On 8 May 2018, the Government delivered a conservative budget in line with what would be expected in an election year. A platform for ongoing individual tax rate cuts was announced over the next 7 years and a series of “tax integrity measures” was announced which will impact some businesses.
Below is a snapshot of some of the more important announcements that we have identified could impact our clients and the SME market:
Personal income tax
- A series of tax cuts have been announced to take effect over the next 7 years. From 1 July 2018, a tax offset will be introduced for low to medium income earners (up to $530 per year). From 1 July 2018, the 32.5% tax rate threshold will also be increased from $87,000 to $90,000. Thereafter, progressive changes will be made to the thresholds at which the differing marginal tax rates shall apply from.
- Previously, high profile individuals (whether they be sportspeople or artists) were able to licence their imaging rights to a separate entity (say a trust) to enable a portion of their income to be generated by the related entity from the exploitation of their imaging rights. However, in the budget, the Government announced that from 1 July 2019, an individual will not be able to licence their imaging rights to a separate entity meaning that the individual will be required to disclose all income from imaging in their own personal name.
- The ATO has previously issued tax rulings confirming their view that Unpaid Present Entitlements (UPE’s) for the benefit of a corporate beneficiary are a type of loan that can be subject to the application of Division 7A. In the Federal Budget, the Government have appeared to announce that they will legislate that ATO interpretation. Presumably, the change will require UPE’s to be structured as Division 7A loans rather than sub-trusts going forward. What remains unclear though is how the new legislation will treat UPE’s that have been quarantined pre-16 December 2009 which the ATO previously accepted in their ruling as not being subject to Division 7A.
- The Government has announced that the $20,000 instant asset write-off concession available to Small Business Entities with turnover of less than $10M for the 2018 financial year will be extended to 30 June 2019.
- Everett assignments occur where partners in professional practices (lawyers, accountants, architects, engineers etc) assign their future profit distribution entitlements to a related entity (say to a trust). The ATO has previously accepted Everett assignments provided the partner continues to satisfy the professional practice safe harbour guidelines. Any capital gain crystallised by the partner on the assignment of their future profit share entitlements was previously able to be potentially reduced by way of applying Small Business CGT concessions. In the budget, the Government has announced that effective immediately, the Small Business CGT concessions will be amended so that partners in professional practices will not be able to apply Small Business CGT concessions on Everett assignments.
- The Government has announced significant changes to the R&D tax concession available for companies. From 1 July 2018, small companies (turnover of less than $20M) will still have access to a refundable tax offset but the rate of the offset will be reduced from 43.5% to 41%. For example, for $50,000 of R&D expenditure, small companies will be able to obtain a refundable tax offset of $20,500 (down from $21,750) in lieu of a tax benefit associated with the deduction associated with the R&D expenditure of $13,750. For companies with turnover of more than $20M, the non-refundable tax offset will now be determined by the “R&D intensity” of the company. From 1 July 2018, the non-refundable tax offset will equal the corporate tax rate of the company plus additional percentage points (ranging from 4% to up to 12.5%) depending on the level of R&D expenses as compared to total expenses of the company.
- Businesses will be denied tax deductions for wages or contractor payments where they have not withheld PAYG withholding or ABN withholding on the payments.
- From 1 July 2019, there will be a cap of $10,000 on the amount of cash payments that a business is able to accept in consideration of the provision of goods or services.
- The Government announced that from 1 July 2019, integrity rules will be introduced to prevent trusts from making circular distributions of income to each other.
- From 1 July 2019, the Government will introduce legislation which prevents assets being contributed/gifted into testamentary trusts for the purpose of sheltering the rate of tax on the income generated on those assets. In its budget papers, the Government stated, “This measure will address benefits currently obtained by injecting assets unrelated to the deceased estate into a testamentary trust.”
- The Government will change the annual SMSF audit requirement to a three-yearly requirement for SMSFs with a history of good record keeping and compliance. The measure will start on 1 July 2019 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.
- As already announced, the Federal Government confirmed its decision to expand the number of members allowed in an SMSF from four to six. Expanding the definition of an SMSF to a fund with a maximum of six members will provide greater flexibility in how funds can be structured.
- The Government will provide more time for Australians aged 65 to 74 to boost their retirement savings, by introducing an exemption from the superannuation work test.
This exemption will apply where an individual’s total superannuation balance is below $300,000 and will permit voluntary superannuation contributions in the first year that they do not meet the work test requirements.
- The Government will allow individuals whose income exceeds $263,157, and have multiple employers, to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018. 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.
- The Government announced that effective 1 July 2019, a taxpayer will not be eligible to claim holding cost deductions (eg interest, rates, land tax) on landholdings until a property has been constructed on the land and is available for rent unless the land is being held in a business conducted by the taxpayer. For example, whereas a taxpayer that was previously intending to construct a rental property could have deducted holding costs prior to construction works commencing and/or during construction (in accordance with Steele’s case), the new legislation will prevent this.
If you have any further questions, please do not hesitate to contact Tim Olynyk on (03) 9810 0700 or at firstname.lastname@example.org.