Federal Budget 2018/2019 - Slick but wanting - but we have Tax Cuts!
Overall: A Budget that is designed to sell the government. It is designed to work on "WIFM" - What's in it for me! Media reports tomorrow (9 May 2018) will report the "Tax Cuts" in 2019 tax year and related 'measures'; but the tax cuts are delivered by a new non refundable Offset/Rebate which 'you' will only see when you lodge your 2019 income tax return; so you will not see an increase in take home pay. So it makes you wonder politically why it was provided this way as it will not be 'immediate'.
Many changes announced in the Budget start "1 July 2019" - that is 2020 tax year! More than a year away as we are still in 2018 tax year and have 2019 to work through.
Overall Economy: Economically the Treasurer noted in 2017-18, the Budget deficit would be $18.2 billion, less than half what it was 2 years ago. The deficit will fall to $14.5 billion in 2018-19. The Budget is forecast to return to a balance of $2.2 billion in 2019-20 (a year ahead of what was previously expected) and increase to projected surpluses of $11.0 billion in 2020-21 and $16.6 billion in 2021-22. That is a long way in economic and political terms. The Budget Papers themselves state that real GDP is forecast to grow by 2.75% in 2017-18 and is forecast to accelerate further to 3% growth in 2018-19 and 2019-20, a pace the Government considers sufficient to continue to lower the unemployment rate over the next few years. But this should be taken for what they are - educated guesses.
Main takeaway: The Budget is about is a range of tax cut measures with an announced "7-year 3-step plan" to "reform" personal income tax. Note, this covers 2 elections into the future so it is a promise at best; except for the rates to be brought in next tax year. See graphic below to show the COMPLICATED words following. ALL rates quoted DO NOT include the Medicare Levy:
First: A new non-refundable low and middle income tax offset from 2018-19 (2019) to 2021-22 (2022), It is a new non-refundable Low and Middle Income Tax Offset from 2019 to 2022, designed to provide tax relief of up to $530 for each of those years. The offset will be delivered on assessment after an individual submits their tax return and will be in addition to the existing low income tax offset (LITO).
The Low and Middle Income Tax Offset (LAMITO) will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. Between $37,000 and $48,000, the value of the offset will increase at a rate of 3 cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. From $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar. The benefit of the Low and Middle Income Tax Offset is in addition to the existing Low Income Tax Offset. (Your brain in meltdown yet?).
Second: This will increase the top threshold of the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018 (2019 TY). In 2022-23, the top threshold of the 19% bracket will increase from $37,000 to $41,000 and the LITO will increase from $445 to $645. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667. The top threshold of the 32.5% bracket will increase from $90,000 to $120,000 from 1 July 2022.
Three: From 1 July 2024 (2025TY), the top threshold of the 32.5% bracket will increase from $120,000 to $200,000, so the 37% tax bracket is removed completely. Taxpayers will pay the top marginal tax rate of 45% on taxable incomes exceeding $200,000 and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000. So this "step" is now stretched.
Economists have pointed out that a bump in collections this year "over 6 months" has been used to justify tax cuts over 5 plus years ("10 years baked in") and represents 'fiscal drag'. So some of these proposals may not survive or be modified as the economy changes.
The ATO announced work related expense (wre) focus (read crack down on Motor Vehicle claims) but the Budget did not announce any measures.
An easier way to see the above from the AFR coverage:
NOTE: 2018 Tax Year rates do NOT change.
The currently legislated low income tax offset (LITO) rates will not change for 2017-18 and are:
LITO amount - $445.
Lower withdrawal limit - $37,000.
Upper withdrawal limit - $66,667.
Withdrawal rate - 1.5%.
OTHER DETAILS
The rest of the budget as it might affect you. The tax/revenue measures announced:
- Extending the $20,000 instant asset write-off by another 12 months
- High Profile Individuals stopped from licensing to other entities
- Major overhaul of the R&D tax incentive
- Application of Div 7A to UPEs clarified
- No tax deduction for non-compliant PAYG and contractor payments
- Cash payments limit of $10,000: payments made to businesses
- Taxing digital business in Australia - discussion paper to be issued within weeks
- Minors and testamentary trusts - concessional tax rates limit
- Deductions disallowed for holding vacant land
- MITs and AMITs: removing CGT discount at trust level (ring me)
- Personal superannuation contributions - tighter Notice of Intention requirements to deduct/claim super
- More money to the ATO for collections activity
- Reportable Payments System to be extended
- Increase in smsf members from 4 to 6 members
- Superannuation work test removed 65-74 year olds
- SMSF audit cycle of 3 years for funds with good compliance history
- Super fees to be capped at 3% for small accounts, exit fees banned.
