09/05/2018

By Mark Chapman, Director of Tax Communications, H&R Block Australia

Last night, the Treasurer, Scott Morrison, unveiled his much anticipated Federal Budget for 2018-2019. With a general election now at most a year away, the emphasis was on good news, the centrepiece of which was a package of personal tax cuts. The speech was also heavy on new investment in roads and railway infrastructure, with big spending packages announced to improve transport links in all states.

H&R Block has analysed the impact of his measures on individuals and small businesses in detail below but the key headlines are:

  • A series of tax cuts were introduced for individuals in the form of a seven-year Personal Income Tax (PIT) Plan. This will be implemented in three steps, to introduce a low and middle income tax offset (introduced from 1 July 2018, to help those on low and middle incomes), to provide relief from bracket creep and (in several years’ time) to remove the 37% tax bracket altogether.
  • The medicare levy increase to 2.5% (announced at the last Budget) will not now happen. The medicare levy will remain at 2%
  • No changes to rules around work-related deductions
  • One year extension of $20,000 instant asset write-off deduction for capital assets acquired by small businesses. The scheme is now scheduled to end on 30 June 2019, after which the threshold will revert to $1,000.
  • Further measures to crackdown on the black economy
  • Restrictions on tax deductions for owners of vacant land.
  • Caps on fees for low balance superannuation accounts
  • Insurance no longer to be mandatory for superannuation accounts of those under 25 or with low balances.
  • No changes to negative gearing
  • No changes to dividend imputation
  • No major GST changes

Personal taxes

A seven-year Personal Income Tax (PIT) Plan will be implemented in three steps, to introduce a low and middle income tax offset, to provide relief from bracket creep and to remove the 37% PIT bracket.

Step 1: Low and middle income tax offset to be introduced

A low and middle income tax offset (LMITO) will be introduced as a non-refundable tax offset of up to $530 pa to resident low and middle income taxpayers from 2018/19 to 2021/22.

The LMITO will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less.

For taxable incomes between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530.

Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530.

For taxpayers with taxable incomes from $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar. For taxpayers earning more than $125,333, no offset will be available.

The LMITO will be received as a lump sum on assessment after an individual lodges their tax return.  This means that whilst the LMITO will apply from 1 July 2018, taxpayers will only enjoy the benefit of the offset after they lodge their 2018/19 tax return (sometime after 1 July 2019).

The benefit of the LMITO is in addition to the existing low income tax offset.

Taken together, a typical middle income couple stands to be over $1,000 per year better off due to this new tax offset.

Step 2: Relief from bracket creep for middle income taxpayers

Middle income taxpayers will be provided relief for bracket creep in phases.

From 1 July 2018, the top threshold of the 32.5% income tax bracket will be increased from $87,000 to $90,000.

From 1 July 2022, the low income tax offset will be increased from $445 to $645, and the 19% tax bracket will be increased from $37,000 to $41,000 to lock in the benefits of the LMITO in Step 1.

The increased low income tax offset will be withdrawn at a rate of 6.5 cents per dollar for incomes between $37,000 and $41,000, and at a rate of 1.5 cents per dollar for incomes between $41,000 and $66,667.

From 1 July 2022, the top threshold of the 32.5% income tax bracket will be further increased from $90,000 to $120,000.

Step 3: Removing the 37% personal income tax bracket

The 37% tax bracket will be removed altogether from 1 July 2024.

From 1 July 2024, the top threshold of the 32.5% tax bracket will be increased from $120,000 to $200,000.

Taxpayers will pay the top marginal tax rate of 45% for taxable incomes exceeding $200,000, and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000.

According to the Budget papers, somebody with annual earnings of $100,000 will be $1125 better off a year in 2024-25.

Those on $160,000 will save $3825 a year and those on $200,000 will be $7225 better off.

