2017 FEDERAL BUDGET. A quick sprint to the finish line for housing affordability, but still an endurance race for real tax reform.

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1 2017 FEDERAL BUDGET A quick sprint to the finish line for housing affordability, but still an endurance race for real tax reform.

2 2017 FEDERAL BUDGET FEDERAL BUDGET

3 2017 FEDERAL BUDGET CONTENTS INTRODUCTION...5 HOUSING AFFORDABILITY...6 Affordable housing through Managed Investment Trusts 6 Increase in CGT discount for affordable housing investments 7 Cheaper and longer-term finance for affordable and social housing 8 Annual charge on foreign owners of under-utilised residential property 8 Foreign residents & CGT 8 Changes in foreign investment reducing administrative costs and restricting foreign ownership 10 One last chance to top up Super 12 Housing affordability measures Access to super.for first home deposit 12 Removal of expensive deductions for rental properties 13 BANKS...14 Major bank levy and more regulation of the.banking system 14 BUSINESS New residential premises purchasers to pay GST 15 Bitcoin and other digital currencies will officially be money 16 GST Changes to treatment of precious metals 17 Higher instant asset write-off for small businesses extended for 12 months 18 National Innovation and Science Agenda 18 New levy on employers of foreign workers 19 Extending tax relief for merging superannuation funds 19 HEALTH Medicare Guarantee Fund 20 Changes to the Medicare system 20 INDIVIDUALS...22 Increase in the Medicare levy 22 Personal income tax - Medicare levy low-income thresholds 23 Personal taxation measures 23 ANTI-AVOIDANCE...25 Superannuation funds anti-avoidance 25 Foreign hybrid mismatches 26 Extension of the Taxable Payments Reporting System 26 Restrictions to Small Business CGT Concessions 27 Toughening the multi-national anti-avoidance law 28 Additional funding to toughen up the ATO FEDERAL BUDGET 3

4 2017 FEDERAL BUDGET FEDERAL BUDGET

5 INTRODUCTION It remains to be seen whether the projects chosen will deliver the boost to the economy that we should expect..." INTRODUCTION With very little in this year s Federal Budget for business, the clear winner in this budget race was housing affordability; but the peloton of real tax reform has been left far behind with Scott Morrison putting in a few chicanes impacting on the pedal power of Banking in particular. Bank investors will be wondering what caused the Government to change gears around taxation and regulation of the major players in that industry. While it is a great nudge to move housing affordability to the front of the pack, continued tinkering around the edges of tax reform, particularly by using this blunt instrument of tax to affect behaviours, continues to draw out the endurance race for real tax reform. The other clear winner in this year s Budget was infrastructure spending. With commitments to fund road, rail and airport projects across the country, the Government has clearly shown that it wants to smooth the path for increased productivity. It remains to be seen whether the projects chosen will deliver the boost to the economy that we should expect when the Government commits our children to repaying significant debts. In the lead up to the Federal Budget, we launched the BDO Quick Poll: Countdown to the 2017 Budget and asked our clients and contacts their thoughts on the critical issues impacting individuals and businesses. The key changes the respondents called for included introducing tax changes to relieve the pressure on housing affordability, however, they didn t want the tax changes to be in the form of negative gearing or capital gains discount changes; this is consistent with the outcomes of the Budget measures. However, aligning with the results from BDO s previous Tax Reform Surveys, which we conducted annually from 2012 to 2016, almost 83% of respondents to the 2017 Poll agreed that the Government should reintroduce a broad tax reform process, not just tinker around the edges. With key themes emanating around housing affordability, changes for the major banks, superannuation measures and some antiavoidance instruments, as well as some fiddling with the Medicare Levy, the 2017 Federal Budget has left business at the starting line. While there have been solid wins for some in this year s budget race, it is a continued disappointment that real tax reform has again gone into granny gear. The hope remains that one day Australia will achieve a coup de chacal for tax reform so that we can strengthen our position as a competitive place to conduct business and raise a family in the future FEDERAL BUDGET 5

6 HOUSING AFFORDABILITY HOUSING AFFORDABILITY AFFORDABLE HOUSING THROUGH MANAGED INVESTMENT TRUSTS The Government proposes to further encourage investment into affordable housing by allowing Management Investment Trusts (MITs) the ability to invest in residential properties, allowing investors to receive concessional tax treatment. Current law Under the current MIT regime, foreign investors receive a concessional treatment and are subject to a 15% withholding tax rate on any fund payments from the MIT. Currently, MITs are limited in their investment capabilities to passive investments, and cannot carry on or control an active trading business. The ATO has generally taken the view that any investment into residential property is active, with a primary purpose of deriving capital growth from increased value. This means that income from property investment is not subject to the MIT concessions and is subject to tax at a rate of 30%. Proposed law Under the new measure, the Government proposes to widen the investment capabilities of MITs, allowing MITs to acquire, construct or redevelop residential properties from 1 July 2017, subject to specific criteria. Any MIT looking to invest in residential property must: Hold the property available for rent for a minimum of ten years Derive at least 80% of its assessable income from affordable housing. The remaining 20% of income of the MIT continues to be restricted to eligible investment activities as permitted under the existing MIT provisions Be provided to low to moderate income tenants Charge rent at a discounted rate below the private rental market rate. Where an MIT fails to derive a minimum of 80% of assessable income from affordable housing, any non-resident investors will be liable to pay withholding tax at 30% on investment returns for that income year. Further, properties held for rent for a period of less than ten years will be subject to a 30% withholding tax rate on the net capital gain arising from that disposal. Residents investing in affordable housing MITs will continue to be taxed on investment returns at their marginal tax rates, however, will be eligible for the increased Capital Gains Tax discount of 60%. Given the requirement that 80% or more of the assessable income must be derived from affordable housing, it is not practical for existing MITs to begin investing in residential property. We expect only newly established MITs to consider this proposed measure, likely via a joint arrangement with a registered community housing provider. Aside from a philanthropic investment, we question the incentive to investors to participate in this scheme. A 10% increase in the CGT discount on a property that is likely to have limited capital growth due to reduced rental returns may be questioned by investors FEDERAL BUDGET

