Federal Budget

Transcription

1 Budget Report 9 May 2018 Federal Budget Insights and analysis into the Australian Federal Budget

2 CONTENTS Corporations Indirect taxes International Small-to-medium business Individuals Superannuation Innovation Tax compliance Industries Progress of 2017 measures For further information visit: 2 RSM AUSTRALIA

3 Hip hip hooray, no surprises today! Have you ever attended a surprise birthday party that didn t end up being a surprise? Federal Budget nights used to be like a surprise birthday party. They were eagerly anticipated and proceeded by suspense and speculation. The Federal Budget continued the recent trend of key budget measures being leaked well before the night. You could say that listening to the Treasurer deliver his budget speech is as much fun as watching a deflating party balloon. Prior to 8 May 2018, the leaks or Government announcements included personal tax cuts, the abolition of the proposed 0.5% Medicare levy increase from 1 July and the tightening of the R&D Tax Offset concession. All of these measures were formally announced tonight. The budget projected the budget deficit at $29B. Improvements in the global economy, Australian GDP and commodity prices now puts the projected budget deficit at $18B. Australia s net debt of $355B is expected to peak at 18.6% of GDP in The budget is due to return to a surplus of $2B in 2020, a year earlier than projections a year ago. And the major economic parameters to 2022 are sound or improving: Major economic parameters Outcomes Forecasts Projections Real GDP Employment Unemployment rate Consumer price index Wage price index Nominal GDP The Government could have used the improved fiscal outlook to pay back debt at a faster rate. Instead, and no doubt with their eye on the federal election after-party that s not that far away, they have handed out the lollies to low and middle income taxpayers in the form of personal tax cuts and offsets worth $13.4B over the forward estimates. From 1 July 2018, a non-refundable low and middle income tax offset of $530 will be received by taxpayers earning up to $90,000 in addition to modest personal tax cuts. Higher income earners will be rewarded from 1 July 2024 when the 32.5% tax bracket is to be extended from $120,000 to $200,000. This will mean that 94% of taxpayers will pay tax at no more than 32.5%. R&D Tax Offset claimants will be in a sombre mood after the proposed introduction of a tiered R&D Tax Offset based on their R&D intensity (R&D expenditure as a percentage of total expenditure). Our expectation is that the tax benefit of the R&D Tax offset will reduce for most claimants. Whilst these changes will improve the budget position by $1.4B over the forward estimates you have to question the longer term cost to our clever-country. The proposed company tax cuts remain accounted for in the forward estimates. The refundable imputation (franking) credits system for individuals and superannuation funds will be maintained a position at odds with Labor. SME s will get a further 12 month period to claim the $20,000 instant asset write off. The deeming of unpaid present entitlements as dividends will be enshrined into Division 7A, albeit with some concessions. A few announcements will cause corporate taxpayers some hangovers. The Significant Global Entity definition is to be expanded and for affected taxpayers, including investee companies of PE funds, they will face increased reporting obligations (CbC, local file, master file), penalty exposures and tax compliance costs. A forthcoming discussion paper is to issue on Taxing Digital Business in Australia to explore options for taxing digital business in Australia. The thin capitalisation rules are to be tightened from 1 July 2019 to deny taxpayers the option of independently valuating assets to work out safe harbour debt amounts. Deductions for holding vacant land are to be disallowed. Simon Aitken Director, Tax Services BUDGET

4 CORPORATIONS Asset values to be aligned to financial statements THIN CAPITALISATION For income years commencing after 1 July 2019, entities will be required to align the value of their assets in their financial statements for thin capitalisation purposes. Currently, entities can rely on independent asset valuations to improve their thin capitalisation position. Valuations made before 7.30pm on 8 May 2018 may be relied upon until the beginning of an entity s first income year on or after 1 July The requirement to use asset values that are consistent with the financial statements aims to increase the integrity of debt deductions claimed by entities by preventing manipulation of asset values for tax gains. Foreign controlled Australian consolidated and Multiple Entry Consolidated (MEC) groups that have outbound investments will now be classified as both inward and outward investors instead of just being inward. This measure will apply from 1 July Changes to the classification of foreign controlled consolidated and MEC groups that have outbound investments aims to protect the tax base by stopping inbound companies from accessing tests that are only intended for outbound investors. Case study Company A has $50m of investment assets in its financial statements. It revalues these investment assets to $60m which increases its safe harbour debt amount for thin capitalisation purposes. This would allow Company A to increase its maximum allowable debt and applicable debt deductions. From 1 July 2019, Company A will be forced to use $50m as its investment asset value consistent with its reported financial statements. WINNER The Government LOSER Multinational corporations 4 RSM AUSTRALIA

