Scott Morrison has loosened the purse strings ahead of a likely election in his third budget. This budget announced a series of tax reforms including:
- Personal income tax cuts.
- Changes to the R&D tax incentives.
- Combating illegal phoenixing.
- Measures to tackle the black economy.
- Various integrity measures.
Anti-avoidance rules for circular trust distributions
The anti-avoidance rule which addresses circular trust distributions, section 100A, being extended to apply to family trusts. Family trusts are not outside the scope of section 100A, so it’s unclear why 100A would need to be extended to apply to them.
From 1 July 2019, businesses will not be able to claim deductions for payments to their employees (e.g. wages) where Pay As You Go withholding (PAYG) has not been withheld. This measure has been proposed following the Black Economy Taskforce recommendation that further financial disincentive should apply to businesses that engage in black economy behaviour and ensure greater compliance with tax obligations.
We are yet to see whether the new measure will apply to businesses that inadvertently classify a worker as an independent contractor rather than an employee, and do not withhold PAYG, such that no deduction will be available. In addition to non-deductibility for payments such as wages, the business would also be exposed to existing implications under the PAYG penalty regime and Superannuation Guarantee Charge.
In addition, no deduction will be available for payments made by businesses to contractors where the contractor does not provide an Australian Business Number (ABN) and the business does not withhold any amount of PAYG despite the withholding requirement applying.
A suite of measures in response to the Black Economy Taskforce, including:
- Introduction of an economy-wide limit of $10,000 for cash payments made to businesses for goods and services from 1 July 2019.
- Further expansion of taxable payments reporting system (TPRS) by extending coverage to security providers and investigation services, road freight transport, and computer system design and related services to a stage where businesses will need to ensure that they collect information from 1 July 2019, with the first annual report required in August 2020.
- New and enhanced ATO enforcement against the Black Economy by creating:
- A new enforcement strategy featuring mobile strike teams and an increased audit presence, a Black Economy Hotline, improved Government data analytics and educational activities.
- Support for the new Black Economy Standing Taskforce to ensure a more coordinated approach to combatting the black economy.
- Consulting on a new regulatory framework for issuing ABNs in 2018-19.
- Combatting illicit tobacco through:
- Collection of tobacco duties and taxes at the border, rather than after tobacco has been imported and warehoused, from 1 July 2019.
- Creation of the Illicit Tobacco Task Force from 1 July 2018, comprising members from law enforcement and border security agencies.
- Providing ongoing funding to detect and destroy domestically grown illicit tobacco crops from 1 July 2018.
- Introducing a permit requirement for all tobacco imports (except duty free purchases) from 1 July 2019.
- Modernising excise systems beginning 2020-21.
- Creating a new Implementation team in the Department of Treasury to manage a whole-of-government response to the Black Economy Taskforce Report.
- Increasing the integrity of the Commonwealth procurement process whereby businesses seeking to tender for Australian Government procurement contracts over $4 million (including GST) will be required to provide a statement from the ATO indicating that they are generally compliant with their tax obligations.
- Creating a Standing Taskforce to share information, knowledge and experience across taskforce agencies.
Improving the integrity of the tax treatment of concessional loans between tax exempt entities
Tax deductions in relation to the repayment of principal of a concessional loan will be disallowed for tax exempt entities that become taxable after 8 May 2018. Instead, tax exempt entities must value any concessional loans as if they were entered into on commercial terms.
This is an integrity measure to combat the unintended deduction that arises as a result of the interaction of various parts of the tax law when a tax exempt entity becomes taxable.
Income tax consolidation
In March 2018, a number of changes to the tax consolidation regime were enacted as law. As part of the Budget, the Government has announced that it will simplify the following two measures:
- ‘Churning measures’ were introduced which switch off the tax cost setting rules where a capital gain/loss made by a foreign resident when it ceases to hold a membership interest in a joining entity is disregarded. The measures were to apply retrospectively from 14 May 2013 but will now apply from 28 March 2018.
- Deferred tax liabilities are to be disregarded for the purpose of entry and exit tax cost setting calculations. Originally, there were complex transitional rules requiring tax consolidated groups to return to their entry tax cost setting calculations to determine if deferred tax liabilities were included. For simplicity, the transitional rules have been removed from the legislation.