7 HOUSING AFFORDABILITY INCREASE IN CGT DISCOUNT FOR AFFORDABLE HOUSING INVESTMENTS The Government has announced that there will be an increase to the CGT discount from 50% to 60% for resident individuals who invest in qualifying affordable housing. Affordable housing investments The existing 50% CGT discount can be accessed by resident individuals and trusts who hold assets for longer than 12 months. There is currently no added incentive for investors to invest in affordable housing. In order for resident individuals to qualify for the increased discount, the following conditions must be met: The housing must be provided to low to moderate income tenants Rent must be charged at a discount below the private rental market The affordable housing must be managed through a registered community housing provider The investment must be held for a minimum of three years. The 60% CGT discount will also be available to resident individuals investing in affordable housing via managed investment trusts. After much speculation around the CGT discount and whether it would be reduced or even eliminated entirely, it seems the Government has bamboozled us all and taken the opposite approach by increasing the discount for affordable housing investments. Although this sounds good in theory, the Government still has some work to do around the edges to clarify the definitions of low to moderate income, and what will qualify as rent charged below market rate FEDERAL BUDGET 7

8 HOUSING AFFORDABILITY CHEAPER AND LONGER-TERM FINANCE FOR AFFORDABLE AND SOCIAL HOUSING As part of a suite of measures to reduce pressure on housing affordability, two measures that are targeted at lowering the cost of finance for affordable and social housing were announced. National Housing Finance and Investment Corporation The Government will establish the National Housing Finance and Investment Corporation (NHFIC) to operate an affordable housing bond aggregator that will provide finance to community housing providers by aggregating their borrowing requirements, and issuing cheaper and longer-term bonds than conventional bank finance to the wholesale market. National Housing Infrastructure Facility The NHFIC will also administer a $1 billion National Housing Infrastructure Facility to provide funds to local governments from 1 July 2018 in the form of concessional loans, grants, and other financial instruments for building infrastructure that supports new and affordable housing. BDO welcomes these measures as a long awaited boost to the community housing sector. This will especially be so in jurisdictions where local governments have not invested in lower cost housing for some time, and community housing providers have been confronted with rising costs but capped rent with limited government support. The success of these measures will depend on how much red tape is built into the system, the speed at which the funding will translate to bricks and mortar, and whether the system will be supported by better policy settings in housing supply and rent assistance. Further, if executed effectively, the infrastructure facility, which is a based on a proven UK model, may have the potential of not only supporting increased housing supply, but also delivering better quality communities. ANNUAL CHARGE ON FOREIGN OWNERS OF UNDER-UTILISED RESIDENTIAL PROPERTY The Government has announced its intention to introduce an annual levy which will apply to foreign owners of residential property located in Australia. The charge will apply in cases where the property is neither occupied, nor genuinely available for rent for at least six months of the year. The charge itself is to be equal to the foreign investment application fee which is imposed at the time the property is acquired by the foreign owner. The measure is anticipated to raise approximately $16.3 million for the Government coffers over a four year period. The charge will be administered by the ATO and will apply with immediate effect to foreign persons who make a foreign investment application for residential property from 7.30pm on 9 May A separate measure is also proposed to be introduced by the Victorian Government on inner-melbourne houses and apartments which are vacant for in excess of six months. A Vacant Residential Property Tax (VRPT) will be levied at 1% of the capital improved value of each property. This measure is set to apply from 1 January 2018 to all owners, not just foreign owners. The so called ghost house reforms are a welcome attempt to encourage foreign owners of residential property to make their properties available for rent. This should help to increase the supply of premium residential housing stock in capital cities. There will be an effective double whammy where foreign owners acquire property in inner-melbourne and crystallise liability to both the ghost-property tax and the VRPT. It is not anticipated that any relief or offset will be made available for this. FOREIGN RESIDENTS & CGT Through the extension of a number of pre-existing measures, the Government is tightening foreign residents ability to access Capital Gains Tax (CGT) concessions. Withholding payments As a result of measures in the 2013 Budget, a 10% non-final withholding tax on payments made to foreign residents that dispose of certain taxable Australian property was introduced. This regime applied to all contracts entered into on or after 1 July Specifically excluded from the taxable Australian property umbrella were residential real property transactions with a market value under $2 million. This ensured that the vast majority of residential house sales were unaffected by this measure. What has changed? Under the proposed Budget measures, the applicable CGT withholding rate for foreign tax residents will increase to 12.5% from 1 July FEDERAL BUDGET

9 HOUSING AFFORDABILITY Main residence exemption In another hit to foreign residents, the Government will deny foreign and temporary tax residents access to the CGT main residence exemption from 7.30pm (AEST) on 9 May Existing properties held prior to this date will be grandfathered under the existing provisions until 30 June It is expected that these rules will result in the deemed disposal and reacquisition of foreign owned properties on 1 July 2019 at market value. Where foreign ownership of property is maintained after this date, we suspect market valuations will be required to exempt (to some extent) any gain accrued to this date. Integrity rules To extend their reach on foreign owned property even further, the Government has proposed to apply the principal asset test for investors in Australian companies on an associate inclusive basis from 7.30pm (AEST) on 9 May For foreign tax residents with indirect interests in Australian real property, this measure will circumvent the ability to avoid a CGT liability by disaggregating indirect interests in Australian real property. Practically, this means that the ATO will now be provided with the ability to look through interposed entities ultimately owned by foreign residents, and levy CGT on the disposal of property by an entity whose underlying value is principally derived from Australian real property. In an attempt to make home ownership for Australians more affordable, the Government s proposed measures have rendered home ownership by foreign and/or temporary residents abundantly more difficult and unattractive. We wait with baited breath to see whether the ATO will be able to keep up with the increased demand from sellers seeking residency certificates FEDERAL BUDGET 9

