Special Edition 2019/2020 Federal Budget Update

INTRODUCTION

This budget summary is presented in an environment of political uncertainty. We have a federal election in the next 6–7 weeks and in the event of an A.L.P. victory, it is likely that they will develop a “mini budget” in June to incorporate some of their stated policies.

An electoral cycle of three years is not a lot of time to implement economic policy and in the event the A.L.P. are successful, we expect them to hit the ground running.

Historically the A.L.P. have also been more willing to make revenue adjustments in the mid-year economic and fiscal outlook (MYEFO) documents, normally released in mid-December. Note that this budget is handed down in a politically charged atmosphere – as such we stress that at all times, we strive to be apolitical while paying due respect to the government of the day.

KEY CHANGES

1. Lower income taxes

• Immediate tax relief for low- and middle-income earners of up to $1,080 for singles or up to $2,160 for dual income families.
• Lowering the 32.5 per cent to 30 per cent in 2024-25, meaning a projected 94 per cent of taxpayers will face a marginal tax rate of no more than 30 per cent.

2. Backing small business

• Increasing the instant asset write-off threshold to $30,000 and expanding access to medium-sized businesses with an annual turnover of less than $50 million. Around 3.4 million businesses will be eligible to benefit.
• Fast tracking the company tax rate cut to 25 per cent for small and medium-sized companies with an annual turnover of less than $50 million and increases to the unincorporated small business tax discount rate.

3. Making multinationals and big business pay their fair share

• $12.9 billion in tax liabilities raised from tax compliance activities since July 2016.
• New funding for the ATO to target tax avoidance by multinationals, big business and high wealth individuals.

SMALL BUSINESS

The small business tax rate has been lowered and this budget will increase and expand access to the instant asset write-off

Lowering the small business tax rate

The government has provided lower taxes for around 3.4 million businesses employing around 7.1 million workers.

The government has legislated lower tax rates for small and medium-sized companies with turnovers below $50 million. Small and medium-sized companies currently facing a 27.5 per cent rate will have a 25 per cent rate by 2021-22 five years earlier than previously planned. This compares to the standard company tax rate of 30 per cent.

Example: An incorporated food van business with four part‑time employees makes $150,000 per year. As a result of the Government’s tax relief, the small business will have an extra $3,750 this year and $7,500 in 2021-22.

Fast-tracking these tax cuts will benefit around 970,000 small and medium sized companies that employ around 5.2 million workers.

The Government has also legislated to bring forward the increases to the unincorporated small business tax discount rate, rising from 8 per cent currently to 13 per cent in 2020-21 and to 16 per cent from 2021-22 (up to the existing cap of $1,000). This will benefit around 2.4 million businesses, employing around 1.9 million workers.

Example: The tax relief also helps medium-sized employers. A company that operates regional tours with 28 employees and $8 million in turnover that makes an annual profit of $800,000 will retain an extra $20,000 this year and $40,000 in 2021-22 to invest, grow and employ more workers.

Incentives for investment and growth

In this Budget, the Government is increasing the instant asset write-off threshold to $30,000 until 30 June 2020. The threshold applies on a per asset basis, so eligible businesses can instantly write off multiple assets. This builds on the Government’s earlier announcement that the instant asset write-off threshold would be increased from $20,000 to $25,000 and extended to 30 June 2020.

More than 350,000 businesses have already taken advantage of the instant asset write‑off.

The Government is also extending access to the instant asset write-off to include medium-sized businesses by increasing the annual turnover threshold from $10 million to $50 million. Around 22,000 additional businesses employing around 1.7 million workers will now be eligible to access the instant asset write-off.

Small and medium-sized businesses will be able to immediately deduct purchases of eligible assets each costing less than $30,000.

Around 3.4 million businesses, employing around 7.7 million workers will be eligible.

The increased threshold and expanded eligibility will apply from 7:30pm (AEDT) on 2 April 2019 to 30 June 2020.

Example 1: Haylee and Martin own a company, HM Nurseries Pty Ltd, through which they operate several nurseries in Newcastle. HM Nurseries Pty Ltd has an aggregated turnover of $5.2 million and a taxable income of $150,000 for the 2019-20 income year. They employ 15 workers.

To continue to expand the business, and offer delivery services to clients, HM Nurseries Pty Ltd purchases two new vans halfway through the financial year. The vans cost $29,000 each, exclusive of GST.

Under previously announced arrangements, the vans each cost more than the $25,000 threshold for the instant asset write-off in the 2019-20 income year. This means they would be added to HM Nurseries Pty Ltd’s small business depreciation asset pool and be depreciated by 15 per cent. HM Nurseries Pty Ltd would claim a tax deduction of $8,700 for the depreciation of the vans.

