10 May 2017
2017-18 Federal Budget: $29.4bn deficit in 2017-18; working towards a surplus of $7.4bn in 2021 on the back of an improving economy; housing affordability package; increased Medicare levy and bank tax; substantial infrastructure program including inland rail project and regional infrastructure.
This Budget continues the intent of gradually returning to surplus over the medium term, with the Budget expected to balance in 2021 and remaining in surplus thereafter. But it’s a case of relying on regulation, not innovation, to find savings in the Budget. Increased taxation through the Medicare Levy and taxation on the 5 largest banks, and savings in university education arrangements, will support funding for NDIS, education, defence and security and infrastructure.
Personal Income Tax
ü There are no changes to personal income tax rates proposed in the Budget.
ü This means that the 2% Temporary Budget Repair Levy will end on 30 June 2017.
ü The following individual income tax rates for Australian residents will apply for the 30 June 2017-18 income year:
Tax on this income
$0 – $18,200
$18,201 – $37,000
19% of excess over $18,200
$37,001 – $87,000
$3,572 plus 32.5% of excess over $37,000
$87,001 – $180,000
$19,822 plus 37% of excess of $87,000
$180,001 and over
$54,232 plus 45% of excess over $180,000
ü The Treasurer announced the Medicare Levy would increase from 2% to 2.5% with effect from 1 July 2019 and low-income thresholds for singles, families, seniors and pensioners would be increased for the 2017-18 income year to take account of inflation.
No major superannuation changes, but the Government has announced housing affordability measures and tax integrity measures applying to specific superannuation investments.
Contributing proceeds from downsizing to superannuation
The Government announced a person aged 65 or over will be permitted to make a non-concessional contribution to superannuation of up to $300,000 from the proceeds of selling a principal residence owned for the past ten or more years from 1 July 2018. The contributions are stated to be in addition to contributions currently permitted under existing contribution rules. The contributions are stated to be exempt from the existing age test, work test and the $1.6 million balance test for non-concessional contributions that may otherwise prohibit the contributions being accepted by the superannuation fund under the current rules.
There is a lot of detail that remains unclear, including how downsizing will be defined, whether you will be required to contribute the actual proceeds from the property sale and whether the contribution amount will be $300,000 per couple or $300,000 each.
Removing the restrictions on non-concessional contributions for these downsizers may improve individuals’ capacity to self-fund their retirement. The proceeds from downsizing a home in this manner are not proposed to be exempt from the Age Pension assets test, which seems to be a missed opportunity to further unlock barriers to downsizing in the current system.
First Home Super Saver Scheme
The Government announced a scheme that will allow first home buyers to use superannuation as a means of saving to purchase a first home. Voluntary contributions to superannuation made by first home buyers from 1 July 2017 will be able to be withdrawn from 1 July 2018 for a first home deposit, along with associated deemed earnings.
Contributions and earnings withdrawn will be taxed at marginal rates less a 30% offset. In most circumstances, the net tax paid on contributions and earnings under the scheme would be 15%, which may result in a better outcome compared to marginal tax rates that would apply if savings were outside a fund.
Up to $15,000 per year and $30,000 in total can be contributed within existing contribution limits of $25,000 per annum. Members of a couple will each have access to the scheme (taking this to potentially $60,000 in total).
Similar schemes have been tried in the past and failed due to complexity and the marginal benefits ultimately achievable. Hopefully, the Government has learnt from previous failures and implements the scheme as it has been announced, in which case it will have a high take up rate amongst middle income first home savers.
Superannuation Borrowing Arrangements
From 1 July 2017, a person’s superannuation balance may be affected by borrowing arrangements entered into by a superannuation fund. The effect of the measure will be to increase what is counted in an individual’s total superannuation balance, and how the person’s $1.6 million pension cap is measured.
This was announced prior to the Budget, including the release of draft legislation. According to the draft legislation, the changes will only apply to borrowings entered on or after the commencement of the legislation. However, the Budget papers did not confirm whether the measure would remain prospective.
Advice should be sought prior to entering borrowing arrangements.
The instant asset write-off is being extended, but access to the small business CGT concessions will be tightened.
Instant asset write-off for Small Business Entities
As expected, the Government has announced that it will extend the immediate deductibility for eligible assets costing less than $20,000 for a further 12 months to 30 June 2018. The immediate write off applies to small business entities with an aggregated turnover of less than $10 million. To obtain the tax deduction, the asset must be first used or installed ready for use by 30 June 2018. After 30 June 2018, the threshold reverts to $1,000.
