This article seeks to give a quick and convenient run down on the key aspects relevant to our clients - i.e small businesses and retirees with Self-Managed Super Funds (SMSF). For those with young-adult children, there is a key measure for first home buyers too.
Importantly, we also cover off on the approval (finally) of the Enterprise Tax Plan announced in last year's 2016 budget. Make sure you read this if you are a business owner with aggregate turnover of $2-10M.
The Institue of Chartered Accountants and New Zealand give the following wrap up "The 2017-18 Federal Budget indicates that the government is in a state of readiness for an earlier than expected Federal Election. The pre-Budget announcement of needs-based school funding – together with big bets on infrastructure, the removal of the Medicare rebate freeze, a crackdown on non-residents investing in Australian real estate and a one year reprieve for the popular small business $20,000 instant asset write-off – will have broad appeal to voters. Overall, the treasurer reported an underlying cash balance deficit of $29.4bn for 2017-2018. In terms of the economic outlook, the Treasurer remains optimistic that Australia will continue its slow recovery, returning to surplus by 2020-21. This "rosy" outlook is based on assumed real GDP growth of 3% per annum."
Removal of Residential Rental Property Depreciation on Existing Assets
Investors in Residential property will have depreciation claims limited to depreciable assets (fans, ovens, carpets, hot water systems etc) that they acquire - they will not be able to claim depreciation for depreciable assets acquired by the previous owner. This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value.
Importantly this measure is grandfathered - meaning that if you already own a residentialy rental property and have been claiming depreciation on it for assets installed when you originally purchased the property, you will be able to continue to claim this depreciation. It also does not apply to investors of commercial property.
Shara's Thoughts - "Negative Gearing" benefits will be decreased. Depreciation on Plant and Equipment (such as fans, ovens, carpets, etc), along with "Capital Works" or "Special Building Write Off" (on the "bricks and mortar" including initial constructuion costs, kitchen cabinets etc) have long played a large part in the tax benefits from holding a rental property. "Capital Works" deduction will remain as tax deductible under the status quo, these are a long write off over 40 years (2.5% of the cost is claimed per year). This will also mean that Quantity Surveyors will ultimately find themselves with less volume of work all of a sudden and/or less fees for the work they do. Increasingly "online" offerings from Quantity Surveyor reports will be the report of choice.
Applies from - Purchases of Property after 9 May 2017
No Travel Deductions for Residential Rental Property Owners
Residential Rental Property Owners can also no longer claim travel costs (be it cents per km for use of the car or accomodation etc) for inspecting, maintaining or collecting rent. :-( Bummer.
Shara's Thoughts - This is another integrity measure to address concerns that tax payers have not been apportioning costs correctly or have claimed costs for private travel. It's just a shame that it completely wipes out the deduction for the legitimate expenses of inspecting and maintaining a property. Combined with the above removal of depreciation deductions on existing assets - it is a real hit for residential rental property investors.
Applies from - 1 July 2017 - meaning the next 2016/2017 tax return will be the last year these expenses can be claimed.
Medicare-Levy Increases to 2.5%
The Medicare levy will increase from the current 2% to 2.5% of total taxable income. I.e earn $80,000 a year and you will see an extra $400 withheld from your wages across the year.
Shara's Thoughts - Although branded with a different name/purpose, this is broadly an increase in income tax for all tax payers. Although the low-income thresholds have also been increased, the number of people this reduction applies to is small (the threshold for families is $36,541). Just 3 years ago (in the 2014 year) the medicare levy was 1.5%.
Applies from - 1 July 2019
Extension of the $20,000 Immediate Write-Off for Small Business
Purchases of Depreciable Assets by businesses where the asset costs less than $20,000 ex GST will remain an immediate write-off in the year of purchase, for purchases on or before 30 June 2018. This was due to end on 30 June 2017 and revert to the previous less than $1000 threshold. It also applies to "pool" balances (aggregate of previous depreciable asset purchases not eligible for immediate write-off) of under $20,000.
Importantly - The Enterprise Tax Plan Bill as announced in last year's budget has been approved by the Senate at the eleventh hour. For the purposes of this measure, this means that businesses with $2 -$10M turnover will be eligible for this immediate-write off deduction for the first time in the 2016-2017 tax return, along with other benefits (see below).
Applies from - Already Applies. Ends 30 June 2018.
New Integrity Measure for Small Business CGT Concessions
Amendments to existing law to ensure that these concessions can only be accessed in relation to assets used in small business or ownership interests in small business.
Applies from - 1 July 2017
Importantly the Enterprise Tax Plan did not (and was not forecast to) increase the turnover threshold for the Small Business CGT Concessions. Thus this continues to apply for small business taxpayers with aggregate turnover (combined across all relevant business interests) of < $2M or business assets <$6M.
