With a modest surplus of $2.2 billion predicted for 2019-20, and tax cuts totalling $140 billion, Scott Morrison’s third budget is a strong indication of an imminent election.
There are few losers in this budget, with significant personal income tax cuts scheduled for the next seven years without any corresponding halt to the planned reduction of the corporate tax rate. Further, despite recent debate and media coverage, the budget did not include any changes to negative gearing or the 50% CGT discount.
Expenditure programs have been slated for infrastructure and the health care sector, among others. The Government has also proposed measures to ‘level the playing field’ for the digital economy.
However, Scott Morrison has tempered the spending and tax cuts with measures aimed at increasing revenue by an estimated $5.3 Billion over the next 4 years by targeting the Black Economy.
Reforms announced in the budget include:
Partner, Head of Tax
David Robertson, Head of Economic and Market Research, Bendigo and Adelaide Bank
The Federal Budget delivered few surprises in its focus and also in the resulting reaction, but did reveal a stronger economic backdrop than many had expected. This stronger economy drove an increase in revenue, and so more cash for government to play with.
The improved fiscal position – roughly $35 billion better off than forecast six months ago – came from higher corporate tax receipts and income tax, reflecting the strong jobs market, business conditions and the advancing global economy and commodity prices.
This windfall was mainly directed in three directions- to personal tax cuts, increased infrastructure investment, and health & aged care. The balance of the windfall primarily brought forward a return to surplus, now pencilled in a year earlier for 20 19/20. While it could be argued the benefits should have been more targeted, including the option of getting back in the black sooner rather than spending what may be a temporary uplift in revenue, the politics were always going to play a part, being the last budget before a federal election expected early next year.
The beneficiaries were low to middle income earners and older Australians and commuters which appears consistent with the features of our economy: low wages growth, which is constraining consumer spending and an ageing (but growing) population, with healthy jobs growth and business confidence.
|Features||Pros||Cons and queries|
|‘7 year plan’ for tax cuts||Next financial year, up to $530 tax savings, aimed at ‘middle’ tax bracket.|
Top of this bracket increased from $87,000 to $90,000 from July 2018.
Elimination of next tax bracket ($90,000 to $180,000) in 2024.
|Relief for ‘low to medium income earners’, rather than tax cuts for higher earnings brackets.|
Aligned to low wages growth environment.
|2018/19 tax cuts delivered at the end of next financial year via the ‘Low Income Tax Offset’, not upfront via PAYG.
Will the corporate tax cuts get through the Senate?
Who knows what the world will look like in 2024?
|Infrastructure||$24.5 billion increase.||Aligned to population growth - good for jobs and productivity.||Needs State Government support (50/50) e.g. Tullamarine rail link, Brisbane and Gold Coast M1 upgrade.|
|Health & Aged Care||$1.6 billion for home care packages.|
$500 million for genomic health program.
Pension loan scheme expanded (reverse mortgage to government).
|Aligned to our ageing population.|
Incentives for employing older Australians (wages subsidies, part time work for pensioners).
|The waiting list for ‘at home care’ is over 100,000 - the $1.6 billion only caters for 14,000 packages.|
|Superannuation||ATO empowered to help match ‘lost superannuation’ activation to active accounts.|
Exit fees for switching superannuation banned, caps on other fees (e.g. administrative).
Insurance for new members under 25 will now be ‘opt-in’.
|Haven’t ‘tampered’ with the system adversely – most of the changes appear to support superannuation savings. Aligned to a lower interest rate environment.||9.5% superannuation guarantee does not increase to 10% until 2021.|
|Market assumptions (to 30 June 2020)||GDP growth 3%.|
Wage growth 2.75% then 3.25%.
Unemployment rate 5.25%.
Iron Ore price US$55/ton.
|GDP target in line with market consensus; jobs and Iron Ore (and other commodity prices) appear conservative.||Wages growth may struggle to return to around 3% over the next two financial years. Risk that this overstates the revenue forecasts.|
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Improving the integrity of the tax treatment of concessional loans between tax exempt entities
Tax deductions in relation to the repayment of the principal of a concessional loan will be disallowed for tax exempt entities that become taxable after 8 May 2018. Instead, tax exempt entities must value any concessional loans as if they were entered into on commercial terms.
