3 April 2019

2019 Federal Budget insight

Introduction

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.

Tony Macvean
Managing Partner
Peter Murray
Partner, Head of Tax

Contents

Infrastructure Bringing forward personal tax rates
Low and middle-income tax offsets raised Medicare levy low-income threshold increased
ATO tax avoidance taskforce expansion Clarifying the operation of hybrid mismatch rules
Increased compliance on tax and superannuation liability Government bolsters support for Australian exports
Supporting small businesses with tax disputes Division 7A start date deferred
Instant asset write-off threshold Strengthening the Australian Business Number system
Single Touch Payroll expanded Contributions changes to superannuation

Infrastructure

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

Summary

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.

Years ending 30 June 2019 to 30 June 2022
Taxable income Tax on this income
$1–$18,200 Nil
$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
$1–$18,200 Nil
$18,201–$45,000 19 cents for each $1 over $18,200
$45,001–$120,000 $5,092 plus 32.5 cents for each $1 over $45,000
$120,001–$180,000 $29,467 plus 37 cents for each $1 over $120,000
$180,001 and over $51,667 plus 45 cents for each $1 over $180,000

 

Income years ending 30 June 2025 onward
Taxable income Tax on this income
$1–$18,200 Nil
$18,201–$45,000 19 cents for each $1 over $18,200
$45,001–$200,000 $5,092 plus 30 cents for each $1 over $45,000
$200,001 and over $51,592 plus 45 cents for each $1 over $200,000

 

Observation

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

Summary

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.

Observation

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

Summary

The Medicare levy low-income thresholds will be raised to the following amounts from the 2018-19 income year.

Taxpayer Existing threshold New threshold
Singles $21,980 $22,398
Families $37,089 $37,794
Single seniors and pensioners $34,758 $35,418
Senior and pensioner families $48,385 $49,304
Dependent child or student +$3,406 per child or student +$3,471 per child or student

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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

Summary

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.

Observation

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.

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