10 HOUSING AFFORDABILITY CHANGES IN FOREIGN INVESTMENT REDUCING ADMINISTRATIVE COSTS AND RESTRICTING FOREIGN OWNERSHIP The Government has announced a number of changes to be administrated by the Foreign Investment Review Board. These changes include a reduction in red tape to simplify Australia s foreign investment framework and new restrictions for issuing New Dwelling Exemption Certificates. Restricting foreign ownership in new property developments Property developers can apply for an exemption certificate to sell new dwellings in a development to foreign persons (New Dwelling Exemption Certificate). These act as a pre-approval, allowing the developer to sell new dwellings to foreign persons without each foreign purchaser seeking their own foreign investment approval. From 7.30pm on 9 May 2017, approval of New Dwelling Exemption Certificates will be subject to a condition that the developer may only sell a maximum of 50% of the total dwellings in the development to foreign persons. Reducing red tape From 1 July 2017, the Government will introduce a number of changes in an attempt to clarify and simplify Australia s foreign investment framework. These changes were developed following public consultation on options to improve the foreign investment framework FEDERAL BUDGET

11 HOUSING AFFORDABILITY The announced reforms will include: Narrowing the meaning of sensitive land so that low sensitivity developed commercial property subject to the lower $55 million threshold will not be captured within the meaning of sensitive land Improving treatment of residential applications by allowing developers to re-sell offthe-plan dwellings that failed to settle to foreign persons Consolidating multi-application approvals for low risk transactions into a single application, for example, introducing a single exemption certificate for foreign individuals considering a number of residential properties with the intention to only purchase one Standardising the fee framework for acquiring interests in agricultural land, commercial land, and business securities Legislating fee relief arrangements, including introducing additional low value fee rules Introducing a new exemption certificate that applies to low risk foreign investors Clarifying the treatment of developed solar and wind farms Restoring previous arrangements where companies with significant foreign custodian holdings (that is, legal rather than equitable interest holders) are not subject to notification requirements. These changes represent a suite of reforms introduced to target foreign investors. At first glance the reduction in red tape would indicate the Government s encouragement of foreign investment into Australia. However, the restriction for the issue New Residential Exemption Certificates when viewed in conjunction with the Government s introduction of an annual charge on foreign owners of underutilised residential property, demonstrate the Government s protectionist approach to residential housing in Australia. These changes should be read in conjunction with the recent reforms at a State level in relation to the foreign acquirer duty surcharge and land tax surcharge in respect of residential land indicate a wider government crackdown on foreign investors. Although the reduction in compliance costs may be seen as a positive outcome, the overall impact of the reforms is that Australia may be viewed as a less attractive investment option FEDERAL BUDGET 11

12 HOUSING AFFORDABILITY ONE LAST CHANCE TO TOP UP SUPER Individuals aged 65 and over who have owned their principal place of residence for more than 10 years will have an opportunity to make a Non-Concessional Contribution of up to $300,000 from the proceeds of selling their home, should they chose to downsize and relocate. Individuals who choose to make a Non-Concessional Contribution from the proceeds of selling their home will be exempt from the age test, the work test, and the $1.6 million balance test. Impact on the Transfer Balance Cap If an individual has not accessed all of their Transfer Balance Cap (currently $1.6 million) we assume they will be able to immediately commence an income stream (pension) on the Non- Concessional Contribution and: The earnings in pension phase will continue to be tax exempt The payment will be tax-free in the individual s personal hands. However, if an individual has already used 100% of their Transfer Balance Cap, the Non-Concessional Contribution will add to the individual s accumulation account, and the earnings will be taxed at normal superannuation rates of up to 15%. While the Budget measure sounds good in theory, each person s individual circumstances will determine whether making the Non-Concessional Contribution is worthwhile. The Budget measure does nothing to address the growing number of Australians who do not own their own home and generally will have relatively low superannuation savings balances. BDO doubts that the measure will be enough of an incentive on its own to encourage older Australians to downsize their home and make a Non-Concessional Contribution. State tax reform around transfer duties will be required to make that a reality. HOUSING AFFORDABILITY MEASURES ACCESS TO SUPER FOR FIRST HOME DEPOSIT Individuals will be able to withdraw certain voluntary contributions made into superannuation to top up their deposit on their first home. This measure encourages voluntary contributions by providing a tax benefit and may be appealing for young people who would not otherwise make additional contributions into super because it is inaccessible until retirement. Tax concessions Individuals who are looking to purchase their first home will be able to access specific voluntary contributions made into superannuation after 1 July The voluntary contributions, and an amount of associated deemed earnings, will be accessible by individuals from 1 July Limits apply to the amount that individuals can contribute under this measure to $15,000 per year and $30,000 in total. The existing contribution caps must be adhered to in conjunction with this initiative. Withdrawals under this measure will be taxed at the individual s marginal tax rate less a 30% tax offset. While this measure may provide young Australian s with an incentive to start, or continue saving for a home, the major tax benefit will be limited to those who sit outside of the lowest tax bracket. In addition, we see a risk for those individuals who do not ultimately decide to purchase a home for some time, or decide to invest elsewhere. Given the vast changes to superannuation over the past number of years, there is concern that some people who would be eligible will be wary of committing to this scheme FEDERAL BUDGET