- Superannuation Fund Insurance 'opt-in' changes
- Superannuation Funds to have a retirement strategy
- STP Funding provision (welcome 1984).
The detail:
$20,000 instant asset write-off for SBEs extended by 12 months: The current instant asset write-off ($20,000 threshold) for small business entities (SBEs, now defined as turnover up to $10m) will be extended by 12 months to 30 June 2019. This applies to businesses with aggregated annual turnover less than $10 million. The threshold amount was due to return to $1,000 on 1 July 2018. As a result of this announcement, SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are acquired between 1 July 2017 and 30 June 2019 and first used or installed ready for use by 30 June 2019 for a taxable purpose. Only a few assets are not eligible for the instant asset write-off (or other simplified depreciation rules), for example In-house software and some agricultural assets..
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business 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). The current 'lock out' laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt out) will continue to be suspended until 30 June 2019.
The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will return to $1,000 on 1 July 2019 (2020 TY).
Taxation of income for high profile individuals: High profile individuals will no longer be able to take advantage of lower tax rates by licensing their fame or image to another entity. Currently, high profile individuals such as sportspeople or actors can license their fame or image to another entity (a related company or trust), and the income derived goes to the entity that holds the licence. This creates opportunities to take advantage of different tax treatments. 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 the individual. Date of effect: From 1 July 2019 (2020 TY).
R&D tax incentive overhaul - call me.
Application of Div 7A to UPEs: The operation of Div 7A of the ITAA 1936 to ensure that unpaid present entitlements (UPEs) come within the scope of Div 7A. A UPE arises where a related private company becomes entitled to a share of trust income as a beneficiary but has not been paid that amount. Division 7A requires benefits provided by private companies to related taxpayers to be taxed as dividends unless they are structured as Div 7A complying loans or another exception applies. This measure will ensure the UPE is either required to be repaid to the private company over time as a complying loan or subject to tax as a dividend.
Start date of other Div 7A measures deferred. The start date of the amendments to Div 7A that were announced in the 2017 Budget will be deferred 1 July 2019 (2020 TY).
No tax deduction for non-compliant PAYG and contractor payments: The government hasn't said how they will do it, but they intend to bring in provisions so taxpayers will not be able to claim deductions for payments to their employees such as wages where they have not withheld any amount of PAYG from these payments, where the PAYG withholding requirements apply. Similarly, the Government intends to remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (again where the withholding requirements apply). This was recommended by the Black Economy Taskforce. Will commence on 1 July 2019 (2020 TY).
Cash payments limit: payments made to businesses: A limit of $10,000 for cash payments made to businesses for goods and services. This measure will require transactions over a threshold to be made through an electronic payment system or by cheque. The rules will not apply to transactions with financial institutions or consumer-to-consumer non-business transactions. This was recommended by the Black Economy Taskforce. The limit will apply from 1 July 2019 (2020 TY).
Testamentary Trusts: The concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from deceased estates or the proceeds of the disposal or investment of those assets. Currently, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors. Some taxpayers are able to "inappropriately" obtain the benefit of the lower tax rate by injecting assets unrelated to the deceased estate into testamentary trusts. This measure will clarify that minors will be taxed at adult marginal tax rates only in relation to income of a testamentary trust that is generated from assets of a deceased estate (or the proceed of the disposal or investment of these assets). Applies from 1 July 2019 (2020 Tax Year).
Deductions disallowed for holding vacant land: Deductions will be disallowed for expenses associated with holding vacant land. Where the land is not genuinely held for the purpose of earning assessable income, expenses such as interest costs will be denied. The measure is intended to reduce the tax incentives for land banking which limit the use of land for housing or other development. The measure will apply to both land held for residential and commercial purposes. However, the "carrying on a business" test would generally exclude land held for a commercial development. It will not apply to expenses associated with holding land that are incurred after a property has been constructed on the land, it has received approval to be occupied and available for rent; or the land is being used by the owner to carry on a business, including a business of primary production.
