Thinking | 3 April 2019
2019 Federal Budget insight
With a forecast surplus for 2019-20, the first time in over a decade, of $7.1 billion, Josh Frydenberg’s 2019 Budget is a not too subtle election budget. Surplus is forecast into the future with government debt eliminated by 2029-30.
There are a number of winners with no new taxes, low to middle income earners receiving $158 billion of personal tax cuts over 10 years and spending incentives for SME businesses proposed through the increase of the instant asset write-off from $25,000 to $30,000, and its extension to medium sized (up to $50million turnover) businesses.
The personal tax cuts will mean almost 10 million taxpayers receiving at least a partial benefit.
There is also significant spending on infrastructure, $100 billion over the next 10 years, and health care.
Tax integrity is also addressed. The Budget increased funding by $1 billion for the Australian Taxation Office for its Tax Avoidance Taskforce. This reflects the ongoing theme of targeting tax avoidance, and is likely to result in increased audit activity for the target group being multinationals, large public and private groups, trusts and high net worth individuals. New requirements were also introduced to address the black economy with new rules for Australian Business Number holders.
The budget will bring the challenge to Labor into a debate about incentive and fiscal responsibility.
On the infrastructure front, this Federal budget from the Coalition was consistent with expectations. It further increased infrastructure spend from $75 billion to $100 billion for the building of road, rail and air infrastructure.
With the increasing number of infrastructure projects being delivered nationally, this places further pressure on our construction clients to find skilled workers. Helpfully, an additional $525 million has been allocated towards the funding of 80,000 new apprenticeships, which will assist with alleviating some of these skill shortage pressures.
For our health clients, we saw $100m allocated to upgrading existing health infrastructure and a further $1.3bn allocated to support patient care in the community, which will reduce the pressure on hospital services.
For our housing clients, there was no change to existing Government policy. The Treasurer referenced in his speech the National Housing Finance Investment Corporation and its recent $300m bond raising. This bond will offer cheaper finance for Community Housing Providers to deliver 300 new affordable rental dwellings. There was no reference to matching Labor’s current election proposal to deliver 250,000 new affordable homes.
With an estimated 47,000 job vacancies in regional Australia and the absence of affordable housing to accommodate potential key workers, targeted investment in affordable housing infrastructure would be an additional avenue to support the Federal Government’s budget surplus strategy. The increased focus on economic infrastructure projects is a real positive for our construction clients. There is still a real need for growth in social infrastructure projects, which will – at least in the short term - continue to fall to the States and our Community Housing Provider clients.
Bringing forward personal tax rates
The Government has announced two key changes to complement its Personal Income Tax Plan announced (and legislated) in 2018.
Previously, from 1 July 2022, the 19% personal income tax bracket was to apply to a taxpayer’s income between $18,201 and $41,000. The upper end of that top threshold will now be raised to $45,000.
Similarly, from 1 July 2024, the 32.5% personal income tax bracket was to apply to a taxpayer’s income between $41,001 and $200,000. This rate will now be lowered to 30% for income between $45,001 and $200,000. Additionally, as part of the original measures under the Personal Income Tax Plan, the 37% tax bracket will be abolished from this date.
The tables below summarise the changes over the next 6 years.
|Listed||Leading Corporate Law Firm (Smaller & Mid-Market Matters) - Victoria, 2017 in Doyle's Guide to the Australian Legal Profession.
Ranked in the Australasian M&A league table by Mergermarket 2019.
Ranked in The Legal 500 2019.
|John Hutchinson||Recognised in The Best Lawyers in Australia in Equity Capital Markets Law, Funds Management, Investment Funds, Corporate/Governance Practice, Corporate Law and Mergers and Acquisitions Law every year since 2014.