5 INDIRECT TAXES GST No significant changes Slight increase in the cost of hotel accommodation booked through offshore online sellers The Government has largely left GST alone in this budget. The only change of significance relates to the calculation of GST turnover by offshore online sellers of hotel accommodation from 1 July At present, such sellers are not required to include sales of Australian hotel accommodation in their GST turnover, meaning they do not need to register for GST if their turnover from other Australian supplies is less than A$75,000. This change will boost these suppliers GST turnover, and so increase the chances of such suppliers exceeding the GST registration threshold of A$75,000. If such suppliers need to register for GST, their supplies of Australian hotel accommodation will be subject to GST. This measure is however subject to the unanimous agreement of the States and Territories. WINNER Australian States and Territories, through increased GST revenue. LOSER Travellers (both domestic and international), who will experience a slight increase in the cost of Australian hotels booked through such suppliers. From a practical perspective, the supply of Australian hotel accommodation is already subject to GST. If purchased through a supplier who is not registered for GST, the GST on the room will be embedded in the price. Therefore, the only saving to the ultimate consumer in this case is on the commission element charged by the online seller. Case study Hotelstayz.com operates an online booking service for hotels around the world. Hotelstayz.com is based outside Australia. Hotelstayz.com currently makes sales of accommodation in Australian hotels to both domestic and international travellers of A$100,000 per annum (hotel costs A$88,000, commission A$12,000). Hotelstayz.com is not currently registered for Australian GST. Under this measure, Hotelstayz.com will be required to register for Australian GST and charge GST on such supplies. By registering, it will be able to claim a GST credit for the accommodation it purchases (A$8,000, currently embedded in the price). The charge to travellers will then be an additional $1,200 (i.e. 10% on the commission element). BUDGET

6 INTERNATIONAL MANAGED INVESTMENT TRUSTS: NON-RESIDENT WITHHOLDING TAX Certain distributions from Managed Investment Trusts to non-resident individuals are subject to a default withholding tax rate of 30%. This rate is reduced to 15% for residents of countries who have entered into Exchange of Information (EOI) agreements with Australia. With effect from 1 January 2019, the Government will increase access for non-residents to the reduced withholding rate to an additional 56 jurisdictions who have entered into EOI agreements with Australia since WINNER Residents of countries who have entered into Exchange of Information agreements with Australia LOSER Australian Taxation Office this measure is estimated to have a cost to revenue of $50 million over the next four years Case study Diego is a tax resident of Uruguay who invests in an Australian Managed Investment Trust. The trust distributes $100 to Diego. The trustee of the trust withholds $15 (as opposed to $30) and pays the remaining amount of $85 (as opposed to only $70) to Diego. PROPOSED INTRODUCTION OF A NEW AUSTRALIAN TAX AS A FOREIGN DIGITAL BUSINESS Treasurer Morrison has foreshadowed that Australia will introduce a new tax, to be levied on foreign digital businesses. No date or details were released a discussion paper is foreshadowed in a few weeks time. Australia will not be breaking new ground India has had a 6% equalisation tax since 2016, and the EU and UK are well advanced with plans to introduce their own version. The new tax would have a low rate (3%-6%) and be applied to the gross revenue charged by the foreign digital business. Payment of the tax would be by withholding, an obligation placed on the in-country customer. India s equalisation tax applies only to advertising services think Google tax. The EU and UK are thinking more broadly. And whilst a withholding tax works well on a B2B transaction, what about a B2C transaction Uber, Facebook, Twitter, others. In that case, if these businesses are covered, the taxpayer is likely to be the taxpayer. We might expect a simplified compliance regime, similar to that applicable for GST on inbound intangible consumer supplies the foreign company would declare its Australian related gross sales and pay a flat percentage tax no deductions. These unilateral moves indicate a collapse of the multilateral support that was evident during the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project it is far too difficult to reach a consensus position with too many States in the same room. Double taxation will be the inevitable result of this unilateralism. And as most of the large digital companies are resident in the US, where their profits are currently taxed, the result will be US companies and the US Revenue being asked to cede taxing rights and tax revenue to foreign Revenue Authorities. Not a position likely to be accepted by the US with equanimity or without response. 6 RSM AUSTRALIA

