On Tuesday night the government delivered a clear pre-Election Budget focusing on two key voting blocs.
- Individuals earning up to $126,000; and
- SME’s with turnovers under $50 million.
The Tax Cut Plan is not new, indeed it was announced last year in a similar form but with the Government now projecting surpluses for the near term, Plan 2.0 offers more tax cuts to more people.
Unfortunately what hasn’t changed, is the timing of these tax cuts, with the real benefits not seen until 1 July 2022 and the major cuts only from 1 July 2024.
We have reviewed the 2020 Budget and outlined below what we think are the key issues.
The Personal Income Tax Plan 2.0
In last year’s Federal Budget the Government announced a substantial Personal Income Tax Plan commencing from 1 July 2018 and culminating in major change from 1 July 2024.
Well, with a bigger Surplus than expected, the Government has upped the ante and released the 2.0 version.
This Plan will still be delivered in 3 steps, with the first step generating immediate tax relief for low and middle income earners for this year, effectively providing a tax offset of up to $1,080 (was $530) each per year. The offset begins at $255 (was $200) for those earning up to $37,000, increasingly incrementally up to $48,000 per annum, with those earning between $48,000 and $90,000 entitled to the maximum offset of $1,080. The benefit then reduces to zero for those earning over $126,000.
The second step from 1 July 2022 increases the 19% tax bracket from $41,000 to $45,000 AND increases the 32.5% tax bracket from $90,000 to $120,000.
The third step remains by far the most beneficial by removing the 37% tax bracket entirely, reducing the 32.5% rate to a flat 30% and, as previously announced, increasing the top threshold from $180,000 to $200,000. This means from 1 July 2024 those earning between $45,000 and $200,000 will be subject to 30% tax, with the top tax bracket of 45% kicking in from $200,000.
Unfortunately we will have to wait over 5 years (and at least 2 elections) for this measure to apply!
|Low and middle income tax offset (proposed for 2018-19 to 2021-22)|
|Taxable income (TI)||LMITO|
|$0 – $37,000||$255|
|$37,001 – $48,000||$255 + ([TI – $37,000] × 7.5%)|
|$48,001 – $90,000||$1,080|
|$90,001 – $125,999||$1,080 – ([TI – $90,000] × 3%)|
|Tax rates and income thresholds|
|Rate||2017-18||2018-19 to 2021-22||2022-23 to 2023-24|
|Nil||$0 – $18,200||$0 – $18,200||$0 – $18,200|
|19%||$18,201 – $37,000||$18,201 – $37,000||$18,201 – $45,000|
|32.5%||$37,001 – $87,000||$37,001 – $90,000||$45,001 – $120,000|
|37%||$87,001 – $180,000||$90,001 – $180,000||$120,001 – $180,000|
|45%||$180,001 +||$180,001 +||$180,001 +|
|Low and middle income tax offset||–||Up to $1,080||–|
|Low income tax offset (LITO)||Up to $445||Up to $445||Up to $700|
|Tax rates and income thresholds 2024-25 onwards|
|Rates from 2024-25||New thresholds from 2024-25|
|Nil||$0 – $18,200|
|19%||$18,201 – 45,000|
|30%||$45,001 – $200,000|
|LITO||Up to $700|
A Further Delay for Division 7A changes
The much anticipated “simplification” of Division 7A (Private Company Loans) has been deferred for a second year from 1 July 2019 to 1 July 2020.
As a result, we still remain uncertain as to whether the recommendations of the Board of Taxation in 2014 to simplify Division 7A or the Treasury’s Consultation proposals from October 2018, or indeed a combination of both will prevail.
Whilst the further delays are frustrating to those that have prepared for and welcome simplicity, they do provide relief for those who have not yet identified or put in place strategies to ensure their clients can benefit from the simplicity and not be penalised by the proposed “all in rules”.
In a promising move, the Government stated in the Budget Paper that the deferral will allow additional time to further consult with stakeholders on these issues and to refine the Government’s implementation approach, including to ensure appropriate transitional arrangements so taxpayers are not unfairly prejudiced”. (our emphasis)
Extension of the Instant Asset Write-Off
As this is a pre-election budget, it is not surprising that the Government has proposed to further increase the instant asset write-off threshold from $25,000 to $30,000. The threshold applies on a per asset basis, so eligible businesses can instantly write off multiple assets. The instant write-off concession will also be expanded to businesses with an aggregated turnover of less than $50 million. However, for those assets costing $30,000 or more, only Small Businesses turning over less than $10 million can use the simplified depreciation pool.
The concession will apply from 2 April 2019 (7:30 PM (AEDT)) to 30 June 2020.
The Government previously announced on 29 January 2019 that it would increase the instant asset write-off threshold for small businesses (with aggregated annual turnover of less than $10 million) from $20,000 to $25,000. Therefore, the $25,000 threshold will only apply from 29 January 2019 until Budget night and the $30,000 threshold will then apply from the Budget night until 30 June 2020.