Disallowed deductions will not be able to be carried forward for use in later income years. Expenses for which deductions will be denied could be included in the cost base if it would ordinarily be a cost base element (that is borrowing costs and council rates) for CGT purposes. However, if the denied deductions are for expenses would not ordinarily be a cost base element, they cannot be included in the cost base. Applies from 1 July 2019 (2020 TY).
Personal superannuation contributions - improving notice of intention to deduct: The notice of intent (NOI) processes for claiming deductions for personal superannuation contribution will be tightened. An additional $3.1 million of funding will be provided to the ATO to develop a new compliance model for deducting personal super contributions, and to undertake additional compliance and debt collection activities. Some individuals currently receive deductions on their personal superannuation contributions but do not submit a NOI, despite being required to do so under s 290-170 of the ITAA 1997. 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.
Currently, a notice under s 290-170 of the ITAA 1997 must be given to the super fund by the time the person lodges their income tax return for the year in which the contribution is made or, if no return has been lodged by the end of the following income year, by the end of that following year. This requirement is even more important from the 2018 income year given that individuals up to age 75 can now deduct personal contributions, regardless of whether they earn 10% or more of their income from employment (provided that the other requirements are satisfied).
The ATO will modify income tax returns to alert individuals to the NOI requirements with a tick box to confirm they have complied. The ATO is expected to provide guidance to individuals on how to comply if they have not yet done so. This seeks to ensure that any deductible contributions are appropriately taxed by superannuation funds and enable the ATO to deny deductions to individuals who do not comply with the NOI requirements. This will start 1 July 2018 (2019TY).
Firm stance on tax and super debts: $133.7 million will be allocated to the ATO to fund strategies to increase in debt collections and an improvement in the timeliness of debt collections. This will extend, and roll into ongoing funding, the measure announced in the August 2013 Economic Statement addressing the level of unpaid tax and superannuation in the community that would otherwise terminate on 30 June 2018. The measure will ensure the ATO is able to continue to target those taxpayers gaining an unfair financial advantage over those who pay their fair share of tax and superannuation. We hope the ATO does not continue to act in a way that is leads the recent reported cases of inappropriate use of its powers.
Reportable payments system extended: security providers, road freight transport and computer design. The taxable payments reporting system (TPRS) will be extended to the following industries - security providers and investigation services; - road freight transport; and computer system design and related services. It is not clear the extent of the definitions. This will extend the TPRS requirements already applying to the building and construction industry. The TPRS requirements will also be extended, from 1 July 2018 (2019 TY) to the cleaning and courier industries under measures contained in the Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018. This will apply from 1 July 2019 (2020 TY), with the first annual report required in August 2020.
SMSF member limit to increase from 4 to 6 - law to be amended: The Budget confirmed that the maximum number of allowable members in new and existing self-managed superannuation funds (SMSFs) and small APRA funds will be expanded from 4 to 6 members from 1 July 2019 (2020 TY). This measure was announced 27 April 2018.
Superannuation work test exemption for contributions by recent retirees: An exemption from the work test for voluntary superannuation contributions by individuals aged 65-74 with superannuation balances below $300,000 in the first year that they do not meet the work test requirements. Currently, the work test in reg 7.04 of the SIS Regulations 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. This will give recent retirees additional flexibilities to get their financial affairs in order in transition to retirement. Date of effect 1 July 2019 (2020 TY).
SMSF audit cycle of 3 years for funds with good compliance history: The annual audit requirement for self-managed superannuation funds (SMSFs) will be extend to a 3-yearly cycle for funds with a history of good record-keeping and compliance. The measure will apply to SMSF trustees that have a history of 3 consecutive years of clear audit reports and that have lodged the fund's annual returns in a timely manner. Starts 1 July 2019 (2020 TY). The Government said it will undertake consultation to ensure a smooth implementation. This measure, as announced, does not make sense to the Superannuation Industry and for SMSF Auditors even less sense. Not for the apparent decrease in Audit work but how to sustain the appropriate Audit Assurance between Audits. Three years is a long time between 'checkups'!
