Concessional contribution caps dropping to $25,000
The Treasurer Scott Morrison, delivering his second Federal Budget, has committed to the principles of “fairness, opportunity and security”. The Government is aware of electorate frustration and is keen to win popular support from this Budget including a new Big Bank Tax, infrastructure spending, employer levies for certain foreign workers, restrictions on foreign investment and tackling housing affordability.
Mr Morrison acknowledged the pain that small business owners and wage and salary earners had put up with over the past few years, but also noted the Government had to live within its means. He believed that the 2017 Budget was about making the right choices for better days ahead.
Mr Morrison announced a Budget deficit of $29.4bn, slightly higher than expected, but even before the Budget was announced he claimed that “things are beginning to look up” and the economy will be in surplus by $7.4bn in 2020-2021. However, getting to surplus will largely be achieved through higher taxes.
The 2017 Budget speech also revealed that this year the Government expects to boost economic growth through significant investment in key sectors. The Budget focuses on creating conditions for further growth and prosperity by using “good debt” wisely. This includes new Government funding of over $70bn in national transport infrastructure projects. In addition, the Government has committed to an increase in spending of $18.6bn on education over the next 10 years, and an increase in healthcare spending of $10bn.
Like most Budgets of modern times many of the announcements came as little surprise because the amount of pre-Budget chatter was considerable. Details on key sectors such as infrastructure and education, and how they would be affected, were released well before the Budget announcement.
Some of the key tax changes include:
- The Medicare levy for all Australians increasing to 2.5% starting 1 July 2019;
- Housing affordability measures and tax saving measures for first home buyers including salary sacrifice and superannuation concessions;
- The $20,000 instant asset write-off for small businesses extending until 30 June 2018;
- The Government remaining committed to reducing the corporate tax rate as previously announced;
- Increasing the non-resident withholding tax on real property sales and reducing the $2m threshold;
- A new levy on foreign workers that is expected to raise $1.2bn; and
- The big banks will face a new levy starting 1 July 2017.
The key message from last night’s Budget is that the Government is under pressure to perform. It believes it has delivered a Budget that it can get past the Senate and address the pressing national economic issues.
What the 2017 Budget means for:
Instant asset write-off extended
The immediate write-off of depreciable assets costing less than $20,000 purchased by small business entities was due to expire on 30 June 2017. The concession has been extended for a further 12 months to 30 June 2018. The concession has been in place since 12 May 2015 and has been very popular with small business entities, particularly at this time of year.
It is important to note that from 1 July 2016 businesses with an aggregated turnover of less than $10m will also be able to access the concession. It will be interesting to see what effect expanding the concession to a much larger group of businesses will have. Whilst obviously welcome, it raises the question of why measures which have such a positive impact on business investment should only be temporary.
Small business CGT concessions
The Government proposes to tighten the small business CGT concessions to ensure that the concessions apply as intended – only in relation to assets used in a small business or ownership interests in a small business.
It is also noted that whilst many of the small business concessions such as the $20,000 asset write-off have now been extended to businesses with a turnover of less than $10m, the turnover threshold for the small business CGT concessions will, as previously foreshadowed, remain at $2m.
Large Business and the Big Bank Tax
A Big Bank Tax targeting the major banks (ANZ, CBA, NAB, Westpac and Macquarie) of 0.06% will be levied on certain bank liabilities of at least $100 billion from 1 July 2017. The new levy is expected to raise $6.2b over four years and assist with repairing Budget deficits.
Other than the major banks, large businesses should generally breathe a sigh of relief in that broadly this year’s Budget did not announce any big ticket fundamental tax reforms. The Federal Government confirmed its intention to re-introduce the remaining elements of its 10-year Enterprise Tax Plan that will eventually reduce the corporate tax rate to 25% by 2026-27.
In the interim, a range of new smaller imposts targeting employers of foreign workers and foreign investments in real property have been introduced, including certain specific anti-avoidance measures per the below.