Significant global entity definition amendment
The Government is continuing its focus on combating multinational tax avoidance by broadening the definition of ‘significant global entity’ (SGE). Currently, an entity will only fall within the definition of an SGE if its head entity is a public company or a private company required to prepare consolidated financial statements. As of 1 July 2018, an entity of a group headed by a partnership, trust, private company or investment entity may also be an SGE.
SGEs are subject additional tax integrity measures such as preparing Country by Country reports, the multinational anti-avoidance law and diverted profits tax. We are likely to see more entities subject to these rules in the 2018/19 year as a result of the broader definition.
Taxation of financial arrangements — regulation reform
The start date for changes to the taxation of financial arrangements (TOFA) regime announced in the 2016/17 Budget has been deferred. The proposed measures aim to simplify the TOFA regime but the Government needs more time to ensure costs of complying with the TOFA regime are reduced and that there are no unintended outcomes from the changes. The rules will apply on or after the date of Royal Assent.
A discussion paper will be released in the next few weeks, exploring options for taxing digital business in Australia. This announcement follows the OECD’s work under Action 1 of the Base Erosion and Profit-Shifting project: Addressing the Tax Challenges of the Digital Economy. The OECD’s Interim Report was recently released in March 2018.
Extend GST by ensuring that offshore sellers of hotel accommodation in Australia calculate their GST turnover in the same way as local sellers from 1 July 2019. The measure will apply to sales made on or after 1 July 2019. Currently, both Australian and foreign consumers are booking Australian hotel rooms through online services based offshore, which take advantage of the exemption designed for offshore tour operators. In many instances, this effectively allows offshore sellers to not have to charge GST on their mark-up on the accommodation price. Removing the existing exemption is intended to level the playing field by ensuring the same tax treatment of Australian hotel accommodation, whether booked through a domestic or offshore company.
Further, the Government has announced it will extend the Director Penalty Regime to apply to unpaid GST so that Directors are personally liable for the company’s debts relating to GST.
The Government has proposed to provide $133.7 million to the ATO to continue to deliver on a range of strategies that sustain both an increase in debt collections and an improvement in the timeliness of debt collections. The measure is estimated to increase GST payments to the States and Territories by $483.7 million over the forward estimates period.
Integrity measures will be introduced to prevent individuals with potentially valuable ‘image rights’ (such as sportspeople, entertainers and media identities) obtaining a tax advantage by entering into arrangements involving the licencing of those image rights to controlled entities (companies and trusts). Payments relating to ‘image rights’ will be included in the individual’s assessable income.
Good news for civil engineers, road engineers and those that manufacture bitumen or try to get around the Country in an increasingly congested environment, with a significant 10 year National Rail Infrastructure Plan costing $75 billion and a focus on road and rail projects around the country. Avalon Airport was singled out with a $20 million hand up to support international services with the flow on effects on job and agriculture in the region – Geelong, Wyndham and Hobsons Bay likely to benefit from increased tourist activity and export opportunities.
Personal Income Tax
Income tax exemption for certain Veteran Payments
From 1 May 2018 supplementary amounts (such as pension supplement, rent assistance and remote area allowance) of Veteran Payment paid to an armed services veteran, and full payments (including the supplementary component) made to the spouse or partner of a veteran who dies, are exempt from income tax.
Medicare levy and low-income thresholds
No increase in the Medicare levy rate, it will remain at 2%. The Medicare levy low-income thresholds for singles, families, and seniors and pensioners will be increased from the 2017-18 income year in line with movements in the Consumer Price Index.
Personal Income Tax Plan
The Government has announced a seven-year Personal Income Tax Plan, comprising targeted tax relief for low income earners and changes to the personal income tax brackets.
Initially, a Low and Middle Income Tax Offset will be introduced, which is to be a non-refundable tax offset of up to $530 per annum to Australian resident low and middle income taxpayers for the 2019 to 2022 income years. This is to be received as a lump sum on assessment after an individual lodges their tax return.
The Government also intends to change the personal income tax brackets by initially increasing the top income threshold of the 32.5% personal income tax bracket from $87,000 to $90,000 from 1 July 2018 and then to $120,000 from 1 July 2022. It then intends to increase the top income threshold of the 19% personal income tax bracket from $37,000 to $41,000 and increase the Low and Middle Income Tax Offset.
Finally, the top threshold of the 32.5% personal income tax bracket will be increased to $200,000 from 1 July 2024 and will abolish the 37% tax personal income tax bracket.