Tax rates and thresholds for 2018-19 onwards

The following table reflects the Government's announced personal tax rate and threshold changes (highlighted in bold), excluding the 2% Medicare levy:

Tax rates and thresholds

Rate

2018-19 to 2021-22

2022-23 and 2023-24

2024-25 onwards

0%

$0 - $18,200

$0 - $18,200

$0 - $18,200

19%

$18,201 - 37,000

$18,201 - 41,000

$18,201 - $41,000

32.5%

$37,001 - 90,000

$41,001 - 120,000

$41,001 - $200,000

37%

$90,001 - $180,000

$120,001 - $180,000

N/A

45%

$180,001+

$180,001+

$200,001+

Tax rates and thresholds for 2017-18 unchanged

The rates for the 2017-18 year (excluding the 2% Medicare levy) remain unchanged and are:

2017-18

Taxable income $

Tax payable $

0 - 18,200

18,201 - 37,000

37,001 - 87,000

87,001 - 180,000

180,001+

Nil

Nil + 19% of excess over 18,200

3,572 + 32.5% of excess over 37,000

19,822 + 37% of excess over 87,000

54,232 + 45% of excess over $180,000

Low income tax offset

The currently legislated low income tax offset (LITO) rates will not change for 2017-18 and are:

  • LITO amount - $445.
  • Lower withdrawal limit - $37,000.
  • Upper withdrawal limit - $66,667.
  • Withdrawal rate - 1.5%.

Foreign residents

The unchanged tax rates for foreign residents for 2017-18 are:

2017-18

Taxable income $

Tax payable $

0 - 87,000

87,001 - 180,000

180,001+

32.5%

28,275 + 37% of excess over 87,000

62,685 + 45% of excess over $180,000

Medicare levy increase cancelled

The 2017/18 Federal Budget measure to increase the Medicare levy from 2% to 2.5% of taxable income from 1 July 2019 will not proceed.

Medicare levy low-income thresholds for 2017-18

For the 2017-18 income year, the Medicare levy low-income threshold for singles will be increased to $21,980 (up from $21,655 for 2016-17). For couples with no children, the family income threshold will be increased to $37,089 (up from $36,541 for 2016-17). The additional amount of threshold for each dependent child or student will be increased to $3,406 (up from $3,356).

For single seniors and pensioners eligible for the SAPTO, the Medicare levy low-income threshold will be increased to $34,758 (up from $34,244 for 2016-17). The family threshold for seniors and pensioners will be increased to $48,385 (up from $47,670), plus $3,406 for each dependent child or student.

No changes to work-related expenses deduction rules

Despite the publicity surrounding the high level of work-related expenses (WRE) claims, and the ATO's strong focus on this area, the Budget did not announce any measures in that regard. The ATO recently announced that it will be closely examining claims for work-related car expenses in 2018 tax returns. The ATO is concerned about taxpayers making mistakes or deliberately lodging false claims in relation to work-related car expenses.  ATO Assistant Commissioner Kath Anderson said this year, the ATO will be particularly focused on people "claiming things they're not entitled to". This is said to include claiming things like home to work travel or other private trips; making claims for trips they didn't actually undertake; or claiming expenses their employer has already paid for or reimbursed.

Small Business Taxes

$20,000 instant asset write off extended

In a welcome move, the current instant asset write-off scheme for small businesses is to be extended by 12 months to 30 June 2019.

This applies to businesses with aggregated annual turnover less than $10 million.

The threshold amount was due to return to $1,000 on 1 July 2018. As a result of this announcement, SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are acquired between 1 July 2017 and 30 June 2019 and first used or installed ready for use by 30 June 2019 for a taxable purpose.

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business 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 (these prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt out) will continue to be suspended until 30 June 2019.

The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2019.

No tax deduction for non-compliant PAYG and contractor payments

Measures will be enacted to ensure that taxpayers will not be able to claim deductions for payments to their employees such as wages where they have not withheld any amount of PAYG from these payments, despite the PAYG withholding requirements applying.

Similarly, the Government intends to remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (again despite the withholding requirements applying).

Both of these measures will take effect from 1 July 2019.

Taxable payments reporting system to be expanded

The taxable payments reporting system (TPRS) will be expanded to the following industries from 1 July 2019:

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

The TPRS requires businesses to report to the ATO any payments made to contractors during an income year. This additional reporting to the ATO is in the form of an annual report, and puts these payments in line with payments made for salaries and wages to employees. As the report is a yearly report for years commencing 1 July 2019, the first annual report will be required in August 2020.