Super fees to be capped at 3% for small accounts, exit fees banned: Passive fees charged by superannuation funds will be capped at 3% for small accounts with balances below $6,000, while exit fees will be banned for all superannuation accounts from 1 July 2019. Exit fees will be banned on all superannuation accounts. Exit fees of around $37 million were charged to members in 2015-16 to simply close an account with a super fund. The proposed ban on exit fees will also benefit members looking to rollover their super accounts to a different fund, or who hold multiple accounts and see exit fees as a barrier to consolidating accounts. From 1 July 2019 (2020TY).
Superannuation insurance opt-in rule for younger and low-balance members: From 1 July 2019 (2020 TY), insurance within superannuation will move from a default framework to be offered on an opt-in basis for members with low balances of less than $6,000; members under the age of 25 years; and members with inactive accounts that have not received a contribution in 13 months. This seeks to protect the retirement savings of young people and those with low balances by ensuring their superannuation is not unnecessarily eroded by premiums on insurance policies they do not need or are not aware of.
Super trustees required to formulate retirement income strategy for members: The Superannuation Industry (Supervision) Act 1993 (SIS Act) will be amended to introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for fund members. This requirement appears to be aimed at supporting the Government's proposed development of a comprehensive income product for retirement (CIPR) framework. Currently, the SIS Act includes covenants requiring trustees to formulate, review regularly and give effect to an investment strategy and an insurance strategy. No start date announced.
Additional funding for Single Touch Payroll to assist small businesses: The Government will provide an addition $15 million over 3 years from the 2018-19 income year to the ATO to support the modernisation of payroll and superannuation fund reporting. The funding will be used to support small businesses with fewer than 20 employees during the transition to Single Touch Payroll Reporting from 1 July 2019. This Orwellian provision has largely been ignored by the mainstream press.
So there it is. Tax Cuts and multiple changes that mainly take effect in 2020 and later tax years. If you have any queries please contact me. This is my 28th Annual Budget Summary and I hope it helps makes some sense of the "2018-2019" Budget.
If you have any comments or questions please let me know. From my annual report to clients on the Budget.
Brett Lamond & Co
8 May 2018
[20180508]
Last Edit 8 May 2018, revised 15 August 2018
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Many changes announced in the Budget start "1 July 2019" - that is 2020 tax year! More than a year away as we are still in 2018 tax year and have 2019 to work through.
Overall Economy: Economically the Treasurer noted in 2017-18, the Budget deficit would be $18.2 billion, less than half what it was 2 years ago. The deficit will fall to $14.5 billion in 2018-19. The Budget is forecast to return to a balance of $2.2 billion in 2019-20 (a year ahead of what was previously expected) and increase to projected surpluses of $11.0 billion in 2020-21 and $16.6 billion in 2021-22. That is a long way in economic and political terms. The Budget Papers themselves state that real GDP is forecast to grow by 2.75% in 2017-18 and is forecast to accelerate further to 3% growth in 2018-19 and 2019-20, a pace the Government considers sufficient to continue to lower the unemployment rate over the next few years. But this should be taken for what they are - educated guesses.
Main takeaway: The Budget is about is a range of tax cut measures with an announced "7-year 3-step plan" to "reform" personal income tax. Note, this covers 2 elections into the future so it is a promise at best; except for the rates to be brought in next tax year. See graphic below to show the COMPLICATED words following. ALL rates quoted DO NOT include the Medicare Levy:
First: A new non-refundable low and middle income tax offset from 2018-19 (2019) to 2021-22 (2022), It is a new non-refundable Low and Middle Income Tax Offset from 2019 to 2022, designed to provide tax relief of up to $530 for each of those years. The offset will be delivered on assessment after an individual submits their tax return and will be in addition to the existing low income tax offset (LITO).
The Low and Middle Income Tax Offset (LAMITO) will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. Between $37,000 and $48,000, the value of the offset will increase at a rate of 3 cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. From $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar. The benefit of the Low and Middle Income Tax Offset is in addition to the existing Low Income Tax Offset. (Your brain in meltdown yet?).