He is also is a recommended Corporate/M&A lawyer in Victoria in Doyle’s Guide.
|Ed Paton||Recommended private equity and capital markets lawyer in Victoria in Doyle’s Guide to the Australia Legal Profession and has been recognised in The Best Lawyers in Australia in Commercial Law and Corporate Law for 2020.|
|Deborah Chew||Deborah Chew has been recognised in The Best Lawyers in Australia in Corporate/Governance Practice for 2019 and 2020 and is recommended in The Legal 500 Asia Pacific 2018 in corporate and M&A.|
|James Morvell||James Morvell is recommended in The Legal 500 Asia Pacific 2018 in corporate and M&A, and is a Recommended Corporate & Commercial Lawyer (SME & Mid-Market Matters) in Victoria, in Doyle’s Guide to the Australian Legal Profession 2018.|
|Oliver Jankowsky||Oliver Jankowsky is recommended in the 2020 edition of the Legal 500 Asia Pacific.|
|Christopher Brown||Christopher Brown was recommended in the 2019 edition of the Legal 500 Asia Pacific.|
|Jacqui Barrett||Jacqui Barrett is recommended in the 2020 edition of the Legal 500 Asia Pacific.|
|PIOs in respect of classes of financial products||In Cigno, Stewart J held (among other things) that there need not be any existing products, or more than one product, in a ‘class’ of financial products, before ASIC may exercise its PIP in relation to that class of financial products.
These observations are reflected at RG 272.23. In comparison to the draft RG 272, ASIC also added comments that a market-wide PIO is likely to be appropriate even where a practice is not currently widespread, but there is a risk that the practice will be ‘phoenixed’ or adopted by others.
|Causing significant consumer detriment||In Cigno, Stewart J also held that relevant detriment need not result from features inherent to the financial product – it is sufficient for detriment to result from particular circumstances in which the product was issued or offered. ASIC added an additional note at RG 272.47 to reflect these observations.|
|Notifying consumers about PIOs||At RG 272.29 to RG 272.31, ASIC added a reference to its power under section 1023N of the Corporations Act and section 301N of the NCCP Act to require a specified person to notify existing customers about a PIO.|
|Factors relevant to whether a financial product has, will, or is likely to result in significant consumer detriment||At RG 272.51, ASIC listed various matters it may take into account when considering if a product is likely to result in significant consumer detriment. In RG 272, a new matter was added: ‘products, conduct or methods of distribution of a sufficiently similar nature that have previously resulted in significant consumer detriment’.
ASIC also inserted a further factor to Table 1, which provides a non-exhaustive list of factors that ASIC may consider. The new factor is the ‘impact that the detriment has had, will have or is likely to have on consumers’. In REP 661, ASIC explained that while it is required to specifically consider financial loss, ASIC may also take non-financial loss into consideration.
|Balancing regulatory objectives||RG 272 does not contain the paragraphs 000.57 to 000.59 of the draft RG 272, which outlined briefly ASIC’s approach to balancing its objectives as set out in the Australian Securities and Investments Commission Act 2001 (Cth) and the impact of ASIC’s actions on competition in the financial system (where they came into opposition).|
|Consultation||At RG 272.66, ASIC added a clarification that the nature of its consultations may vary significantly in different cases.
At RG 272.67, which states that ASIC is required to consult with APRA before making a PIO that will apply to an APRA-regulated body, ASIC added that it will also consult with other regulators as appropriate.
|If you are a...||Existing scheme||New changes for Hong Kong nationals|
|current or future student||Depending on your field of study, you are eligible for a two-to-four-year Temporary Graduate visa after you complete your Australian studies.||You will be eligible for a five-year graduate visa once you complete your studies in Australia, with a pathway to permanent residency (PR) after five years.|
|current or future student studying in a regional area||There are pathways to PR after three years, for example, through the Permanent Residence (Skilled Regional) visa.||You continue to have access to PR after three years.|
|current Temporary Graduate visa holder||Your visa is valid for 18 months to four years.||From 10 July 2020 to 10 July 2025, you can extend the visa for five years, with a pathway to PR after five years.|
|current 457 or 482 visa holder (Temporary Work (Skilled) visa and Temporary Skill Shortage visa)||Your visa is generally valid for two to four years. If you work in an eligible occupation (Medium and Long-term list) or are subject to grandfathering provisions for the 457 visa, you will have access to PR after two or three years. If you do not work in an eligible occupation, you are generally able to renew your visa two years at a time.||You can extend your visa for five years starting 10 July 2020 and ending 10 July 2025, with a pathway to PR after five year, regardless of whether the occupation falls under the Medium and Long-term or Short-term list.|
|future 482 visa applicant (Temporary Skill Shortage visa)||In most circumstances, your visa will be granted for two or four years.||Your temporary skilled visa will be granted for five years.
