The Federal Budget 2018 was handed down in Canberra on Tuesday 8 May 2018. While major tax reform missed out again, we may see an early return to surplus.
This year’s budget also announced that the ATO will get more money for individual tax compliance activities. There’s never been a better time to have an awesome boring accountant and proper audit insurance in place.
What do the budget announcements mean for you?
1. Personal income tax changes
1.1 Personal income tax plan
The Government will introduce a seven-year, three-step, Personal Income Tax Plan, as follows:
Step 1: Targeted tax relief to low and middle income earners
The Government will introduce the Low and Middle Income Tax Offset, a non-refundable tax offset of up to $530 per annum to Australian resident low and middle income taxpayers. The offset will be available for the 2019, 2020, 2021 and 2022 income years and will be received as a lump sum on assessment after an individual lodges their tax return.
The benefit of the proposed Low and Middle Income Tax Offset is as follows:
• Taxpayers with taxable incomes of $37,000 or less will receive a benefit of up to $200;
• For taxpayers with taxable incomes between $37,000 and $48,000, the value of the offset will
increase at a rate of three cents per dollar to the maximum benefit of $530;
• For taxpayers with taxable incomes from $48,000 to $90,000 a $530 offset applies; and
• For taxpayers with taxable incomes from $90,001 to $125,333, the offset will phase out at a rate of
1.5 cents per dollar.
Step 2: Protecting middle income Australians from bracket creep
The Government has proposed the following changes to the personal income tax rates:
1. From 1 July 2018, the Government will increase the top threshold of the 32.5% personal tax bracket from $87,000 to $90,000. The rates below do not include the Medicare Levy.
2. From 1 July 2022, the Government will:
• extend the 19% personal income tax bracket from $37,000 to $41,000; and
• further increase the top threshold of the 32.5% personal income tax bracket from $90,000 to
Step 3: Ensuring Australians pay less tax by making the system simpler
In the third step of the Personal Income Tax Plan the Government will simplify and flatten the personal tax system by removing the 37% tax bracket entirely. From 1 July 2024, the Government will extend the top threshold of the 32.5% personal income tax bracket from $120,000 to $200,000. The 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000 and taxpayers with taxable incomes exceeding $200,000 will pay tax at the top marginal rate of 45%.
1.2 Changes to the Medicare levy low-income thresholds
The Government will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from the 2018 income year, while the Medicare levy rate remains unchanged.
2. Changes affecting business taxpayers
2.1 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).
2.2 Removing tax deductibility of payments where withholding obligations have been disregarded
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).
2.3 Introduction of an economy-wide cash payment limit
From 1 July 2019, the Government will introduce a limit of $10,000 for cash payments made to businesses for goods and services. Transactions with financial institutions or consumer to consumer non-business transactions will not be affected.
2.4 Expanding the contractor payment reporting system
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.
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.
2.5 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.
3. Superannuation related changes
3.1 Exemption from the work test for voluntary contributions
From 1 July 2019, the Government will introduce an exemption from the work test for voluntary contributions to superannuation, for people aged 65-74 with superannuation balances below $300,000, in the first year that they do not meet the work test requirements.
Under current law, the work test restricts the ability to make voluntary superannuation contributions for those aged 65-74 to individuals who self-report as working a minimum of 40 hours in any 30 day period in the financial year.
3.2 Three-yearly audit cycle for some SMSFs
From 1 July 2019, the Government will change the annual audit requirement to a three-yearly requirement for SMSFs with a history of good record-keeping and compliance.
This measure will reduce red tape for SMSF trustees that have a history of three consecutive years of clear audit reports
and that have lodged the fund’s annual returns in a timely manner.
3.3 Increasing the maximum number of allowable members in an SMSF and small APRA fund
From 1 July 2019, the Government will increase the maximum number of allowable members in new and existing SMSFS and small APRA funds from four to six. This will provide greater flexibility for joint management of retirement savings, in particular for large families.
3.4 Preventing inadvertent concessional cap breaches by certain employees
From 1 July 2018, the Government will allow individuals whose income exceeds $263,157, and who have multiple employers, to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG). The measure will allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory SG contributions. Employees who use this measure could negotiate to receive additional income, which is taxed at marginal tax rates.
3.5 Deductions for personal contributions
The Government intends to improve the integrity of the ‘notice of intent’ (‘NOI’) processes for claiming personal superannuation contribution tax deductions. Currently, some individuals receive deductions on their personal superannuation contributions but do not submit a NOI, despite being required to do so. This results in their superannuation funds not applying the appropriate 15% tax to their contribution.
As the contribution has been deducted from the individual’s income, no tax is paid on it at all. The additional funding will enable the ATO to develop a new compliance model, and to undertake additional compliance and debt collection activities. From 1 July 2018, the ATO will modify income tax returns to alert individuals to the NOI requirements with a tick box to confirm they have complied.
3.7 Capping passive fees, banning exit fees and reuniting small and inactive superannuation accounts
From 1 July 2019, the Government will introduce a 3% annual cap on passive fees charged by superannuation funds on accounts with balances below $6,000 and will ban exit fees on all superannuation accounts. The Government will also strengthen the ATO-led consolidation regime by requiring the transfer of all inactive superannuation accounts where the balances are below $6,000 to the ATO.
3.8 Changes to insurance in superannuation
The Government will change the insurance arrangements for certain superannuation members.
Insurance within superannuation will move from a default framework to an opt-in basis for: members with low balances of less than $6,000; members under the age of 25 years; and members whose accounts have not received a contribution in 13 months and are inactive.
The changes will take effect on 1 July 2019 — affected superannuation holders will have a period of 14 months to decide whether they will opt-in to their existing cover or allow it to switch off.
4. Other relevant changes
4.1 Deductions denied for vacant land
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.
4.2 Taxation of income for an individual’s fame or image
From 1 July 2019, high profile individuals are no longer able to take advantage of lower tax rates by licencing their fame or image to another entity.
High profile individuals (such as sportspeople and actors) can currently licence their fame or image to another entity such as a related company or trust. Income for the use of their fame or image goes to the entity that holds the licence. This creates opportunities to take advantage of different tax treatments and facilitates misreporting and incorrect tax outcomes.
This measure will ensure that all remuneration (including payments and non-cash benefits) provided for the commercial exploitation of a person’s fame or image will be included in the assessable income of that individual.
There have been few other changes announced by we believe the above covers most that would concern our clients. Should you have any questions, don’t hesitate to get in touch.
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