13 HOUSING AFFORDABILITY REMOVAL OF EXPENSIVE DEDUCTIONS FOR RENTAL PROPERTIES As part of the Government s agenda to facilitate affordable housing, the Budget proposes removal of a number of deductions in relation to investment properties, which have allegedly been exploited. Travel expenses for residential rental property From 1 July 2017, the Government will disallow deductions for travel expenses relating to inspecting, maintaining, or collecting rent for a residential rental property. The Budget papers describe this as an integrity measure to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes. This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible. The Treasurer s related press release describes this as a deductible expense that is seen as being abused. The Government also makes the point that inspection costs undertaken by third parties will be permissible, meaning that inspection costs are seen as legitimate, but only if genuinely incurred for pure inspection purposes. Travel expense deductions will still be permitted for nonresidential investment property, so presumably investments in more active property assets such business facilities, farming, factories and so on should still be claimable. Restriction on depreciation deductions From 1 July 2017, the Government will also limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. The Budget papers state that these plant and equipment items are usually mechanical fixtures or those which can be easily removed from a property such as dishwashers and ceiling fans. The associated Treasurer s press release also includes carpet as an item that will be affected by this measure. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. The net result of this measure is that only the person who actually pays for the asset will be able to claim a depreciation deduction for it. Subsequent owners will not be able to inherit the writtendown value of any such assets, nor presumably will taxpayers be entitled to a depreciation deduction for assets for which they have not provided any consideration. Once again, this measure only applies to residential property, and not other forms of business related property investment. CGT implications However, there will still be some tax benefit with these asset items, but investors will need to be patient to benefit from them. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors. Therefore, the cost of these items will have some tax benefit when the property is ultimately disposed of. However, there will not be an immediate tax benefit claimed each year until the end of the assets effective life. Grandfathering 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 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. The Government has been true to its word and not removed negative gearing. However, it has curtailed some of the large discretionary expenditure deductions which can add to negative gearing losses. By announcing these as integrity measures designed to improve taxpayer confidence in the negative gearing system the Government has managed to stay true to its word while reducing the cost of negative gearing to the Budget. This is described as an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value. Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset FEDERAL BUDGET 13

14 BANKS BANKS MAJOR BANK LEVY AND MORE REGULATION OF THE BANKING SYSTEM A new levy of 0.06% will be imposed on major banks from 1 July This represents a major new tax on our financial institutions. It will apply to all Authorised Deposit-taking Institutions (ADIs) with licensed entity liabilities of at least $100 billion, and will be calculated quarterly. The levy will not apply to liabilities such as additional Tier 1 capital and deposits of individuals, businesses, and other entities protected by the Financial Claims Scheme. It will apply to items such as corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. This measure states that it represents a fair additional contribution from our major banks and will provide a more level playing field for smaller banks and non-bank competitors. from 1 July 2020). Funding will be provided to the Australian Securities and Investments Commission (ASIC) to ensure AFCA delivers an effective dispute resolution service Additional funding to ASIC to broaden ASICs financial literacy program. Imposing a new tax on our very strong financial institutions and subjecting them to more regulation seems likely to be a popular move. However, we also note that another Government goal is to improve housing affordability. Whether the costs of this levy and regulation will be passed on by the banks to people with mortgages through interest rate increases, remains to be seen. A residential mortgage pricing inquiry will be conducted by the Australian Competition and Consumer Commission until 30 June 2018, to facilitate the introduction of the levy. Relevant ADIs will be required to explain any proposed changes to residential mortgage pricing including changes to fees, charges, or interest rates by those ADIs. Other measures were announced to provide a more accountable and competitive banking system including: Requiring banking executives to be registered with APRA, strengthening APRA s powers to remove and disqualify senior executives, new penalty provisions and deferral of remuneration for senior executives. Funding will be provided to APRA to introduce and administer the new legislation Additional funding to APRA to undertake new regulatory activities to support a stable, efficient and competitive financial system, including responding to new financial system activities and products A new one-stop shop for dispute resolution will be introduced from 1 July 2018 being the Australian Financial Complaints Authority (AFCA). It will provide financial services consumers, small businesses and retail investors with access to a free, fast and binding dispute resolution service. Australian Financial Services Licensees will be required to be members of AFCA. It will replace the Financial Ombudsman Service, the Credit and Investments Ombudsman, and the Superannuation Complaints Tribunal (which will be wound down and no longer operating FEDERAL BUDGET

15 BUSINESS BUSINESS NEW RESIDENTIAL PREMISES PURCHASERS TO PAY GST The Government has announced that from 1 July 2018, purchasers of newly constructed residential properties or new subdivisions are required to remit the GST payable directly to the ATO at settlement. The Government has determined that developers are failing to remit GST on the sale of new residential premises. This is despite the developers claiming input tax credits for their construction costs. The Government considers that most purchasers obtain professional conveyancing services and therefore the impact of this change on purchasers will be minimal. It is assumed GST will be remitted to the ATO in a similar manner to which transfer duty is provided to state revenue authorities. The Government has not provided any specifics on the implementation of this measure. We eagerly await further detail on how this change will be administered. For the most part, the purchasers will not have the knowledge or information to determine the seller s GST liability. In particular, purchasers cannot be expected to make an assessment on whether a property constitutes new residential premises, or to verify the GST liability in instances where the margin scheme has been applied. The Government is unlikely to achieve its objectives unless the developer remains accountable for these GST decisions and the purchaser merely acts as a collection intermediary for the GST liability. However, we note that the proposed commencement date of this measure allows the Government 12 months to address the above issues FEDERAL BUDGET 15

16 BUSINESS BITCOIN AND OTHER DIGITAL CURRENCIES WILL OFFICIALLY BE MONEY The Government proposes to fundamentally change the characterisation of digital currencies for GST purposes. Historically, the ATO has treated the supply of bitcoin and other digital currencies as a taxable supply of intangibles (see Goods and Services Tax Ruling GSTR 2014/3) rather than equalising digital currencies to money or cash. This means that when purchasing goods and services with digital currency, a GST registered purchaser incurs GST on the goods and services purchased, and is required to remit GST of 1/11th on the purchase (because the digital currency is not characterised as money). Ultimately, GST registered purchasers paying with digital currency have been double taxed on purchases. This treatment has resulted in a number of practical and competitive issues. To address this issue, the Government proposes to make digital currencies a form of money for GST purposes. By making digital currencies a form of money, GST will only be imposed on the supply of goods and services being purchased and not on the exchange of the digital currency itself. This is in accordance with the policy intention of the GST law. Digital currency is an expanding global industry with the total market capitalisation of all digital currencies tripling to US$51 billion as at 1 January The Government initially announced this change in March BDO considers it is logical and appropriate that the Government will actually make the change from 1 July This will mean Australian start-ups in this space are on a level playing field both within Australia and internationally, as many foreign countries do not double tax digital currencies FEDERAL BUDGET