You must work in an eligible occupation and meet other existing criteria currently in force for the 482 visa scheme. The Labour Market Testing requirements apply regardless of the Free Trade Agreement between Australia and Hong Kong.
Alternatively, you may qualify for a five year visa through the Global Talent temporary visa scheme, which is for exceptional talent where the sponsoring employer pays above the Fair Work High Income Threshold ( currently set at $153,600 for financial year 2020-2021)
Future temporary skilled visa holders will also have a pathway to PR after five years.
|current or future applicant under the Business Innovation and Investment scheme||The standard average processing time applies.||Your application will be prioritised. As there are dedicated officers handling applications from Hong Kong, we expect processing timeframes to be shortened.|
These measures complement the government’s legislated Personal Income Tax Plan - to lower taxes, consolidate the personal income tax brackets and to limit bracket creep.
Flattening the progressive marginal tax rate scale is a win for simplicity. With the reduction of the 32.5% rate to 30% and the removal of the 37% tax bracket by 2024-25, 94% of Australian taxpayers are projected to have a tax rate of 30% or less.
While the details of these changes were not known before the Budget papers were released, they are not unexpected. With a forecasted surplus and a rapidly approaching election, we should expect generous promises from both sides of politics.
$158 billion of income tax cuts over a decade - while taxpayers will no doubt be excited by the prospect of a lower personal income tax bill, they may need to keep some grains of salt on hand. We will see two full election cycles before the full effect of these changes will be seen, and who knows what will happen in that time.
Low and middle-income tax offsets raised
The low and middle-income tax offset (LMITO) will be increased.
The maximum LMITO available will increase from $530 to $1,080 per annum, with the base amount increasing from $200 to $255 per annum.
The increased LMITO will be available for returns lodged for the income year ending 30 June 2019. The LMITO will remain available for the income years ending 30 June 2020 to 30 June 2022, after which it will be removed.
Then, from 1 July 2022, the low-income tax offset (LITO) will be increased.
The LITO will increase from $645 to $700. The full LITO will be available to people with taxable incomes of less than $37,000. It will progressively be phased out for those on incomes between $37,000 and $66,667.
The changes to the LMITO and LITO are welcome changes for those on low and middle incomes. Unlike the marginal tax rate cuts, the change to the LMITO is more immediate, with Australian taxpayers benefiting when they lodge their returns from 1 July 2019. However, the increase to the LITO is not scheduled to take effect until 1 July 2022, after the completion of another election cycle.
Medicare levy low-income threshold increased
The Medicare levy low-income thresholds will be raised to the following amounts from the 2018-19 income year.
|FY2020||10% (5% above the required minimum)|
|FY2021||7% (2% above the required minimum)|
|Total excess distributions||7%|
Together with the changes to the LMITO and LITO, the increase to the Medicare levy low-income thresholds will undoubtedly provide further relief to lower and middle-income earners.
ATO tax avoidance taskforce expansion
The Government will increase ATO funding to extend the operation of the Tax Avoidance Taskforce’s programs and activities. The Taskforce carries out compliance activities targeting large corporates, multinationals and high net worth individuals.
The Government proposes to provide an additional $1 billion of funding until 30 June 2023, which is estimated to raise a further $3.6 billion in tax liabilities over the next four years.
The Government is continuing its focus on combating tax avoidance and these additional funding measures reflect additional resources available for the ATO to achieve its broader compliance objectives. This is likely to result in increased audit activity for the target group.
Clarifying the operation of hybrid mismatch rules
The hybrid mismatch rules seek to prevent multinational corporations from exploiting differences in the tax treatment of an entity or instrument under the income tax laws of two or more countries.
The Government will clarify the operation of Australia’s hybrid mismatch rules through a number minor technical amendments commencing from 1 January 2019. These measures are expected to include stipulating how the rules apply to MEC groups and trusts, limiting the meaning of foreign tax, and specifying that the integrity rule can apply where other tax provisions have applied.
