TAG Tips – Federal Budget, what you need to know

Treasurer, Scott Morrison, delivered his third Federal Budget on 8 May 2018 and the third budget of the Turnbull government. We have summarised the Federal Budget essentials for our clients including individuals and small business owners.

Personal Income Tax

A number of measures were announced that seek to reduce personal income tax over the next seven years.

From 1 July 2018

  • A new non-refundable Low and Middle Income Tax Offset (LMITO) will be introduced to provide tax relief of up to $530 for taxpayers earning up to $90,000.
  • The offset phases out from $90,001 to $125,333. This offset will be in addition to the existing Low Income Tax Offset (LITO).
  • The Government will also increase the upper threshold of the 32.5% tax bracket from $87,000 to $90,000.

From 1 July 2022

  • The LITO will be increased from $445 to $645, extending the upper threshold of the 19% tax bracket from $37,000 to $41,000.
  • The upper threshold of the 32.5 % tax bracket will be increased from $90,000 to $120,000.

From 1 July 2024

  • The upper threshold of the 32.5% tax bracket will increase to $200,000, removing the 37% tax bracket completely.

For taxable incomes exceeding $200,000, taxpayers will pay the top marginal tax rate of 45% (excluding the 2% Medicare Levy).

Business Taxation

$20,000 Asset Write-Off

Businesses with less than $10 million turnover can continue to immediately write-off asset purchases of less than $20,000. This has been extended to 30 June 2019.

Non-Compliant PAYG withholding

From 1 July 2019, businesses/employees will be unable to claim tax deductions for wages and contractor payments (where the contractor does not provide an ABN), where they have not withheld any amount of Pay-As-You-Go (PAYG) from these payments.

Limiting Tax Deduction for Vacant Land

From 1 July 2019, income tax deductions will be denied for expenses associated with holding vacant land, such as interest expenses and rates. These costs may be added to the Capital Gains Tax cost base of the land where they would ordinarily be an element of the cost base. This is an integrity measure to discourage land owners from holding vacant land, a process more commonly known as ‘land banking’.

Other Business Announcements

From 1 July 2019, a limit of $10,000 will be introduced for cash payments made to businesses for goods and services. This will not apply to transactions with financial institutions or consumer-to-consumer non-business transactions.

Single Touch Payroll

Single Touch Payroll will be introduced from 1 July 2018 for businesses with 20 or more employees and from 1 July 2019 for business with less than 20 employees.

It was announced that from 1 July 2019, there will be additional funding for small business to transition to Single Touch Payroll reporting.

Private Taxation

It was announced that there will be no changes to the Small Business CGT concessions themselves, but indicated a specific integrity measure where partners in partnerships that alienate their income by assignment in rights to future income of the partnership will no longer be able to access the Small Business CGT concession on the capital gain made in relation to the right.

Unpaid Present Entitlements (UPEs) to be treated as loans under Division 7A

While the ATO currently applies Div 7A to UPEs the budget announcement is that they will legislate the ATO interpretation.

It is unclear how the new legislation will treat quarantined UPEs which the ATO have previously accepted in their ruling that the quarantined UPE are outside the scope of the ruling.

The changes announced in the 2016-17 Budget in relation to Div 7A loans have been deferred to 1 July 2019.

Superannuation

No. of Members in a SMSF

The maximum number of members within SMSF will be increased from four to six from 1 July 2019 to allow for greater succession planning.

SMSF Audits

For SMSFs with a good compliance record, the requirement for annual audits will be changed to a three-yearly requirement. To be eligible, SMSFs need to have a clear audit history and a record of lodging returns on time for three consecutive years

Work Test Exemption for Retirees

From 1 July 2019, for those aged 65 – 74 years will not be required to satisfy the work test in order to make personal contributions to superannuation in the first year that they would otherwise not satisfy the test. To qualify, the individual must also have a balance of less than $300,000.

 Superannuation Guarantee opt-out

From 1 July 2018, individuals who have multiple employment arrangements, and where those arrangements result in employer superannuation contributions exceeding the $25,000 concessional contribution cap, will be able to nominate to exclude earnings from the superannuation guarantee regime.

 Measures to Limit the Erosion of Member Balances

From 1 July 2019, there will be a:

  • 3% annual cap on passive fees on low balance accounts (less than $6,000);
  • a ban on exit fees;
  • changes to insurance arrangements for low balance accounts, members under 25 or accounts that have been inactive for 13 months; and requiring the transfer of all low balance inactive superannuation accounts to the ATO.

Trusts

Testamentary Trusts

From 1 July 2019, an integrity measure for minors receiving income from testamentary trusts will be introduced. The concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets. Income received by minors from testamentary trusts is currently taxed at normal adult tax rates rather than the higher tax rates that normally apply to minors.

Round Robin Distributions

The specific anti-avoidance rule that applies to closely held trusts that undertake circular trust distributions in a “round robin” manner will be extended to family trusts.

From 1 July 2019, these types of arrangements will give rise to tax on such distributions at a rate equal to the top personal tax rate (plus Medicare Levy).

Disclaimer: The information contained in this document is general in nature only.  Professional advice should be sought before acting on any aspect of this document.  Liability limited by a scheme approved under Professional Standards Legislation.

More Information

For all the Federal Budget’s key initiatives, visit the Federal Government budget website at Federal Budget 2018-2019.

If you have any questions after reading this please contact your TAG Financial Services adviser on (03) 9886 0800 or via email.