2018 Federal Budget Summary
2018 Federal Budget Summary
(produced using resources of CPA Australia and Wolters Kluwer)
This year’s Federal Budget, the third handed down by the treasurer, Scott Morrison is certainly an attention grabber for its broad and long-term tax relief. Many of the announcements are focused on the longer-term, especially surrounding personal income tax, so it’s important to be mindful of the proposed dates for each budget item.
As your trusted adviser for business and tax matters, we want to provide you with a summary of a selection of the proposed measures from the budget which may affect and/or be of interest to you.
Important to Note:
- These measures are proposed and do not become law until passed through Parliament.
- This information is of a general nature and does not take into account your particular circumstances and/or objectives. As such, no liability is accepted and no warranty provided for; anyone relying on this information to make a decision, take action, or refrain from action.
- We encourage you to discuss with us what these proposed changes may mean for you and your business.
Index
- Income Tax
- The $20,000 instant asset write-off extended for small businesses until 30 June 2019.
- Payments to employees/contractors no longer deductible when amounts required to be withheld not remitted.
- Significant changes to the R&D tax incentive incl. a maximum cash refund for some entities.
- Div 7A UPE rule strengthened; major reform delayed.
- Individual Taxpayers
- Superannuation and Pension
- Cash (Black) Economy
1.1 Immediate deduction for depreciating assets < $20,000
Businesses with an aggregated turnover of less than $10 million will continue to have access to the $20,000 instant asset write-off for another 12 months. A small business will get an immediate deduction for assets costing less than $20,000, and are installed and ready for use before 30 June 2019.
Items costing more than $20,000 cannot be immediately deducted, will be included in the entity’s small business pool and depreciated at 15% in the first income year and 30% each income year thereafter. Also, small business depreciation pools valued under $20,000 as at 1 July 2018 can be immediately written off in the 2018-19 income year.
1.2 Payments to employees/contractors no longer deductible when amounts required to be withheld not remitted
Businesses will no longer be able to claim deductions for payments to their employees where they have not met their PAYG obligations. This includes where the employer is required to withhold PAYG from gross payments, but fails to report or remit it to the ATO.
Additionally, the deduction for businesses on certain payments to contractors which have not met PAYG obligations will be removed. Currently, if a contractor does not quote an ABN in a business-to-business transaction, the purchaser is required to withhold an amount at the top marginal tax rate and remit this amount to the ATO. Failure to do this correctly will render the entire payment non-deductible.
Both of these measures will take effect from 1 July 2019.
Source: Budget Paper No 2, p 24.
1.3 Significant changes to the R&D tax incentive incl. a maximum cash refund for some entities
The calculation for entities claiming the R&D tax incentive will change commencing for income years beginning on or after 1 July 2018. Also, a maximum cash refund for “smaller” R&D claimants will be capped at $4 million per financial year. A “smaller” R&D claimant is an entity with aggregated annual turnover below $20 million.
Companies with annual turnover less than $20 million.
Currently: A 43.5 per cent refundable tax offset is available with a minimum eligible R&D expenditure of $20,000 pa.
Proposed: A refundable tax offset of 13.5 per cent percentage points above the entity’s corporate tax rate. This will mean no change for some companies as the refundable tax offset will remain 43.5 per cent. However, “base rate entities” which have a lower corporate tax rate of 27.5 per cent will now have a maximum refundable tax offset of 41 per cent. Also, it is proposed that the maximum cash refund available is $4 million. Any additional refunds past this amount can be carried forward to later income years.
Source: Budget Paper No 2, p 21.
1.4 Div 7A UPE rule strengthened; major reform delayed
Division 7A of ITAA 1936 will be amended to clarify the circumstances in which it applies to unpaid present entitlements (UPEs) — where a related private company becomes entitled to a share of trust income as a beneficiary, but has not been paid that amount. The amendments will apply from 1 July 2019.
Division 7A is an integrity rule that 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.
The start date of targeted amendments to Div 7A will be deferred from 1 July 2018 to 1 July 2019. Those reforms, announced in the 10-Year Enterprise Tax Plan in the 2016-17 Budget, will enable all Div 7A amendments to be progressed as part of a consolidated package.
Source: Budget Paper No 2, p 41.
2.1 Seven Year – Three Step Personal Income Tax Relief Plan
A seven-year Personal Income Tax (PIT) Plan will be implemented in three steps, to introduce a low and middle income tax offset, to provide relief from bracket creep and to remove the 37 % PIT bracket.
Step 1: Low and middle income tax offset to be introduced. A low and middle income tax offset (LMITO) will be introduced as a non-refundable tax offset of up to $530 pa to resident low and middle income taxpayers from 2018-19 to 2021-22.
The LMITO will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. For 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. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. 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: Relief from bracket creep for middle income taxpayers
Middle income taxpayers will be provided relief for bracket creep in phases.
From 1 July 2018, the top threshold of the 32.5 % PIT bracket will be increased from $87,000 to $90,000.
From 1 July 2022, the low income tax offset will be increased from $445 to $645, and the 19 % PIT bracket will be increased from $37,000 to $41,000 to lock in the benefits of the LMITO in Step 1. The increased low income tax offset will be withdrawn at a rate of 6.5 cents per dollar for incomes between $37,000 and $41,000, and at a rate of 1.5 cents per dollar for incomes between $41,000 and $66,667.
From 1 July 2022, the top threshold of the 32.5 % PIT bracket will be further increased from $90,000 to $120,000.