These reporting requirements are identical to ones already in place for payments to contractors in the building and construction industry, as well as payments in the cleaning and courier industries, which commence 1 July 2018.

Cash payments limit: payments made to businesses

In an attempt to curb tax avoidance in the cash economy, the Government will introduce a limit of $10,000 for cash payments made to businesses for goods and services. This measure will require transactions over this threshold to be made through an electronic payment system or by cheque.

Property investors

There were no changes to the fundamental tax rules for property investors. The rules which allow negative gearing of investment properties remain untouched.  

Deductions for vacant land to be denied

From 1 July 2019, tax deductions will not be allowed for expenses associated with holding vacant land. This is claimed to be an integrity measure to address concerns 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. The government says that it will also reduce tax incentives for land banking, which deny the use of land for housing or other development.

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.

Deductions that are denied will not be able to be carried forward for use in later income years. Expenses for denied deductions that would ordinarily be a cost base element (such as borrowing expenses and council rates) may be included in the cost base of the asset for capital gains tax (CGT) purposes when sold. However, deductions denied for expenses that would not ordinarily be a cost base element would not be able to be included in the CGT cost base.

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.

Superannuation

Although the government has avoided the major reforms which have proved controversial in recent years, there were a number of eye-catching minor changes to superannuation.

Increased membership of SMSFs and small APRA funds

New and existing self-managed superannuation funds (SMSFs) and small APRA funds will be allowed to have a maximum of six members from 1 July 2019. Currently, the maximum allowable number of members in an SMSF and a small APRA fund is four.

Three-yearly audit cycle for some SMSFs

The annual audit requirement for self-managed superannuation funds (SMSFs) will be changed to a three-yearly requirement for SMSFs with a history of good record keeping and compliance, ie for SMSF trustees that have a history of three consecutive years of clear audit reports and timely lodgements of the fund’s annual returns.

This measure will commence on 1 July 2019.

Improving integrity of personal contributions deductions

Individual income tax returns will be modified to include a tick box for individuals with personal superannuation contributions to confirm that they have complied with the requirements to submit a “notice of intent” (NOI) where they intend to take a tax deduction for the contributions.

The change is intended to improve the integrity of the NOI processes for claiming personal superannuation contribution tax deductions. Where individuals take deductions for their personal superannuation contributions, but do not submit the required “notice of intent”, it results in superannuation funds not applying the 15% tax to their contribution and no tax is paid on it.

This measure will commence from 1 July 2018.

Super work test exemption for recent retirees

An exemption from the work test for voluntary contributions to superannuation will be introduced from 1 July 2019 for people aged 65-74 with superannuation balances below $300,000, in the first year that they do not meet the work test requirements.

Currently, Australians between 65 and 74 need to work at least 40 hours over a 30-day period in the financial year in order to make contributions to superannuation.

The work test exemption will give recent retirees flexibility to get their financial affairs in order in the transition to retirement. 

Changes to superannuation insurance arrangements

To combat claims that young and low-income people are being forced to take out expensive insurance within their superannuation that they don’t need, the government has announced that Insurance within superannuation will move from being a default framework to being offered on an opt-in basis for:

  • members with low balances — less than $6,000
  • members under the age of 25 years, and
  • members whose accounts have not received a contribution in 13 months and are inactive.

The changes will take effect on 1 July 2019 and affected people will have a period of 14 months to decide whether they will opt-in to their existing cover or allow it to switch off.

Superannuation fee protection measures to be introduced

A 3% annual cap will be introduced on passive fees charged by superannuation funds on accounts with balances below $6,000, and exit fees on all superannuation accounts will be banned.

The government will also strengthen the ATO's account consolidation regime by requiring the transfer of all inactive superannuation accounts to the ATO where the balances are below $6,000.

The ATO will expand its data matching processes to proactively reunite these inactive superannuation accounts with the member’s active account, where possible. This measure will also include the proactive payment of funds currently held by the ATO.

These changes will take effect from 1 July 2019.

 

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We're here for you year-round. We can help you get your maximum tax refund and provide advice to help you manage your taxes. Find an office near you and book an appointment online.

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