Compared to the last budget where all multinationals were in the spotlight with a broad focus on tax avoidance and inappropriate profit shifting, this year’s budget affecting multinationals has been narrowed to the following main areas:
- International Workers – New Employer Levy Imposed on Certain Skilled Visas
- Increase in Withholding Tax on Sales of Real Property to Non-Residents
- Tightening the Foreign Resident Capital Gains Tax Regime
- Crackdown on use of Foreign Trusts and Partnerships
- Crackdown on Certain Hybrid and Arbitrage Arrangements
- Other International Related Proposals
International Workers – New Employer Levy Imposed on Certain Skilled Visas
With effect from March 2018, businesses that employ foreign workers on certain skilled visas will be required to pay a foreign worker levy. The amount of the levy will depend on business turnover of the employer and the type of visa issued. The new levies can be summarised in the table below.
|Levy for Business with Turnover of:||Less Than $10m||$10m or more|
|Upfront payment on Temporary Skill Shortage visa||$1,200 per year per visa||$1,800 per year per visa|
|One off payment of Employer Nomination Scheme visa (subclass 186)||$3,000 per visa||$5,000 per visa|
|One off payment of Regional Sponsored Migration Scheme visa (subclass 187)||$3,000 per visa||$5,000 per visa|
The above foreign worker levies are intended to replace the current training benchmark financial obligations on subclass 457 and 186 visas which the Government has indicated have been difficult to monitor effectively.
The revenue raised from the new foreign worker levies will be used to fund a new Skilling Australians Fund aimed at apprenticeships and traineeships in high demand sectors including regional and rural areas.
Increase in Withholding Tax on Sale of Real Property to Non-Residents
Currently, there is a 10% non-final withholding on payments made to foreign residents under contracts relating to sale of Australian real property, including land rich shares. The Federal Budget now proposes to increase the 10% withholding rate to 12.5% from 1 July 2017 and reduce the property value threshold from $2m to $750,000. The reduction in the value threshold appears to now increase focus on residential house sales, particularly in the major capital cities.
Tightening the Foreign Resident Capital Gains Tax (CGT) Regime
The foreign resident CGT regime will be tightened by applying the “principal asset test” on an associate inclusive basis for foreign residents with indirect interests in Australian real property (e.g. shares in Australian land rich companies). This is an integrity measure to ensure foreign residents cannot avoid CGT by disaggregating their indirectly held Australian real property interests.
Crackdown on use of Foreign Partnerships and Trusts
The “multi-national anti-avoidance law” (“MAAL”) introduced in 2015, targeting the use of foreign trusts and partnerships in corporate structures, will be expanded to counter the inappropriate use of those structures to circumvent the law. The MAAL will be enhanced so that it applies to:
- corporate structures that involve the interposition of partnerships that have any foreign resident partners;
- trusts that have any foreign resident trustees; and
- foreign trusts that temporarily have their central management and control in Australia.
- The impact of these provisions to business structures generally remains to be seen until further details are released.
- These amendments will apply retrospectively with effect from 1 January 2016.
Hybrid Mismatch Rules – Tax Arbitrage under the Spotlight Continues in the Finance Sector
Tax arbitrage continues to be a concern for the Government this time with the spotlight on multinational banks and financial institutions that use arbitrage opportunities involving regulatory capital called “Additional Tier 1 capital”.
The hybrid mismatch rules are broadly aimed at eliminating tax benefits which take advantage of tax arbitrage opportunities between two or more countries because of differing tax treatment of a financial instrument or entity. For example, funding between related parties that are structured to allow a tax deduction in Australia but which are not taxable to the related party in the overseas jurisdiction are potentially caught.
The new hybrid mismatch rules are intended to apply on certain returns of capital from the later of 1 January 2018 or six months after legislation receives Royal Assent.
Other International Related Proposals
Given the volume of legislation that has been introduced (and to be introduced) targeting multinational tax avoidance, the government will provide $8.1m over two years from 2016/17 to communicate the key tax integrity measures to the Australian business community and the general public.
Other international related proposals include clarifying and simplifying the foreign investment framework starting from 1 July 2017. The Government’s intention is to make foreign investor obligations clearer and to allow Foreign Investment Review Board screening resources to be directed to higher risk foreign investment cases.
Goods and Services Tax (GST)
GST on new homes – Pay it straight to the ATO
The Government is proposing to have buyers of new homes pay the GST portion of sale proceeds direct to the ATO from 1 July 2018. The Government expects this to have little impact on buyers, though there would be additional compliance costs for settlement agents. This may be an admission of significant GST collection issues in the housing market and the need to ensure GST is remitted.