17 BUSINESS GST CHANGES TO TREATMENT OF PRECIOUS METALS Acting on historical and ongoing concerns, the ATO has sought to improve the integrity of the GST system through technical changes to the GST Act to crack down on GST fraud in the precious metals industry. This will be achieved through the following changes: Imposition of a reverse charge mechanism The amendment to the definition of second-hand goods. The changes to the GST law were initially announced on 31 March 2017 and confirmed in Tuesday s Budget. However, these changes will apply retrospectively from 1 April The scheme reason for change The scheme is a form of carousel fraud, which operated in the following manner: A GST non-registered seller would remove the hallmark guaranteeing the fineness of the metal or add impurities to it The GST non-registered seller would then sell the metal without GST to a GST registered entity The GST registered buyer would subsequently claim an input tax credit under the second-hand goods provisions from the ATO on the basis that the metals were not precious metals as they were not in an investment form The metal was then refined and sold by the buyer as a GST-free supply to an unregistered seller and the loop would continue. This resulted in revenue lost by the Government through input tax credit claims with no GST being remitted on sales. There were also cases where taxable sales of scrap metal were being made with no GST being subsequently remitted to the ATO. Reverse charge Under the proposed changes, where both the supplier and recipient are registered (or required to be registered) for GST, the purchaser will be responsible for reporting and paying the GST amount to the ATO. The GST remitted under the reverse charging mechanism will then offset any input tax credits that the buyer could recover, thereby eliminating any GST benefit. Second-hand goods - definition The definition of second-hand goods has been amended to clarify gold, silver or platinum not in investment form is not a second-hand good. This will remove any input tax credit entitlement for acquirers of out of scope supplies of precious metals. Fraud undermines the system and results in losses to taxpayers. Therefore, this is a welcome change to promote the integrity of the GST system. After initial costs surrounding enforcement have been fully quantified and procedures cemented, it is envisaged that ATO resources will be free for reallocation to other taxation issues FEDERAL BUDGET 17

18 BUSINESS HIGHER INSTANT ASSET WRITE-OFF FOR SMALL BUSINESSES EXTENDED FOR 12 MONTHS Last year s Budget introduced a number of welcome Small Business Entities (SBEs) concessions including a more generous instant asset write-off for SBEs, and changes to the simplified depreciation regime with a view to improving cash flow for the small end of town. This concession raised the instant write-off threshold from $1,000 to $20,000 with an end date pencilled in for 30 June The Government has indicated it will extend the SBE instant asset write-off concession on assets costing less than $20,000 by 12 months until 30 June This concession extends to small business simplified depreciation pools to allow eligible taxpayers to write-off the pool balance where the total written down value is less than $20,000. Lock out laws suspended The legislation restricts an SBE from re-entering the simplified depreciation regime for five years where they have opted out. However, the Government has set aside these rules to allow universal access to the increased concessions for SBEs while they are available. The Government obviously sees value in the extension of these measures with an estimated cost to revenue of $650 million over the forward estimates period. We note that while the definition of an SBE (turnover less than $10 million) is more accessible than it has been in the past, the majority of Australian businesses will miss out. Further, with the write-off threshold set to return to $1,000 on 1 July 2018, businesses may be pressured into debt financing depreciable assets ahead of schedule in order to take advantage of the measures. BDO suggest the Government would realise more consistent spending over the longer-term where the instant asset write-off was not subject to time pressures. NATIONAL INNOVATION AND SCIENCE AGENDA More than 16 months after the Government announced its revised scope for the review of the R&D Tax Incentive (3F report), as part of its National Innovation and Science Agenda, no changes to the R&D Tax Incentive were announced in the Budget. New initiatives released in the Budget, as part of the agenda, include: $100 million of additional investment in the manufacturing sector, including a further $47.5 million for a new Advanced Manufacturing Growth Fund to support manufacturers in South Australia and Victoria Extension of the crowd-sourced equity funding (CSEF) to proprietary companies. The initiative will enable these companies to have an unlimited number of CSEF shareholders, while ensuring they are protected by higher governance and reporting obligations An enhanced regulatory sandbox offering Financial Technology (FinTech) companies the flexibility required to test and advance a wider range of products and services. On the face of it, while no news is good news for claimants of the R&D Tax Incentive, this leaves continued uncertainty as to the eventual fate of the recommendations contained in the 3F report. The Government needs to clarify urgently what it intends to do with the review to provide investment certainty FEDERAL BUDGET