The change results from an unintended deduction that arises as a result of the interaction of the taxation of financial arrangements rules and the deemed market value rules that apply when a tax exempt entity becomes taxable.
This is an integrity measure to combat the unintended deduction that tax exempt entities have been able to claim in the past when becoming taxable.
Income tax consolidation
In March 2018, a number of changes to the tax consolidation regime were enacted as law. As part of the Budget, the Government has announced that it will simplify the following two measures:
‘Churning measures’ were introduced which switch off the tax cost setting rules where a capital gain or loss made by a foreign resident when it ceases to hold a membership interest in a joining entity is disregarded. One aspect of the churning measures is that they will only apply when a joining entity is controlled by the disposing entity or an associate. The churning measures were to apply retrospectively from 14 May 2013. Now, the associate test will only apply from 28 March 2018.
Deferred tax liabilities are to be disregarded for the purpose of entry and exit tax cost setting calculations. Originally, there were complex transitional rules requiring tax consolidated groups to return to their entry tax cost setting calculations to determine if deferred tax liabilities were included. For simplicity, the transitional rules have been removed from the legislation.
These changes are not new and were included as part of the tax consolidation amendments that were enacted in March 2018.
Both measures are part of broader amendments that have been discussed over the last 6 years to improve the integrity of the tax consolidation regime.
Significant global entity definition amendment
The Government is continuing its focus on combating multinational tax avoidance by broadening the definition of ‘significant global entity’ (SGE). Currently, an entity will only fall within the definition of an SGE if its head entity is a public company or a private company required to prepare consolidated financial statements. As of 1 July 2018, an entity of a group headed by a partnership, trust, private company or investment entity may also be an SGE.
SGEs are subject to additional tax integrity measures such as preparing Country by Country reports, general purpose financial statements, the multinational anti-avoidance law and diverted profits tax. In addition, SGEs are subject to higher administrative penalties (approximately double) than other taxpayers.
We are likely to see more entities characterised as SGEs and subject to these rules in the 2018/19 year as a result of the broader definition.
Entities should be aware that while you may have small operations in Australia, you may still be caught within the definition of SGE and subject to the additional tax rules (and significant penalties for non-compliance) if you are part of a large global group.
Taxation of financial arrangements — regulation reform
The start date for changes to the taxation of financial arrangements (TOFA) regime announced in the 2016/17 Budget has been deferred. The proposed measures aim to simplify the TOFA regime but the Government needs more time to ensure costs of complying with the TOFA regime are reduced and that there are no unintended outcomes from the changes. The rules will apply on or after the date of Royal Assent.
The deferred start date is unlikely to impact taxpayers however the Government’s commitment to simplifying the TOFA system are welcomed.
Image Rights arrangements
The introduction of integrity measures which ensure that all remuneration (cash and non-cash) provided for the commercial exploitation of a person’s fame or image will be included in the individual’s assessable income.
This announcement is surprising because the Commissioner of Tax has been in the process of finalising its Practical Compliance Guideline 2017/D11 (Guideline), which was first released in July 2017.
The Guideline’s starting point was that professional sportspeople could have image rights licencing arrangements, involving a separate but controlled entity (such as a company or trust). The Guideline sought to assist and simplify compliance, by setting out a ‘Safe Harbour’ approach and valuation basis for apportioning lump sum payments received by a professional sportsperson between their services and the use and exploitation of their image rights under licence. The Guideline was released in draft and was subject to a consultation process. It would now seem to be ‘dead in the water’.
As yet, there is no detail about the proposed integrity measures, which have a proposed start date of 1 July 2019. If the usual course if followed, an exposure draft will be released, followed by a consultation process. It may be some time until there is clarity about how the provisions will work, including what transitional provisions will apply and whether existing arrangements will be grandfathered.