Second: This will increase the top threshold of the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018 (2019 TY). In 2022-23, the top threshold of the 19% bracket will increase from $37,000 to $41,000 and the LITO will increase from $445 to $645. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667. The top threshold of the 32.5% bracket will increase from $90,000 to $120,000 from 1 July 2022.
Three: From 1 July 2024 (2025TY), the top threshold of the 32.5% bracket will increase from $120,000 to $200,000, so the 37% tax bracket is removed completely. Taxpayers will pay the top marginal tax rate of 45% on taxable incomes exceeding $200,000 and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000. So this "step" is now stretched.
Economists have pointed out that a bump in collections this year "over 6 months" has been used to justify tax cuts over 5 plus years ("10 years baked in") and represents 'fiscal drag'. So some of these proposals may not survive or be modified as the economy changes.
The ATO announced work related expense (wre) focus (read crack down on Motor Vehicle claims) but the Budget did not announce any measures.
An easier way to see the above from the AFR coverage:
NOTE: 2018 Tax Year rates do NOT change.
The currently legislated low income tax offset (LITO) rates will not change for 2017-18 and are:
LITO amount - $445.
Lower withdrawal limit - $37,000.
Upper withdrawal limit - $66,667.
Withdrawal rate - 1.5%.
OTHER DETAILS
The rest of the budget as it might affect you. The tax/revenue measures announced:
- Extending the $20,000 instant asset write-off by another 12 months
- High Profile Individuals stopped from licensing to other entities
- Major overhaul of the R&D tax incentive
- Application of Div 7A to UPEs clarified
- No tax deduction for non-compliant PAYG and contractor payments
- Cash payments limit of $10,000: payments made to businesses
- Taxing digital business in Australia - discussion paper to be issued within weeks
- Minors and testamentary trusts - concessional tax rates limit
- Deductions disallowed for holding vacant land
- MITs and AMITs: removing CGT discount at trust level (ring me)
- Personal superannuation contributions - tighter Notice of Intention requirements to deduct/claim super
- More money to the ATO for collections activity
- Reportable Payments System to be extended
- Increase in smsf members from 4 to 6 members
- Superannuation work test removed 65-74 year olds
- SMSF audit cycle of 3 years for funds with good compliance history
- Super fees to be capped at 3% for small accounts, exit fees banned.
- Superannuation Fund Insurance 'opt-in' changes
- Superannuation Funds to have a retirement strategy
- STP Funding provision (welcome 1984).
The detail:
$20,000 instant asset write-off for SBEs extended by 12 months: The current instant asset write-off ($20,000 threshold) for small business entities (SBEs, now defined as turnover up to $10m) will be extended by 12 months to 30 June 2019. This applies to businesses with aggregated annual turnover less than $10 million. The threshold amount was due to return to $1,000 on 1 July 2018. As a result of this announcement, SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are acquired between 1 July 2017 and 30 June 2019 and first used or installed ready for use by 30 June 2019 for a taxable purpose. Only a few assets are not eligible for the instant asset write-off (or other simplified depreciation rules), for example In-house software and some agricultural assets..
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business 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). The current 'lock out' laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt out) will continue to be suspended until 30 June 2019.
The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will return to $1,000 on 1 July 2019 (2020 TY).
Taxation of income for high profile individuals: High profile individuals will no longer be able to take advantage of lower tax rates by licensing their fame or image to another entity. Currently, high profile individuals such as sportspeople or actors can license their fame or image to another entity (a related company or trust), and the income derived goes to the entity that holds the licence. This creates opportunities to take advantage of different tax treatments. 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 the individual. Date of effect: From 1 July 2019 (2020 TY).
R&D tax incentive overhaul - call me.
Application of Div 7A to UPEs: The operation of Div 7A of the ITAA 1936 to ensure that unpaid present entitlements (UPEs) come within the scope of Div 7A. A UPE arises where a related private company becomes entitled to a share of trust income as a beneficiary but has not been paid that amount. Division 7A requires benefits provided by private companies to related taxpayers to be taxed as dividends unless they are structured as Div 7A complying loans or another exception applies. This measure will ensure the UPE is either required to be repaid to the private company over time as a complying loan or subject to tax as a dividend.
