Federal Budget 2018 – What You Need To Know
written by Josh McMullen
The 2018 Federal Budget was handed down on Tuesday 8 May. Following is a brief summary of some of the headline measures.
- Income Tax Reduced – The centrepiece of the Budget was a three-step plan to reduce income tax for low and middle income earners over the next 7 years. The first step involves introducing a new Low and Middle Income Tax Offset from 2018/2019. This provides up to $530 per year by way of a non-refundable offset after an individual submits their tax return each year and is in addition to the existing Low-Income Tax Offset. Taxpayers who earn between $48, 000 and $90, 000 will receive the maximum $530. For individuals earning $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar, while a benefit of up to $200 will be provided for taxpayers with taxable income of $37,000 or less. Also from 1 July 2018, the Government intends to increase the top income threshold of the 32.5% tax bracket from $87,000 to $90,000. This first stage, to apply from 2018/2019, has the support of the Opposition and is therefore very likely to be passed into law. The next two steps are however opposed by the Opposition and in any case will only apply from 2022/2023 assuming they are first enacted, and then not repealed by subsequent Governments. Essentially, these later steps provide for a staged increase in the 32.5% tax bracket from $90,000 to $200,000, which will ultimately see the 37% tax bracket abolished altogether.
- Minors and Testamentary Trusts Crackdown – Effective 1 July 2019, the concessional tax rates available for minors (those under 18) receiving income from testamentary trusts will be limited to income derived from assets that are transferred from deceased estates or the proceeds of the disposal or investment of those assets. Currently and up until this date, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors.
- Medicare Levy Increase Scrapped – The Government will not proceed with its plans to increase the Medicare levy from 2% to 2.5% from 1 July 2019.
- Instant Asset Write-Off – The $20,000 instant asset write-off will be extended by 12 months to 30 June 2019, for businesses with an annual aggregated turnover of less than $10 million. This threshold amount was due to revert to $1, 000 from 1 July 2018. To access the $20,000 write-off, assets must be acquired and installed ready for use in your business by 30 June 2019.
- No Tax Deductions for Non-Compliant Payments to Employees and Contractors – Under this measure, from 1 July 2019 businesses will no longer be able to claim tax deductions for payments to their employees where they have not withheld any amount of PAYG (where PAYG withholding is required). The Government will also remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold under the “No ABN Withholding” requirements.
- Deductions Disallowed for Holding Vacant Land – From 1 July 2019, deductions will be disallowed for expenses associated with holding vacant land in circumstances where that land is not genuinely held for the purpose of earning assessable income. An example of a denied deduction is interest on money borrowed to acquire that land. The measure will apply to land held for residential or commercial purposes. However, the “carrying on a business” test will generally exclude land held for commercial development. Any denied expenses under this measure may, if eligible, be included in the cost base of the property for CGT purposes (such as borrowing expenses and council rates). This measure however will not apply to expenses associated with holding land that are incurred either (a) after a property has been constructed on the land and is available for rent, or (b) where the land is being used to carry on a business (for example, primary production).
- Division 7A Clarified – For those who operate discretionary trusts, the Government will clarify the law to ensure that Division 7A applies to unpaid present entitlements (UPE). To recap, a UPE arises where a related private company becomes entitled to a share of trust income as a beneficiary but has not been paid that amount (i.e. it has been retained by the trust). Division 7A requires benefits provided by private companies to related taxpayers (such as trusts) to be taxed as dividends unless they are put under complying Division 7A loans or another exception applies. This measure will ensure the UPE is either required to be repaid to the private company over time as a complying loan (including interest) or subject to tax as a dividend. This area of law can be difficult for taxpayers to understand, and therefore clarification will be welcome.
- Crackdown on Circular Distributions by Family Trusts – From 1 July 2019, the anti-avoidance rules that currently apply to other closely held trusts that engage in circular trust distributions will be extended to family trusts. This will prevent the currently available strategy where family trusts act as beneficiaries of each other in a round-robin style arrangement whereby a distribution can be returned to the original trustee in a way that avoids any tax being paid on that amount. The crackdown will enable the ATO to impose 47% tax on such distributions.
- SMSF Maximum Membership Increased – To increase from a maximum of four individuals to six from 1 July 2019. This may allow for example additional family members or friends to join your SMSF.
- Safeguards to Prevent Inadvertent Breaches of Contribution Caps – Individuals with multiple employers who are earning over $263,157 can nominate certain employers to not pay superannuation guarantee on their behalf.
- Work Test Exemption for Recent Retirees – Individuals will be granted an exemption from the “work test” for voluntary superannuation contributions, provided their superannuation balance is below $300,000 in the first year that they do not meet the work test requirements. The work test requires individuals work for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which you plan to make a contribution. This will provide scope for those transitioning to retirement to contribute extra cash to the concessionally taxed superannuation environment.
- Crackdown on Super Fund Fees – Passive fees charged by superannuation funds will be capped at 3% for small accounts with balances below $6,000, while exit fees will be banned for all superannuation accounts from 1 July 2019.
If you have any question on how these measures may impact you or your business, please contact your PT Partners Advisor on (07) 3808 4499.
Josh McMullen is a senior tax writer at PT Partners.