2017/18 Federal Budget changes
On Tuesday 9 May 2017, the Treasurer, Scott Morrison, released the Government’s 2017-18 Budget. The Government is proposing to address the housing affordability crisis with a package of tax, superannuation and other measures. Additionally, the Budget contains measures intended to ensure the integrity of the tax and superannuation system. We have summarised the proposed changes in order of the date of commencement.
PROPOSED MEASURES EFFECTIVE FROM BUDGET NIGHT ON 9 MAY 2017 (16/17 FINANCIAL YEAR)
CGT main residence exemption removed
Individuals who are foreign or temporary tax residents will no longer have access to the CGT main residence exemption from 7:30pm (AEST) on 9 May 2017. Existing properties held before this date will only be grandfathered until 30 June 2019. The principal asset test will be applied on an associate inclusive basis for foreign tax residents with indirect interests in Australian real property.
The measure will apply from 7:30pm (AEST) on 9 May 2017. It is intended to ensure that foreign tax residents cannot avoid CGT liability by disaggregating indirect interests in Australian real property.
Annual charge for foreign-owned vacant residential properties
Foreign owners of vacant residential property, or property that is not genuinely available on the rental market for at least six months per year, will be charged an annual levy of at least $5,000. The annual levy will be equivalent to the relevant foreign investment application fee imposed on the property when it was acquired. This measure will apply to persons who make a foreign investment application for residential property from 7:30pm (AEST) on 9 May 2017.
This measure is intended to encourage foreign owners of residential property to make their properties available for rent where they are not used as a residence and limiting the overall housing stock.
N.B. In the Victorian 2017-18 State Budget, the State Government also proposed that an annual vacant residential property tax equivalent to 1% of Capital Improvement Value of the taxable land will be imposed from 1 January 2018.
No information has been provided in the Federal Budget as to how this new annual levy will interact with the proposed State based vacant residential property tax.
Foreign ownership in new developments restricted to 50%
The Government will introduce a 50% cap on foreign ownership in new developments through a condition on New Dwelling Exemption Certificates. The cap will be included as a condition on New Dwelling Exemption Certificates where the application was made from 7:30pm (AEST) on 9 May 2017. New Dwelling Exemption Certificates are granted to property developers and act as a pre-approval allowing the sale of new dwellings in a specified development to foreign persons without each foreign purchaser seeking their own foreign investment approval. The current certificates do not limit the amount of sales that may be made to foreign purchasers.
The measure will ensure that a minimum proportion of developments are available for Australians to purchase.
Increase to Medicare levy low-income threshold
The Government will increase the Medicare levy low-income thresholds for singles, families and seniors and pensioners from the 16/17 income year. The threshold for singles will be increased to $21,655. The family threshold will be increased to $36,541 plus $3,356 for each dependent child or student.
For single seniors and pensioners, the threshold will be increased to $34,244. The family threshold for seniors and pensioners will be increased to $47,670 plus $3,356 for each dependent child or student.
PROPOSED MEASURES EFFECTIVE FOR 17/18 FINANCIAL YEAR
Individual income tax rates for 2017-18:
Tax on this income
$18,201 – $37,000
19c for each $1 over $18,200
$37,001 – $87 000
$3,572 plus 32.5c for each $1 over $37,000
$87,001 – $180,000
$19,822 plus 37c for each $1 over $87,000
$54,232 plus 45c for each $1 over $180,000
* The above marginal tax rate does not include Medicare levy (2%)
The 2% Temporary Budget Repair levy applicable to taxable income exceeding $180,000 will expire on 30 June 2017. For the 17/18 Financial Year, for taxpayers earning more than $180,000 will have a drop of 2% marginal tax rate because of the removal of the Temporary Budget Levy.
First home super saver scheme
To reduce pressure on housing affordability the Government will allow voluntary superannuation contributions to be withdrawn for a first home deposit. From 1 July 2017, first homebuyers can make voluntary contributions of up to $15,000 per year, up to $30,000 in total. The contribution must be within existing concessional and non-concessional caps. Concessional contributions are taxed at 15% in the fund and earnings on contributions are taxed at 15% in the fund.