The government also reaffirmed its commitment to cut the small business tax rate to 25 per cent, which would be fast-tracked to full implementation by the 2021–22 financial year.
Although this is a welcome proposal for small and medium sized businesses, we think that it does not go far enough. The threshold should be made permanent as it will improve cash flow for small and medium sized businesses and provide a boost to business activity and investment. If this is unacceptable from the revenue point of view, at least the threshold should be made permanent for small businesses (with an aggregated turnover of less than $10 million).
Tackling the Black Economy
The Government proposes to ‘strengthen’ the Australian Business Number (ABN) system by requiring ABN holders:
- from 1 July 2021, to lodge their income tax returns where they have an income tax return obligation; and
- from 1 July 2022, to confirm the accuracy of their details on the Australian Business Register annually.
Under the current rules, ABN holders are able to retain their ABN regardless whether they are meeting their income tax return lodgement obligation or the obligation to update their ABN details.
Although the proposed measures are aimed at businesses engaging in the ‘black economy’, this may also have an impact on other taxpayers conducting legitimate businesses. There should be mitigating circumstances for these types of taxpayers, especially for micro and small businesses who are often under-resourced but are faced with ever increasing ‘red tape’. On the flip side, this may help tax agents in dealing with their recalcitrant clients as the mere threat of ABN cancellation may prompt them into action!
Skills Package – Incentive Payments for Apprenticeships
The Budget announced a new $525 million skills package. It aims to help create 80,000 new apprenticeships over 5 years in industries identified as having skills shortages. The Government will double incentive payments to employers to $8,000 per placement. These new apprentices will also personally receive a $2,000 incentive payment.
This payment will provide:
- Employers a total of $4,000 ($2,000 after 12 months and $2,000 at completion), in addition to the existing standard employer incentives of $1,500 at commencement and $2,500 at completion of an apprenticeship.
- Apprentices a total of $2,000 ($1,000 after 12 months and $1,000 at completion).
Eligible occupations will include: Carpenters and joiners; Plumbers; Hairdressers; Air-conditioning and refrigeration mechanics; Bricklayers and stonemasons; Plasterers; Bakers and pastry cooks; Vehicle painters; Wall and floor tilers; Arborists. Eligible occupations will be reviewed annually to ensure current and expected skills shortages are captured.
More Money for the ATO’s Tax Avoidance Taskforce
The Government has committed $1 billion to the Australian Taxation Office’s Tax Avoidance Taskforce to continue the crack down on tax avoidance by large corporates, private groups and wealthy individuals. Additional new measures are proposed to the ABN regime to target the black economy behaviour (see above) and extra spending will be allocated assist the ATO to recover unpaid superannuation and taxes.
Super contributions work test exemption extended to age 66
The Budget amends the work test so that individuals aged 65 and 66 will be able to make voluntary superannuation contributions from 1 July 2020 (both concessional and non-concessional) without needing to meet the contributions work test. The age limit for making spouse contributions will also be increased from 69 to 74. The proposed extension of the work test exemption means that individuals aged 65 or 66 who do not meet the work test, because they may only work one day a week or volunteer, will be able to make voluntary contributions to superannuation, giving them greater flexibility as they near retirement. The Treasurer said the proposed change will align the work test with the eligibility for the Age Pension, which is scheduled to reach age 67 from 1 July 2023.
Whilst this is a welcome change, those of us who have been around a few years will remember that when those big changes to Superannuation were announced in the 2016 budget one of the measures announced as part of that package was to remove the work test altogether. In the mid-year update 6 months later, when the Government tweaked these changes one of these tweaks was to bring this test back in. As one of the more cumbersome tests for older clients, at least this change is a step in the right direction again but it is far from any real reform.
Exempt current pension income calculation to be simplified for super funds
Superannuation fund trustees with interests in both the accumulation and retirement phases during an income year will be allowed to choose their preferred method of calculating exempt current pension income (ECPI).
The Government will also remove a redundant requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase for all of the income year.
Where an SMSF is 100% in pension phase for all or part of an income year, the ATO considers that all of the fund’s assets are “segregated current pension assets” and the fund cannot choose to use the alternative proportionate method. The ATO has previously acknowledged that this legal view is at odds with an industry practice whereby some SMSFs have used the proportionate method even if the fund was solely in pension phase. The ATO therefore granted an administrative concession whereby SMSF trustees did not face compliance action for 2016-17, and prior years, for ECPI calculations based on an industry practice. However, for 2017-18 and later years, the ATO has expected funds that are 100% in pension phase will only use the segregated method.
This measure will mean that for Funds where one member has a total superannuation balance of over $1.6 million over multiple funds, the Fund will still be able to use the segregated method for calculating ECPI where 100% of the fund’s assets are supporting a pension account. A welcome change that fixes in our view an unintended consequence to the way in which the Transfer Balance Cap rules were initially handed down.
If you have any queries about this year’s Federal Budget tax measures, please contact Louis or Tracey at the office.