Under the new $30,000 instant asset write-off, HM Nurseries Pty Ltd would instead claim an immediate deduction of $58,000 for the purchase of the two vans in the 2019-20 income year, $49,300 more than under previously announced arrangements.

Example 2: Mark owns a company, Lat Val Pty Ltd, through which he operates a food manufacturing business in the Latrobe Valley employing 60 staff. Lat Val Pty Ltd has an aggregated turnover of $25 million and a taxable income of $900,000 for the 2019-20 income year. Ordinarily Lat Val Pty Ltd would be too large to access the instant asset write-off, but the changes in the 2019‑20 Budget mean it can now benefit.

Lat Val Pty Ltd purchases 10 new commercial ovens halfway through the income year, at a cost of $12,000 each, exclusive of GST, to allow Lat Val Pty Ltd to expand its business and improve efficiency.

Under existing tax arrangements, Lat Val Pty Ltd would depreciate the new ovens using an effective life of 15 years. Choosing to use the diminishing value method, Lat Val Pty Ltd would claim a tax deduction of $800 per oven, a total deduction of $8,000 for the 2019-20 income year.

Under the new $30,000 instant asset write-off, Lat Val Pty Ltd would instead claim an immediate deduction of $120,000 for the purchase of the 10 ovens in the 2019‑20 income year, $112,000 more than under existing arrangements.

Making it easier, cheaper and quicker for small businesses to resolve tax disputes

• Creation of a dedicated Small Business Taxation Division within the Administrative Appeals Tribunal with dedicated case managers, a lower application fee and fast-tracked decisions.
• Requiring the ATO to pay reasonable legal costs for the small business in certain circumstances when they challenge ATO decisions.
• Establishing a small business concierge service within the Australian Small Business and Family Enterprise Ombudsman’s office to provide advice and support.

Improving access to advice

• Establishing 10 tax clinics across metropolitan and regional Australia, as a 12-month pilot, which provide access to free advice to assist unrepresented small businesses and individuals on tax issues.

Cutting red tape

• Streamlining GST reporting for around 2.7 million small businesses by reducing the number of BAS GST questions.
• Reducing financial reporting and audit costs for businesses currently subject to reporting obligations by more than $300 million over four years.
• Simplifying and expanding the current regulatory regime for employee share schemes, reducing the time and cost burden for small businesses.

Improving digital capability

• Creating a non-government organisation dedicated to improving small businesses’ digital capability.

Progress to share

The Government has implemented more than a dozen measures to strengthen the integrity of Australia’s international tax framework. These measures include implementing the Multinational Anti-Avoidance Law, the Diverted Profits Tax, the G20/OECD Base Erosion and Profit Shifting (BEPS) recommendations, increased tax penalties for large entities, and establishing a Tax Avoidance Taskforce within the ATO.

As a result, since 1 July 2016, the ATO has raised $12.9 billion in tax liabilities against large public groups and multinationals, as well as wealthy individuals and associated groups.

The Government is estimated to raise $400 million over four years by closing down tax loopholes that were only available to foreigners investing into Australia through stapled structures. If left as is, the forgone revenue could grow to billions of dollars.

Additionally, the Government is reforming the Petroleum Resource Rent Tax to ensure Australians receive a fair return for our petroleum resources while not discouraging investment.

The Government is now extending funding for the ATO Tax Avoidance Taskforce until 30 June 2023, with a focus on multinationals. This is estimated to raise a further $4.6 billion in tax liabilities over the next four years.

The Government will also provide $42.1 million over four years to the ATO to increase activities to recover unpaid tax and superannuation liabilities, including from large corporate entities and high wealth individuals.

Cracking down on organised crime and the black economy

The Government has already taken action to reduce the impact of the black economy. Their measures are estimated to return over $5 billion to the budget to fund essential services. Since 1 July 2018:

Businesses cannot manufacture, distribute, possess or use software to let them hide their sales to reduce the taxes they owe.

The Australian Taxation Office has raised over $500 million in liabilities through nearly 106,000 interactions with businesses including over 5,500 mobile strike team visits, to tackle black economy behaviour.

The Illicit Tobacco Taskforce has seized in excess of 71 tonnes of smuggled tobacco and approximately 103 million cigarettes, equivalent to more than $161 million in evaded tobacco duty.

From 1 July 2019, the Government will progress additional measures, including:

Ensuring people in certain high‑risk industries cannot hide or under‑report their income.

