How does the 2018 Federal Budget impact you?

Reward for work is a dominant theme in this year’s Budget. The seven year personal income tax plan initially targets low to middle income earners before making significant changes to the tax brackets.

Innovation continues to be the Government’s mantra with the medical industry a clear winner. The Government has dedicated a total of $1.3 billion to fund genomic research projects investigating medicines that can be tailored to individual patients, clinical trials of new drugs and development of new medical technologies.

As you would expect from an election budget, there is not a lot of bad news or serious cuts. The black economy however features consistently with a multiagency taskforce and all manner of programs including the imposition of a limit of $10,000 on cash payments.

There are also a number of tax changes to close loopholes and while not presented in the budget, the Treasurer has flagged the release of a discussion paper that will explore options for taxing digital business in Australia. There will be more to come – just not this year.

Below is a summary of how the 2018 Budget may effect you, your family and your business.

Individuals and families

Superannuation

Investors

Business


Individuals and families

Personal income tax cuts

The anticipated personal income tax cuts will be delivered as part of a seven year plan culminating in the removal of one tax bracket from 1 July 2024. The Government states that the end result will be that around 94% of taxpayers will be subject to a marginal tax rate of 32.5%.

The focus right now however is the low and middle tax income brackets with changes to the tax brackets and the introduction of the Low and Middle Income Tax Offset (LIMITO).

Tax rate Tax thresholds
Current From 1 July 2018 From 1 July 2022 From 1 July 2024
0% $0 - $18,200 $0 - $18,200 $0 - $18,200 $0 - $18,200
19% $18,201 - $37,000 $18,201 - $37,000 $18,201 - $41,000 $18,201 - $41,000
32.5% $37,001 - $87,000 $37,001 - $90,000 $41,001 - $120,000 $41,001 - $200,000
37% $87,001 - $180,000 $90,001 - $180,000 $120,001 - $180,000 -
45% > $180,000 > $180,000 > $180,000 > $200,000
LITO Up to $445 Up to $445 Up to $645 Up to $645
LIMITO - Up to $530 - -
LITO = Low Income Tax Offset; LIMITO = Low and Middle Income Tax Offset

From 1 July 2018:

  • The top threshold of the 32.5% personal income tax bracket will increase from $87,000 to $90,000.

From 1 July 2022:

  • The top threshold of the 19% personal income tax bracket will increase from $37,000 to $41,000.
  • The top threshold of the 32.5% personal income tax bracket will again increase from $90,000 to $120,000.
  • The Low Income Tax offset will increase from $445 to $645. The increased Low Income Tax Offset will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667.

From 1 July 2024:

  • The 37% tax bracket will be removed.
  • The top threshold of the 32.5% personal income tax bracket will again increase from $120,000 to $200,000.

Low and Middle Income Tax Offset

Effective from: 2018-19 until 2021-22 income years

How to give low and middle income earners a tax break without directly benefiting those on larger incomes? The Government's solution to this conundrum is the introduction of the Low and Middle Income Tax Offset (LIMITO) from the 2018-19 income year.

Applied as a non-refundable tax offset after an individual lodges their income tax return, the tax offset provides:

Income Low and Middle Income Tax Offset
$0 - $37,000 Up to $200
$37,000 - $48,000 Offset increase of 3 cents per dollar up to $530
$48,000 - $90,000 Up to $530
$90,001 to $125,333 Offset phases out at a rate of 1.5 cents per dollar

Assuming the amending legislation passes Parliament, the offset is intended to be available for the 2018- 19 to 2021-22 income years.

The Low and Middle Income Tax Offset is in addition to the existing Low Income Tax Offset.

If you are trying to work out what these changes mean to you, the Government has added a tax relief estimator on the front page of the budget website. For example, someone on an annual taxable income of $65,000, would receive an annual benefit of around $530 in the first few years and a total benefit of $3,740.

Medicare levy low income threshold increase

Effective from: 2017-18 income years

The Medicare levy low income thresholds for singles, families, seniors and pensioners will increase from the 2017-18 income years.

