FEDERAL BUDGET 2018/19 – SNAPSHOT FOR SMES AND INDIVIDUALS

The Government has handed down its 2018/19 Federal Budget and there are a lot of measures that will impact SMEs and individuals. Together with the expected personal income tax cuts, there is a large focus on the black economy and funding the ATO to ensure taxpayers comply with their tax obligations.

Interestingly, the majority of the start dates are 1 July 2019, a change from prior years where start dates have generally been the date of the Budget or 1 July of the same year. This may be due to the current large backlog of legislation in Parliament.

Personal Tax Rate Cuts

As expected, the Government has announced cuts to personal income tax. The new measures are to phase in via a 3-step process over 7 years, and results in the following tax rates:

According to the Government’s calculator, the changes result in the following increases in after-tax income to an individual:

As this shows, the bulk of the savings will ultimately go to what most Australian taxpayers would consider to be higher income earners.

It has already been flagged that the Senate may oppose these changes and, given the above result, some opposition would be expected.

Small Business Instant Asset Write-Off

The instant write-off for assets costing less than $20,000 has been extended to 30 June 2019. This write-off was due to finish on 30 June 2018.

Changes to Division 7A

The Government will ensure that unpaid present entitlements come within the scope of Division 7A. An unpaid present entitlement (‘UPE’) arises where a beneficiary is made entitled to a share of trust income but has not been paid that amount. While the ATO currently applies Division 7A to UPEs, this
announcement appears to confirm the ATO’s position, and may also bring within the scope of Division 7A currently ’quarantined’ UPEs that arose prior to December 2009.

The Government will also defer the start date of the Division 7A measures that were announced in the 2016-17 Budget from 1 July 2018 to 1 July 2019.  Given that no legislation has currently been released on these changes, the deferred start date is not a surprising development. The 2016-17 Budget measures included:

– A self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Division 7A with the opportunity to voluntarily correct their arrangements without penalty;

– New safe harbour rules, such as for use of assets, to provide certainty and simplify compliance for taxpayers; and

– Amendments regarding complying Division 7A loans, including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions.

Measures regarding Trusts

Circular Trust Distributions

Measures will be introduced to deter circular trust distributions within a family group. Where family trusts act as beneficiaries of each other in a round robin arrangement, income will be taxed at the top personal tax rate (plus medicare levy).

Testamentary Trusts

There will be a change to the tax treatment for minor beneficiaries of testamentary trusts.  Income distributed to minors will only be taxed at the marginal adult rates where the income has been generated from assets transferred to the testamentary trust from the deceased asset. This is to ensure that assets injected into the testamentary trust are not taxed at the concessional rates.

Non-Deductible Expenses for Vacant Land

Measures will be introduced to disallow deductions for holdings costs associated with vacant land, such as interest. A deduction will be denied for costs incurred before the building has been constructed, received approval to be occupied and is available for rent. This will not apply to land is being used by the owner to carry on a business, including a business of primary production.  This measure will have a major impact on property developments.

Other Tax Measures 

Other tax measures of interest include

– The small business CGT concessions will not be available on the assignment of future income rights by a partnership. This measure will start at the date of the Budget.

– An individual will no longer be able to licence their fame or image to another entity to reduce tax. All remuneration provided for commercial exploitation of a person’s fame or image will be included in the individual’s assessable income.

– The Research and Development (‘R&D’) tax incentive rates will be amended from 1 July 2018. Broadly:

• For companies with aggregated annual turnover below $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.
• For companies with aggregated annual turnover of $20 million or
  more,  the R&D tax offset will link to the incremental intensity of R&D expenditure as a proportion of total expenditure .

Tax Compliance and Integrity Measures

Measures relating to the Black Economy

The black economy is a major focus of this Budget. Measures being introduced include the following:

– Expanding the taxable payments reporting system to security providers and investigation services, road freight transport, and computer system design and related services.

– Businesses can no longer receive cash payments over $10,000 for goods and services. Payments over $10,000 must be made through an electronic payment system or via cheque.

– Increased funding for the ATO’s black economy taskforce.

– A tax deduction will not be available where there is a failure to withhold PAYG or no-ABN withholding.

Other compliance and integrity measures

In addition, the following compliance and integrity measures will be introduced:

– Additional funding for the ATO to increase compliance activities targeting individual taxpayers and their tax agent. This includes additional audits, prosecutions, and education and guidance.

– Measures to prevent illegal phoenix activity. In particular, this includes:

• Extending the Director Penalty Regime to GST, Luxury Car Tax and Wine Equalisation Tax, making directors personally liable for these.
• Expanding powers to retain tax refunds where there are outstanding tax lodgements.

– Additional funding to the ATO to focus on compliance in regard to self-managed superannuation funds, in particular individuals claiming personal superannuation contributions who do not submit a Notice of Intention to Deduct such that the contributions are not reported as taxable.

Superannuation

A number of measures are to be introduced relating to the regulation of superannuation funds, protecting balances and making contributions. These measures include:

– The maximum number of allowable members in new and existing SMSFs and small APRA funds will be expanded from 4 to 6.

– Exemption from the work test for voluntary superannuation contributions by individuals aged 65-74 with superannuation balances below $300,000 in the first year that they do not meet the work test requirements.

– From 1 July 2018, 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 the superannuation guarantee, and instead receive additional income. This is to reduce the risk of inadvertently breaching the annual concessional cap.

– The annual audit requirement for SMSFs will be extend to a 3-yearly cycle for funds that have a history of 3 consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.

– Passive fees charged by superannuation funds will be capped at 3% for small accounts with balances below $6,000, while exit fees will be banned for all superannuation accounts.

– All inactive superannuation accounts with balances below $6,000 will be required to be transferred to the ATO to protect them from further erosion.

– The ATO will expand its data matching processes to proactively reunite lost and low balance super accounts with the member’s active account.

– Insurance arrangements to be offered by superannuation funds on an opt-in basis for members who have balances of less than $6,000, are under the age of 25 years or have inactive accounts that have not received a contribution in 13 months.

– A retirement covenant will be introduced that will require superannuation trustees to formulate a retirement income strategy for fund members.

– The Corporations Act will be amended to introduce a requirement for providers of retirement income products to report simplified, standardised metrics in product disclosure statements to assist customer decision making.

The information contained in this bulletin is intended to  provide  general information only and is not intended to serve as tax advice. Specific advice should always be sought regarding a taxpayers’ particular circumstances. Please contact MC Tax Advisors if you would like assistance with the issues identified in this bulletin.