Treatment of digital currencies to change
The use of digital currencies such as Bitcoin will now have the same GST treatment as money from 1 July 2017. The alignment of the treatment removes the current situation where there is a double imposition of GST when using digital currencies as a payment method. The Bitcoin industry will welcome this change which is expected to assist the growth of the e-commerce environment and the use of digital currencies.
Innovation and Research & Development (R&D)
Introduction of Advanced Manufacturing Fund
In line with the pre-budget announcement, the Government will provide $101.5 million over the next five years to establish an Advanced Manufacturing Fund to promote research and capital development for high technology manufacturing businesses.
The new package contains the following elements:
- $47.5 million for a new Advanced Manufacturing Growth Fund, committed over two years, to assist industry affected by the wind-down in automotive manufacturing. The funding will support up to one third of eligible expenditure on projects focussing on the establishment and expansion of high value manufacturing in South Australia and Victoria. As with similar programs in recent years, including the Next Generation Manufacturing Investment Program and the Automotive Diversification program, the new Fund is likely to be highly competitive and necessitate the development of a comprehensive business case that addresses the key criteria of the Fund;
- $4 million for the Advanced Manufacturing Growth Centre, committed over two years, to support small scale and pilot research projects in advanced manufacturing, benefiting small firms and early stage researchers, allowing them to quickly move to larger scale research or commercialisation;
- $20 million under the Cooperative Research Centre – Projects initiative, committed over two years, for larger scale advanced manufacturing research projects providing up to $3 million in funding over three years;
- $10 million to establish Innovation Labs in South Australia and Victoria to serve industry in a variety of roles including test centre facilities and business capability development, delivered through existing Government services such as the Entrepreneurs’ Programme, Industry Growth Centres and Austrade;
- $5 million to maintain engineering excellence by investing in student research at universities, technology institutions and in industry to continue the flow of highly trained engineers to the automotive design and engineering sector; and
- $13.5 million tariff reduction on imported vehicle prototypes and components used by Australian motor vehicle design and engineering providers that operate in a global network.
While this is a positive announcement, South Australia’s Manufacturing and Automotive Transformation Minister, Mr Kyam Maher, was less excited noting that $785 million remained in the Automotive Transformation Scheme and that this full amount should be allocated to assist companies affected by the cessation of automotive manufacturing.
Nevertheless, the Advanced Manufacturing Fund presents a considerable opportunity for manufacturing clients of Bentleys, particularly those located in Victoria and South Australia. Bentleys has a successful track record in securing funds for its clients through these programs.
R&D Tax Incentive stays as is
The Budget contained no announcement of any change to the R&D Tax Incentive. It is expected that tabled changes such as introducing an intensity threshold, placing a cap on refunds and introducing a collaboration premium are likely to be the subject of further debate with any changes forming part of a second National Innovation and Science Agenda (NISA) statement.
Individuals and Families
Individual tax rates
There were no changes in this year’s Budget to the personal income tax rates and thresholds. The 2% temporary Budget Repair Levy that has applied to the highest marginal tax rate for the past three financial years will cease as previously legislated on 30 June 2017.
Effective from 1 July 2019, the Medicare Levy will increase by 0.5% to 2.5%. Relief from the Medicare Levy will continue to be offered to low income earners with the 2017 thresholds being increased as follows:
|Families||$36,541 plus $3,356 for each dependent child or student|
|Single – Seniors/Pensioners||$34,244|
|Family – Seniors/Pensioners||$47,670 plus $3,356 for each dependent child or student|
The increase to the Medicare Levy will also impact on other tax rates that are associated with the top marginal tax rate, such as the Fringe Benefits Tax rate.
Higher Education Loan Program (HELP)
As announced pre Budget, the Government plans to reduce the minimum repayment HELP threshold from $55,874 in the 2018 financial year to $42,000, commencing on 1 July 2018. The percentage repayment rates will also be adjusted such that they phase in from 1% (instead of starting at 4%) through to 10% of adjusted taxable income for those earning $119,882 or more (currently 8% for those earning $101,900 or more).