Personal income tax plan
The Government has announced a Personal Income Tax Plan, comprising targeted tax relief for low income earners and changes to the personal income tax brackets that will be implemented over the next seven years.
A Low and Middle Income Tax Offset will be introduced, which is to be a non-refundable tax offset of up to $530 per annum to Australian resident low and middle income taxpayers for the 2019 to 2022 income years. This is to be received as a lump sum on assessment after an individual lodges their tax return.
The Government also intends to change the personal income tax brackets by initially increasing the top income threshold of the 32.5% personal income tax bracket from $87,000 to $90,000 from 1 July 2018 and then to $120,000 from 1 July 2022. It then intends to increase the top income threshold of the 19% personal income tax bracket from $37,000 to $41,000 and increase the Low and Middle Income Tax Offset.
Finally, the top threshold of the 32.5% personal income tax bracket will be increased to $200,000 from 1 July 2024 and the 37% personal income tax bracket will be abolished.
|Years ending 30 June 2019||to 30 June 2022|
|Taxable income||Tax on this income|
|$18,201–$37,000||19 cents for each $1 over $18,200|
|$37,001–$90,000||$3,572 plus 32.5 cents for each $1 over $37,000|
|$90,001–$180,000||$20,797 plus 37 cents for each $1 over $90,000|
|$180,001 and over||$54,097 plus 45 cents for each $1 over $180,000|
|Years ending 30 June 2023 to 30 June 2024|
|Taxable income||Tax on this income|
|$18,201–$41,000||19 cents for each $1 over $18,200|
|$41,001–$120,000||$4,332 plus 32.5 cents for each $1 over $41,000|
|$120,001–$180,000||$30,007 plus 37 cents for each $1 over $120,000|
|$180,001 and over||$52,207 plus 45 cents for each $1 over $180,000|
|Income years ending 30 June 2025 onward|
|Taxable income||Tax on this income|
|$18,201–$41,000||19 cents for each $1 over $18,200|
|$41,001–$200,000||$4,332 plus 32.5 cents for each $1 over $41,000|
|$200,001 and over||$56,000 plus 45 cents for each $1 over $200,000|
The Government will also increase the Medicare levy from 2.0 to 2.5% of taxable income from 1 July 2019.
The introduction of another mechanism such as the Low and Middle Income Tax Offset goes against efforts to simplify the taxation system and provides the same relief to low and middle income earners that could be achieved by adjusting income tax brackets or rates. However, to do so would also benefit high income earners so the Government has opted for a targeted mechanism in the Low and Middle Income Tax Offset.
For income years ending 30 June 2023 onward, more substantial reductions are proposed, which will address the increasing issue of ‘bracket creep’. Below is an illustration of the effects of these changes upon a taxpayer earning $200,000 per annum.
One effect of the changes to tax brackets will be that the level of taxable income at which an individual’s effective rate of tax is equal to the company rate of tax will change. This demonstrates the point at which top-up tax will become payable on the receipt of franked dividends by that individual, assuming their taxable income is comprised wholly of franked dividends.
Below is a table setting out these approximate figures, calculated on the basis of a company tax rate of 30% and reduced company tax rate of 27.5%. It does not take into account the proposed future changes to the company tax rates.
|Year ending 30 June||Taxable income at which average rate is 27.5%||Taxable income at which average rate is 30%|
Compliance and recovery
Increased funding is to be provided to the ATO to boost its compliance and enforcement activities, and separately improve its debt collection activities.
Increased funding of $130.8 million will be provided to the ATO to ramp up compliance activity targeting individual taxpayers and their tax agents. This will primarily extend existing income-matching programs that would otherwise terminate on 30 June 2018. The funding will also provide for new compliance activities, including additional audits and prosecutions, education and guidance materials, pre-filling of income tax returns and improved real time messaging to tax agents and individual taxpayers to deter over-claiming of entitlements.
Additionally, $133.7 million will be provided to the ATO to support a general increase in debt collections and improve the timeliness of debt collections. This will extend, and roll into ongoing funding, the measure announced in the August 2013 Economic Statement Addressing the level of unpaid tax and superannuation in the community that would otherwise terminate on 30 June 2018.