Making it harder for businesses to pay cash wages to staff while also evading their obligations to report the income.

Requiring businesses to have a good tax record when tendering for large Government contracts.

In this Budget, the Government will strengthen the Australian Business Number (ABN) system to disrupt black economy behaviour and target ABN misuse, generating an additional $22.2 million gain to the budget over the forward estimates. This measure will better align an ABN holder’s obligations with community expectations of compliant and honest business behaviour.

Sham Contracting

The Government announced it will provide $9.2 million over four years from 2019-20 (and $2.3 million ongoing) to establish a dedicated sham contracting unit within the Fair Work Ombudsman. This dedicated unit aims to address sham contracting behaviour by some employers to avoid employment entitlements through increasing education, compliance and enforcement activities, and dedicating additional resources to investigate and litigate cases.

Summary of changes to rates and thresholds

Rates and thresholds under the Government's enhanced Personal Income Tax Plan

Rates from 2017-18 to 2023-24	Thresholds in 2017-18	New thresholds from 2018-19 to 2021-22	New thresholds from 2022-23 to 2023-24
Nil	Up to $18,200	Up to $18,200	Up to $18,200
19 per cent	$18,201 - $37,000	$18,201 - $37,000	$18,201 - $45,000
32.5 per cent	$37,001 - $87,000	$37,001 - $90,000	$45,001 - $120,000
37 per cent	$87,001 - $180,000	$90,001 - $180,000	$120,001 - $180,000
45 per cent	Above $180,000	Above $180,000	Above $180,000
Low- and middle-income tax offset	-	Up to $1,080	-
Low income tax offset	Up to $445	Up to $445	Up to $700

Rates from 2024-25	New thresholds from 2024-25
Nil	Up to $18,200
19 per cent	$18,201 – $45,000
30 per cent	$45,001 – $200,000
45 per cent	Above $200,000
Low income tax offset	Up to $700

INCREASING THE MEDICARE LEVY LOW-INCOME THRESHOLDS

Effective 1 July 2018

The Government will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from the 2018-19 income year.

The following table compares the level of taxable income below which no Medicare Levy is payable.

SUPER BOOST: MORE FLEXIBILITY FOR RETIREMENT

From 1 July 2020, Australians aged 65 and 66 will be able to make voluntary superannuation contributions, both concessional and non-concessional, without meeting the Work Test.

Currently, they can only make voluntary contributions if they meet the Work Test, which requires that they work a minimum of 40 hours over a 30-day period.

This means that Australians aged 65 or 66 years who don’t meet the work test, because they may only work one day a week or volunteer, will now be able to make voluntary contributions to their superannuation.

This will align the Work Test with the eligibility age for the Age Pension, which is scheduled to reach 67 from 1 July 2023.

There are around 55,000 Australians aged 65 and 66 who will benefit from this reform in 2020-21.

In addition, the age limit for spouse contributions will be increased from 69 to 74 years. Currently, those aged 70 years and over cannot receive contributions made by another person on their behalf.

The government will also extend access to the bring-forward arrangements, which currently allow those aged less than 65 years to make three years’ worth of non-concessional contributions, which are capped at $100,000 a year, to their super in a single year. This will now be extended to those aged 65 and 66.

TAX INTEGRITY – DEFERRING THE START DATE OF PROPOSED DIVISION 7A AMENDMENTS

Effective date 1 July 2020

The Government will defer the start date of the 2018-19 Budget measure, Tax Integrity – clarifying the operation of the Division 7A integrity rule,  from 1 July 2019 to 1 July 2020.

The Government issued a consultation paper in October 2018 seeking stakeholder views on the proposed implementation approach for the amendments to Division 7A of the Income Tax Assessment Act 1936. The Government acknowledged that it had received valuable feedback from stakeholders. This Is a complex area of the tax law and clearly there are implementation issues that warrant further consideration.

Delaying the start date by 12 months will allow additional time to further consult with stakeholders on these issues and to refine the Government’s implementation approach, to ensure appropriate transitional arrangements.

Increased luxury car tax refunds for eligible primary producers and tourism operators

The Government will further extend luxury car tax refund arrangements for primary producers and tourism operators. For vehicles acquired on or after 1 July 2019, eligible primary producers and tourism operators will be able to apply for a luxury car tax refund to a maximum of $10,000 (up from $3,000 under the current arrangements). This measure will not impact on the eligibility criteria and types of vehicles eligible for the current partial refund.

INCENTIVES FOR EMPLOYERS

Employers will be paid up to $15,000 to take on 80,000 new apprentices, as part of a $525 million training scheme to re-skill Australia.

