Key tax changes arising from the 2017-18 Federal Budget
There have been a number of recent and proposed tax changes during the last 12 months, and many of these are particularly relevant to smaller businesses and individual taxpayers. A number of the changes also apply from 1 July 2017 so may impact on year-end planning or structures.
We have outlined the following in this letter.
- Key tax changes arising from the 2017-18 Federal Budget.
- Major legislated tax reforms over the 2016-17 year.
- Key amendments to the superannuation regime over the 2016-17 year.
Key tax changes arising from the 2017-18 Federal Budget
- A Small Business Entity (SBE) will be able to claim an immediate deduction in respect of an eligible depreciating asset costing less than $20,000 for a further year as that concession will now cease on 30 June 2018 rather than on 30 June 2017. The threshold will now revert back to $1,000 from 1 July 2018 rather than on 1 July 2017 as originally intended. The effect of the above change is that an SBE will be able to claim an immediate deduction for a depreciating asset costing less than $20,000 which is first used or installed ready for use by 30 June 2018 to the extent it is used for a taxable purpose. Assets costing $20,000 or more can likewise continue to be depreciated under the general small business pool at a rate of 15% for additions acquired during the year ended 30 June 2018 and at a rate of 30% in subsequent years. Similarly, the lockout rules that prevent an SBE from re-entering the small business depreciation regime will also be suspended for a further year so that they do not apply for the year ended 30 June 2018.
- The Medicare levy will be increased by 0.5% from 2% to 2.5% effective from 1 July 2019. As a corollary, the effective highest marginal tax rate effective from 1 July 2019 will be increased by 0.5% from 47% to 47.5%. This increase in the tax rate to 47.5% will also be reflected in other tax rates such as the Fringe Benefits Tax (FBT) rate and the rate of tax payable by trustees under section 99A of the Income Tax Assessment Act 1936 (the ITAA 1936) where no beneficiary is presently entitled to trust income.
- The Taxable Payments Reporting System will be extended to apply to contractors in the courier and cleaning industries from 1 July 2018.
- The purchase of digital currency will be treated as being acquired under an input taxed financial supply from 1 July 2017 for GST purposes.
- From 1 July 2018, purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST on the purchase directly to the ATO as part of a settlement.
- From 1 July 2017, the depreciation of plant and equipment used in rental properties will be limited to outlays actually incurred by investors who own residential real estate properties. That is, investors who purchase plant and equipment for a residential investment property after 9 May 2017 will be able to claim a deduction for the depreciation of such plant and equipment over their effective life. However, subsequent owners of the property will be unable to claim deductions for plant and equipment purchased by the previous owner of that property. The cost incurred by subsequent purchasers in acquiring such depreciating assets will instead be taken into account for CGT purposes when the property is on-sold. As a transitional measure where plant and equipment forms part of a residential property on 9 May 2017 (or was acquired under a contract for a property entered into by that date), the existing depreciation rules will continue until the property is either sold or the asset is written off.
- From 1 July 2017, the travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property will be disallowed.
- An annual charge on foreign owners of a residential property will be imposed where the property is not occupied or genuinely available on the rental market for at least six months per year. The proposed change will apply to foreign persons who make a foreign investment application for a residential property on or after 9 May 2017.
- From 1 January 2018, the CGT discount will be increased by 10% from 50% to 60% in respect of investments held by resident individuals in qualifying affordable housing.
- Foreign and temporary tax residents will be denied access to the CGT main residence exemption from 9 May 2017 (although such foreign owners will continue to be able to claim the CGT main residence exemption in respect of residences acquired before that time up to 30 June 2019).
- The foreign resident CGT withholding tax rate will increase from 10% to 12.5% effective from 1 July 2017, and the safe harbour threshold below which withholding does not apply will be reduced from the current level of $2 million to $750,000 from 1 July 2017.
- From 1 July 2018, a person aged 65 or over can make a non-concessional contribution of up to $300,000 from the proceeds of selling their principal residence if it has been owned for the past 10 years or more which will not be included in the calculation of that person’s total superannuation balance.
- From 1 July 2017, individuals will be able to make extra voluntary superannuation contributions of up to $15,000 a year up to a total of $30,000 additional voluntary superannuation contributions which will be used to later fund a deposit on a first home. Such voluntary contributions will be taxed at 15% and can be withdrawn to help finance the deposit on a first home on or after 1 July 2018. Where the extra concessional contributions (and related earnings) are withdrawn, the individual will pay tax on the withdrawn amount at their marginal tax rate less a 30% tax offset.