From 1 July 2018, these contributions (along with deemed earnings) can be withdrawn for a first home deposit. Concessional contributions and earnings that are withdrawn will be taxed at the taxpayer’s marginal tax rate less a 30% offset. When non-concessional contributions are withdrawn, they will be tax free.
Under this new first home saver scheme, both members of a couple can take advantage of the measure to buy their first home together.
Extending the $20,000 immediate write-off for small business
The $20,000 instant asset write-off for small business will be extended by 12 months to 30 June 2018, for businesses with an aggregated annual turnover of less than $10 million (before 1 July 2017, the small business turnover is only less than 2 million). This means small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2018. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter. The pool balance can also be immediately deducted if the balance is less than $20,000 over this period.
From 1 July 2018, the immediate deductibility threshold and the balance at which the pool can be immediately deducted will revert back to $1,000.
Small business CGT concessions to be tightened
The Government will amend the small business CGT concessions with effect from 1 July 2017 to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business. This proposed amendment is targeted at taxpayers who are able to access these concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do the count towards the tests for determining eligibility for the concessions.
The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million.
Reduced residential property deductions
From 1 July 2017, the Government will no longer allow deductions for travel expenses related to inspecting, maintaining or collecting rent for residential property. However, investors can continue to deduct those types of expenses incurred by third parties such as real estate agents and property management services. In addition, from 1 July 2017, depreciation deductions on plant and equipment (for example dishwashers and fans) will be limited to outlays actually incurred on residential properties.
For plant and equipment purchased after the 9 May 2017, deductions are claimable over the effective life of the asset only by the investor who purchases the items. Subsequent investors of a property will be unable to claim deductions for existing plant and equipment, although the value of existing items will be reflected in the cost base for capital gain tax purposes.
For investors with existing investment properties as at Budget night (9/5/2017), grandfathering rules will apply, allowing depreciation deductions on plant and equipment to continue until either the investor no longer owns the asset or the asset reaches the end of its effective life.
However, the proposed measure does not apply to commercial, industrial, and other non-residential properties.
Limited recourse borrowing arrangements (LRBAs)
The use of LRBAs will be included in a member’s total superannuation balance and transfer balance cap from 1 July 2017. This will affect a person’s ability to make non-concessional contributions and use the segregated method in an SMSF. LRBAs can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap. The outstanding balance of an LRBA will now be included in a member’s annual total superannuation balance and the repayment of the principal and interest of an LRBA from a member’s accumulation account will be a credit in the member’s transfer balance account.
Extending tax relief for merging superannuation funds
The Government will extend the current tax relief for merging superannuation funds until 1 July 2020. Since December 2008, tax relief has been available for superannuation funds to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. This tax relief was due to lapse on 1 July 2017. Extending this relief will ensure superannuation fund members’ balances are not reduced by tax when superannuation funds merge.
Expansion of foreign resident CGT withholding regime
The CGT withholding rate that applies to foreign tax residents will be increased from 10% to 12.5% from 1 July 2017. Currently, the foreign resident CGT withholding obligation applies to Australian real property and related interests valued at $2 million or more. This threshold will be reduced to $750,000 from 1 July 2017, increasing the range of properties and interests that will come within this obligation.
Double taxation of digital currency removed
From 1 July 2017, the Government will align the GST treatment of digital currency (e.g., Bitcoin) with money. Digital currency is currently treated as intangible property for GST purposes. Consequently, consumers who use digital currencies as payment can effectively bear GST twice: once on the purchase of the digital currency and again on its use in exchange for other goods and services subject to GST. This measure will ensure purchases of digital currency are no longer subject to the GST.
Skilling Australians Fund levy introduced
Businesses that employ foreign workers on certain skilled visas will be required to pay a levy that will provide revenue for a new Skilling Australians Fund from March 2018. Businesses with turnover of less than $10 million per year will be required to make an upfront payment of $1,200 per visa per year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $3,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
Businesses with turnover of $10 million or more per year will be required to make an upfront payment of $1,800 per visa per year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $5,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
The levy will replace the current training benchmark financial obligations for employers of workers on Temporary Work (Skilled) (subclass 457) visas, which are being abolished, and permanent Employer Nomination Scheme (subclass186) Direct Entry stream visas.