Compliance and recovery
Increased funding of $133.7 million will be provided to the ATO to support a general increase in debt collections and reduce 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.
Additionally, $130.8 million will be provided to the ATO to ramp up compliance activity targeting individual taxpayers and their tax agents. This will primarily extend existing income-matching programs that would otherwise terminate on 30 June 2018. The funding will also provide for new compliance activities, including additional audits and prosecutions, education and guidance materials, pre-filling of income tax returns and improved real time messaging to tax agents and individual taxpayers to deter over-claiming of entitlements.
Protection of older Australians
The Government will look strengthen the regulation of aged care services in order to better respect and protect older Australians from potential elder abuse by providing $22 million over the next 5 years. The funds will be directed toward establishing an independent Aged Care Quality and Safety Commission, as well as ensuring that regulatory settings are strengthened and made more transparent.
Further, the Government is set to work with the States and Territories, in close consultation with industry and community groups, to develop a National Plan to address elder abuse, with an integral part of this work involving the development of a nationally consistent online register for enduring powers of attorney.
Research and development tax incentive changes
The Government intends to better target the Research and Development Tax Incentive (R&D TI) with an emphasis on:
- improving the integrity of the system by strengthening anti-avoidance rules
- providing additional resources to assist with enforcement of the R&D TI
- improving transparency relating to who is claiming the R&D TI
- increasing guidance on R&D TI eligibility by enabling Innovation and Science Australia to produce public findings and
- improving the simplicity and transparency of administration by imposing a three month limit on extensions of time available for applications, registrations and review.
Additionally, further to the recommendations of the 2016 Review of the R&D TI, it is proposed that the following changes will occur (with effect from 1 July 2018):
For companies with aggregated annual turnover more than $20 million an R&D premium will be introduced that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year. This R&D premium will be at a claimants company tax rate plus:
- 4 percentage points (for 0% to 2 % R&D intensity)
- 6.5 percentage points (for 2% to 5 % R&D intensity)
- 9 percentage points (for 5% to 10% R&D intensity)
- 12.5 percentage points (for above 10% R&D intensity)
For companies with aggregated annual turnover less than $20 million:
- the refundable R&D offset will be a premium of 13.5 percentage points above a claimant’s company tax rate
- cash refunds from the refundable R&D tax offset will be capped at $4 million per annum
- R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to the future income year.
Across the board, the $100 million R&D expenditure threshold will be increased to $150 million.
Full implementation of Enterprise Tax Plan
The Government will ensure unpaid present entitlements come within the scope of Division 7A to require them to be repaid over time or give rise to deemed dividend. In addition, the start date of the targeted amendments to Division 7A (announced in the 2016-17 Budget) will be deferred from 1 July 2018 to 1 July 2019, to enable all Division 7A amendments to be progressed as a consolidated package.
The amendments announced in the 2016-17 Budget include:
- a self-correction mechanism for inadvertent breaches of Division 7A
- appropriate safe-harbour rules to provide certainty
- simplified Division 7A loan arrangements and
- a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.
$20,000 instant asset write-off extended
The $20,000 instant asset write-off has been extended for a further 12 months to 30 June 2019, for businesses with an aggregated annual turnover of less than $10 million. Assets valued at $20,000 or more can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter.
Anti phoenixing measures
The Government will reform the corporations and tax laws and provide regulators with additional powers to deter and disrupt illegal phoenix activity. From a tax perspective, the Government proposes to extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, and make directors personally liable for the company’s debts.
In addition, the ATO’s powers will be expanded to retain refunds where there are outstanding tax lodgements.
An exemption from the work test will be introduced, allowing individuals aged between 65 and 74 who have less than $300,000 in superannuation to make voluntary contributions in the first year that they do not meet the work test. This measure will apply from 1 July 2019.
Certain fees (‘passive fees’) will be capped on balances less than $6,000 at 3%. This will apply from 1 July 2019.
Exit fees on superannuation accounts will be banned from 1 July 2019.
The maximum number of allowable members in an SMSF or small APRA fund will increase from 4 to 6. This will apply from 1 July 2019.
The Government will require the transfer of all inactive superannuation accounts where the balance is below $6,000 to the ATO. This will apply from 1 July 2019. The ATO will expand its data matching processes to proactively reunite inactive superannuation accounts with the member’s active account where possible.