This is a welcomed measure and will help to provide an immediate cash benefit to small businesses.
Access to small business CGT concessions
The Government has announced it will tighten access to the small business CGT concessions from 1 July 2017.
As part of its tax integrity package, the Government’s proposed changes will deny access to the small business CGT concessions for assets which are unrelated to a small business. This is purportedly aimed at taxpayers with an ownership interest in larger business entities that may currently be excluded when considering the eligibility threshold for the concessions. The small business CGT concessions will continue to be available to small businesses with aggregated turnover of less than $2 million or net assets of less than $6 million.
The Government has not provided any further details on this measure and the breadth of these changes is currently uncertain. The disposal of business assets after 1 July 2017 should be carefully considered following the announced changes.
The Government has introduced two new measures to restrict the availability of deductions in respect of residential investment property, expecting to save $800 million over the forward estimates.
In new measures that will apply from 1 July 2017 (for plant and equipment acquired after 9 May 2017), depreciation deductions will no longer be allowed on removable type assets, typically plant and equipment, acquired with an existing residential investment property. These changes will apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30 pm (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
Depreciation deductions will only be available for newly acquired assets, where the property owner directly incurs the expenditure. Under this measure, the entire purchase price will be allocated to the property’s cost base for capital gains tax purposes, rather than being apportioned between the property, and removable assets such as carpets, dishwashers and air-conditioning units. The allocation of the purchase price as between the property and the component assets would ordinarily be performed by a qualified quantity surveyor.
The rules may prevent genuine purchasers of newer homes, with relatively high amounts of undeducted depreciation, from claiming deductions for the decline in value of these assets. Deductions will no longer be available over the life of the asset, but will instead form part of the cost base of the property.
Legislation will also be introduced to limit deductions available for travel expenditure for inspecting, maintaining or collecting rent. Deductions were previously available for travel on an apportionment basis. Whilst these rules are being tightened, deductions will still be allowed for investors using real estate agents to manage investment properties on their behalf.
Although the Government has not specifically targeted negative gearing, these measures (in effect) target tax deductions and the tax effectiveness of holding rental properties. Investors will need to take into consideration these proposed changes when looking to invest in pre-existing rental properties. For new properties, depreciation benefits may still be available where an investor buys the depreciable assets as part of the purchase. However, the extent that depreciation may be available for all depreciable assets will be subject to the detail of the new provisions.
Finance & Investment
A major bank levy (0.06%) will be imposed on Authorised Deposit Institutions with liabilities greater than $100 million. The banks impacted include ANZ, CBA, NAB, Westpac and Macquarie. This cost to the banks will be passed onto either customers or shareholders.
The Government has also introduced tax incentives to encourage investment in affordable accommodation. Tax concessions have been made available for managed investment schemes that invest in affordable housing.
The ATO continues to focus on the black economy and organised crime.
The Federal Government will seek to boost the economy by investing an additional $20 billion in transport infrastructure over the next ten years. In particular, we note:
ü The Government has established a Regional Growth Fund, with $472 million over four years from 2017-18. The Fund will provide grants of at least $10 million to support major infrastructure projects to help transform the regions and support long-term growth.
ü Another $200 million will support an expansion of the Building Better Regions Fund, which supports the construction of capacity-building community infrastructure in the regions.
ü Delivering on an election commitment, a new Regional Investment Corporation will deliver up to $4 billion in concessional loans for water infrastructure and farming businesses.
The Budget is a significant document with substantial details that we have not tried to replicate in this document. We have simply taken those announcements that will have the biggest impact on our clients. More detailed analysis is provided by the Institute of Chartered Accountants (51 pages) and the National Tax and Accountants Association (6 pages), which we have included on our website at www.principlefocus.com.au. As with all Budgets, the devil is in the detail and it usually surfaces over the coming weeks.
From a PrincipleFocus perspective, reforms announced earlier this year have a substantially more significant impact on our client base than last night’s announcements, including:
ü The Small Business Entity threshold increasing from $2 million to $10 million.
ü The reduction in the SBE company tax rate from 28.5% to 27.5%.
ü The superannuation changes announced last year and effective from 1 July 2017.
However, we consider the following Budget announcements following to be of value to our clients: