Bentleys: Australian Federal Budget
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Tax cuts for everybody eventually… The most friendly budget? Leading his third Federal Budget, Treasurer Scott Morrison has focussed on tax cut “affordability” and delivering a “responsible” budget that will encourage consumer spending and economic growth, without damaging the reduction of the national debt and drive to surplus. The winners in the 2018 budget are taxpayers on lower income tax brackets, older Australians and small business. In keeping with previous years, this year’s budget delivered few surprises. But the question remains – has Treasurer Scott Morrison done enough to convince the electorate that the Coalition Government should be returned to power? It is a fine balancing act for the Government as it endeavours to appease the electorate – which has not seen an increase in real wages for several years amidst rising household costs – while, at the same time, needing to maintain its position of being fiscally responsible and getting the economy back into surplus by 2019-20.
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Bentleys: Australian Federal Budget
- 2. Disclaimer Important Notice The information in this presentation is of a general nature only and may not be based on your particular objectives, financial situation or needs. Before making any decisions, you are strongly advised to discuss your particular situation with your Adviser or Accountant.
- 3. An overview • 2018 is the year of infrastructure, tax and supporting the Baby Boomers • Did we see the expected pre election spend? • Current cash deficit of $18.2b • Projected return to surplus in 2019/20 • Few surprises
- 4. Infrastructure • The government is funding $24.5 billion in new major transport projects • $75 billion investment in transport program from 2018–19 to 2027–28 • $1b Urban Congestion Fund
- 5. Individual & families • Change the savers into spenders! • Personal income tax cuts for low to middle income earners • $530 tax relief for middle to lower earners for 2018-22 • Simplifying & flattening the tax system • Medicare levy to remain at 2%
- 6. New personal tax rates
- 7. New personal tax rates - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Individual Income Tax Benefits From 1 July 2018 From 1 July 2022 From 1 July 2024
- 8. Superannuation and retirement • Three-yearly audit cycle for some self-managed superannuation funds • Expanding the SMSF member limit from four to six • Work test exemption • Life insurance cover in super to be opt-in for individuals under 25 years of age • Exit fees banned
- 9. The Older Australian Package • Older Australian Package – Pension Work Bonus – Pension means test rules – Pension Loans Scheme
- 10. Small business • $20k asset write off • Limited R&D cash benefits • Single Touch Payroll assistance • PAYG deductions denied for non-compliant PAYG withholding – From 1 July – Payments to be closely monitored by ATO
- 11. Large business • Ten year enterprise plan • Current 27.5% corporate tax rate to apply with over $50m turnover • Thin capitalisation changes • Broaden the “Significant Global Entity” definition (>$1 billion global income) • Digital business – no new measure • Managed investment trusts (MITs) • Film industry tax measures
- 12. Private business • Land banking measures • Integrity rules dealing with assignment of partnership interest from 8 May 2018 • Division 7A – loans from private companies • Anti-avoidance rules for circular trust distributions • Testamentary trusts changes
- 13. R&D Overhaul • $4m cash cap for small business with less than $20m turnover • For large business – new progressive scale based on the ‘intensity’ of R&D spend • Clinical trials are exempt from caps
- 14. R&D case study
- 15. Other measures • Stronger enforcement around tax and super debt • Combat the illegal trade economy • Holding vacant land deduction • Black Economy • Phoenix activities crackdown • Craft beer producers
- 16. What didn’t happen • Standard work related deductions • Meaningful tax reform • LRBA action for SMSF - CAUTION • No major GST changes
- 17. Conclusion • Real GDP is forecast to grow • Higher wages, inflation and better terms of trade • Key uncertainties in non-mining business investment and spare capacity in the labour market. • Western Australian Budget 2018. . . .
- 18. Q&A • https://www.bentleys.com.au/federal-budget-2018 • Ross Prosper • Director, Tax and Business Services • +61 8 9 226 4500 • rprosper@perth.Bentleys.com.au
Editor's Notes
- Government is in pre-election mode Has lost 30 ‘News Polls’ in a row Aware of the increase in private sector debt Wages growth is still painfully slow, inflation is below trend and economic growth is tepid BUT commodity prices have been stronger than forecast while employment growth has been good The budget is forecast to return to modest surplus of $2.2 billion, in 2019-20 The 2018 budget shifts tax brackets to bring small savings to many, gives lump sums to lower income earners, helps the ageing who want to live at home longer, and continues an infrastructure spending theme to create jobs.
- The Roads of Strategic Importance initiative includes: $1.5 billion for a Northern Australia Package for Queensland, the Northern Territory and Western Australia, $400 million for Tasmania, $220 million for the Bindoon Bypass in Western Australia, $100 million for the Barton Highway Upgrade benefiting NSW and the ACT, and $1.3 billion for future national priorities. In Victoria, There is $7.8 billion for new major projects, including a commitment of up to $5 billion for the Melbourne Airport Rail Link. Preparatory work on the Melbourne to Brisbane Inland Rail project is underway and construction is due to start this year.
- He will present it as a package and reject any attempt in parliament to separate the elements: Personal income tax cuts for low to middle income earners. From July this year, the 32.5% tax bracket will be lifted to $90,000 from $87,000. A new tax offset to provide up to $530 a year, paid as a lump sum. Those earning between $48,000 and $90,000 will get the full benefit Simplifying the tax system so that 94% of taxpayers pay no more than 32.5 cents in the dollar in 2024–25. Looks to encourage and incentivise people to work hard and do well He has a three-stage plan on taxes, spread over seven years. The first stage will give just $11.25 a month or $135 a year as a personal tax saving starting from July this year. The top bracket of the 32.5% rate will then be further increased to $120,000 from $90,000 from July 2022, a saving of up to $1350 a year. That change is projected to prevent about 1.8 million people moving to a higher marginal tax rate of 37% in 2022–23. The Government’s planned increase in the Medicare levy from 2 per cent to 2.5 per cent, to fund the National Disability Insurance Scheme, will now not go ahead due to increased tax revenues.
- More than 10 million people will benefit and about 4.4 million of those with incomes between $48,000 and $90,000 will get the full $530 benefit starting next financial year. Those earning up to $37,000 and paying 19 cents in the dollar will have tax reduced by up to $200. The average tax paid in this tax bracket is $1900 per year. Tax will be reduced up to a maximum of $530 per year for those being paid more than $37,000 and paying the 32.5 cents in the dollar tax rate. The average tax in this tax bracket is $10,400. Morrison says a middle income household with both parents working on average wages will see their combined incomes benefit by more than $1000 a year. For those earning above $90,000 the tax relief reduces to zero at just over $125,000. Next financial year someone earning: $22,000 a year would pay $200 less tax, $40,000 a year would pay $290 less tax, $50,000 a year would pay $530 less tax. And those on the average wage of about $84,600 would also pay $530 less tax
- More than 10 million people will benefit and about 4.4 million of those with incomes between $48,000 and $90,000 will get the full $530 benefit starting next financial year. Those earning up to $37,000 and paying 19 cents in the dollar will have tax reduced by up to $200. The average tax paid in this tax bracket is $1900 per year. Tax will be reduced up to a maximum of $530 per year for those being paid more than $37,000 and paying the 32.5 cents in the dollar tax rate. The average tax in this tax bracket is $10,400. Morrison says a middle income household with both parents working on average wages will see their combined incomes benefit by more than $1000 a year. For those earning above $90,000 the tax relief reduces to zero at just over $125,000. Next financial year someone earning: $22,000 a year would pay $200 less tax, $40,000 a year would pay $290 less tax, $50,000 a year would pay $530 less tax. And those on the average wage of about $84,600 would also pay $530 less tax
- Government delivers SMSF friendly 2018-19 Federal Budget An SMSF friendly budget is the good news coming out of the 2018-19 Federal Budget. With SMSF members still working through the wide-reaching and complex superannuation changes which took effect from 1 July 2017, this Federal Budget will provide much needed stability while looking to reduce costs for SMSFs and prove additional flexibility. The key changes proposed for SMSFs and superannuation are: Three-yearly audit cycle for some self-managed superannuation funds The Government will change the annual SMSF audit requirement to a three yearly requirement for SMSFs with a history of good record keeping and compliance. The measure will start on 1 July 2019 for SMSF trustees that have a history of three consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner. Expanding the SMSF member limit from four to six As already announced, the Federal Government confirmed its decision to expand the number of members allowed in an SMSF from four to six. Expanding the definition of an SMSF to a fund with a maximum of six members will provide greater flexibility in how funds can be structured. Work test exemption The Government will provide more time for Australians aged 65 to 74 to boost their retirement savings, by introducing an exemption from the superannuation work test. This exemption will apply where an individual’s total superannuation balance is below $300,000 and will permit voluntary superannuation contributions in the first year that they do not meet the work test requirements. Life insurance cover in super to be opt-in for individuals under 25 years of age The Government will legislate that life insurance cover in superannuation will be opt-in for those individuals under 25 years of age or with account balances under $6000 to ensure that unnecessary fees do not erode smaller balances. Life insurance cover will also cease where no contributions have been made for a period of 13 months.
- The budget expands the Pension Work Bonus to allow pensioners to earn an extra $1300 a year without reducing pension payments. The bonus will be extended to the self-employed who can now earn up to $7800 a year with affecting their pension. Age Pensioners will be able to earn up to $300 each fortnight, which is an additional $50 each fortnight, without reducing pension payments. Morrison also ruled out any change to franking credit rebates, as proposed by the Labor Opposition, calling this is an “unfair” tax grab on retirees and pensioners. “We will stand up for older Australians to keep them safe and prevent elder abuse, with new support services and a national online register for enduring powers of attorney,” says Morrison. The government will expand the Pension Loans Scheme, where the retired use the equity in their homes to boost their incomes, to include full rate pensioners and self-funded retirees. These retirees will be able to increase retirement income by up to $17,800 for a couple without impacting on their eligibility for the pension or other benefits. And the number of home care places, allowing the ageing to stay in their homes longer, will rise by 14,000 over four years at a cost of $1.6 billion.
- $20,000 small business (aggregated turnover <$10 million) asset write-off extended to 30 June 2019 Small business simplified depreciation pool for assets costing >$20,000 available (balance <$20,000 write off) From 1 July 2019 immediate deductibility threshold reverts back to $1,000 GST inclusive Limited cash benefits for R&D for SMEs with aggregated turnover <$20 million PAYG Deductions denied for non-compliant PAYG withholding From 1 July 2019, tax deductions denied for wage and contractor payments where no PAYG withheld when required to do so Adds to director penalties ATO can impose on offending taxpayers Includes contractors that should be treated as employees; foreign employees working in Aust. or Australians working overseas Single Touch Payroll means payments more closely scrutinized by ATO
- Phased approach in Ten Year Enterprise Plan subject to passing Senate 25% corporate tax rate by 2026/27 Current 27.5% corporate tax rate to apply to other corporate tax entities with aggregated turnover of <$50 million Apply from start of 2018/19 income year The ’80% passive income’ threshold test for eligibility of lower rate remains before the Senate THIN CAPITALISATION CHANGES Operate to deny debt deductions > $2 million of an entity and its associates (10% from 1 July 2018) Debt/Equity safe harbour ratios to align value of assets with value in financial accounts Valuations prior to 7.30PM (AEST) on 8 May 2018 relied upon until first income year after 1 July 2019 Foreign controlled Aust consolidated/MEC groups that control a foreign entity – Inward Investor methodology Apply from 1 July 2019 GLOBAL ENTITY DEFINITION Broaden the “Significant Global Entity” definition (>$1 billion global income) Remove requirement for global parent entity to prepare consolidated accounts Apply to private companies, trusts, partnerships and investment entities that meet the turnover test No new measures announced, consultation paper to be issued on taxing models of digital business in Australia MANAGED INVESTMENT TRUSTS 56 new countries whose residents can benefit from reduced 15% WHT on certain distributions from Australian MITs Effective from 1 January 2019 Remove the 50% CGT discount at the trust level discount available in the hands of the beneficiary who qualify Applies to payments made by Australian MITs and Attribution MITs from 1 July 2019 FILM INDUSTRY TAX MEASURES Tax measures affecting actors, sportspeople and the film industry Changes to income attribution rules of foreign individuals working in Australia to tax fame and image rights income from 1 July 2019
- LAND BANKING MEASURES Denial of income tax deductions for expenses of holding vacant land, such as interest and council rates, from 1 July 2019 Costs denied a deduction maybe included in cost base subject to satisfying existing cost base tests Two exclusions (1) land used to carry on a business, including primary production; or (2) expenses incurred after property constructed on land that has received occupancy approval and is available for rent Development groups that hold land for extended periods in separate SPV entities as part of group of entities carrying on business need clarity INTEGRITY MEASURES Integrity rules dealing with assignment of partnership interest from 8 May 2018 CGT small business exemption not available to partners of partnerships assigning rights to future income of the partnership No change to small business CGT concessions DIVISION 7A Division 7A – loans from private companies Unpaid present entitlements (UPEs) treated as loans under Division 7A from 1 July 2019 Measures silent on whether limited to new UPEs or pre-existing loans at 1 July 2019 No date by which UPE must be repaid or placed on complying loan terms Top up tax by small business owner operating through trusts utilising corporate beneficiaries, even if business profits reinvested Anticipated amendments to improve integrity of Division 7A deferred to 1 July 2019 ANTI AVOIDANCE RULES Anti-avoidance rules for circular trust distributions Anti-avoidance rules apply from 1 July 2019 to family trust that act as beneficiaries of each other in a ‘round-robin’ arrangement Where a distribution can be ultimately returned to the original trustee to avoid paying tax will be taxable at the top MTR plus MCL Increase compliance for trusts to trace and report ultimate trust distributions where there are no round-robin distributions TESTAMENTARY TRUSTS From 1 July 2019, concessionally taxed income distributed from testamentary trusts to minors restricted Only income from assets owned by deceased at time of death, or investment of proceeds from sale of such assets concessionally taxed Minors taxed at higher tax rates (as opposed to adult marginal tax rates) from income from assets unrelated to the deceased estate
- Small Business: Less than $20 million turnover No impact to the 13.5% tax saving on R&D expenditure Cash refunds from refundable R&D tax offset capped at $4 million per annum Excess carried forward as non-refundable tax offsets to future income years Large Business: Greater than $20 million turnover The flat 8.5% tax saving on R&D expenditure will be replaced with a progressive scale that increases from 4% to 12.5% of R&D expenditure, based on R&D intensity. R&D intensity is defined as R&D spend divided by total annual expenditure. The R&D cap will increase from $100 million to $150 million. R&D Intensity Scale 4% for R&D expenditure between 0% to 2% R&D intensity 6.5% for R&D expenditure above 2% to 5% R&D intensity 9% for R&D expenditure above 5% to 10% R&D intensity 12.5% for R&D expenditure above 10% R&D intensity
- “A company with a 30% tax rate that has $120 million of R&D expenditure for the year and $300 million of total expenditure will have an overall R&D intensity of 40%. It claims R&D tax offsets at a rate of 34 per cent for the first $6 million of R&D expenditure, 36.5% for the next $9 million of R&D expenditure, 39% for the next $15 million of R&D expenditure and 42.5% for the final $90 million of its R&D expenditure. It also benefits from the increased $150 million R&D expenditure threshold as it can claim concessional R&D tax offsets for its R&D expenditure that exceeds $100 million, rather than claiming these offsets at the company tax rate.”
- Elsewhere the Government is spending much more on a crackdown on the black economy (including outlawing cash transfers above $10k), airport security, the PBS and has extended the immediate asset write off for small business investments of less than $20k.
- Budget deficit for 2017-2018: Now forecast to be $18.2bn – the lowest deficit in a decade. Forecast deficit for 2018-2019: Drops to $14.5bn, before a forecast return to surplus of $2.2bn in 2019-2020. GDP growth: Projected to be 3% per annum for the four financial years from 2018-2019. Wages growth: Expected to be 2.25% in 2017-2018, rising to 2.75% in 2018-2019 and then 3.25% in 2019-2020. Overall we don’t see this Budget as a big spending pre-election give away. That means the Budget will provide scope to spend more – and both sides of politics will almost certainly do so. The Contingency reserve is around $21bn.