These changes should provide greater certainty for taxpayers in respect of complying with the hybrid mismatch rules. Impacted taxpayers should consider the proposed amendments once further details and draft legislation are released.
Increased compliance on tax and superannuation liabilities
The Government proposes to provide an additional $42.1 million of funding over four years to the ATO to increase its activities to recover unpaid tax and superannuation liabilities. These activities are aimed at increasing compliance and ensuring timely tax payments by large businesses and high wealth individuals. The measure will not extend to small businesses.
Over the forward estimates, these measures are estimated to have a gain to the budget of $103.6 million and increase GST payments to states and territories by $41.8 million.
This additional funding will provide the ATO with additional resources to increase its compliance activities to recover unpaid tax and superannuation liabilities from large businesses and high wealth individuals. This is likely to result in increased audit activity for the target groups.
Government bolsters support for Australian exports
The Government will provide an additional $61 million over 3 years from 2019-20 to support Australian businesses to export Australian goods and services to overseas markets. This includes:
- $60 million over 3 years from 2019-20 to increase funding for the Export Market Development Grants (EMDG) to increase reimbursements of export marketing expenditure for eligible small and medium enterprise exporters; and
- $1 million in 2019-20 to further promote Australian industries to overseas markets.
Since the EMDG’s establishment in 1997, it has been very popular amongst start-ups and scale-ups resulting in thousands of applications per year. However, recently, due to the number of applicants and the limited pool of funds the Government has been unable to provide the full 50% reimbursement.
As a result, the Government had changed the method of reimbursement so that payments were made over two tranches. Businesses that applied before the first tranche payment would generally be granted a reimbursement of 50% for the first $80,000 of expenses; second tranche payments would vary depending on the number of additional applicants throughout the year and the amount of funds left in the pool. In effect, the two tranche payment method has meant that some businesses have only received a 35-40% reimbursement for expenses.
The increase could allow businesses to receive a full 50% reimbursement of claimed expenses outright, or at least to receive a full 50% reimbursement over first and second tranche payments. Overall, this will likely be a welcome measure by a number of start-ups and scale-ups expanding their operations overseas.
Supporting small businesses with tax disputes
The Government will provide $57.5 million over 5 years from 2018-19 to provide small businesses with access to a fast, low cost, independent review mechanism where they are in dispute with the Australian Taxation Office (ATO). Funding will be spread across the ATO, the Administrative Appeals Tribunal (AAT) and the Department of Jobs and Small Business.
This measure came into effect on 1 March 2019, along with the setup of the Small Business Taxation Division (SBTD) of the AAT to improve access to justice for small businesses appealing the outcome of a tax dispute.
On 20 March 2019, the ATO released an internal ATO document - Dispute Resolution Instruction Bulletin DR IB 2019/1 - which instructs ATO staff on how litigation should be conducted in the SBTD. The Instruction Bulletin states that where the ATO engages an external legal service provider but the taxpayer is not legally represented, the ATO will give the taxpayer funding for "equivalent legal representation". In addition, funding will not be denied if the taxpayer also receives legal advice through the Australian Small Business and Family Enterprise Ombudsman Concierge Service.
At this stage, there is no clarity about how tax and/or legal advisors can express interest and/or lend support to the SBTD. We would welcome further information about this measure.
Division 7A start date deferred
The start date of the targeted amendments to Division 7A (originally announced in the 2016-17 Budget and again in the 2018-19 Budget) will be deferred (again) from 1 July 2019 to 1 July 2020. Our summary of the Division 7A amendments was discussed in our 2018-19 Budget update.
In October 2018 the Government issued a consultation paper to seek stakeholder views on the proposed approach for implementing the amendments to Division 7A. The Government received valuable feedback from stakeholders which highlighted the complexities of the tax law. As a result, the deferral of a further 12 months will allow the Government to consult with stakeholders and refine an implementation approach, including appropriate transitional arrangements.
While the deferral provides Treasury with an opportunity to reconsider some of the more onerous proposals included in its consultation paper, it leaves taxpayers and their advisors in limbo as to what to do with historical issues such as pre-1997 loans and pre-2009 UPEs.