Start date of other Div 7A measures deferred. The start date of the amendments to Div 7A that were announced in the 2017 Budget will be deferred 1 July 2019 (2020 TY).
No tax deduction for non-compliant PAYG and contractor payments: The government hasn't said how they will do it, but they intend to bring in provisions so taxpayers will not be able to claim deductions for payments to their employees such as wages where they have not withheld any amount of PAYG from these payments, where the PAYG withholding requirements apply. Similarly, the Government intends to remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (again where the withholding requirements apply). This was recommended by the Black Economy Taskforce. Will commence on 1 July 2019 (2020 TY).
Cash payments limit: payments made to businesses: A limit of $10,000 for cash payments made to businesses for goods and services. This measure will require transactions over a threshold to be made through an electronic payment system or by cheque. The rules will not apply to transactions with financial institutions or consumer-to-consumer non-business transactions. This was recommended by the Black Economy Taskforce. The limit will apply from 1 July 2019 (2020 TY).
Testamentary Trusts: The concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from deceased estates or the proceeds of the disposal or investment of those assets. Currently, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors. Some taxpayers are able to "inappropriately" obtain the benefit of the lower tax rate by injecting assets unrelated to the deceased estate into testamentary trusts. This measure will clarify that minors will be taxed at adult marginal tax rates only in relation to income of a testamentary trust that is generated from assets of a deceased estate (or the proceed of the disposal or investment of these assets). Applies from 1 July 2019 (2020 Tax Year).
Deductions disallowed for holding vacant land: Deductions will be disallowed for expenses associated with holding vacant land. Where the land is not genuinely held for the purpose of earning assessable income, expenses such as interest costs will be denied. The measure is intended to reduce the tax incentives for land banking which limit the use of land for housing or other development. The measure will apply to both land held for residential and commercial purposes. However, the "carrying on a business" test would generally exclude land held for a commercial development. It will not apply to expenses associated with holding land that are incurred after a property has been constructed on the land, it has received approval to be occupied and available for rent; or the land is being used by the owner to carry on a business, including a business of primary production.
Disallowed deductions will not be able to be carried forward for use in later income years. Expenses for which deductions will be denied could be included in the cost base if it would ordinarily be a cost base element (that is borrowing costs and council rates) for CGT purposes. However, if the denied deductions are for expenses would not ordinarily be a cost base element, they cannot be included in the cost base. Applies from 1 July 2019 (2020 TY).
Personal superannuation contributions - improving notice of intention to deduct: The notice of intent (NOI) processes for claiming deductions for personal superannuation contribution will be tightened. An additional $3.1 million of funding will be provided to the ATO to develop a new compliance model for deducting personal super contributions, and to undertake additional compliance and debt collection activities. Some individuals currently receive deductions on their personal superannuation contributions but do not submit a NOI, despite being required to do so under s 290-170 of the ITAA 1997. 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.
Currently, a notice under s 290-170 of the ITAA 1997 must be given to the super fund by the time the person lodges their income tax return for the year in which the contribution is made or, if no return has been lodged by the end of the following income year, by the end of that following year. This requirement is even more important from the 2018 income year given that individuals up to age 75 can now deduct personal contributions, regardless of whether they earn 10% or more of their income from employment (provided that the other requirements are satisfied).
The ATO will modify income tax returns to alert individuals to the NOI requirements with a tick box to confirm they have complied. The ATO is expected to provide guidance to individuals on how to comply if they have not yet done so. This seeks to ensure that any deductible contributions are appropriately taxed by superannuation funds and enable the ATO to deny deductions to individuals who do not comply with the NOI requirements. This will start 1 July 2018 (2019TY).
Firm stance on tax and super debts: $133.7 million will be allocated to the ATO to fund strategies to increase in debt collections and an improvement in the timeliness of debt collections. This will extend, and roll into ongoing funding, the measure announced in the August 2013 Economic Statement addressing the level of unpaid tax and superannuation in the community that would otherwise terminate on 30 June 2018. The measure will ensure the ATO is able to continue to target those taxpayers gaining an unfair financial advantage over those who pay their fair share of tax and superannuation. We hope the ATO does not continue to act in a way that is leads the recent reported cases of inappropriate use of its powers.
