On Tuesday, 9 May 2017, Treasurer Scott Morrison handed down the 2017-18 Federal Budget. It was a budget with a heavy focus on infrastructure spending, with announcements (or re-announcements) of significant projects such as Snowy Hydro 2.0, the Western Sydney Airport and the Brisbane to Melbourne rail link. The government has committed more than $70 billion to build transport infrastructure across Australia.
There were no major tax reform announcements, but as with every budget there were a number of tax changes announced, including a number with the reported aim of making housing more affordable.
In this MinterEllison tax bulletin, we highlight the key tax measures which have emerged in the Budget, focusing on business taxpayers and those measures which have been announced for the first time on Budget night.
The Treasurer reported an underlying cash balance deficit of $29.4 billion for the year ended 30 June 2018, which is projected to improve to a $7.4 billion surplus by 2021. Total 2017-18 revenues are estimated to rise to $444.4 billion, or 24.4% of GDP. Expenses are projected to rise to $464.3 billion or 24.4% of GDP.
Growth is estimated to be 2.75% in the year ended 30 June 2018 and 3.0% in 2019, supported by an increase in household consumption, exports and a pick-up in business investment.
Among the more significant tax changes outlined in the Budget, the Government has announced the following:
Large business taxation measures
The Multi-National Anti-Avoidance Law (MAAL) will be broadened so that in addition to companies, it will also apply to:
- corporate structures involving the interposition of partnerships with foreign resident partners;
- trusts that have any foreign resident trustees; and
- foreign trusts that temporarily have their central management and control in Australia.
These changes will take effect from 1 January 2016, being the date on which the original MAAL commenced.
OECD hybrid mismatches
The Government will seek to eliminate hybrid tax mismatches in cross border transactions which relate to regulatory capital known as Additional Tier 1 (AT1) capital by:
- preventing returns on AT1 capital from carrying franking credits where those returns are tax deductible in a foreign jurisdiction; and
- where the AT1 capital is not wholly used in the offshore operations of the issuer, requiring the franking account of the issuer to be debited as if the returns were to be franked.
Subject to transitional arrangements, the measure will apply to returns on AT1 instruments paid from the later of 1 January 2018, or six months after Royal Assent.
Purchasers of newly constructed residential properties will be required to remit GST direct to the ATO, rather than to the developer. This measure has been introduced in response to an apparent failure of developers to comply with their GST obligations. This change is to take effect from 1 July 2018.
MIT – Affordable Housing
The concessional tax treatment provided to managed investment trusts (MITs) will now specifically include investments in affordable housing. These investments include acquiring, constructing or redeveloping property from which at least 80% of the assessable income is derived from affordable housing.
This measure will apply to income years starting on or after 1 July 2017 and will apply to investments that meet the following requirements:
- the property is let as affordable housing for at least ten years;
- the qualifying housing must be provided to low to moderate income tenants; and
- the rent charged in respect of the qualifying housing must be at a discount to the private rental market rate.
Where a trust qualifies as a MIT, distributions by the MIT (which will include rental income and potentially capital gains) will be taxed at a concessional final withholding tax rate of 15% (where it is paid to a foreign resident in a jurisdiction with which Australia has an information exchange agreement). Australian resident investors are subject to tax on distributions from MITs at their ordinary marginal tax rates, and will remain eligible for the capital gains tax (CGT) discount. However, from 1 January 2018, the CGT discount for resident individuals will increase from 50% to 60% in relation to investments in qualifying affordable housing.
Changes affecting foreign investors
A revenue gain of $600 million over the forward estimates is expected from changes affecting foreign investors, as follows:
- The foreign resident CGT withholding regime will be expanded from 1 July 2017 to apply to property sales worth $750,000 or more (down from $2 million currently) and to increase the withholding rate to 12.5% (currently 10%).
- From 9 May 2017, the principal asset test for foreign tax residents with indirect interests in Australian real property will be applied on an associate inclusive basis to discourage CGT avoidance by splitting indirect interests amongst associates.
