Deferral of proposed private company loan (Division 7A) changes

The Government is proposing to defer the introduction of the proposed Division 7A measures by one year to 1 July 2020.

The private company loan rule changes were to have significant impacts on business cash flow requirements to meet loan repayments under a broader range of loans captured. For example, pre-1997 loans may be repayable, 25 year loans would need to be repaid earlier and interest charges were significantly higher.

Small businesses now have an extra year to plan for the changes and manage restructures and tax cash flow impacts from the proposals. The team at Bentleys will continue to keep clients up-to-date with any changes to the proposals and how this may impact your tax cash flow in future.

Extension of instant asset write-off

The Government will increase the thresholds and timing for the instant asset write-off.

Currently small businesses with a turnover less than $10 million can claim an upfront income tax deduction for certain assets costing less than $25,000 from January 2019 until the end of the 2020 financial year. The Government has announced it will increase the asset write-off threshold to $30,000 and the turnover threshold to $50 million for expenditure from 2 April 2019 until 30 June 2020.

If your business was previously over the $10 million turnover threshold, but below $50 million, you should now review your capex plans and consider whether capex should be brought forward before 30 June 2020. You also need to be aware that certain assets (e.g. leased assets) are not eligible for the write-off. Property owners may consider how capex is shared with small business tenants eligible for the write-off. Asset leasing entities in groups may also need to be structured appropriately to access the new measures.

Expansion of STP data collections

The Government will expand the use of data collected under the single touch payroll (STP) measure.

The STP will be extended to all businesses from 1 July 2019. This measure requires that all employers report employee payroll data in real time to the ATO through their software packages. The Government will now use this data for other Commonwealth Agencies (such as social security) to assist with other programs. This enhancement to the STP measures will apply from 1 July 2020.

Small businesses that will be subject to STP should now be planning to transition to the regime on 1 July 2019. This may require working with your current software provider or looking at different reporting alternatives. Your Bentleys advisor can assist you through this process.

International tax arbitrage rules refined

Technical amendments are to be made to ensure certain tax arbitrage rules operate effectively.

The hybrid mismatch rules are designed to prevent multinational corporations obtaining a tax arbitrage between different country’s tax treatments of financial arrangements. They are to be amended to clarify their operation.

The technical changes are to apply to income years commencing on or after 1 January 2019 or on or after 2 April 2019, depending on the relevant provision that is to change.

Taxpayers employing tax arbitrage opportunities, particularly including those with multiple entry consolidated (MEC) groups or trusts, may need to consider the impact of the technical amendments.

Managed investment trusts to reach more new investors

The country list is to be expanded for managed investment trusts (MITs).

The MIT regime allows a reduced 15% withholding tax rate (as opposed to 30%) on certain distributions to residents of countries that enter into effective information sharing agreements with Australia. There are currently 114 countries already listed and the Government proposes to add another eight countries, including Curaçao, Lebanon, Nauru, Pakistan, Panama, Peru, Qatar and the United Arab Emirates. The additional countries are to be added from 1 January 2020.

The MIT provisions offer very favourable after-tax returns to foreign investors in eligible Australian investments.

Bentleys helps businesses to establish and operate MITs, and helps investors to maximise their after-tax returns. This can involve assistance with establishing appropriate financing structures at the outset, so businesses can manage different types of returns for investors.

No new tax measures, but the ATO may be coming!

More funding has been given to the Australian Tax Office (ATO) to undertake audits and reviews.

The Government is continuing its campaign, as in previous budgets, to target aggressive tax planning strategies that may be carried out by multinationals, large public and private groups, including trusts and high wealth individuals.

Notably, the Government is providing the ATO’s Tax Avoidance Taskforce with an additional $1 billion in funding for 2020 to 2023 to undertake reviews and investigations.

You should make sure you have kept appropriate records to support tax positions taken in your returns. Bentleys can assist you to bring your tax files into an ‘audit ready’ state.

Does your business have unpaid taxes or unpaid superannuation obligations?

More funding has been given to the ATO to collect unpaid taxes and unpaid super.

An additional funding of $42.1 million over four years is to be provided to the ATO targeting unpaid taxes and superannuation liabilities. This measure is particularly aimed at larger business and high wealth individuals.

With an additional $103.6 million revenue expected including potential penalties, large business and high net worth individuals are encouraged to settle any outstanding tax obligations.