The continued targeting of complying tax agents will improve the integrity of the tax system.
Medicare levy and low-income thresholds
No increase in the Medicare levy rate, it will remain at 2%. The Medicare levy low-income thresholds for singles, families, and seniors and pensioners will be increased from the 2017-18 income year in line with movements in the Consumer Price Index.
Income tax exemption for certain Veteran Payments
From 1 May 2018, supplementary amounts (such as pension supplement, rent assistance and remote area allowance) of Veteran Payment paid to an armed services veteran, and full payments (including the supplementary component) made to the spouse or partner of a veteran who dies, are exempt from income tax.
Protection of older Australians
The Government will look strengthen the regulation of aged care services in order to better respect and protect older Australians from potential elder abuse by providing $22 million over the next 5 years (part of an over all increase spend on aged care of $5 billon over the next 5 years).
A portion of the funds will be directed toward establishing an independent Aged Care Quality and Safety Commission from 1 January 2019. The Commission brings together the functions of the Australian Aged Care Quality Agency, the Aged Care Complaints Commissioner, and, from 1 January 2020, the aged care regulatory functions of the Department of Health. This will ensure older Australians and their families have a single point of contact to raise concerns and ask questions about their aged care, as well as ensuring that current regulatory settings are strengthened and made more transparent.
Further, the Government is set to work with the States and Territories, in close consultation with industry and community groups, to develop a National Plan to address elder abuse, with an integral part of this work involving the development of a nationally consistent online register for enduring powers of attorney.
Research and development tax incentive changes
The Budget canvassed the Government’s intention to better target the Research and Development Tax Incentive (R&D TI). The proposed measures (although yet to be legislated) follow in response to a variety of recommendations contained in the 2016 Review of the R&D TI (Review) to improve the effectiveness, integrity and additionality of the program. Another driver behind these measures may be indicated by the notes in the Fact Sheet which provide that the cost of R&D TI was expected to be $1.8 billion per annum when it was introduced (2011/12) and actually cost around $3 billion in 2016/17.
The proposed R&D TI changes place an emphasis on:
- improving integrity of the system by strengthening anti-avoidance rules
- providing additional resources to assist with enforcement of the R&D TI
- improving transparency relating to who is claiming the R&D TI
- increasing guidance on R&D TI eligibility by enabling Innovation and Science Australia to produce public findings and
- improving the simplicity and transparency of administration by imposing a three month limit on extensions of time available for applications, registrations and review.
Additionally, further to the recommendations of the Review, it is proposed that the following changes will occur (with effect from 1 July 2018):
- For companies with aggregated annual turnover more than $20 million an R&D premium will be introduced that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.
This R&D premium will be a claimants company tax rate plus:
- 4 percentage points (for 0% to 2% R&D intensity)
- 6.5 percentage points (for 2% to 5% R&D intensity)
- 9 percentage points (for 5% to 10% R&D intensity)
- 12.5 percentage points (for above 10% R&D intensity)
For companies with aggregated annual turnover less than $20 million:
- the refundable R&D offset will be a premium of 13.5 percentage points above a claimant’s company tax rate.
- Cash refunds from the refundable R&D tax offset will be capped at $4 million per annum.
- R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income year.
Across the board, the $100 million R&D expenditure threshold will be increased to $150 million
These changes evidence that the R&D incentive is closely tied to a company’s tax rate. This will result in lower R&D incentives for certain eligible entities (compared to the incentive under existing rules). There is also uncertainty around when draft legislation will be introduced for these measures.
It will be interesting to see how the new approach to allowing Innovation and Science Australia to produce public findings plays out in practice. A public ruling system can provide potential claimants with some guidance to assist them in self-assessing eligibility.
However, as is the case with reliance on ATO public rulings, care must always be taken to ensure that rulings (and principles within those rulings) are not misinterpreted or stretched beyond the scope of intention of the legislation. It is hoped that Innovation and Science Australia will provide industry with the opportunity to consult and provide input on rulings so as to improve their utility.