Reportable payments system extended: security providers, road freight transport and computer design. The taxable payments reporting system (TPRS) will be extended to the following industries - security providers and investigation services; - road freight transport; and computer system design and related services. It is not clear the extent of the definitions. This will extend the TPRS requirements already applying to the building and construction industry. The TPRS requirements will also be extended, from 1 July 2018 (2019 TY) to the cleaning and courier industries under measures contained in the Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018. This will apply from 1 July 2019 (2020 TY), with the first annual report required in August 2020.
SMSF member limit to increase from 4 to 6 - law to be amended: The Budget confirmed that the maximum number of allowable members in new and existing self-managed superannuation funds (SMSFs) and small APRA funds will be expanded from 4 to 6 members from 1 July 2019 (2020 TY). This measure was announced 27 April 2018.
Superannuation work test exemption for contributions by recent retirees: An exemption from the work test for voluntary superannuation contributions by individuals aged 65-74 with superannuation balances below $300,000 in the first year that they do not meet the work test requirements. Currently, the work test in reg 7.04 of the SIS Regulations 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. This will give recent retirees additional flexibilities to get their financial affairs in order in transition to retirement. Date of effect 1 July 2019 (2020 TY).
SMSF audit cycle of 3 years for funds with good compliance history: The annual audit requirement for self-managed superannuation funds (SMSFs) will be extend to a 3-yearly cycle for funds with a history of good record-keeping and compliance. The measure will apply to SMSF trustees that have a history of 3 consecutive years of clear audit reports and that have lodged the fund's annual returns in a timely manner. Starts 1 July 2019 (2020 TY). The Government said it will undertake consultation to ensure a smooth implementation. This measure, as announced, does not make sense to the Superannuation Industry and for SMSF Auditors even less sense. Not for the apparent decrease in Audit work but how to sustain the appropriate Audit Assurance between Audits. Three years is a long time between 'checkups'!
Super fees to be capped at 3% for small accounts, exit fees banned: Passive fees charged by superannuation funds will be capped at 3% for small accounts with balances below $6,000, while exit fees will be banned for all superannuation accounts from 1 July 2019. Exit fees will be banned on all superannuation accounts. Exit fees of around $37 million were charged to members in 2015-16 to simply close an account with a super fund. The proposed ban on exit fees will also benefit members looking to rollover their super accounts to a different fund, or who hold multiple accounts and see exit fees as a barrier to consolidating accounts. From 1 July 2019 (2020TY).
Superannuation insurance opt-in rule for younger and low-balance members: From 1 July 2019 (2020 TY), insurance within superannuation will move from a default framework to be offered on an opt-in basis for members with low balances of less than $6,000; members under the age of 25 years; and members with inactive accounts that have not received a contribution in 13 months. This seeks to protect the retirement savings of young people and those with low balances by ensuring their superannuation is not unnecessarily eroded by premiums on insurance policies they do not need or are not aware of.
Super trustees required to formulate retirement income strategy for members: The Superannuation Industry (Supervision) Act 1993 (SIS Act) will be amended to introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for fund members. This requirement appears to be aimed at supporting the Government's proposed development of a comprehensive income product for retirement (CIPR) framework. Currently, the SIS Act includes covenants requiring trustees to formulate, review regularly and give effect to an investment strategy and an insurance strategy. No start date announced.
Additional funding for Single Touch Payroll to assist small businesses: The Government will provide an addition $15 million over 3 years from the 2018-19 income year to the ATO to support the modernisation of payroll and superannuation fund reporting. The funding will be used to support small businesses with fewer than 20 employees during the transition to Single Touch Payroll Reporting from 1 July 2019. This Orwellian provision has largely been ignored by the mainstream press.
So there it is. Tax Cuts and multiple changes that mainly take effect in 2020 and later tax years. If you have any queries please contact me. This is my 28th Annual Budget Summary and I hope it helps makes some sense of the "2018-2019" Budget.
If you have any comments or questions please let me know. From my annual report to clients on the Budget.
Brett Lamond & Co
8 May 2018
[20180508]
Last Edit 8 May 2018, revised 15 August 2018
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