  2016-17 2017-18
Singles $21,655 $21,980
Families $36,541 $37,089
Single seniors and pensioners $34,244 $34,758
Family threshold for seniors and pensioners $47,670 $48,385
Each dependent child or student (increase to family threshold) $3,356 $3,406

Encouraging pensioner financial independence

Effective from: 2017-18

A range of measures seek to encourage pensioner financial independence:

  • Pension Work Bonus increase from $250 to $300 per fortnight - allowing pensioners to earn up to $7,800 each year without impacting their pension. This is in addition to the income free area, which is currently $168 a fortnight for a single pensioner and $300 a fortnight (combined) for a pensioner couple. A single person with no other income will be able to earn up to $468 a fortnight from work and get the maximum rate of Age Pension.
  • Pensioners will also continue to accrue unused amounts of the fortnightly Work Bonus, which can exempt future earnings from the pension income test. The maximum accrual amount will increase to $7,800.
  • The pension work bonus will also be expanded to allow self-employed retirees to earn up to $300 per fortnight without impacting their pension.
  • Example from the pension work bonus fact sheet

    Nisha is a single part rate age pensioner who runs a small business. She earns an average of $1,000 a fortnight. Her assets are below the pension asset test free area. As Nisha's income from self- employment is now eligible for the Work Bonus, the first $300 of her income will be excluded from the pension income test, and Nisha will receive a higher part-rate Age Pension. Her pension will increase by $150 per fortnight.

  • Amendments to the pension means test rules - new Age Pension means testing rules will be introduced for pooled lifetime income streams. The rules will assess a fixed 60% of all pooled lifetime product payments as income, and 60% of the purchase price of the product as assets until 84, or a minimum of 5 years, and then 30% for the rest of the person's life.
  • Expansion of the pension loan scheme - the scheme, enabling Australians to use the equity in their homes to increase their incomes, will be extended to everyone over Age Pension age. The maximum fortnightly income stream will increase to 150% of the Age Pension rate.

Superannuation

3-Year cycle for Self-Manager Super Fund audits

Effective from: 1 July 2019

Well this one won't be popular with the accounting community.

SMSFs with a history of good record-keeping and compliance - that is, three consecutive years of clear audit reports and annual returns lodged on time, will only be required to have their fund audited every three years.

The Government has flagged consultation with key stakeholders on this measure (with no further details available at present).

The key issue with this measure is how the three-year cycle will work - is it an audit for one year in three or three years once?

If the audit is only for the third year of the cycle, then there is a major risk of compliance issues going unnoticed. Having two years with no audits may present opportunities for 'creative' trustees to manipulate the superannuation system. It will be difficult for an auditor to sign-off on the third year without having a level of comfort as to what has transpired in previous years.

If the audit is for the prior three years, the benefit for members may be negligible as auditors will need to charge for three years of work. The measure is designed to reduce 'red-tape' for trustees but having three years of questions from auditors might just group three years into one.

Auditors could be faced with seasonal swings in workflow which will be extremely difficult to manage with audits staggered across the 3 years.

Retirement income strategy for super fund members

Effective from: No time period noted

The Superannuation Industry (Supervision) Act 1993 will be amended to introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for superannuation fund members.

The Corporations Act 2001 will also be amended to require providers of retirement income products to report simplified, standardised metrics in product disclosure to assist customer decision making.

Preventing inadvertent breaches of concessional caps

Effective 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 (SG).

The measure will allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap (and incurring excess contributions tax) as a result of multiple compulsory SG contributions.

It is anticipated that employees who use this measure will negotiate additional income in lieu of the 9.5% superannuation guarantee.

Exit fees scrapped, fees capped, and more transferred to ATO

Effective from: 1 July 2019

A ban on exit fees from all superannuation funds will be introduced along with a 3% annual cap on passive fees on accounts with balances below $6,000 from 1 July 2019.

Superannuation funds will also be required to transfer all inactive superannuation accounts with balances below $6,000 to the ATO.

These changes create a gain of $1.1 billion in the underlying cash balance over the forward estimates. This gain is in part a timing issue reflecting the time taken to reunite lost super balances with their owners.

Work test exemption for retirees

Effective from: 1 July 2019

An exemption to the work test will be introduced for people aged 65 to 74 with superannuation balances below $300,000, who make voluntary contributions to superannuation. The exemption applies in the first year that they do not meet the work test requirements. This measure is really a reprieve for people transitioning to retirement to get their affairs in order.

Currently, the work test restricts the ability to make voluntary superannuation contributions for those aged 65-74 to individuals who work a minimum of 40 hours in any 30 day period in the financial year.

Example from the Superannuation Work Test exemption for retirees fact sheet

At the age of 68, Gus retires from full-time work on 1 June 2020. As he would not meet the work test in the 2020-21 financial year, Gus would currently be prevented from making any voluntary super contributions after 30 June 2020.