7 SIGNIFICANT GLOBAL ENTITIES Federal Government announces its intention to broaden the definition of a Significant Global Entity. A Significant Global Entity (SGE) is a member of a group of entities whose global annual income in its consolidated financial statements is greater than A$1 billion (or upon conversion if necessary). This class of taxpayers is required to lodge three additional compliance documents (namely a Country-by-Country Report, Master File and Local File) summarising its global operations adopted by Australia following the measures considered in Action item 13: Transfer Pricing Documentation and Country-by-Country Reporting, drafted as part of the OECD s BEPS project. These compliance documents have also been adopted by many jurisdictions across the globe. These SGEs may also be subject to the multinational anti avoidance law and Diverted Profits Tax and other transparency reporting measures not applicable to smaller corporates. The definition of an SGE is currently limited only to members of entities whose accounting groups were headed by a private or public company which are required to prepare and provide consolidated financial accounts, and whose global turnover is greater than A$1billion. The amendment proposes to broaden the definition of an SGE to capture members of Multinational Enterprises (MNEs) who aren t required to prepare consolidated financial accounts but whose annual global turnover is greater than A$1 billion. This amendment will now capture members of MNEs headed by: Private companies with no obligation to prepare consolidated accounts Trusts Partnerships Members of groups headed by investment entities The amendment will also confirm the Commissioner s power to make a Determination that an entity has formed part of an SGE and will be required to prepare the additional compliance documents, despite it not formally meeting the definition. Jurisdictions across the globe have broadly settled on the definition of an SGE. This amendment to the definition will cause a misalignment of required compliance documents for these Australian-defined SGEs across the globe. Inbound SGEs under the new definition will have a requirement to prepare and lodge a Country-by-Country Report, Master File and Local File only in Australia, a substantial undertaking for the Australian subsidiary which may not receive the requisite support from its head entity to prepare these documents. WINNER None to speak of, this amendment will not release any member of an MNE from any existing SGE compliance obligations LOSER Global groups with annual turnover exceeding A$1 billion which do not have a requirement to provide consolidated financial accounts BUDGET

8 SMALL-TO- MEDIUM BUSINESS Instant asset write-off extended for a further 12 months Extending the $20,000 instant asset write-off for a further 12 months to 30 June 2019 for SBEs Deferral of clarification of the Division 7A application to unpaid present entitlements to corporations No deductions for payments made to contractors and employees where a requirement to withhold PAYG was not met Further extension of the instant asset write-off Small Business Entities (SBEs) with aggregated annual turnover of less than $10 million will enjoy immediate deductions for capital purchases not exceeding $20,000 for a further 12 months until 30 June SBEs which have the cash flow to make these equipment purchases will benefit from a lower tax bill in the year they make the purchase. Treatment of UPEs under Division 7A The Government announced they would amend the Division 7A rules to provide clarity as to when Unpaid Present Entitlements (UPEs) owing from trusts to private companies will be subject to Division 7A. In 2009, the ATO controversially announced changes to their interpretation of the Division 7A rules as they relate to such UPEs, but this change in interpretation had no case law or legislative precedent. It appears that the Government is legislating the ATO s position to draw a line in the sand under the controversy, and to provide clarity for taxpayers going forward. The Government also announced that the start date for Division 7A reform measures announced as part of the Budget will be deferred from 1 July 2018 to 1 July Safe-harbour provisions to protect compliant taxpayers Setting Division 7A loan durations to 10 years and better aligning interest rate calculations with commercial transactions Deductions for wages and contractors may be denied In a measure to bring transparency into the cash economy, deductions will be denied for businesses who do not withhold PAYG when there has been a requirement to do so, as well as denying deductions where no PAYG has been withheld for contractors who have failed to provide an ABN. Business owners paying wages are now compelled to ensure they are complying with the PAYG withholding regimes for employees and contractors or will be unable to claim their expenditure as a deduction. WINNER Any small business owners considering making a capital purchase now have an additional 12 months to make the purchase and still enjoy the benefit of an immediate deduction Private groups with UPEs to benefit from an additional 12 months LOSER Employers will be penalised by denied deductions where they have not been compliant with the PAYG withholding regime The detail of these measures is yet to be released by the Government, however we understand that the measures will include: A self-correction mechanism to avoid inadvertent Division 7A application by way of an opportunity to correct arrangements without being penalised 8 RSM AUSTRALIA