Family Benefit and Child Care
There were no significant changes in the Budget in relation to family benefits or child care other than reductions to Family Tax Benefit Part A, with supplement payments to reduce by $28 per fortnight ($728/year) for each child who is not immunised in accordance with Government requirements. The Government will also not proceed with an increase to the maximum rate of Family Tax Benefit Part A that was previously announced as part of the 2015-16 Mid Year Economic and Fiscal Outlook.
As expected, there were numerous measures directed at reducing pressure on housing affordability.
Restrictions to deductions for property investors
While no changes to negative gearing were applied, two measures will limit the deductions available to residential property investors.
Plant and equipment depreciation deductions
Currently, property investors can claim a depreciation deduction for plant and equipment included as part of the acquisition of a rental property. This is usually based on an apportionment of the acquisition price to plant and equipment by a quantity surveyor.
From 1 July 2017, plant and equipment depreciation deductions for residential real estate property investors will be limited to outlays actually incurred by the investor (rather than when acquired as part of the acquisition of the real estate property).
The current treatment will be grandfathered for existing property investments at 9 May 2017 (including investments under contract at 7.30pm AEST on 9 May 2017).
Deductions for travel expenses for residential rental property
From 1 July 2017, a deduction will not be allowed for travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property. This change will not apply to expenses for investors from engaging third parties (such as real estate agents for property management services) which will remain deductible.
Changes for foreign property investors
There are a number of changes targeted at foreign property investors.
New charge on underutilised foreign owned residential property
A new annual charge will apply to foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least 6 months per year. This measure will apply to foreign persons who make a foreign investment application for residential property from 7.30pm AEST on 9 May 2017.
Capital gains tax changes for foreign investors
The capital gains tax (CGT) regime for foreign investors will be extended as follows:
- Foreign and temporary tax residents will no longer have access to the CGT main residence exemption from 7.30pm AEST on 9 May 2017, with existing properties held prior to this date grandfathered until 30 June 2019.
- As noted above, the CGT withholding rate for foreign tax residents will increase from 10% to 12.5% and the CGT withholding threshold for foreign tax residents will reduce from $2 million to $750,000 from 1 July 2017.
- As noted above, for foreign tax residents with indirect interests in Australian real property, the principal asset test in the foreign resident CGT regime will be amended to apply on an associate inclusive basis from 7:30PM AEST on 9 May 2017.
Fifty per cent cap on foreign ownership in new developments
Property developers can currently apply for an exemption certificate to sell new dwellings to foreign persons in certain developments with at least 50 dwellings (a New Dwelling Exemption Certificate). By obtaining a New Dwelling Exemption Certificate the individual foreign investor will not be required to seek their own foreign investment approval to purchase a new dwelling in that development.
Any application for a New Dwelling Exemption Certificate made from 7.30pm AEST on 9 May 2017 will be subject to a condition applying a 50 per cent cap on foreign ownership in new developments. This measure is intended to increase the housing stock for Australian purchasers.
Incentives for affordable housing
To increase the availability of affordable housing the Government announced two new measures.
From 1 January 2018 the CGT discount for Australian resident individuals will be increased from 50% to 60% for capital gains relating to investments in qualifying affordable housing.
To qualify, the housing must be provided to low to moderate income tenants, the rent charged at a discount below the private rental market and be managed through a registered community housing provider. The property must also be held for a minimum of three years.
The additional discount will be pro-rated for periods where it is not used for affordable housing purposes. It is not limited to new investment properties; existing properties can be eligible if they meet the criteria.
The higher discount will also flow through to resident individuals investing in qualifying affordable housing Managed Investment Trusts (as discussed below).
Managed Investment Trusts (MITs)
Broadly, MITs can only invest in “passive investments” to access concessional tax treatment. From 1 July 2017, to encourage MITs to invest in affordable housing, the new rules will allow residential property that meets the eligibility requirements to be treated as a “passive investment”.
To be eligible, the property (acquired, constructed or redeveloped) must be available for rent for at least 10 years and at least 80 per cent of the income of the MIT must be derived from affordable housing. This is housing provided to low-to-moderate income tenants at a rate below the private rental market.
