On 2 April 2019, the Treasurer, Mr Josh Frydenberg handed down the 2019-20 Federal Budget announcing "we will put a speed limit on taxes", "the largest personal income tax cuts since the Howard Government" and "additional tax relief for small and medium-sized businesses"1.
Clearly, the pre-election Budget aims to win the votes of low to middle income earners and small businesses. The Federal Election will be held no later than 18 May 2019. It's unsurprising that the announcements centred on election-friendly promises including investing in infrastructure, creating jobs and funding for education and aged care. For the first time in twelve years, the Federal Budget moves into the black with a budget surplus of $7.1 billion forecast for the next financial year.
Below are the key tax and superannuation proposals that will affect you and your clients:
Proposed Div 7A reforms deferred until 1 July 2020
After a considerable amount of feedback was provided to Treasury on the Consultation Paper released in October 2018 containing the proposed amendments to Division 7A, the Government has announced that it will defer the start date of the reforms to Div 7A from 1 July 2019 to 1 July 2020. The announcement is a welcome one so that further feedback can be considered, including the proposed transitional measures, which were of concern to many taxpayers.
The Government has chosen to leave superannuation policy largely untouched. However, it announced the following measures:
- The Government will remove the requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the superannuation fund are in the retirement phase for the whole of the financial year. The measure will commence on 1 July 2020.
- From 1 July 2020, the Government will increase the work test age to 67 to align with the qualifying age for the age pension. People aged 65 and 66 will be able to make voluntary concessional and non-concessional contributions without meeting the work test. They will also be able to make up to three years of non-concessional contributions under the bring-forward rule.
- The Government will increase the spouse contribution age limit to 74.
Prior to the Budget, on 2 April 2019, the Government dropped the proposed amendment to the current rules which would enable the maximum number of members in an SMSF to increase from four to six contained in the Treasury Laws Amendment (2019 Measures No 1) Bill 2019 so as to ensure the bill's passage through the Upper House.
With no more sitting days left for the Senate before the election is called, the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 containing the Superannuation Guarantee (SG) opt-out measure, amendments to the non-arm's length income (NALI) provisions and SG Amnesty has now officially lapsed. The bill stalled in the Senate where it has remained since June 2018.
Small business instant asset write-off
From Budget night until 30 June 2020, the Government is increasing and expanding access to the immediate deduction for the cost of depreciating assets used by small business entities. These measures include:
- increasing the asset threshold (i.e. immediate deduction) from $25,000 to $30,000; and
- allowing access to this concession to taxpayers with an aggregated turnover of up to $50 million (up from the previous turnover of less than $10 million). 2
If legislated, small businesses with a turnover under $10 million can claim assets "first used or installed ready to use" between 29 January 2019 and Budget night under the $25,000 cap and then claim assets under the $30,000 cap from budget night to 30 June 2020. Medium-sized businesses with a turnover of between $10 million and $50 million would only be able to claim eligible assets from Budget night until the 2020 cut-off.
Lowering the small business tax rate
The Government has legislated lower tax rates for small and medium-sized companies (SMCs) with turnovers below $50 million. SMCs which are currently subject to a 27.5% tax rate will be subject to a 25% tax rate by 2021-22.
Resolving tax disputes for small businesses
The Government has committed to making it easier, cheaper and quicker for small businesses to resolve tax disputes through:
- The establishment of the Small Business Taxation Division within the Administrative Appeals Tribunal in March 2019. The Division has lower application fees and fast-tracked decisions.
- Requiring the ATO to pay reasonable legal costs for a small business in certain circumstances when an ATO decision is challenged.
- Establishing a small business concierge service within the Australian Small Business and Family Enterprise Ombudsman's Office to provide advice and support.
- Personal income tax cuts will be delivered in the current year,
with further cuts commencing from 1 July 2022 and 1 July 2024
respectively. The Government has already passed laws changing the
upper limit of the income tax bracket to which the 32.5% marginal
tax rate will apply from $90,000 to $120,000.
- From 1 July 2022, the upper limit of the income tax bracket which is subject to a 19% marginal tax rate will increase from $41,000 to $45,000.
- From 1 July 2024, the Government will reduce the 32.5% marginal tax rate to 30% and abolish the 37% marginal tax bracket. This will reduce the number of income tax rates from four to three, being 19%, 30% and 45%.
- The immediate income tax cuts announced in the Federal Budget were passed by both Houses of Parliament on 3 April 2019 providing increases to the Medicare levy low-income thresholds to take into account recent movements in the CPI so that low-income taxpayers continue to be exempted from paying the Medicare levy.3
- The reduction in tax provided by the non-refundable low and middle income tax offset increases from the maximum amount of $530 to $1,080 per annum and the base amount will increase from $200 to $225 per annum for the current and subsequent income years until 2021-22.