The $20,000 instant asset write-off has been extended for a further 12 months to 30 June 2019, for businesses with an aggregated annual turnover of less than $10 million. Assets valued at $20,000 or more can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter.
The extension of the instant asset write-off is welcome, but disappointing for small businesses that were hoping the measure would be made permanent.
Anti phoenixing measures
The enforcement measures to be implemented as part of the Budget announcements include:
The creation of new offences to target those who conduct or facilitate phoenix activity
While the new offences have not been officially released, in its September 2017 paper entitled ‘Combatting Illegal Phoenixing’ (Paper) the Government proposed amendments to the Corporations Act to specifically prohibit “the transfer of property from Company A to Company B if the main purpose of the transfer was to prevent, hinder or delay the process of that property becoming available for division among the first company’s creditors.” The Paper proposed that in these scenarios ASIC would have the power to issue a notice upon Company B asking for that property or money’s worth to be delivered up. Potential remedies foreshadowed in the Paper included civil and criminal penalties, compensation orders and clawback of assets.
Preventing directors from improperly backdating resignations to escape prosecution or liability
The Paper proposed amending the Corporations Act to impose a rebuttable presumption that where a notice of change of director is lodged more than 28 days after the date of the director’s effective resignation, the director could still be held liable for misconduct that had occurred up to the point of lodgement. Additionally, the onus for reporting director resignations could be shifted from the company to the individual resigning director.
Limiting the ability of directors to resign if their resignations would leave a company with no directors
The Paper proposed limiting a sole director’s ability to resign from office without either first finding a replacement director or winding up the company’s affairs by making such a resignation ineffective and/or an offence (similar restrictions were proposed to limit the near-simultaneous mass resignation of directors).
Restricting the ability of related creditors to vote on appointing, removing or replacing external administrators
This would be done to minimise the risk that related creditors, with or without the assistance of the external administrator, can frustrate unrelated creditors by “stacking” votes in a creditors meeting – particularly where a resolution is proposed to remove and replace the external administrator. This is a particular concern where the external administrator’s relationship with the pre-insolvency adviser or director might result in an actual conflict of interest.
Phoenix activity is a significant enforcement issue for both the ATO and ASIC and occurs where a company deliberately liquidates to avoid paying creditors, taxes and employee entitlements. Phoenix activity is estimated to cost the Australian economy more than $3 billion a year.
In a recent example, a liquidator’s report tendered in Federal Court proceedings last year alleged that a pre-insolvency adviser prepared a master schedule listing 360 companies that he had advised, the company’s original directors and the company’s dummy directors installed by the pre-insolvency adviser. The dummy directors were often paid, had no knowledge of the business and acted as a shield for original directors against claims from creditors and liquidators. The liquidator’s report referenced an “extensive number of contraventions” of the Corporations Act and Crimes Act and stated that there are “far too many” to list on an individual basis. The pre-insolvency adviser was accused of helping struggling companies avoid paying tax on more than $20 million in otherwise taxable income.
Full implementation of Enterprise Tax Plan
The Government will ensure unpaid present entitlements come within the scope of Division 7A to require them to be repaid over time or give rise to a deemed dividend. In addition, the start date of the targeted amendments to Division 7A (announced in the 2016/17 Budget) will be deferred from 1 July 2018 to 1 July 2019, to enable all Division 7A amendments to be progressed as a consolidated package.
The amendments announced in the 2016/17 Budget include:
- a self-correction mechanism for inadvertent breaches of Division 7A
- appropriate safe-harbour rules to provide certainty
- simplified Division 7A loan arrangements and
- a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.
The Budget papers state that the amendments draw on some recommendations made in the 2016/17 Budget and the Board of Taxation in its Post-implementation Review.
At this stage, there is still very little detail provided. However, our understanding is that the changes regarding unpaid present entitlements (UPEs) are intended to be a clarification of how Treasury and the ATO have viewed the operation of the law, rather than an amendment. A similar approach was taken with section 109BC ITAA 1936, which was introduced in 2010 to put beyond doubt that Division 7A applies where a shareholder of a private company (or their associate) is an Australian resident and the private company involved in the arrangement is a foreign resident.
