Now that the dust has settled, lets talk about the budget.
What is in the budget?
Who benefits from the budget?
How does it impact our clients?
Budget 2018/2019 – For the Average Joe…
The Personal Income Tax Plan will be delivered in 3 steps;
- The first step generating immediate tax relief for low and middle income earners from 1 July 2018. Which effectively provides a tax offset of up to $530 per year.
- The second step also applies from 1 July 2018 and increases the 32.5% tax bracket from $87,000 to $90,000. From 1 July 2022, it increases the 19% tax bracket from $37,000 to $41,000. It will also increase the 32.5% tax bracket from $90,000 to $120,000.
- The third step is removing the 37% tax bracket entirely. This means those earning between $41,000 and $200,000 are subject to 32.5% tax. The top tax bracket of 45% kicking in from $200,000. Unfortunately we will have to wait over 6 years (and at least 3 elections) for this measure to apply!
No Evidence, No Deductions, No Guesses.
The Government has provided a further $131 million to the ATO, this will increase compliance activities to individuals and their tax agents. Data matching programs will identify and deter over claiming by certain tax agents from 1 July 2018. The extra money for audits and prosecutions will ensure the ATO remain active in this area.
The pleasing aspect of this announcement is that there is no mention of the “Standard Tax Deduction” that has been raised as one method of clamping down on the over claiming of expenses.
A Win For Small Business –
Small Business Entities (SBEs) will be able to claim an immediate deduction for depreciating assets costing less than $20,000 for another 12 months to 30 June 2019. The threshold will revert to $1,000 on 1 July 2019.
There are a few depreciating assets that are not eligible, such as horticultural plants and in-house software. Further, assets valued at $20,000 or more can continue to be placed into the Small Business General 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.
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.
This measure confirms the rumour leading up to the Federal Budget and will be welcomed by small businesses. It will hopefully help to improve cash flow for small businesses and encourage investment and business activity in the small business space.
Land: Build a House, or Get Over it!
Taxpayers will not be able to claim deductions for expenses associated with holding vacant land. This is an integrity measure to address concerns that deductions are being improperly claimed for expenses, such as interest costs, related to holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. This measure is intended to reduce tax incentives for land banking, which deny the use of land for housing or other development.
Denied deductions will not be able to be carried forward for use in later income years. However, they could be included in the cost base if it would ordinarily be a cost base element (e.g. borrowing costs and council rates) for CGT purposes.
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, where it is clear a business is being carried on. 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.
This measure applies from 1 July 2019.
This measure will effectively shut down arguments using the decision in Steele’s case whereby deductions can be claimed immediately where vacant land is held for future or intended income providing purposes.
Tackling the Black Economy.
As part of the recommendations made by the Black Economy Taskforce, the Government has proposed to enact the following measures (among others):
- Taxpayers will not be able to claim deductions for payments to their employees or contractors if PAYG is required to be withheld from the payments (e.g. employee wages or payments to contractors where no ABN provided) but has not been withheld.
- Business transactions over $10,000 will be required to be made through an electronic payment system or by cheque. However, this will not apply to transactions with financial institutions or consumer-to-consumer non-business transactions.
The measures are proposed to apply from 1 July 2019. The ATO funding will be increased by $318.5 million over 4 years to implement the proposed measures as well as additional strategies to combat the black economy. The funding will commence on 1 July 2018. These measures form part of the Government plans to crack down on the cash economy, phoenix activities and other tax evasion activities. However, we are concerned that the proposed measures will potentially affect genuine businesses and will add to their list of compliance obligations.
Post Budget: Lets Talk Retirement.
Currently all Australians aged 65-74 are required to meet the “Work Test” in order to make contributions to superannuation at all. This can pose an issue where a member retires after their 65th birthday, sells down some assets and wants to move the monies into their superannuation fund.
The 2018-19 budget proposes 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, to allow these individuals the ability to make contributions in their first year after retirement.
This measure is slated to commence on 1 July 2019.
Given that one of the 2016-17 budget proposals was to abolish the work test all together before being scrapped this measure appears a step in the right direction, although the abolishment of these tests altogether would seem a logical future decision for government.
Three Year audit cycle for SMSF’s with good compliance history.
Under this measure SMSF’s who have a clean compliance history with three clear audit reports and who have lodged their Annual Returns on time for that period, will only need to have an audit completed every three years, rather than the current annual audit.
This will be a very welcome measure for the thousands of SMSF’s who lodge on time every year and have not had any compliance breaches. This measure will not only save trustees money in audit costs each year, but also assist in Annual Returns being lodged earlier as the audit process will be avoided.
This measure is slated to commence on 1 July 2019 with the government engaging in a consultation process as to its implementation prior to this date.
If you have any queries about this year’s Federal Budget tax measures, please contact (08) 9474 6333 or click here for more information.