2018/2019 FEDERAL BUDGET SUMMARY
Whilst some would say that this year’s budget was a bit of a quiet one, there was some very interesting proposed reforms when delving a bit deeper, the effect of which we’ll see in years to come if (“if” being the key word) enacted.
These include the proposed removal of the 37% tax bracket which would open the doorway to individuals being able to withdraw $200K per year out of their businesses tax effectively. A very welcome measure! On the other hand the proposal to remove the “Sub Trust” provisions which are used when capping tax by using “bucket companies”, and replace them with more onerous Division 7A requirements requiring a minimum yearly repayment. This will have a significant effect on tax planning if enacted, particularly if it does proceed before the removal of the 37% bracket as proposed.
The other very interesting announcement was the proposal to remove the annual audit requirement for SMSF’s and move to a triannual basis. This seems contradictory to all of the recent increased compliance and regulatory measures which the government has introduced such as an increase in trustee penalties and ATO de-regulation of SMSF’s with overdue returns. It is likely intended to be an incentive to be on “good behavior” and be rewarded with reduced compliance costs. However, the overwhelming response from the industry has been extremely critical. Ultimately it is expected that this will make it difficult for auditors to run a cost effective business and result in increased workload and thus cost to SMSF's in the actual years or audit Tag lines such as “Audit Proposal to See Fee Hike, Harsher Penalties” says it all. This are likely to be no-winners from this one and thus it is somewhat doubtful it will make it through parliament.
The budget also has a real focus on putting the onus on businesses to put importance on their compliance activities, with the proposed increased PAYG withholding requirements, and directors penalties for unpaid GST. They are increasingly encouraging businesses to keep up with their lodgments if nothing else. There are also more measures to tighten up the “black market” behavior with the proposed $10,000 cash payment limit and other illegal phoenixing reforms .
On an immediate basis, it is great to see income tax cuts to middle income earners for once and these measures would be welcomed by many!
This article will give a quick and convenient run down on the key aspects relevant to our small business clients and those with self-managed super funds.
INCREASE IN TAX RATE THRESHOLDS AND LOWERING OF TAX
The centerpiece of this year’s budget is the Governments 7 year plan for Personal Income Tax. The 3 step plan approach is:
1. Targeted tax relief to low and middle-income earners through an additional non refundable tax offset up to $530 per annum, on top of the low income tax offset. Available from the 2019 to 2022 income years for income earners up to $125,333.
2. Combat bracket creep with an increase in the ceiling from $87K to $90K of the 32.5% tax bracket with larger threshold increases to follow in 2022-2023, up to $120K.
3. Lift the 32.5% threshold again in 2024-2025, income up to $200K, which will effectively remove the 37% bracket entirely.
By the time all measure takes full effect in 2024-2025 the following rates/brackets would apply:
Thoughts: The measure to increase the 32.5% bracket to $200,000 would be an absolute win for businesses and mid-high income earners. However the proof is in the pudding. One is highly skeptical that this will eventuate.
MEDICARE LEVY UNCHANGED
Great news for individuals is that the proposed Medicare Levy increase from 2% to 2.5% will not proceed.
$20,000 INSTANT ASSET WRITE OFF EXTENDED
The availability of the small business $20,000 instant asset write-off has been extended for a further 12 months to 30 June 2019.
CASH PAYMENT LIMIT
The government will introduce a limit of $10,000 for cash payments made to businesses for goods and services.
Applies from -1 July 2019
Thoughts: Great! Its not fair to have people doing the right thing disadvantaged and not on an evening playing field with their competition. The key to this measure will be active and strict regulatory activity, perhaps placing fines on consumers as well as suppliers for making such cash payments.
REMOVING TAX DEDUCTIBILITY OF NON-COMPLIANT PAYMENTS
Tax deductions would not be allowed for the following where PAYG is not withheld
1. Wages-despite the fact that PAYG withholding requirement apply
2. Payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (despite the existing withholding requirements applying)
Applies from-1 July 2019
Thoughts: It will be very interesting to see the detail of this when available. Surely it doesn’t mean that you don’t get a tax deduction if there was no need to withhold because of being under the tax free threshold? Furthermore this will add just a little bit of compliance costs for for small businesses owners – increasing the need to tax plan and set wages before 30 June. The need for which we were likely to see as a result of Single Touch Payroll anyway.
DIVISION 7A TO UNPAID PRESENT ENTITLEMENTS
The government is tightening the application of Division 7A where a related private company aka “bucket company” is made entitled to a share of trust income but has not been physically paid. The proposal will require minimum yearly repayments in addition to the current interest applying to UPE’s on SubTrusts and ultimately mostly require full repayment over 7 years. However, the workaround might be through franked dividends paid to trusts, however the government did also announce it would target circular trust distributions which may also capture this mitigation strategy.
Applies from-1 July 2019
Thoughts: Capping tax at the corporate tax rate is going to get more difficult where cashflow is reinvested in the business. This is a real shame. It would have been nice if this measure didn’t take effect until the widening of the 32.5% tax bracket proposed to occur in 2025.