From 1.7.2019, the Government will double the standard incentive payment to employers of apprentices, to $8000 per placement.

It will also pay new apprentices $2000 to take up 10 key trades, to end the nation’s crippling skills shortage.

From 1.7.2020, the incentives will be even higher, when bosses will be paid up to $15,000 to employ apprentices aged 21 or older, a disadvantaged person 45 years or older, students undertaking an Australian school-based apprenticeship, or those working in a rural or regional area.

Eligible trades 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, and arborists.

Apprentices will be paid $1000 after the first year of training, and another $1000 when they finish.

Employers, who already receive $4000 per apprentice, will be given a $2000 bonus after 12 months plus $2000 upon completion of the apprenticeship.

The goal is 80,000 additional apprenticeships over the next five years.

EXPANSION OF SINGLE TOUCH PAYROLL

The Government will provide $82.4 million over four years to support the expansion of data collected through Single Touch Payroll (STP) and provided to the ATO and other Government agencies.

This will reduce the need for employers and individuals to report such information to Government agencies.

SUMMARY OF A.L.P. TAXATION POLICY

Measures impacting individuals (directly or via partnerships and trusts)

• Removal of dividend imputation credit refunds but note the pensioner guarantee including SMSFs with members eligible for age pension.
• 49% top marginal tax rate for taxpayers with taxable income in excess of $180,000 
• §The Federal opposition will consider tax cuts for high income earners when Budget is in "sustainable surplus"
• A 30% minimum tax rate on discretionary trust distributions to adult beneficiaries
• Negative gearing restrictions for real estate and other passive investments (existing assets to be grandfathered) to commence 1 January 2020
• 50% CGT discount reduced to 25% (existing assets to be grandfathered) to commence 1 January 2020
• $3,000 cap on deductions for management of tax affairs (e.g. tax agent fees)
• Beneficial ownership tracing: establish a publicly accessible central registry (companies and trusts)
• Requirement of disclosure to ATO of residency or citizenship of other countries
• Measures impacting business

Superannuation policies

• Non-concessional cap to be reduced to $75,000 (currently $100,000)
• Income threshold for the extra 15% contributions tax for high income earners to be lowered to $200,000 p.a. (currently $250,000 p.a.)
• Abolish catch-up concessional contributions
• Deductibility of personal contributions for employed persons to be removed
• Committed to low income superannuation tax offset
• Borrowing by SMSFs to be prohibited
• Superannuation Guarantee coverage to be expanded to include both parental leave and salary and wages of less than $450 per month
• Increase in the Superannuation Guarantee rate to 12% ahead of the current timetable "when prudent"
• Develop guidelines for tax haven investment by superannuation funds

Measures impacting business

• Small and medium-sized businesses with a turnover of up to $50 million a year will have their tax rate reduced to 25 per cent by 2021-22
• Australian Investment Guarantee (AIG) (20% capital allowance write-off in Year 1)
• By supporting the Government’s decision to accelerate the reduction of corporate tax rates for SMEs, ALP will delay the introduction of the AIG by 12 months to 1 July 2021
• Debt deductions - Eliminate safe harbour and arm's length debt test in the thin capitalisation rules and have a single test (world-wide gearing ratio)
• Public disclosure of country-by-country (CbC) lodged by significant global entities (SGEs)
• Mandatory shareholder reporting of tax haven exposure (changes to Corporations Act 2001)
• ATO's tax transparency reports: reduce threshold for reporting for private companies to $100 million
• Deny tax deductions for travel to tax havens

Measures impacting ATO administration

• ATO's annual report to disclose number and size of tax settlements
• ATO: appoint a Second Commissioner to review tax disputes
• Increased compliance funding

Other tax-related measures

• GST distribution: Western Australia fair share fund (70 cent in the $ floor)
• Board of Taxation: community sector representative to be appointed
• Whistle blower laws: rewards for whistle-blowers up to $250,000
• Public reporting of AUSTRAC international funds transfer data
• Government contracts: tax domicile disclosure for all firms tendering for Government contracts worth more than $200,000
• Increase penalties for individuals and entities promoting tax evasion and avoidance
• Allow the Commissioner of Taxation to name individuals and entities as a penalty for the most serious of tax offences
• Funding 10 free tax clinics to provide assistance with administrative tax matters to low income taxpayers and micro-businesses (this policy is slightly different to the Government’s version)
• To commit $4 million over next 4 years
• Cut the Managed Investment Trust withholding tax rate from 30% to 15% on tax distribution attributable to investments in build-to-rent housing to encourage institutional investors into the housing market.