Superannuation and Retirement
Thankfully, there were no restrictive announcements on changes to superannuation. The industry is still smarting from the 2016 Budget and is busily preparing to implement those changes in under two months’ time. That said, there are two new measures which affect superannuation and couple well with reducing pressure on housing affordability.
First Home Super Saver Scheme
From 1 July 2017, individuals can make voluntary contributions into superannuation of up to $15,000 per year, up to $30,000 in total, for the purpose of saving for the purchase of a first home.
If concessional, the contributions will be taxed at 15% – the same as all other concessional superannuation contributions. The contributions, along with deemed earnings, can be withdrawn for use as a deposit. A withdrawal will be allowed after 1 July 2018. The withdrawal of concessional contributions and associated deemed earnings will be taxed at marginal tax rates less a 30% tax offset. Non-concessional contributions withdrawn will not be taxed.
This measure has the opportunity to boost the savings of first home savers due to the concessional tax treatment of superannuation. The deemed earnings rate will be calculated using the 90-day Bank Bill rate plus 3 per cent. The scheme will be administered by the ATO, including the calculation of any earnings, and the release of funds must be approved by the ATO. A release request will be provided to the applicant’s super fund.
From 1 July 2017, individuals can claim a personal tax deduction for contributions made to superannuation above the 9.5% made by the employer, instead of relying on a salary sacrifice arrangement. The first home saver scheme measure combines nicely to enable an individual to be more in control of their superannuation contributions whilst also saving for a first home.
It is important to note that the contributions made must be within the contribution caps that apply from 1 July 2017, being $25,000 for concessional contributions and $100,000 for non-concessional contributions. Non-concessional contributions can also be saved in the same manner however there is no tax concession – these contributions will only benefit from the concessional rate of tax on the earnings.
Reducing barriers to downsizing
The current superannuation regime limits contributions after age 65 to those who meet a work test. Further, people over age 65 are not able to bring forward 3-years’ worth of non-concessional contributions, limiting these to $100,000 per year.
This new measure encourages older homeowners to downsize to free up housing stock to younger families. From 1 July 2018 people aged 65 and older will be able to make a non-concessional contribution of up to $300,000 to their superannuation after selling their home. This is in addition to any other contributions they are eligible to make and regardless of the balance in superannuation. The conditions are that the home must be a principal place of residence owned for more than 10 years. Both members of a couple will be able to take advantage, meaning $600,000 may be contributed under this new special downsizing cap.
Note that any change to superannuation balances may affect age pension assets test.
In conclusion, superannuation practitioners breathed a sigh of relief when hearing the Budget announcements tonight. It is anticipated that these two measures may fly under the radar as the conditions for using them are quite restrictive. Time will tell as to whether they are used by the broader population to relieve pressure on housing affordability and assist younger people to own their first home.
Taxable Payments Reporting extended to couriers and cleaners
The Government will require the courier and cleaning industries to report annually on cash payments to contractors from 1 July 2018. This system of reporting is already in use by the building and construction industry. The system has the dual purpose of ensuring businesses collect the ABNs of all contractors, and the reporting allows the ATO to data match payments to the contractor’s income tax return. While conceivably this is additional red tape, a majority of these industries will have reporting systems in place.
Abolition of 457 and other visas
The Government confirmed as part of the Budget release that the Temporary Work (Skilled) visa (subclass 457) will be abolished in March 2018. This visa will be replaced with a Temporary Skill Shortage visa to address genuine skill shortages requirements.
Extension of black economy audits
Funding for ATO compliance and audit activity in the black economy has been extended by a year. The program will now run until 30 June 2018. The purpose of this activity is to change behaviours of non-lodgement and payment, and non-declaration of income.
Sale of suppression software prohibited
The Government has been advised that software is available for point of sale systems that will untraceably delete sales. These sales are never reported as income and GST is not paid to the ATO. The Government will move to make the manufacture, distribution, sale, use of even possession of such software illegal.
If you have any immediate issues or concerns please contact your local ASC Advisor.
Give us a call or email to discuss your SMSF needs.
Setting up and managing your own SMSF can be a daunting and expensive task, especially if you get it wrong.
Got a question? Or to book a FREE appointment to discuss your situation, drop us a line to discuss your personal situation.