Major bank levy to be introduced
From 1 July 2017, the Government will introduce a levy for banks with licensed entity liabilities of at least $100 billion. The $100 billion threshold will be indexed to grow in line with nominal gross domestic product (GDP). Currently this levy will only affect the five largest banks but does not apply to Superannuation Funds and insurance companies. The levy will be calculated quarterly as 0.015% of a bank’s licensed entity liabilities. This equates to an annualised rate of 0.06%.
Importantly, the levy will not apply to deposits of individuals, businesses and other entities protected by the Finance Claims Scheme. That means that banks will not incur this cost on funds held by an individual of up to $250,000.
PROPOSED MEASURES EFFECTIVE FOR 18/19 AND LATER FINANCIAL YEARS
Purchasers of new residential properties to remit GST
From 1 July 2018, purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO as part of settlement. Under the current law (where the GST is included in the purchase price and the developer remits the GST to the ATO), some developers are failing to remit the GST to the ATO despite having claimed GST credits on their construction costs. The new measure is an integrity measure to strengthen compliance with the GST law.
Super contributions from downsizing
From 1 July 2018, the Government will allow a person aged 65 or over to make a non-concessional contribution into superannuation of up to $300,000 from the proceeds of selling their principal residence. They must have owned their principal residence for at least 10 years and both members of a couple will be able to take advantage of this measure up to $600,000 for the same home.
These contributions are in addition to existing rules and caps and are exempt from the age test, work test and the $1.6 million total superannuation balance test for making non-concessional contributions.
Related party transactions to increase super reduced
From 1 July 2018, the Government will further improve the integrity of the superannuation system by reducing opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings. The non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.
Changes affecting the Higher Education Loan Program (HELP)
From 1 July 2018, the Government will revise the income threshold for repayment of HELP debt, repayment rates and the indexation of the repayment thresholds. A new minimum repayment threshold of $42,000 will be established with a 1% repayment rate. Currently, the minimum repayment threshold for 2017/18 year is $55,874 with a repayment rate of 4%.
A maximum threshold of $119,882 with a 10% repayment rate will also be introduced. Currently, the maximum repayment threshold for the 2017/18 year is $103,766 and a repayment rate of 8%.
Payments reporting extended to couriers and cleaners
From 1 July 2018, the Government will extend the taxable payments reporting system (TPRS) to contractors in the courier and cleaning industries. Under the TPRS, businesses are required to report payments they make to contractors (individual and total for the year) to the ATO. This measure brings payments to contractors in the courier and cleaning industries into line with wages, which are reported to the ATO.
Businesses in these industries will need to ensure that they collect information from 1 July 2018, with the first annual report required in August 2019.
Increase in the Medicare levy from 1 July 2019
From 1 July 2019, the Government will increase the Medicare levy from 2% to 2.5% of taxable income. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased. Low income earners will continue to receive relief from the Medicare levy through the low -income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place. All revenue generated by the Medicare levy will be used to support the National Disability Insurance Scheme (NDIS) and to guarantee Medicare.
It is important to note that the proposed measures are not yet law, they are required to be passed in the Parliament and subject to change. TST Partners shall be addressing these in upcoming publications.
Eddie Li Bcom FCPA RTA | Partners, TST Partners (Accountants) | firstname.lastname@example.org
Francis Gu BCom (Finance) | Managing Director, TST Partners Group | email@example.com
This publication only provides an outline of the 2017/18 Federal Budget changes.This publication is provided on the understanding that TST Partners Group and its subsidiaries does not take responsibility for any errors or omissions in this document, for persons acting on the information contained in this document or from any action which might arise from reliance on this publication. TST Partners Group and its subsidiaries disclaims any liability that may arise from reliance on the contents of this publication.