ATO enforcement and maintaining integrity of the tax system
The ATO will be given additional resources ($42.1 million over four years) to audit compliance to recover unpaid tax and superannuation liabilities. The focus will be on high wealth individuals and larger businesses to ensure on time payment of their tax and superannuation obligations. This measure will not extend to small business.
The Government announced $1 billion to the ATO from 1 July 2019 to extend the operation of the Tax Avoidance Taskforce focused on corporates, multi-nationals and high net worth individuals. The Taskforce's focus will extend to include scrutiny of tax advisors and "intermediaries that promote avoidance schemes".
Changes to the ABN system aimed at the black economy
The Government proposes to:
- make lodging an income tax return a requirement for holding an ABN from 1 July 2021;
- require ABN holders to confirm the accuracy of the details provided on ABN applications annually from 1 July 2022.
The proposals are designed to "target ABN misuse, enhance the quality of the Australian Business Register data and improve ABN holder engagement and compliance.4
Proposals of the Labor Government
The Coalition Government is unlikely to legislate the majority of their announcements prior to calling an election in May. Mr Bill Shorten used Labor's Budget reply speech (delivered on 4 April 2019) to pledge $2.3 billion for cancer patients, match the Government's tax offset of up to $1,080 and promise extra tax cuts for low-income earners earning under $40,000. Mr Shorten refused to support the measure to flatten tax rates so that 94% of Australians would pay no more than 30% income tax by 2024.
Below is a summary of the key tax and superannuation proposals announced by the Labor Government that are likely to have a significant impact on advisers and their clients if the Labor Government is elected at the May election:
- Reimpose the Temporary Deficit Levy - Under Labor, individuals earning $180,000 or more would pay an extra 2% tax under the temporary deficit levy until at least 2023. Lifting the highest marginal tax rate to 49%.
- Deny cash refunds of franking credits - Labor proposes to deny cash refunds of franking credits from 1 July 2019 which would largely impact individuals and superannuation funds.
- Limit Negative Gearing - Labor's proposal to limit negative gearing would apply across the board to all investments from 1 January 2020. All investments made before this date will be grandfathered to allow losses on rental properties to be deducted from other income.
- Capital Gains Tax (CGT) general discount halved - The CGT discount, which applies to assets held for more than twelve months, would be halved from 50% to 25% for assets purchased after 1 January 2020.
- Taxation of trusts at minimum 30% rate - Labor proposes to introduce a minimum 30% tax rate for discretionary trust distributions to beneficiaries over the age of 18 years. Labor's proposals will not apply to testamentary trusts, charitable and philanthropic trusts, special disability trusts, fixed trusts, farm trusts and public unit trusts. Trusts will not be taxed like companies.
- Deductions for tax advice - Labor proposes to limit deductions for the cost of managing tax affairs to $3,000 each income tax year. All entities, apart from companies, will be subject to the cap.
- Ban new Limited Recourse Borrowing Arrangements (LRBAs) - Labor is committed to banning SMSFs entering into new LRBAs despite the Council of Financial Regulators (CFR) Report into LRBAs confirming that LRBAs do not create a systemic risk for the financial system.
- Tax deduction for personal superannuation contributions - Labor proposes to reintroduce the 10% rule that precludes individuals from claiming a tax deduction for personal superannuation contributions where they earned more than 10% of their overall earnings from employee-type activities.
- Abolish rolling five year catch up - The rolling five year catch up of concessional contributions (CC) cap which allows members with a total superannuation balance of less than $500,000 to make additional CC where they have not reached their CC cap in the prior five income years will be abolished under Labor.
- Superannuation guarantee - Under Labor, the current superannuation guarantee charge rate of 9.5% will increase as soon as practicable to 12% instead of the gradual increases under current law.
- SG Amnesty - Labor will not support the SG Amnesty but may introduce a bill on integrity measures covering NALI and LRBAs.
- Division 293 threshold - Labor proposes to lower the threshold under which high income earners pay additional contributions tax from $250,000 to $200,000.
Ultimately, taxpayers will have the opportunity to decide whether the tax and superannuation measures announced as part of the Federal Budget will come to fruition by voting at the ballot box.
1 Budget speech 2019-20 delivered on 2 April 2019 by Honourable Josh Frydenberg MP, http://jaf.ministers.treasury.gov.au/speech/002-2019/
2 Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019
3 Treasury Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2019
4 Budget overview
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.