As such, it is possible that whilst 1 July 2019 is proposed to be the start date of the consolidated package of Division 7A amendments, the changes regarding UPEs may have retrospective effect so that UPEs will have always come within Division 7A.
Practically, what this means for pre-December 2009 UPEs remains to be seen. Presumably, if such UPEs are regarded as loans the Commissioner of Taxation’s period of review should have ended.
We would expect to see the amendments deal with transitional measures required for UPEs that have been placed on complying sub-trust arrangements as part of the ATO’s administrative measures (e.g. Option 1 in PS LA 2010/4). Presumably, Treasury and the ATO will consult again to come up with transitional arrangements.
An exemption from the work test will be introduced, allowing individuals aged between 65 and 74 who have less than $300,000 in superannuation to make voluntary contributions in the first year that they do not meet the work test. This measure will apply from 1 July 2019.
The balance of $300,000 will be measured at the beginning of the financial year in which the individual fails to meet the work test. This is a welcome change and will allow individuals to top up their superannuation in the year immediately following retirement.
Certain fees (‘passive fees’) will be capped on balances less than $6,000 at 3%. This will apply from 1 July 2019.
According to the Exposure Draft legislation, the total amount of administration fees and investment fees that can be deducted from a member’s account is 1.5% to apply to the following 6 month period. This will require changes to administration systems.
Exit fees on superannuation accounts will be banned from 1 July 2019.
According to the Explanatory Materials with the Exposure Draft legislation, the prohibition on exit fees only applies to the cost of disposing of the member’s interest in the fund, and not to buy-sell spreads. These will still be able to be charged. This change will require changes to administration systems.
The maximum number of allowable members in an SMSF or small APRA fund will increase from 4 to 6. This will apply from 1 July 2019.
It seems unlikely that this change will see significant take up, given the vast majority of self-managed superannuation funds have no more than 2 members. However, it will facilitate family groups wanting to operate superannuation funds together. Many advisers counsel against including children in their parents’ self-managed superannuation funds, due to the governance issues that arise and the difficulty of ensuring that the children are appropriately engaged in the fund’s affairs.
There are also concerns about the consequences should a child’s marriage break up, and the impact on the fund if assets have to be sold unexpectedly to comply with splitting orders. Nonetheless, adding extra members may provide additional cash flow and capital to funds, which may be of assistance to those that wish to enter into limited recourse borrowing arrangements or acquire bulky assets.
The Government will require the transfer of all inactive superannuation accounts where the balance is below $6,000 to the ATO. This will apply from 1 July 2019. The ATO will expand its data matching processes to proactively reunite inactive superannuation accounts with the member’s active account where possible.
The initial transfer of inactive low-balance accounts to the ATO will take place during the 2019/20 financial year, which will also be when the Commissioner starts proactively reuniting monies currently held. The changes do not replace existing account consolidation processes available to fund members. This change will require changes to administration systems.
Insurance within superannuation will move from a default framework to be offered on an opt-in basis for members with balances of less than $6,000, members under age 25, and members whose accounts have not received a contribution in 13 months and are inactive. This will take effect from 1 July 2019. Affected fund members will have 14 months to decide whether to opt-in to existing cover or allow it to be cancelled.
The changes do not apply to existing members under the age of 25 with active accounts with balances over $6,000. There has been considerable negative commentary about the practice of charging young people for insurance they may not need. However, young people arguably do need disability insurance, and an early life disabling injury can be catastrophic, particularly where there is no insurance in place. It should be noted that there are many reasons why an account may be temporarily inactive, including because the fund member is out of the workforce on parental or other leave. Such fund members may wish to have their insurance remain in place, and will have to opt-in to cover. Communication with fund members will be critical as this change is introduced, so that people with small and inactive accounts, as well as young people, are made fully aware of the implications of ceasing to hold insurance. This change will require significant changes to administration systems.