- From 1 July 2017, the major five banks will be subject to a quarterly levy of 0.015% of their licensed entity liabilities which is expected to yield approximately $6.2 billion in additional revenue over the next 4 years.
- Various anti-avoidance measures will be legislated including extending the operation of the multinational anti-avoidance law (MAAL) provisions of Part IVA of the ITAA 1936.
Major legislated tax reforms over the 2016-17 year
The major tax changes legislated during the 2016-17 year included the following.
- Following the enactment of the Treasury Laws Amendment (Enterprise Tax Plan) Act 2016 the company tax rate will be reduced from 28.5% to 27.5% for tax year ended 30 June 2017 for a company which qualifies as a small business entity, being a company that carries on a business and whose aggregated turnover is less than $10 million for the tax year ended 30 June 2017. The company tax rate of 27.5% will be extended to a ‘base rate entity’ being a company which carries on a business and whose aggregated turnover is less than $25 million for the tax year ended 30 June 2018, and to a company whose aggregated turnover is less than $50 million for the year ended 30 June 2019. Thereafter the company tax rate will be progressively reduced for a base rate entity with an aggregated turnover of less than $50 million to 27% in the tax year ended 30 June 2025, 26% in the year ended 30 June 2026 and 25% in the year ended 30 June 2027. All other companies which are not eligible for the reduced company tax rate cut during this period will continue to be subject to the standard corporate tax rate of 30%.
- The above changes to the company tax rate have also resulted in changes to the imputation system for companies who are either a small business entity for the year ended 30 June 2017 or a base rate entity eligible for a reduced company tax rate in the year ended 30 June 2018 or in subsequent years because their aggregated turnover is below $50 million. In these circumstances, the maximum franking credit that can be attached to a frankable distribution by the above companies will be based on a corporate tax rate determined according to the aggregated turnover the company made in the immediately preceding year. That is, an eligible company’s corporate tax rate for a particular year will be worked out on the assumption that the company’s aggregated turnover for an income year is equal to its aggregated turnover threshold for the immediately preceding year albeit for franking purposes only.
- The non-refundable small business tax offset for unincorporated businesses has increased by 3% from 5% to 8% for the tax year ended 30 June 2017. In addition, the eligibility threshold enabling individuals deriving net small business income to access the tax offset will increase from the current less than $2 million aggregated turnover threshold to a less than $5 million aggregated turnover limit from the tax year ended 30 June 2017 onwards. The small business tax offset will then remain at 8% before progressively increasing to 10%, 13% and 16% for the tax years ended 30 June 2025, 30 June 2026 and 30 June 2027 respectively. However, the amount of the small business tax offset will remain capped at an annual maximum amount of $1,000 for each individual directly or indirectly deriving net small business income in the 2016-17 year and in future years.
- The definition of a small business entity under section 328-110 of the ITAA (1997) will be amended to increase the aggregated turnover threshold for an entity to be eligible to be a small business entity from a less than $2 million aggregated turnover to a less than $10 million aggregated turnover threshold from the tax year ended 30 June 2017 onwards. Hence, an eligible small business entity will be able to claim the following concessions for the tax year ended 30 June 2017:
- immediate deductibility for certain small business start-up expenses
- simpler depreciation rules (including access to the immediate deduction for depreciating assets)
- simplified trading stock rules
- roll-over for restructures of small businesses
- deductions for certain prepaid business expenses immediately
- accounting for goods and services tax (GST) on a cash basis
- annual apportionment of input tax credits for acquisitions and importations that are partly creditable
- paying GST by quarterly instalments
- Fringe Benefits Tax (FBT) car parking exemption (from 1 April 2017)
- Pay As You Go (PAYG) instalments based on the gross domestic product (GDP) adjusted notional tax.
- However, the basic eligibility conditions of the small business CGT concessions have been amended so that taxpayers seeking to access those concessions as a small business entity will continue to be subject to a less than $2 million aggregated turnover threshold rather than a less than $10 million aggregated turnover threshold as is the case with the above tax concessions.
Key amendments to the superannuation reforms over the 2016-17 year
Some of the major superannuation reforms enacted during the 2016-17 year were as follows.
- A new $1.6 million general transfer cap will apply to amounts that can be held in a complying superannuation fund in the tax-free retirement phase effective from 1 July 2017. It will be necessary for individuals to ensure that their personal transfer balance cap does not exceed the general transfer balance cap which will commence from $1.6 million but which will be subject to future indexation. This has led to the development of a new transfer balance account concept under which certain credit and debit movements need to be closely monitored to ensure that the personal transfer balance cap does not exceed the prevailing general transfer balance cap. Amounts received in excess of the cap can either be transferred to an accumulations account (with any income derived on such excess amounts being concessionally taxed at 15%) or may be withdrawn from the superannuation fund. Individuals with funds in retirement phase which were in excess of the $1.6 million cap between 9 November 2016 and 30 June 2017 were required to transfer the excess amount to an accumulations account or withdraw such funds by 30 June 2017 (subject to a range of transitional measures).