Step 3: Removing the 37 % personal income tax bracket
The 37 % PIT bracket will be removed from 1 July 2024.
From 1 July 2024, the top threshold of the 32.5% PIT bracket will be increased from $120,000 to $200,000.
Taxpayers will pay the top marginal tax rate of 45 % for taxable incomes exceeding $200,000, and the 32.5 % PIT bracket will apply to taxable incomes of $41,001 to $200,000. This is illustrated in the table below.
| Rate | Current threshold 2017-18 | New thresholds for 2024-25 |
| NIL | Up to $18,200 | Up to $18,200 |
| 19% | $18,201 – $37,000 | $18,201 – $41,000 |
| 32.5% | $37,001 – $87,000 | $41,001 – $200,000 |
| 37% | $87,001 – $180,000 | N/A |
| 45% | Above $180,000 | Above $200,000 |
Source: Budget Paper No 2, pp 33-34; Treasurer’s media release “Tax relief for working Australians, low and middle income earners first”, 8 May 2018; and Budget 2018-19 Glossy: Stronger growth to create more jobs, p 11.
2.2 Medicare Levy – Remain at 2%
The 2017-18 Federal Budget measure to increase the Medicare levy from 2 % to 2.5 % of taxable income from 1 July 2019 will not proceed.
2.3 $130.8m of additional funding for ATO compliance
The ATO will be provided with $130.8 million from 1 July 2018 to increase compliance activities targeting individual taxpayers and their tax agents. This measure will continue four income matching programs that would otherwise terminate from 1 July 2018 to allow the ATO to detect incorrect reporting of income, such as foreign source income of high wealth individuals.
The measure will also provide funding for new compliance activities, including additional audits and prosecutions, improving education and guidance materials, pre-filling of income tax returns and improving real time messaging to tax agents and individual taxpayers to deter over-claiming of entitlements, such as deductions by higher risk taxpayers and their agents.
Source: Budget Paper No 2, p 31.
3.1 Increased membership of SMSFs
New and existing self-managed superannuation funds (SMSFs) and small APRA funds will be allowed to have a maximum of six members from 1 July 2019. Currently, the maximum allowable number of members in an SMSF and a small APRA fund is four.
Source: Budget Paper No 2, p 40.
3.2 Three-yearly audit cycle for some SMSFs
The annual audit requirement for self-managed superannuation funds (SMSFs) will be changed to a three-yearly requirement for SMSFs with a history of good record keeping and compliance, i.e. for SMSF trustees that have a history of three consecutive years of clear audit reports and timely lodgements of the fund’s annual returns.
This measure will commence on 1 July 2019. The government will consult with stakeholders to ensure a smooth implementation of this measure.
Source: Budget Paper No 2, p 41.
3.3 Preventing inadvertent concessional cap breaches
Individuals whose income exceeds $263,157 and have multiple employers, will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018. The measure is intended to ensure eligible individuals can avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory SG contributions. Breaching the cap results in individuals being liable to pay excess contributions tax and a shortfall interest charge. Employees using this measure may receive additional income which will be taxed at marginal tax rates.
Source: Budget Paper No 2, p 40.
3.4 Super work test exemption for recent retirees
An exemption from the work test for voluntary contributions to superannuation will be introduced from 1 July 2019 for people aged 65-74 with superannuation balances below $300,000, in the first year that they do not meet the work test requirements.
The work test exemption will give recent retirees flexibility to get their financial affairs in order in the transition to retirement. Currently, 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.
Source: Budget Paper No 2, p 30.
4.1 Reforms to combat illegal Phoenix activities
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:
- introduce new phoenix offences to target those who conduct or facilitate illegal phoenix arrangements
- 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
- restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator
- extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts, and
- expand the ATO’s power to retain refunds where there are outstanding tax lodgements.
Additional funding to the ATO will also be provided over four years to implement new strategies to combat the black economy. The ATO will implement a new and enhanced enforcement strategy that brings together new mobile strike teams and an increased audit presence, a Black Economy Hotline that will allow for the community to report black economy and illegal phoenix activities, improved government data analytics, and educational activities.
Source: Budget Paper No 2, p 37 and Minister for Revenue and Financial Services’ media release, “Tackling Illegal Behaviour in the Black Economy”, 8 May 2018.
4.2 Expansion of Taxable Payment Reporting System
The taxable payments reporting system (TPRS) will be expanded to the following industries from 1 July 2019:
- Security providers and investigation services
- Road freight transport, and
- Computer system design and related services.
The TPRS requires businesses to report to the ATO any payments made to contractors during an income year. This additional reporting to the ATO is in the form of an annual report, and puts these payments in line with payments made for salaries and wages to employees. As the report is a yearly report for years commencing 1 July 2019, the first annual report will be required in August 2020.
These reporting requirements are identical to ones already in place for payments to contractors in the building and construction industry, as well as payments in the cleaning and courier industries, commencing 1 July 2018.
Source: Budget Paper No 2, p 22.
4.3 Limit of $10,000 on business cash transactions
Large undocumented cash payments can be used to avoid tax or to launder money from criminal activity. The government will introduce a Black Economy Taskforce recommendation to limit a cash receipt for a business to under $10,000, from 1 July 2019.
Transactions with financial institutions or consumer to consumer non-business transactions will not be affected.
The Black Economy Taskforce measures include additional funding for the Department of Treasury to enable stakeholder consultation to help with details on the measure. Also, the ATO will receive enhanced funding that will help with enforcement of these proposed measures.
Source: Budget Paper No 2, p 23.