19 BUSINESS NEW LEVY ON EMPLOYERS OF FOREIGN WORKERS On the back of the announcement of the replacement of 457 visas, the Government has announced the introduction of a new levy on businesses with foreign workers on certain skilled visas, with a slightly lower levy applying to small business entities. Levy to fund Skilling Australians Fund The Government has proposed the introduction of a new levy for businesses with foreign workers on certain skilled visas, with application from March The revenue raised from this measure will be applied to a new Skilling Australians Fund to support the training and development of Australian workers. Businesses with a turnover of less than $10 million per year will be required to pay: Upfront payment of $1,200 per visa per year for each employee on a Temporary Skill Shortage visa One-off payment of $3,000 for each employee being sponsored on a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional sponsored migration Scheme (subclass 187) visa. Businesses with turnover of $10 million or more will be required to pay: An upfront payment of $1,800 per visa per year for each employee on a Temporary Skill Shortage visa One-off payment of $5,000 for each employee being sponsored on a permanent Employer Nomination Scheme (subclass 186) visa, or a permanent Regional sponsored migration Scheme (subclass 187) visa. This measure is estimated to have a revenue gain of $1.2 billion over 2018 to EXTENDING TAX RELIEF FOR MERGING SUPERANNUATION FUNDS The Government will extend the current tax relief for merging superannuation funds, which was due to lapse on 30 June 2017, until 1 July The Government first introduced tax relief for merging superannuation funds in December The relief enables superannuation funds to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. The extension of the relief will continue to ensure superannuation fund member balances are not reduced by tax when superannuation funds merge. This will ensure that income tax will not act as an impediment to mergers and will continue to facilitate industry consolidation. The extension of this relief period should ensure that fund trustees continue to investigate opportunities to merge small and inefficient superannuation funds, thus improving the efficiency of the industry. There is no specific detail yet regarding the administration of this new levy, but this will be a significant (and unexpected) cost to small businesses who may already be struggling with costs to employ staff. The process of hiring foreign workers is already a complicated and costly process, involving many cross border issues, including cross border taxation considerations. The levy is targeted at making hiring foreign workers less attractive in an effort to provide jobs for Australians first. The proceeds going to fund a training program for Australian workers will be a good idea to assist people getting back into the workforce. However, for businesses with a global presence who are required to send staff between different jurisdictions across the globe for proprietary skills particular to that business (e.g. staff with access to particular intellectual property), hiring foreign workers is unavoidable in many cases. The new levy adds an unnecessary burden FEDERAL BUDGET 19

20 HEALTH HEALTH MEDICARE GUARANTEE FUND The Government has proposed the establishment of a Medicare Guarantee Fund (MGF) as a special account to be used to cover the costs of the Medicare Benefits Schedule (MBS) and Pharmaceutical Benefits Scheme (PBS). The MGF will be funded by raising revenue from the Medicare levy (excluding amounts to fund the National Disability Insurance Scheme), with any balance to be funded by a portion of personal income tax receipts. The establishment of the special account will be effective from 1 July The MGF s main objective is to guarantee the Government s commitment to the MBS and PBS into the future. The introduction of the MGF is to ensure that all Australians can be certain they will continue to have access to the essential healthcare services they need. The forecasted annual contributions to the MGF will be updated at every Budget update to be in line with the forecast of the MBS and PBS expenditure over the forward estimates. The MGF will be used solely for funding the MBS and PBS. It has been the case for many years that the Medicare Levy does not cover the costs of the MBS and PBS. While badged as a guarantee fund there is no way in which the levy will ever cover the costs of the MBS and PBS. As such, this is an accounting public relations exercise and nothing more. CHANGES TO THE MEDICARE SYSTEM The Government is reintroducing the indexation of certain Medicare items, providing a fairer price for doctors. Along with this additional funding, the Government will target unusual billings and improve the consistency of administrative arrangements in the system. Reintroducing indexation ahead of schedule Last year the Government announced they would continue the pause on indexation for all Medicare Benefits Schedule (MBS) fees for a further two years. Slightly earlier than expected, the Government has now confirmed an extra $1 billion will be allocated over four years as indexation is phased in for certain items on the MBS. This will include: Bulk-billing incentives for GPs from 1 July 2017 Standard consultations by GPs and specialist attendances from 1 July 2018 Specialist procedures and allied health services from 1 July In addition, for the first time since 2004, the Government will introduce indexation for certain diagnostic imaging items on the MBS including for mammography and radiology. With the increased funding, the Government will also introduce changes to better target unusual business billings, improve compliance arrangements and enhance debt recovery practices. The phased reintroduction of indexation will placate the medical lobby. However, they should be careful what they wish for the announcement also includes tougher controls on expenditure within the system to ensure doctors are doing the right thing FEDERAL BUDGET

21 HEALTH 2017 FEDERAL BUDGET 21

22 INDIVIDUALS INDIVIDUALS INCREASE IN THE MEDICARE LEVY As of 1 July 2019 the Government will increase the Medicare levy by 0.5% from 2.0% to 2.5% of taxable income to ensure the National Disability Insurance Scheme (NDIS) is fully funded. Not only will the Medicare levy be subject to this increase, but other taxes linked to the top personal tax rate, such as the fringe benefits rate, will also increase. Increase in tax revenue to fund healthcare As a result of the increase, it is estimated there will be an $8.2 billion gain in tax revenue over the forward estimates period. However, this is the net impact across all heads of revenue, not just the Medicare levy. With the increased revenue, the Government is committed to fully funding its share of the costs of the NDIS. One-fifth of the revenue raised by the Medicare levy will be directed to the NDIS Savings Fund. The remaining revenue raised from the Medicare levy will be credited to the soon to be established Medicare Guarantee Fund. Relief for low income earners Despite the increase in the Medicare levy, low-income earners will continue to receive relief from the Medicare levy through the lowincome thresholds for singles, families, seniors, and pensioners. The current exemptions from the Medicare levy will also remain in place. The increase to the Medicare levy, combined with the abolition of the deficit levy from 1 July 2017, creates a set of circumstances in which those paying the top personal tax rate receive the greatest net benefit. By 2019, those earning over $180,000 will have received an effective tax cut of 1.5%, being taxed at 47.5%, compared to the current effective tax rate of 49%. As the 2% deficit levy was not applied to those outside of the top tax bracket, those earning less than $180,000 face a 0.5% increase in their rate of income tax (other than those in the low-income exemption brackets) FEDERAL BUDGET