Update on Enterprise Tax Plan Bill as announced in the 2016 Budget
This measure has finally (as of yesterday - 9th May 2017) been approved by the House of Representatives and the Senate in its final form.
It increases the Small Business Aggregated Turnover Threshold from $2M to $10M. This relates to;
GST (Choice of Cash vs Accruals)
Immediate Write-Off of Depreciable Assets < $20K
Simplified "Pooling" options for Depreciation
Simplified Trading Stock rules (no requirement to report movement in stock if the movement is <$5K)
A 2 year amendment period instead of 4 years (note in practice for well structured clients that are a potential beneficiary of ANY trust - this remains at 4 years).
A reduced company tax rate - 27.5% for the 2016-2017 year and gradually reducing to 25% by 2026-2027
Tax Discount for unincorporated Small Business ( 8% capped at $1000 per person for businesses with turnover <$5M for the 2016-2017 year)
Applies from - 1 July 2016 - i.e the next 2016/2017 tax return
First Home Buyers Support using Superannuation
First Home Buyers can contribute $15,000 a year up to a maximum of $30,000 to super as voluntary contributions, that can later be withdrawn (along with deemed earnings) for a first home deposit. The contributions must still fit within the usual concessional contribution caps ( $25K per year from next year with averaging in future years). In practice, this will be via salary sacrificed super contributions from pre-tax pay, and the contributions will be taxed within super at 15%. Both members of a couple can take advantage of this measure. This represents a saving of $5850 (or $11,700 per couple) on a total of $30K for someone on a wage of between $37-87K.
Shara's Thoughts - This is of great help to first home buyers. Ultimately one wonders whether this might have a spin off effect leading to young people continuing to contribute more to super on a longer term basis beyond the purposes of buying their first home.
Applies from; Contributions from 1 July 2017. Earliest date for withdrawal is 1 July 2018.
Downsizing for Retirees
The government will allow people aged 65 or over to make non-concessional contributions to super of up to $300,000 from the proceeds of selling a home they have held for the past 10 years or more. This will be in addition to the current caps and will be exempt from the age and work tests and the $1.6M balance test (which govern the ability to contribute to super). Both members of a couple will be able to take advantage of this for the same home.
Note - it is unclear how this will affect the assets test for aged pension purposes.
Applies from - 1 July 2018
Integrity measures for GST on Property Transactions
Purchases of newly constructed residential properties or new subdivisions will be required to remit the GST to the ATO as part of settlement. Currently the developer/vendor remits the GST, like any other business taxpayer. For example, if I buy a newly constructed house and land package to live in or rent out, instead of the vendor receiving the full proceeds of the sale, an amount will be deducted from the settlement and paid to the ATO (along with a form). This is an integrity measure as some developers are still failing to remit the GST to the ATO despite having claimed GST credits on their construction costs and despite extensive ATO audit in this area.
Shara's Thoughts - The government believes that as most purchasers use conveyancing services to complete the purchase, they should experience minimal impact from these changes. However from a tax agents perspective, it raises questions about the administrative cost and practicality of calculating and implementing this. For example, most but not all developers will use the "margin scheme" on sale, on which GST is payable on the difference between sale price of the home/land and original purchase price of the land. If they are using margin scheme, the conveyancer will presumably do a search for the acquisition cost of the land but how will they know the correct choice of apportionment across multiple titles particularly where units remain unsold? Interestingly however, this measure appears to be quite significant and is estimated to increase GST revenue by $660m or $1.6bn over the next 4 years.
Applies from - 1 July 2018.
Increased CGT discount for resident individuals investing in qualifying affordable housing
The general CGT discount (for holding an asset for more than 1 year) will increase from 50% to 60% for investors in quality affordable housing. The housing must be provided to low/moderate income tenants at less than private rental market rent, managed through a registered community housing provider and held for a minimum of 3 years. A similar measure will also apply to Managed Investment Trusts.
Applies from - 1 January 2018
Extention of Taxable Payments Reporting System to Couriers and Cleaners
The Taxable Payments Reporting System (TPRS) currently applies to those in the building and construction industry. It requires businesses to report payments made to contractors to the ATO annually for data matching purposes. This will now aply to contractors in the courier and cleaning industries as well.
Applies from - 1 July 2018
Repayment of HELP (formerly HECS) applies sooner
The income thresholds and repayment rates for HELP will be changed, such that the new HELP repayment threshold will be $42,000 at 1% repayment rate (increasing to 10% as income increases). The 2017/2018 threshold is currently $55,874 with a repayment rate of 4% increasing to 8% as income increases.
Applies from - 1 July 2018