The ATO will receive funding to allow it to improve the integrity of the ‘notice of intent’ processes for claiming personal superannuation contribution deductions. This measure will commence from 1 July 2018.
Apparently there has been an issue with contributors claiming a tax deduction but not lodging a notice of intent, with the result that no contributions tax is charged. This measure will allow the ATO to improve integrity in the system in this regard.
In a welcome measure, 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 superannuation guarantee, from 1 July 2018. This will allow these individuals to avoid being forced into breaching the $25,000 annual concessional contributions cap.
Submissions have been made to Treasury for some time seeking this change. There has seemed little point in forcing taxpayers to breach the concessional contributions cap. It will be up to employees to negotiate with their employers the implications of ceasing to have superannuation guarantee contributions deducted from wages or salary. It also appears that it will be voluntary for the employer to comply with an exemption certificate.
SMSFs that have a history of three consecutive years of clear audit reports will be able to move to a 3 yearly audit cycle. This will apply from 1 July 2019.
This is a welcome reduction in compliance obligations applicable to ‘low risk’ self-managed superannuation funds. There is, however, some risk for funds that do depart from the straight and narrow that it may be up to 3 years before problems are picked up by the auditor.
Funding will be provided to the ATO to support the modernisation of payroll and superannuation fund reporting, in particular to support small businesses with less than 20 employees during the transition to Single Touch Payroll Reporting from 1 July 2019.
This is a welcome measure.
There are to be technical amendments to the transition to retirement income stream rules relating to the death of a member and addressing double taxation in respect of deferred annuities purchased by a superannuation fund or retirement savings account.
These changes were included in Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 introduced into Parliament in April.
The Government will clarify how innovative income stream products are to be assessed against the Age Pension means test, with new means testing rules to take effect from 1 July 2019.
Clarification of the rules has been long-awaited and is welcome.
Superannuation fund trustees will be required pursuant to a new covenant to develop a retirement plan for members and offer a wider variety of products (Comprehensive Income Products for Retirement (or CIPRs)). They will also be required to provide more information aimed at allowing consumers to compare and choose products.
There is to be consultation with the industry about these measures. Requiring all superannuation funds to offer a CIPR will be a significant obligation, as these products are complex and require significant administrative support. Anecdotally, those funds that have already introduced CIPRs have experienced very low take-up of these products. Disclosure and communication will be of critical importance so that fund members are made fully aware of the nature and benefits of the CIPR offered by their fund. There may be a need for increased financial advice as fund members consider whether or not a CIPR is suitable for them. It will not be compulsory for retiring fund members to take up a CIPR.
The financial institutions supervisory levies will be increased to fully recover the cost of the ATO’s superannuation activities.
Superannuation funds will need to budget for these increased costs.
Tax changes to Testamentary Trusts
The Budget announced integrity measures to clarify the concessional tax rates available for minors receiving income from Testamentary Trusts. From 1 July 2019, the benefit of adult marginal tax rates applying to distributions from Testamentary Trusts to minor beneficiaries will only be available for income generated from the assets placed in the Testamentary Trust by the deceased or the proceeds of the disposal or investment of those assets.
This is not a significant change, as this integrity issue has always been debatable where non-estate funds are added to a Testamentary Trust, although the changes do leave open the question of whether non-estate assets received before1 July 2019 qualify for the concessional treatment. That said, the ATO has taken a conservative view for some time.
One question left open by the Budget is whether superannuation assets will be considered to be outside the deceased’s estate (as superannuation is held in a form of trust before death) and not qualify for the concessional tax treatment where they are distributed to the estate and held via a Testamentary Trust or a Superannuation Proceeds Testamentary Trust in their Will.
Concessions in relation to partnerships
Partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership, will no longer be able to access the small business Capital Gains Tax concessions in relation to those rights.
This proposed change follows the Commissioner’s suspension of the online guidance on ‘Assessing the Risk: Allocation of profits within professional firms guidelines’ and Everett Assignments, in December 2017. In this regard, updated online commentary released by the Commissioner includes concerns about the inappropriate use of CGT concessions.
