus (up to a total of $7,800 pa) can continue to be accrued to reduce assessable employment income
in a future period.
Means-testing of certain lifetime income streams
Date of effect: 1 July 2019
Favourable social security rules will be introduced to encourage the development and use of income products that will help retirees reduce the risk of outliving their savings.
Under the proposed rules, only 60% of the amount initially invested in these ‘lifetime income streams’ will be assessed under the assets test. This concession will apply until the account holder is 84 (or for a minimum of five years). After this time, only 30% will be assessed for the rest of the person’s life. Also, only 60% of the income payments will be assessed under the income test.
Means testing of Carers Allowance
Date of effect: To be confirmed by Government
As previously announced, the Carer Allowance and Carer Allowance (child) Health Care Card will be income tested. Households earning over $250,000 won’t be eligible. Both existing and new recipients of Carer Allowance will need to meet this income test.
Aged care
Additional funding for aged care
Date of effect: From 1 July 2018
Funding for home care services and residential aged care will increase, including:
14,000 new home care packages over four years
13,500 new residential aged care places, and
grants for aged care facilities in rural, regional and remote areas.
Legislated super changes post 1 July 2018
Downsizer contributions
Individuals aged 65 or older may be able to make super contributions of up to $300,000 (or $600,000 per couple) from 1 July 2018 when selling their home.
These contributions, known as ‘downsizer contributions’ can be made without having to meet a ‘work test’ or ‘total super balance test’ and they don’t count towards the contribution caps. However, they must be made with 90 days of settlement and a tax deduction can’t be claimed.
The property must have been owned for at least 10 years and have been the main residence at some time during this period.
First home super saver scheme - access
First home buyers who have made super contributions under the First Home Super Saver Scheme (FHSSS) can access their money from 1 July 2018.
The FHSSS started on 1 July 2017 and allows eligible first home buyers to save a deposit in the concessionally taxed superannuation system. Contributions of up to $15,000 per year (and a total of $30,000) can be made and they count towards the relevant contribution cap.
Catch-up concessional contributions
Where the annual concessional contribution (CC) cap is not fully utilised from 1 July 2018, it may be possible to accrue unused amounts for use in subsequent financial years.
The CC cap is currently $25,000 pa1. Counted towards this limit are all employer contributions (including super guarantee and salary sacrifice), personal tax deductible contributions and certain other amounts.
Unused cap amounts can be accrued for up to five financial years. 2019/20 is the first financial year it will be possible to use carried forward amounts.
To be eligible, individuals cannot have a total super balance exceeding $500,000 on the previous 30 June.
This measure could help those with broken work patterns and competing financial commitments to better utilise the CC cap. It could also help to manage tax and get more money into super when selling assets that result in a capital gain.
1. This cap applies in FY 2017/18 and 2018/19. It may be indexed in future financial years.