As his total superannuation balance is $150,000 at the end of the 2019-20 financial year, Gus is eligible to make contributions under the work test exemption from 1 July 2020 to 30 June 2021.

As Gus had not reached his concessional contribution cap over the past 2 years, having contributed only $18,000 in 2018-19 and $12,000 in 2019-20, under the existing carry forward arrangements and new work test exemption Gus can contribute up to $45,000 at concessional tax rates in the 2020-21 financial year.

As a result of the work test exemption, Gus is also able to contribute up to $100,000 in non-concessional contributions in 2020-21.

Increase in the maximum number of members in a Self-managed Super Fund

Effective from: 1 July 2019

The maximum number of allowable members in new and existing SMSFs and small APRA funds will increase from four to six.


Investors

No deductions for vacant land

Effective from: 1 July 2019

Deductions will be denied for expenses associated with holding vacant land. The Government is concerned that deductions are being improperly claimed for expenses, such as interest costs, related to holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. They expect the measure will also help to prevent 'land banking', which denies the use of land for housing or other development.

Denied deductions will not be able to be carried forward for use in later income years. However, expenses which cannot be claimed as a deduction can form part of the CGT cost base of the property as long as they fall within specific categories (such as interest, borrowing expenses and council rates). This means that the expenses can reduce a capital gain made on future sale, although there are limitations on this which mean that holding costs cannot create or increase a capital loss and cannot generally be taken into account if the property was acquired before 20 August 1991.

The measure will not apply to expenses associated with holding land that are incurred after:

  • a property has been constructed on the land, it has received approval to be occupied and is available for rent; or
  • the land is being used by the owner to carry on a business, including a business of primary production.

The measure applies to land held for residential or commercial purposes. However, the 'carrying on a business' test will generally exclude land held for commercial development.

Unfortunately, it appears that this measure may impact on those who incur holding costs in relation to land that is genuinely held for the purpose of producing assessable income, including where the owner is actively constructing a dwelling on the land that will be used as a rental property (Steele's case and ATO ruling TR 2004/4 deal with this area). This is another example of where those doing the right thing will be impacted by the Government becoming fed up with those who aren't.

It also remains to be seen how holding expenses that relate to land held as trading stock will be dealt with under the proposed changes.


Business

$20K accelerated depreciation extended

Effective from: continues until 30 June 2019

The popular $20,000 immediate deduction for small business entities will be extended for another 12 months until 30 June 2019. The measure was originally introduced in the 2015-16 Budget.

Small businesses entities will be able to immediately deduct purchases of eligible assets costing less than $20,000 that are first used or installed ready for use by 30 June 2019.

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

The current 'lock out' laws for the simplified depreciation rules (preventing small businesses from re- entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2019.

Security, road freight, and computer design services become ATO black economy target

Effective from: 1 July 2019

The taxable payments reporting system requires businesses in certain industries to report payments they make to contractors (individual and total for the year) to the ATO. 'Payment' means any form of consideration including non-cash benefits and constructive payments.

From 1 July 2019 the following industries will be required to lodge annual reports to the ATO:

  • security providers and investigation services;
  • road freight transport; and
  • computer system design and related services.

The building industry, cleaning and courier businesses are already required to provide this enhanced reporting to the ATO.

The first annual report for these industries is required by August 2020. Businesses in these industries will need to start collecting information on payments to contractors from 1 July 2019.

No more salary and wage tax deductions for late paying employers

Effective from: 1 July 2019

The Government really wants employers focussed on their tax obligations to the point where employers that fall behind will lose the right to claim employment related tax deductions.

Employers who do not keep up with their PAYG obligations will not be able to claim a tax deduction for payments to employees (such as wages).

Businesses will also lose the ability to claim deductions for payments made to contractors where the contractor does not provide an ABN and the business does not withhold PAYG.

$10K limit on cash transactions

Effective from: 1 July 2019

A limit of $10,000 will be introduced for cash payments made to businesses for goods and services from 1 July 2019. Payments above the threshold will need to be made through an electronic payment system or by cheque.

The measure does not impact on transactions with financial institutions or non-business consumer to consumer transactions. But, if you run a business, from 1 July 2019 you will not be able to accept cash transactions above $10,000.

If you're unsure how these changes will impact you, please don't hesitate to give us a call or book an appointment to speak to your accountant.

Stay informed of impacts to your finances