- From 1 July 2017 earnings on assets supporting transition to retirement pensions will also be taxed at 15% rather than be exempt (regardless of the date on which the payment of the transition to retirement pension commenced).
- From 1 July 2017, a standard concessional contributions cap of $25,000 will apply to all individuals regardless of age. The $25,000 cap will be indexed for movements in Average Weekly Ordinary Time Earnings (AWOTE) in later years and increased in tranches of $2,500.
- From 1 July 2017, the annual cap on non-concessional contributions will be reduced from $180,000 to $100,000. In addition, only an individual who has a total superannuation balance which is less than the general transfer balance cap at 30 June of the preceding year will be eligible to make non-concessional contributions from 1 July 2017. Very broadly, an individual’s total superannuation balance comprises an individual ‘s accumulation and retirement phase interests in all their superannuation funds reduced by any personal injury structured settlement amounts contributed to a superannuation fund. The general transfer balance cap for the year ended 30 June 2018 will be $1.6 million.
- The maximum amount of non-concessional contributions that can be made under the three-year brought forward rule will be reduced from $540,000 to $300,000 from the year ended 30 June 2018 onwards. However, amounts contributed under the brought forward rule cannot be made to the extent that they would cause the $1.6 million cap to be exceeded. Special transitional rules also apply in respect of the phasing-in of the above changes to the three-year brought forward rule whereby the maximum amount that can be contributed is reduced from $540,000 to $300,000 on 1 July 2017. Where the three-year brought forward rule was applied in the 2016 year the maximum cap will be $460,000 (being $180,0000 for both the 2016 and 2017 years and $100,000 for the 2018 year). Conversely, where the three-year brought forward rule was applied in the 2017 year the maximum cap will be $380,000 (being $180,000 for the 2017 year and $100,000 for both the 2018 and 2019 years).
- A Low Income Superannuation Offset has been introduced being a non-refundable tax offset of $500 available to low-income earners deriving adjusted taxable income of up to $37,000 for the 2017-18 tax year. The design features of this offset are very similar to the Low Income Superannuation Contribution that applies up to the year ended 30 June 2017 including the absence of tapering off rules so that no entitlement to the offset will arise if adjusted taxable income is more than $37,000.
- The extra 15% tax paid by high-income earners on certain ‘low-tax’ contributions (i.e. concessional contributions up to the concessional contributions cap) under Division 293 of the ITAA 1997 will apply from 1 July 2017 where a person’s total ‘income for Medicare Levy Surcharge purposes’ and ‘low tax contributions’ is in excess of $250,000 rather than the $300,000 threshold that currently applies.
- From 1 July 2017, it is proposed that all individuals under the age of 75 will be able to claim an income tax deduction for personal superannuation contributions up to the amount of that person’s concessional contributions cap for the year in which such a contribution was made. This measure will enable substantially self-employed persons to claim deductions for personal superannuation contributions where more than 10% of their total earnings (i.e. assessable income, reportable fringe benefits and reportable employer superannuation contributions) were employment related.
- From 1 July 2017 access to the low income spouse superannuation tax offset will be broadened as the income eligibility threshold will increase from $10,800 to $37,000 for the full $540 tax offset, and the tax offset will only fully phase out where such income is in excess of $40,000 in lieu of the existing $13,800 threshold. However, a taxpayer will no longer be entitled to a tax offset when making contributions for a spouse whose non-concessional contributions exceed the non-concessional contributions cap in the corresponding financial year or whose total superannuation balance exceeds their general transfer balance cap immediately before the start of the financial year.
- From 1 July 2018, it is proposed that an individual will be able to make catch up concessional contributions if that person did not fully utilise their concessional contributions cap in one or more of the immediately preceding five years, and that person’s total superannuation balance is less than $500,000 at 30 June of the immediately preceding year. The amount of the unused concessional contributions cap is the difference between the concessional contributions made in a year and the prevailing concessional contributions cap in that year. The five year period in which catch-up contributions can be made will be on a rolling basis so that the five year period will progressively be refreshed annually in each successive tax year. The first year in which an individual will be able to make additional superannuation contributions by applying their unused contributions cap will be in the 2019-20 tax year as the unused amounts will start to be available from the 2018-19 tax year.
Please contact us should you wish to discuss any of the issues raised above.