Minor indirect tax changes

There are no changes to GST in this year’s budget. However, there are changes to the luxury car tax refund arrangements for eligible primary producers and tourism operators. There is also an extension to the indirect tax concession scheme for certain diplomatic and consular representatives and international organisations.

Luxury car tax refunds – primary producers and tourism operators

The Government has announced increases to the luxury car tax refund arrangements for eligible primary producers and tourism operators. Luxury car tax (LCT) is a tax on cars with a GST-inclusive value above the LCT threshold. Currently, primary producers and tourism operators may be eligible for a partial refund of the LCT paid on eligible four-wheel or all-wheel drive cars, up to a maximum of $3,000. For vehicles acquired on or after 1 July 2019, the potential refund increases to a maximum of $10,000. The eligibility criteria and types of vehicles eligible for the current partial refund will remain unchanged.

Indirect tax concession scheme – diplomatic, consular and international organisation concessions

The government has also announced that it has granted or extended access to refunds of indirect tax (including GST, fuel and alcohol taxes) under the Indirect Tax Concession Scheme (ITCS). Access to the ITCS will be given to diplomatic and consular representatives of Sudan. Upgraded access to the ITCS will be granted to the Commission for the Conservation of Southern Bluefin Tuna. Extended access to the ITCS will apply for Laos, Mauritius and Samoa.

Primary producers and tourism operators should consider the potential benefit of deferring the acquisition of eligible cars to on or after 1 July 2019, when the increase in the LCT refund potentially applies.

R&D tax incentives

This federal budget has not made any announcements with respect to the R&D Tax Incentive or launch and any new broad-based innovation incentive/grant programs.

Most disappointing was the absence of any announcement as to the future of the Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 that incorporated numerous proposed changes to the R&D Tax Incentive; such as the contentious intensity test and a cap/ceiling on refundable tax offsets, both designed for budget control and general program integrity measures.

The Government has doubled down on its previous tax cuts for individuals, announcing further cuts in this budget

In the 2018 federal budget, the Government introduced tax cuts, mainly focused on low and middle income earners in the short term and making structural changes to the marginal tax rates in the longer term. These tax cuts were ultimately legislated with support of key independent cross-benchers in the Senate. In the 2019 budget, the Government has extended the previous year’s tax cuts, again focusing on immediate relief for small and middle income earners with some further changes to the structural tax rate changes further down the track.

Increase in the low and middle income tax offset

The Government has announced tax cuts for low and middle income earners in the form of an immediate increase in the low and middle income tax offset (LMITO). This will be applicable from the 30 June 2019 year, meaning eligible taxpayers can get access to the tax saving in their soon to be lodged 2019 tax return.

The maximum amount of the LMITO will be increased from $530 to $1,080 per annum. The minimum amount of the LMITO will increase from $200 to $255 per annum. The precise LMITO will be calculated according to the following table:

From 1 July 2022, the low income tax offset (LITO) will increase from $645 (the current legislated position) to $700. The phase out of the LITO will be calculated as follows:

Further structural tax rate changes

The Government has announced further structural changes to the marginal tax rate structure, with minor changes to income thresholds and reduction of one of the marginal rates.

In particular:

• From 1 July 2022, the top threshold of the 19% bracket will increase from $41,000 to $45,000
• From 1 July 2024, the current 32.5% marginal rate will be reduced to 30% which, consistent with the already legislated changes to the thresholds, will apply to taxable incomes between $45,001 to $200,000.

Marginal rates 2018-19 to 2023-24

Taking these changes into account, the following tables summarise the Government’s overall plan to reduce personal income tax (these rates exclude Medicare Levy):

Marginal rates from 2024-25 onwards

The low and middle income tax cuts will provide immediate relief to taxpayers from 2018-19. Individuals may want to consider lodging their tax return as early as possible as low and middle income earners should generally expect an increased refund of tax in their 30 June 2019 tax return.

The structural tax changes result in a flatter marginal tax rate structure with around 94% of individuals in the middle to higher brackets paying a maximum of 30% tax from 1 July 2024. The Government highlights that the move to the 30% rate is intended to align the rate with corporate tax rates, however recent corporate tax changes have meant that companies earning income of $50 million or less may be eligible for a lower tax rate legislated to reduce to 25% over time. As such, taxing income in a corporate structure may still be preferred in certain cases.