- From 9 May 2017, both foreign and temporary tax residents will be denied access to the CGT main residence exemption (although existing holdings will be grandfathered until 30 June 2019).
- From 9 May 2017, foreign ownership in new developments will be limited. Developers granted a New Dwelling Exemption Certificate (allowing the sale of new dwellings to foreign persons without FIRB approval) may not sell more than 50% of new dwellings in the development to foreign investors.
Introduction of the 'major bank levy'
From 1 July 2017, a levy will be imposed on large banks of 0.06% annually of their licensed entity liabilities. Licensed entity liabilities will include corporate bonds, commercial paper, certificates of deposit and Tier 2 capital instruments. The levy will not apply to liabilities such as Tier 1 capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme. The Government's rationale for the introduction of the levy is that it represents a fair additional contribution from major banks and will assist with budget repair.
Extending tax relief for merging superannuation funds
The current tax relief for merging superannuation funds will be extended until 1 July 2020. This tax relief was due to lapse on 1 July 2017 but will be temporarily extended as the Productivity Commission completes a review into the efficiency and competitiveness of Australia’s superannuation industry.
Review of stapled structures
As expected, the Budget did not include any changes in the tax treatment of stapled structures, which will instead be dealt with as a separate work stream. A consultation paper was released by Treasury in March 2017 and the timeline for the review will be extended to July 2017.
Small business taxation measures
Company tax rate reduction and small business package changes
The Budget confirmed the Government's intention to re-introduce the remaining elements of the company tax rate reduction. As part of the 2016-17 Budget, the Government announced that the company tax rate would be gradually reduced from 30% to 25% by the 2026-27 financial year.
The turnover threshold to qualify for the lower rate will start at $10 million (in 2016-17) and progressively rise until the 27.5% rate applies to corporate tax entities with less than $50 million aggregated annual turnover in the 2018-19 income year.
The Bill to amend the company tax rate also contains measures to increase the tax discount for unincorporated small businesses from 5% to 16% by 2026-27.
When passed, the Bill will also increase the small business entity threshold from $2 million to $10 million which will broaden access to certain tax concessions for small businesses.
Higher instant asset write-off threshold for small business extended
The current asset write-off concession for small business entities has been extended to 30 June 2018. This will allow small businesses that acquire eligible depreciating assets (up to $20,000) prior to 30 June 2018 to claim a 100% immediate deduction for their cost. From 1 July 2018, the immediate deductibility threshold will only apply to assets acquired for less than $1,000. The extended measure will only be available to entities with a turnover of less than $10 million.
Small business CGT integrity rule
The Government will amend the small business CGT concessions from 1 July 2017 to ensure that they are only able to be utilised appropriately. The concessions are designed to assist small business owners with capital gains tax relief on assets related to their business. The amendments seek to prevent taxpayers accessing concessions for assets which are unrelated to their small business.
The Government's concern is that taxpayers have been arranging their affairs so that their ownership interests in larger businesses do not count towards the eligibility tests (which are based on aggregated turnover and maximum net asset values).
Personal taxation measures
There have been no changes to personal income tax rates and thresholds. As scheduled, the temporary budget repair levy for high income earners (incomes over $180,000) will be repealed from 1 July 2017. The highest personal marginal tax rate will therefore revert to 45%. The Government has, however, announced an increase to the Medicare levy from 2% to 2.5% from 1 July 2019.
Super concessions for first home buyers
In a move intended to address housing affordability, the Government has introduced the 'first home super saver scheme' (Scheme). Starting on 1 July 2017, this scheme will allow individuals to contribute to their superannuation on a 'salary sacrifice' basis for the purposes of funding a deposit on their first home. Individuals will be able to contribute up to $15,000 per year and $30,000 in total, but the existing concessional contribution caps will apply. Withdrawals for a deposit, consisting of both Scheme contributions and earnings, will be taxed at marginal rates less a 30% offset, and will be allowed from 1 July 2018.