This may reduce future Everett’s if the small business CGT consessions are not avaliable.
One thing that is not clear from the budget announcement is whether this integrity measure would apply to a complete transfer of a partnership interest to a family trust, where a family trust becomes a partner in the partnership.
Denial of deductions for vacant land
Taxpayers will not be allowed a deduction for expenses associated with holding vacant land from 1 July 2019. The measures will apply to residential and commercial land.
Disallowed deductions may not be carried forward to future years when the land may no longer be vacant. Where the denied deduction would ordinarily form part of the cost base of a capital gains tax asset, it may still be included in the cost base of the asset. However, items such as interest, that would not ordinarily form part of cost base, will not be deductible or included in cost base.
There are exceptions where:
- a property has been constructed and has received approval to be occupied and is available to rent or
- the owner is using the land to carry on a business (including primary production).
This is an integrity measure to stop taxpayers claiming deductions where they are not holding the land for the purpose of earning assessable income.
These measures are likely to impact a large number of taxpayers.
Although the ‘carrying on a business’ exception will save some taxpayers, it will not help those who are quarantined from the business for asset protection purposes.
Thin capitalisation — valuation of assets and treatment of consolidated entities
The Government announced the following two changes to tighten Australia’s thin capitalisation rules:
- Entities will be required to align valuations of their assets for thin capitalisation purposes with those in their financial statements. Taxpayers can continue to rely on valuations obtained prior to 8 May 2018 until the first income year commencing on or after 1 July 2019.
- Australian consolidated groups and multiple entry consolidated groups that are both foreign controlled and control a foreign entity, will be treated as inward and outward investment vehicles.
Both changes will apply from 1 July 2019.
The new valuation rules may cause more entities to fall within the thin capitalisation rules and have debt deductions denied. Entities with offshore debt funding should revisit their thin capitalisation calculations to determine whether the valuations of their assets need updating and whether this may cause a different thin capitalisation outcome.
MITs and CGT discount
From 1 July 2019, the 50% CGT discount will not be available to Managed Investment Trusts (MITs) and Attribution MITs (AMITs). Under this measure, MITs and AMITs that derive a capital gain can still distribute this income as a capital gain that can be discounted in the hands of the beneficiary, but only if the beneficiary is eligible for the CGT discount. Beneficiaries that are not entitled to the CGT discount will not benefit from the CGT discount being applied at the trust level.
The measure is intended to prevent beneficiaries that are not entitled to the CGT discount (e.g. corporate beneficiaries) benefitting from the CGT discount being applied at the trust level. However, the measure’s application at the trust level rather than at the beneficiary level, may unintentionally result in an adverse outcome for resident beneficiaries not otherwise targeted by the measure (e.g. superannuation funds).
Stapled structure integrity measures
The Budget reaffirms the integrity measures released by Treasury on 27 March 2018 that tighten the rules for stapled structures and limit certain tax concessions available to foreign investors investing in Australian assets.
Specifically, the measures propose that:
- the threshold for the thin capitalisation associate entity test be lowered from ‘50% or more’ to ‘10% or more’, limiting so called ‘double gearing’
- MIT fund payments derived from cross-staple rental payments or trading trust distributions be subject to withholding tax when paid to non-residents at the prevailing company tax rate, rather than the current concessional rate of 15%
- withholding tax exemptions for foreign pension funds be limited to interest and dividend income derived only from portfolio investments (i.e. an interest of less than 10%)
- a sovereign immunity tax exemption be restricted to portfolio investments of a sovereign investor and
- MITs no longer being eligible for the concessional MIT rate for agricultural land investments (as opposed to the 27 March 2018 announcement which suggested that rent from agricultural land would not qualify as eligible investment business income, in turn potentially triggering the trading trust rules).
Transitional measures will allow a fifteen year respite from the measures for stapled structures that relate to infrastructure assets and seven years for other staples.
The measures go beyond stapled structures, and address concessions available to foreign investors. Under the guise of levelling the playing field between foreign and domestic investors, the measures have the effect of watering down a system which was initially intended to attract foreign investment into Australia.