Insurance within superannuation will move from a default framework to be offered on an opt-in basis for members with balances of less than $6,000, members under age 25, and members whose accounts have not received a contribution in 13 months and are inactive. This will take effect from 1 July 2019. Affected fund members will have 14 months to decide whether to opt-in to existing cover or allow it to be cancelled.
The ATO will receive funding to allow it to improve the integrity of the ‘notice of intent’ processes for claiming personal superannuation contribution deductions. This measure will commence from 1 July 2018.
In a welcome measure, 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 superannuation guarantee, from 1 July 2018. This will allow these individuals to avoid being forced into breaching the $25,000 annual concessional contributions cap.
SMSFs that have a history of three consecutive years of clear audit reports will be able to move to a 3 yearly audit cycle. This will apply from 1 July 2019.
Funding will be provided to the ATO to support the modernisation of payroll and superannuation fund reporting, in particular, to support small businesses with less than 20 employees during the transition to Single Touch Payroll Reporting from 1 July 2019.
There are to be technical amendments to the transition to retirement income stream rules relating to the death of a member (already announced) and addressing double taxation in respect of deferred annuities purchased by a superannuation fund or retirement savings account.
The Government will clarify how innovative income stream products are to be assessed against the Age Pension means test, with new means testing rules to take effect from 1 July 2019.
Superannuation fund trustees will be required pursuant to a new covenant to develop a retirement plan for members and offer a wider variety of products (Comprehensive Income Products for Retirement (or CIPRs)). They will also be required to provide more information aimed at allowing consumers to compare and choose products. This measure will commence on 1 July 2019.
The financial institutions supervisory levies will be increased to fully recover the cost of the ATO’s superannuation activities.
Concessions in relation to partnerships
This announcement provides that from Budget night, partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership, will no longer be able to access the small business CGT concessions in relation to those rights.
Deny deductions for vacant land
Taxpayers will not be allowed a deduction for expenses associated with holding vacant land from 1 July 2019. The measures are expected to impact a large number of taxpayers and will apply to residential and commercial land.
Disallowed deductions may not be carried forward to future years when the land may no longer be vacant. Where the denied deduction would ordinarily form part of the cost base of a capital gains tax asset, it may still be included in the cost base of the asset. However, items such as interest, that would not ordinarily form part of cost base, will not be deductible or included in cost base.
There are exceptions where:
- A property has been constructed and has received approval to be occupied and is available to rent; or
- the owner is using the land to carry on a business.
This is an integrity measure to stop taxpayers claiming deductions where they are not holding the land for the purpose of earning assessable income.
Thin capitalisation — valuation of assets and treatment of consolidated entities
The Government announced the following two changes to tighten Australia’s thin capitalisation rules:
- Entities will be required to align valuations of their assets for thin capitalisation purposes with those in their financial statements; and
- Australian consolidated groups and multiple entry consolidated groups that are both foreign controlled and control a foreign entity, will be treated as inward and outward investment vehicles.
Both changes will apply from 1 July 2019.
Stapled structure integrity measures
The Budget reaffirms the integrity measures released by Treasury on 27 March 2018 that tightened the rules for stapled structures, limiting the tax concessions available to foreign investors receiving passive income from Australian property investments, and lowering the thin cap associate entity threshold from 50% to 10%.
The intention is to level the playing field between foreign and domestic investors, as the current rules are considered to provide foreign investors with a competitive advantage. Transitional measures will allow a fifteen year respite from the measures for stapled structures that relate to infrastructure assets and seven years for other staples.
MITs and CGT discount
From 1 July 2019, the 50% CGT discount will not be available to Managed Investment Trusts (MITs) and Attribution MITs (AMITs). Under this measure, MITs and AMITs that derive a capital gain can still distribute this income as a capital gain that can be discounted in the hands of the beneficiary, but only if the beneficiary is eligible for the CGT discount. Beneficiaries that are not entitled to the CGT discount will not benefit from the CGT discount being applied at the trust level.
Integrity measures have been announced applying to Testamentary Trusts. The benefit of adult marginal tax rates applying to distributions from Testamentary Trusts to minor beneficiaries will only be available for income generated from the assets placed in the Testamentary Trust by the deceased. If a Testamentary Trust is topped up with ‘new’ assets, the concessional treatment will not apply.