23 INDIVIDUALS PERSONAL INCOME TAX - MEDICARE LEVY LOW-INCOME THRESHOLDS The Government has announced the annual increase in the Medicare levy for low-income thresholds for singles, families, seniors, and pensioners. The increases take account of movements in the Consumer Price Index (CPI) so that lowincome taxpayers generally continue to be exempted from paying the Medicare levy. The increases are outlined below. TITLE CURRENT NEW Singles $21,335 $21,655 Family Single seniors and pensioners (eligible for SAPTO) Family senior and pensioners $36,001 plus $3,306 per dependent child or student $33,738 $34,244 $46,966 plus $33,06 per dependent child or student $36,541 plus $3,356 per dependent child or student $47,670 plus $3,356 per dependent child or student The increase in the thresholds is not linked to the increased rate of Medicare Levy. Given that the increase in the levy is designed to be a new tax to fully fund the National Disability Insurance Scheme (NDIS), we would not expect any change to this position in future years. PERSONAL TAXATION MEASURES The Government has announced changes to personal taxation measures centred on accelerating Higher Education Loan Program (HELP) debt repayment, and increasing the availability of Higher Education Contribution Scheme (HECS) eligible courses as the main changes to education. Further personal taxation matters impacting individuals include tax exempt payments to child sexual abuse survivors and changes to Family Tax Benefit Part A payments. New HELP repayment thresholds and rates to be introduced The Government has announced that it will widen the repayment thresholds in a bid to accelerate HELP debt repayment from 1 July The current minimum repayment threshold for the 2017/18 year of $55,874 with a repayment rate of 4% is set to decrease to $42,000 and 1% respectively. Conversely, the maximum band will be increased from the 2017/18 year threshold of $103,766 with a repayment rate of 8% to $119,882 and a repayment rate of 10% FEDERAL BUDGET 23

24 INDIVIDUALS Changes to maximum student contributions will also be introduced from 1 July 2018 to allow an incremental yearly increase in contribution levels of 1.8% each year, totalling a 7.5% increase by HECS eligibility has also widened with support places now being offered to students in sub-bachelor courses. Courses with a focus on industry and a probable pathway into related bachelor programs will meet the requirements and students will be excluded from the scheme if they have completed a prior higher education qualification. Tax-free payments to child sexual abuse survivors As part of its Commonwealth Redress Scheme,for survivors of institutional child sexual abuse, the Government announced that any redress payments under the scheme received by people who were sexually abused as children in Commonwealth institutions will be exempt from income tax. Family Tax Benefit (FTB) Part A changes The Government has ruled out a proposed rate increase to Family Tax Benefit Part A, however, has made changes to the dollar income test taper rate in an effort to ensure that higher income families are not advantaged. The changes to the test taper rate come in the form of a consistent 30 cents in the dollar income test taper rate for families exceeding the Higher Income Free Area of household income currently set at $94,316. Additionally, further changes have been introduced for families with children who do not meet the Government s immunisation requirements having their supplement payments reduced by $28 per fortnight. The widening of the HELP repayment thresholds and increased rates is an expected response from the government in their bid to accelerate repayment of an increasingly growing HELP debt. Changes to the Family Tax Benefit Part A and payments under the Commonwealth Redress Scheme are equitable and meet community expectations FEDERAL BUDGET

25 ANTI-AVOIDANCE ANTI-AVOIDANCE SUPERANNUATION FUNDS ANTI-AVOIDANCE The Budget measures around Limited Recourse Borrowing Arrangements (LRBA) and non-arm s length income are aimed at improving and maintaining the integrity of the superannuation changes that were introduced in the 2016 Federal Budget. These measures will likely limit the use of LRBA in Self Managed Superannuation Funds (SMSFs). LRBAs and the 2016 changes From 1 July 2017 these proposals are intended to ensure that superannuants cannot utilise LRBAs to avoid the limitations imposed by the 2016 changes. Those superannuants who have LRBAs inside their SMSF will need to add any outstanding loan balance to their member accounts when calculating their Total Superannuation Balance. The Total Superannuation Balance is the threshold that determines whether an individual can make further non-concessional contributions to their fund. As an example a SMSF member who has a member balance of $1.1 million and an outstanding LRBA loan balance of $500,000 will have a total superannuation balance of $1.6 million, and will therefore not be able to make further non-concessional contributions. In addition, LRBA loan repayments will be counted towards a member s Transfer Balance Account (where the superannuant has a pension account). Where loans are repaid from a member s accumulation member account, the repayment will be recorded as a credit against the member s Transfer Balance Account. Non-Arm s Length Income From 1 July 2018 these proposals are intended to ensure all transactions undertaken with an entity related to the superannuation fund or its members, are undertaken on commercial or arm s length terms. The proposals require that normal commercial expenses are considered as part of the assessment process, for determining whether a related party transaction is commercial. Where a transaction is determined to not be undertaken on an arm s length basis, any income arising from the arrangement (say rental income from property) is assessed as non-arm s length income, and taxed at the top marginal tax rate in the superannuation fund. These proposed superannuation measures are not likely to impact a significant number of SMSFs or superannuants. However, they do add further complexity to the 2016 superannuation changes which are already causing significant concern for individuals wanting to responsibly provide for their own retirement FEDERAL BUDGET 25