9 Case studies Instant asset write-off David and Jennifer currently own a company, Sunrise Bakers Pty Ltd, through which they operate two bakeries. During the year the company has an aggregated turnover of $8,000,000 and taxable income of $490,000. Sunrise Bakers Pty Ltd purchases two new baking ovens costing $18,600 each (exclusive of GST) on 24 June 2019 in order to expand the baking capacity of the bakeries and to increase the sales to nearby restaurants and hotels. Due to the ovens costing less than $20,000 each, the company will be entitled to an immediate tax deduction of $37,200 in the year. This will reduce the company s taxable payable by $10,230. Division 7A Unpaid Present Entitlement Changes David and Jennifer also own a number of commercial rental properties in their family trust, the Sunrise Investment Trust. The properties are positively geared and the Trust will have net income of $150,000 for the year ended 30 June David and Jennifer are both already paying tax at the top individual marginal rate, so the trustee elects to distribute the trust s income to Sunrise Bakers Pty Ltd for the year ended 30 June 2018 to take advantage of the company s 27.5% tax rate. Whilst the trustee has made the election to distribute the trust s income to Sunrise Bakers Pty Ltd, it does not actually pay the money to the company, and uses the funds to undertake improvements on its commercial rental properties. The amount owing to the company is shown as an Unpaid Present Entitlement (UPE) in the liabilities section of the trust s financial statements. The UPE will be taken to be a financial accommodation by the company back to the trust, and therefore a loan for Division 7A purposes if it is not repaid or put on Division 7A compliant loan terms by the lodgment date of the company s 30 June 2019 return (ie the UPE will not trigger any Division 7A issues until the end of the following year). This treatment is currently required under the ATO s current interpretation of the application of Division 7A to UPEs (contained in Tax Ruling 2010/3). If the circumstances were to arise in the 2020 year, the treatment would be required in-line with legislation arising from this Budget announcement. Denied deductions for wages David s nephew, Jason who is studying carpentry at TAFE, was asked by Jennifer to do some work at one of their bakeries. Jason does not have an ABN and was paid an agreed fee to undertake the work. On payment, no amounts were withheld. Sunrise Bakers Pty Ltd is not permitted to claim a deduction for this expense as the requirement to withhold PAYG on the payment to Jason was not met. BUDGET