Medicare Levy low income thresholds to be adjusted to reflect movements in CPI

Due to movements in CPI, the Government has announced an increase in the Medicare Levy low income thresholds.  These changes are necessary to ensure that low income taxpayers continue to be exempt from the Medicare Levy notwithstanding CPI-driven wage growth.

Medicare Levy is generally imposed at a rate of 2% of taxable income for resident individual taxpayers. However, an exemption is available from the Medicare Levy where a taxpayer’s income is below the low income threshold. The low income threshold is different depending on whether you are a single, family or senior/pensioner. Due to the movement in CPI and the associated growth in wages, the Government has announced an increase in the Medicare Levy low income threshold.

Subject to legislation being passed to give effect to this measure, the Medicare Levy low income maximum thresholds that will apply for the 2018-19 and future years, as well as the existing thresholds, can be summarised as follows:

Low income earners will not only receive immediate personal tax cuts but will also be granted modest additional relief from the Medicare Levy.

Amendments to the protecting your super package continue

The Government has agreed to amendments to the Protecting Your Super Package announced in the 2018-19 Budget.

The following changes will be introduced:

• extend to 16 months the period after which an account that has not received any contribution is considered inactive
• expand the definition of when an account is considered active for the ATO-led consolidation regime
• require the ATO to consolidate to an active account, where possible, within 28 days of receipt.

The Government will delay the start date for ensuring insurance within superannuation is only offered on an opt-in basis for accounts with balances of less than $6,000 and new accounts belonging to members under the age of 25 years to 1 October 2019. This measure is estimated to reduce the fiscal balance by $41.8 million over the forward estimates period.

These changes (currently before Parliament) will protect the retirement savings of young people and those with low balances by ensuring their superannuation is not unnecessarily eroded by premiums on insurance policies they do not need or are not aware of.  The changes will also reduce the incidence of duplicated cover so that individuals are not paying for multiple insurance policies, which they may not be able to claim on.

These changes will not prevent anyone who wants insurance from being able to obtain it. Low balance and young members will still be able to opt-in to insurance cover in superannuation.

Improved eligibility to make contributions for older Australians

The Government has introduced measures to give older Australians greater flexibility to save for retirement.

In a welcome move, the Government will allow voluntary superannuation contributions (both concessional and non-concessional) to be made by those aged 65 and 66 without meeting the work test from 1 July 2020.

People aged 65 and 66 will also be able to make up to three years of non-concessional contributions under the bring-forward rule. The bring forward rules currently allows individuals aged less than 65 years to make 3 years’ worth of non-concessional contributions (capped at $100,000 a year) in a single year. Those up to and including age 74 will be able to receive spouse contributions, with those 65 and 66 no longer needing to meet a work test.

Around 55,000 people aged 65 and 66 are expected to benefit from this reform in 2020-21. The existing annual caps for concessional contributions and non-concessional contributions ($25,000 and $100,000 respectively) will continue to apply.

Currently, people aged 65 to 74 can only make voluntary superannuation contributions if they self-report as working a minimum of 40 hours over a 30-day period in the relevant financial year. Those aged 65 and over cannot access bring-forward arrangements and those aged 70 and over cannot receive spouse contributions.

Aligning the work test with the eligibility age for the Age Pension (scheduled to reach 67 from 1 July 2023) and increasing the age limit for spouse contributions to 74 will give older Australians greater opportunity to contribute to super.

Reducing red tape for superannuation funds

Starting from 2020, the Government will reduce costs and simplify reporting for superannuation funds by streamlining some administrative requirements for the calculation of exempt current pension income (ECPI). The Government will allow superannuation fund trustees, with interests in both the accumulation and retirement phases during an income year, to choose their preferred method of calculating ECPI.

The Government will also remove a requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase for all of the income year.

While this budget does promise to reduce administrative costs and the opportunity for better tax planning outcomes, all in all, it is a quiet budget for the superannuation sector as opposed to prior years.