REFORMS TO COMBAT ILLEGAL PHOENIXING
The government will reform the corporations and tax laws to provide regulators with additions tools to assist them to deter and disrupt illegal phoenix activity. Reforms include:
1. Extend the director penalty regime to GST, luxury care tax and wine equalization tax, making directors personally liable for company debts
2. Retain refunds-expanding on ATO’s power to retain refunds where there are outstanding tax lodgments.
3. Prevent directors from improperly backdating resignation to avoid liability/prosecution
4. Limiting the ability of directors to resign when this would leave the company with no directors
5. Introduce new phoenix offences to target those who conduct/facilitate illegal phoenixing
6. Restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator.
Thoughts: Definitely great to see that the ATO will be able to target those taxpayers gaining an unfair financial advantage over those who do the right thing and communicate with the ATO by lodging on time and applying for payment arrangements! Its all about making it a level playing field. Competing with those undercutting the market but not paying their taxes and employee obligations is just not fair-game.
EXPANDING CONTRACTOR PAYMENT REPORTING
The Taxable Payments Reporting system will be expanded yet again, such that going forward it will include those in the following industries;
· Building & Construction
· Security & Investigation
· Road Freight Transport
· Computer System Design
Thoughts: Expect to see more year after year in this space. Please also note the very wide definition that applies when determining businesses in these industries.
EXEMPTION FROM THE WORK TEST FOR VOLUNTARY CONTRIBUTIONS
An exemption is proposed from the work test for voluntary contributions to superannuation for people aged 65-74 with superannuation balances below $300,000, in the first year that they do not meet the work test requirements. Currently, the work test restricts the ability to make voluntary superannuation contributions for those aged 65-74 to individuals who self-report as working a minimum of 40 hours in any 30 day period in the financial year.
Applies from- 1 July 2019
Thoughts: Will give additional flexibility to get financial affairs in order during the transition to retirement phase although is unlikely to affect many.
THREE- YEARLY AUDIT CYCLE FOR SMSF
The annual audit requirement is proposed to be changed to a three-yearly requirement for those self-managed super funds (SMSFs) with a history of good record-keeping and compliance. This will be measured by: 1. History of 3 consecutive years of clear audit reports and 2. Have lodged the fund’s annual returns in a timely manner.
Applies from-1 July 2019
Thoughts: A highly criticsed and unexpected move from those in the industry. Extracts from Accountants Daily article “Audit Proposal to See Fee Hike, Harsher Penalties” published on 11 May 2018, says it all. As such whether this proposal makes it in following industry involvement is somewhat unlikely.
SMSF Adviser and BDO national leader of superannuation, Shirley Schaefer said “If we go to a three-year cycle, it could be three or four years before any mistakes are found, and so because it's a strict liability provision, penalties are imposed, and the ATO might not be inclined to remit penalties if it's gone on for three years. Their view will be well the trustee is responsible, they should know what is going on and that's fair,” said Ms Schaefer. Sourcing information will also be harder “If they can't find it now, how are they going to find it after three years?” “If there's been a mistake, then potentially there will be increased audit fees as the auditors will have to dig down further to get to the bottom of it. There are fees to rectify it as well, which could be more the longer it goes on, it just doesn't seem to make any sense to me.”
Tactical Super director Deanne Firth said “Currently an SMSF is audited under the Australian Auditing Standards. These standards do allow for instances where you have not been provided with the prior year audit. You have to do additional testing on the opening balances,” “Ms Firth said it is also likely to lead to a greater administration cost to the ATO as they will need to keep track of the audit of each fund that is due, and which SMSFs are on the “good list or the naughty list”. “How much will the SMSF levy be increased by to cover this cost?”
DEDUCTION FOR PERSONAL CONTRIBUTIONS
The integrity of the “notice of intent” (“NOI”) process for claiming personal superannuation contribution tax deduction is intended to be improved. Currently, some individuals receive deductions on their personal superannuation contributions but do not submit a NOI, despite it being a requirement. Therefore, resulting in their superannuation funds not applying the appropriate 15% tax to their contribution. As the contribution has been deducted from the individuals’ income, no tax is paid on it at all. The ATO will modify income tax returns to alert individuals to the NOI requirement.
Applies from – 1 July 2018
Thoughts: It is disheartening to see this even had to be raised. I remember the day when the ATO would ring and check we had these before processing the return. The ATO has had this data for years. To not be data-matching this enough to date doesn’t provide much incentive to tax payers to do the right thing.
PREVENTING INADVERTENT CONCESSIONAL CAP BREACHES
The government will allow individuals whose income exceeds $263,157, and who have multiple employers, to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG). This will allow eligible individuals to avoid unintentionally breach $25,000 annual concessional contribution cap as a result of multiple SG contributions. Employees could instead negotiate to receive additional income, which would be taxed at marginal tax rates.
Applies from-1 July 2018
INCREASE IN MAXIMUM NUMBER OF SUPER MEMBERS
The maximum number of allowable member in new and existing SMSFs and small APRA funds is proposed to be increased from four to six.
Applies from-1 July 2019
Thoughts: Great for large families in particular to allow for greater flexibility in joint management of retirement savings.