26 ANTI-AVOIDANCE FOREIGN HYBRID MISMATCHES In a further attack on the big banks, tax advantages from hybrid mismatches are being further restricted. The Government is targeting mismatched hybrid instruments issued by the offshore units of Australian banks and financial institutions. This foils the potential manipulation of Australia s debt/equity rules, where instruments issued by an offshore unit pay interest, but will be treated as Additional Tier 1 capital under the banking regulatory requirements. In the 2016/17 Budget, the Government committed to the OECD measures to neutralise hybrid mismatches. These measures aimed to deny benefits arising from taxpayers claiming a tax deduction in one jurisdiction where the amount is not income in another jurisdiction, or claiming a deduction in two tax jurisdictions. The current amendment clarifies the position adopted by the ATO. In earlier private rulings issued by the ATO to specific taxpayers, the ATO confirmed these securities provided interest returns, meaning the distributions did not need to be franked for tax purposes. The mismatch arises as these securities should have paid a franked distribution if they were issued through the Australian based parent. Under the changes, the returns on these securities will give rise to franking debits where the capital is not exclusively used in the foreign branch. These rules will apply to returns on investments paid after 1 January 2018, with some transitional arrangements for instruments currently on foot. BDO welcomes the Government s attempt to strengthen the hybrid mismatch rules and provide clarity to taxpayers operating in this market. However, financial institutions may fall foul of these provisions as they will apply to existing instruments, which are frequently issued for five to ten years. Banks require certainty in tax to offer long-term instruments to their investors. Ultimately, the potential loss of franking credits may result in unhappy shareholders in Australian banks. EXTENSION OF THE TAXABLE PAYMENTS REPORTING SYSTEM In an effort to strike a further blow to the cash economy, the Government has extended the Taxable Payments Reporting System (TPRS) to the cleaning and courier industries. The measures will be introduced from 1 July The TPRS currently covers the building and construction industry only. Businesses in the building and construction industry are required to record and report payments made to each separate contractor throughout the year. The system acts as a tax integrity measure to ensure payments made to contractors are reported to the ATO in a similar manner to salary and wages payments to employees. This greatly increases the ATO s ability to use data matching to track payments being received by contractors in the industry. The Budget measure widens the reporting regime to cover the predominantly contractor-based cleaning and courier industries. This extension is off the back of the reported improvement to contractor compliance that resulted from the introduction of the TPRS in the building and construction industries. The first report under the extended regime will be due for lodgement in August Despite the Government s increased integrity measures, the cash economy remains a challenging adversary to tame. The success of the TPRS in the building and construction industries will be difficult to mirror in the higher volume cleaning and courier industries. The focus on business to contractor payments may yield some results at the cost of significantly increased compliance costs to businesses. However the black economy of cash payments for private expenditure will continue to remain unreported and untaxed FEDERAL BUDGET

27 ANTI-AVOIDANCE RESTRICTIONS TO SMALL BUSINESS CGT CONCESSIONS The Federal Government will tighten the accessibility to the small business Capital Gains Tax (CGT) concessions by limiting the assets eligible for the concessions. It has been proposed that eligibility for the concessions will be denied for assets unrelated to small business from 1 July Under the current law, small business taxpayers can access certain concessions which provide them with various relief on capital gains derived on CGT assets that are used in their business. The concessions are in place to assist small business taxpayers in re-investing, and to allow these small businesses to further grow. Currently, it is the view that some taxpayers are accessing these concessions for assets which are not related to the taxpayer s small business. Further, it is believed that some taxpayers are arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions. The Federal Government has proposed that access to the small business CGT concessions will be tightened from 1 July This is an integrity measure, and will aim to stop taxpayers manipulating their affairs to allow access to the concessions in inappropriate circumstances. Little detail has been released by the Government in relation to this measure. It is undoubtedly the case that the provisions, as currently drafted, may allow access to the concessions in inappropriate circumstances. However, the Government will need to ensure that its amendments do not over-reach and deny access to the concessions to those who should properly be entitled to them FEDERAL BUDGET 27

28 ANTI-AVOIDANCE TOUGHENING THE MULTI-NATIONAL ANTI-AVOIDANCE LAW The definition of foreign entities to whom the multi-national anti-avoidance law (MAAL) regime applies has been broadened to include the use of foreign trusts and partnerships in corporate structures. The imposition of a more specific definition will afford clarity to taxpayers and tax agents during their self-assessment of whether the MAAL regime is applicable to their existing related party transactions. From exhaustive to inclusive definitions In order to fall under the umbrella of the MAAL regime, an entity or individual is currently defined as a foreign entity that is a significant global entity or a person. As part of the early engagement and risk assessment process of the MAAL, taxpayers or their corresponding tax agents are required to carry out a self-assessment of the applicability of the MAAL to their respective related party transactions. Under the current law, the applicability of the MAAL was restricted to the broad definition of foreign entity and a person. Under the new proposed measure, MAAL will also apply to the following entities: Corporate structures that involve the interposition of partnerships that have any foreign resident partners Trusts that have any foreign resident trustees Foreign trusts that temporarily have their central management and control in Australia. The amendments however apply retrospectively from 1 January The amendments to the definitions strengthen the implementation of the original policy intent behind the MAAL which is to combat the erosion of the Australian tax base by multi-national entities using artificial and complex schemes to avoid the attribution of profits to a permanent establishment in Australia. The proposed measure also reduces the likelihood of potential loopholes arising from any ambiguity in definitions when assessing and characterising an entity or an individual as a foreign entity or a person. The proposed measure improves, to some extent, the clarity surrounding the characterisation of entities and/or individuals entering a scheme that is subject to the MAAL. The changes are targeted at taxpayers and advisers who are perceived to have been seeking loopholes in the MAAL. As the MAAL only applies to groups with a global turnover in excess of $1 billion, the changes impact on a small, but significant, target group FEDERAL BUDGET

29 ANTI-AVOIDANCE ADDITIONAL FUNDING TO TOUGHEN UP THE ATO Serious and organised crime taskforce As part of the Government s tax integrity measures, $28.2 million will be provided to the ATO in order to target serious and organised crime within the tax system. This extends an existing measure by a further four years to 30 June The Government estimates that organised crime costs Australia between $10 billion and $15 billion annually. The additional funding is intended to ensure that the ATO works closely with federal, state, and territory agencies to combat serious and organised crime. Black economy taskforce The Government will also provide $32 million for one year of additional funding for ATO audit and compliance programs to better target black economy risks. This measure provides further funding to ATO programs that focus on businesses with a turnover between $2 million and $15 million that have disengaged from the tax system. These programs are directed at changing black economy and related behaviours such as non-lodgement, omission of income, and non-payment of employer obligations. In recent years, the ATO has targeted businesses that are not declaring cash revenues with a focus on businesses in high risk industries such as cafes and restaurants, building trades, beauty and nail specialists, and cleaners. Additional funding to the ATO to target non-compliance should be welcomed by businesses who do the right thing. However, experience says that the ATO will need to be careful to discriminate carefully between those who actively disengage from the system and those who try, but fail, to comply with their obligations FEDERAL BUDGET 29