Energy assistance payment to combat rising living costs along with changes to ADF pensions

The Government will provide $284.4 million over two years from 2018-19 to make a one-off Energy Assistance Payment of $75 for singles and $62.50 for each member of a couple eligible for qualifying payments on 2 April 2019 and who are resident in Australia. Qualifying payments are the age pension, carer payment, disability support pension, parenting payment single, the veterans’ service pension and the veterans’ income support supplement, veterans’ disability payments, war widow(er)s pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988. This measure builds on the 2017-18 budget measure, entitled Energy Assistance Payment.

The Government will also provide $6.2 million over four years from 2019-20 (and $1.4 million per year ongoing) to ensure equal treatment of former spouses and former de-facto partners of veterans concerning access to the partner service pension when they separate from their veteran partner. Both former spouses and former de-facto partners of veterans will be able to continue to receive the partner service pension after their relationship with their veteran partner has ended, including as a result of family or domestic violence.

The Government will also extend Australian defence force superannuation scheme (ADF Super) membership eligibility to allow ADF Super members to choose to remain contributory members when they discharge from the ADF. This will align ADF Super arrangements with superannuation arrangements available in broader industry and other public superannuation schemes.

More rigour applied to ABN holders

The Government continues to focus of areas where it feels income is not being reported, or the appropriate amounts of tax revenues are being collected. The ATO is being funded to improve its data analytical capabilities. A sham contracting unit will be established to address employers who are deliberately avoiding their statutory and employee obligations.

Further measures are being enacted resulting from the Black Economy Taskforce. The ABN system will have new compliance measures put in place to ensure that ABN holders are meeting their compliance obligations. From 1 July 2021 ABN holders who have income tax return obligations will now be required to lodge their income tax return to retain their ABN. In addition, from 1 July 2022 ABN holders will need to provide annual confirmation that their ABN details are correct. These measures should ensure swifter compliance with tax obligations and provide some disruption in the black economy by enforcing touchpoints with Government.

The Government is continuing to fund the ATO’s ability to collect and analyse data. The Government has committed $70m to begin preparatory work to shift its data centre to a new facility. An additional $6.9m will be provided to improve data analytics within other areas of Government agencies. Data analysis is instrumental in identifying where the ATO and other agencies should be focussing their audit and review activities.

The Government intends on creating a dedicated sham contracting unit. The purpose of the unit is to address those employers who recklessly misrepresent employment arrangements to be that of a contracting arrangement. These actions can lead to those employers avoiding their statutory obligations as well as employee entitlements. $9.2m has been provided for the unit, which will be designed not just on enforcement and compliance, but also on educational activities.

If you work within the confines of the law, and seek out advice when required, these measures should not have any meaningful impact. There will be additional paperwork due to the ABN annual confirmation, so a proactive approach in ensuring these details are correct may be prudent. If you employ contractors, you may wish to review those arrangements to ensure they would pass any review.

Further investment in incentives, skills and aged care

There are various measures in the budget which aim to incentivise businesses to invest in staff and in the business itself. This budget has focused on the export market development grants (EMDG) scheme, creating a skills package, addressing seasonal workforce issues, and adding access to aged care.

The Government had previously announced an increase to the EMDG scheme. It has now been confirmed as part of the budget that $60m of additional funding will be provided over the next three years to encourage Australian businesses to expand overseas.

The Government is looking to boost the amount of apprenticeships by 80,000 over the next five years. It has proposed a doubling of incentive payments to employers to $8,000 per apprentice. Apprentices will receive $2,000 of incentives.

The occupations eligible for the increased payments will be reviewed annually.

The Government is providing $2.9 million to implement a 12-month pilot program from 1 May 2019 in three locations to improve small farmers’ access to the seasonal worker program. This is an interesting development considering the ‘backpacker tax’ anecdotally reduced access to seasonal workers.

The Government is looking to release 10,000 additional home care packages over five years, at a cost of $282 million. In addition, there is an immediate $320 million subsidy boost for residential aged care recipients.

Small businesses looking to access the EMDG scheme should have increased access to refunds of export promotion costs going forward.

If you have a business and you are looking to employ apprentices, you should review the cost benefit analysis in light if the additional funding.

Aged care providers and recipients should welcome the additional funding.

With any queries or concerns in relation to this year’s federal budget, please contact your local Bentleys advisor.

This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. Bentleys (Australia) Pty Ltd strongly suggests that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based on their own personal circumstances. Although we consider the sources for this material reliable, no warranty is given and no liability is accepted for any statement or opinion or for any error or omission.