Instant asset write-off threshold
From Budget night to 30 June 2020, the instant asset write-off threshold will increase from $25,000 to $30,000 and will extend to medium-sized businesses (aggregated annual turnover of less than $50 million). The instant asset write-off is already available to small businesses (aggregated annual turnover of less than $10 million).
We note that in January 2019, the Government announced an increase to the threshold from $20,000 to $25,000, and an extension of the write-off for an additional 12 months to 30 June 2020.
For small businesses, assets acquired from 1 July 2018 which are valued at $25,000 or more, and assets acquired from Budget night which are valued at $30,000 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.
For medium-sized businesses, assets acquired from Budget night which are valued at $30,000 or more can continue to be depreciated in accordance with existing depreciating asset provisions.
The increase in the threshold to $30,000 as well as the extension of the write-off to medium business is welcome.
We expect the generosity of the write-off and its extension to more taxpayers will attract greater ATO scrutiny of whether taxpayers meet the aggregated turnover test; including critically examining the notoriously difficult connected entity and affiliate tests. Medium sized taxpayers who have never had to test aggregated turnover in the past will now have to carefully consider and apply these tests.
Strengthening the Australian Business Number system
The Federal Government proposes to impose more stringent compliance requirements for Australian Business Number (ABN) holders.
Flowing on from other tax system integrity and compliance measures introduced in response to the Black Economy Taskforce’s efforts, the Federal Government proposes to impose more stringent compliance requirements for ABN holders. To retain their ABN, an entity:
- must confirm the accuracy of their details on the Australian Business Register annually (from 1 July 2022); and
- if they have an income tax return lodgement obligation, must comply with this obligation (from 1 July 2021)
(Refer to Page 13 of Budget Paper No. 2)
According to the Federal Government, these integrity measures are expected to generate net revenue in the order of $22.2 million over FY21 to FY23.
The changes are intended to complement the other tax system integrity and compliance measures introduced in response to the Black Economy Taskforce’s recommendations.
Single Touch Payroll expanded
The Government will provide $82.4 million over four years from 2019-20 to the ATO and the Department of Veterans’ Affairs to support the expansion of the data collected through Single Touch Payroll (STP) by the ATO and the use of this data by Commonwealth agencies.
STP data will be expanded to include more information about gross pay amounts and other details.
These changes are intended, in part, to reduce the compliance burden for employers and individuals who report information to multiple Government agencies. However, it is not yet clear which details will now be included in STP reports. These changes are consistent with the recent focus on sharing and matching data between Government agencies.
Contributions changes to superannuation
The Budget announced changes to the superannuation contributions rules.
- From 1 July 2020, individuals aged 65 and 66 will be able to make voluntary superannuation contributions (concessional and non-concessional) without meeting the work test.
- The age limit for spouse contributions will be increased from 69 to 74 years.
- Individuals aged 65 and 66 will be able to bring-forward non-concessional contributions.
The Budget also announced that the current tax relief for merging superannuation funds that are due to expire on 1 July 2020 will be made permanent.
It was also announced that superannuation funds with interests in both the accumulation and pension phases will be able to choose their preferred method of calculating exempt current pension income (ECPI). Further, funds, where all of the members are fully in pension phase for the whole income year, will not have to obtain an actuarial certificate when using the proportionate method of calculating ECPI.
The change allowing contributions to be made by persons aged 65 and 66 without meeting the work test builds on a change taking effect on 1 July 2019 that allows a person aged from 65 to 75 who has stopped working to make voluntary superannuation contributions, if they have less than $300,000 in superannuation, in the first year after they ceased to meet the work test.
The permanent extension of tax relief for merging funds is welcome, as tax issues have in the past constituted a brake on fund mergers.
The changes to the calculation of ECPI and actuarial certificates is also welcome - the need to obtain certificates when all members are fully in pension phase has constituted an unnecessary burden on funds.
Mark Richards, Special Counsel, shares his thoughts about the Federal Budget with a focus on infrastructure and its impact on health, housing and the construction industry.
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