10 INDIVIDUALS Introduction of a low and middle income tax offset (LMITO) of up to $530 Changes to the income tax rate brackets over a seven year period The LMITO and income tax rate bracket changes only apply to Australian resident taxpayers and not to foreign residents with Australian sourced income Streamlining of superannuation administration and the introduction of measures to protect low balance super accounts Baby boomers will be encouraged to stay in the work force for longer LMITO: Income Thresholds $0-$37,000 $200 $37,000-$48,000 $530 $48,000-$90,000 $530 Maximum LMITO $90,000-$125,333 Reduced by 1.5c per $ > $125,333 Nil Tax rate changes: Rates 01 July to July to July onwards 0.0% $0-$18,200 $0-$18,200 $0-$18, % $18,201- $37, % $37,001- $90, % $90,001- $180,000 $18,201- $41,000 $41,001- $120,000 $120,001- $180,000 $18,201- $41,000 $41,001- $200,000 No longer applicable 45.0% $180,001+ $180,001+ $200,001+ Seven-year Personal Income Tax Plan In a bid to reward Australian taxpayers for effort, the Government has announced the implementation of a sevenyear Personal Income Tax (PIT) Plan. The PIT will provide tax relief in a 3-step plan. Step 1: Implementation of the low and middle income tax offset A LMITO will be introduced as a non-refundable tax offset which will provide tax relief of up to $530 per annum to resident taxpayers commencing from 1 July 2018 until 30 June The amount will be received as a lump sum payment upon taxpayers lodging their individual tax return, and is in addition to the existing Low Income Tax Offset (LITO). The LMITO will provide a benefit of up to $200 per annum for individuals with a taxable income of $37,000 or less. The value of the benefit increases at 3 cents per dollar with a maximum benefit of $530 per annum for individuals with a taxable income between $37,000 and $48,000. Taxpayers with a taxable income between $48,000 to $90,000, will still receive the full offset of $530. Individuals with a taxable income between $90,000 to $125,000 will have the benefit phased out at a rate of 1.5 cents per dollar. Step 2: Bracket creep for relief to middle income earners To help middle income earners, from 1 July 2018 the Government plans to increase the 32.5% PIT bracket from $87,000 to $90,000. This bracket will see a further increase from $90,000 to $120,000 from 1 July In addition, from 1 July 2022, the LITO will increase from $445 to $645 and the 19% PIT bracket will increase from $37,000 to $41,000. The LITO will be phased out at 6.5 cents per dollar for taxable incomes of between $37,000 and $41,000, and at a rate of 1.5 cents per dollar for taxable incomes of between $41,000 and $66, RSM AUSTRALIA

11 Step 3: Removal of the 37% PIT bracket Significant changes to the tax brackets will occur from 1 July Under step 3, the 37% PIT bracket will be removed and the 32.5% tax bracket will extend to taxable income of $200,000. The 45% PIT bracket will apply to taxable income above $200,000. Superannuation There are several changes to the way superannuation is to be administered which, cumulatively, will have a significant impact upon individuals with low-balance super account(s). These measures will take effect from 1 July The Government proposes restrictions on fees and other costs on low-balance super accounts. The restrictions include: Fees to be capped at 3% on super accounts with balances less than $6,000 Exit fees banned for all transfers of superannuation account balances Introduction of an opt-in rule on insurance policies provided to members who are less than 25 years old and have a super account with a balance of less than $6,000 Strengthening of the ATO-led consolidation regime to require the transfer of all inactive superannuation accounts with a value of less than $6,000 to the ATO to protect them from further fee erosion This raft of amendments to the administration of low-balance superannuation account balances are aimed at preserving small balance accounts. Case study OTHER CHANGES FOR INDIVIDUALS Government aged pension With effect from 1 July 2019, Australians on an aged pension will be able to increase their Pension Work Bonus from $250 per fortnight to $300 (up to $7,800 per year) without impacting their pension. This will apply to self-employed individuals as well as employees. Youth Allowance The parental income test for regional students will be increased from $150,000 to $160,000 and a further $10,000 for each additional student/child. Medicare Levy The proposed Medicare Levy increase from 2.0% to 2.5% will not proceed. Imputation credits The Government has reaffirmed its support for the current refundable imputation (franking) credit regime. WINNER Low-middle income earners from 1 July 2018 Higher income tax earners from 1 July 2022 People with multiple and low balance super funds Regional students Older Australians LOSER Minimal tax relief for higher income earners in the short term The hare and the tortoise Samantha and Jeremy are married with three children. Samantha works full-time as a finance director and Jeremy currently works part-time as an electrician. In the income year Samantha earns a salary of $200,000 per annum (pa) and Jeremy earns wages of $50,000 pa From 1 July 2018, Jeremy receives the full entitlement of the LMITO of $530 pa whereas Samantha receives $135 pa in tax relief. However, from 1 July 2024 Samantha will receive tax relief of $7,225 whereas Jeremy s tax benefit does not materially change. Step Year Income Tax Paid Tax Relief One Sam $200,000 $67,097 $135 Jeremy $50,000 $8,017 $530 Two Sam $200,000 $65,207 $2,015 Jeremy $50,000 $8,007 $540 Three Sam $200,000 $60,007 $7,225 Jeremy $50,000 $8,007 $540 BUDGET

12 AMITs AND MITs: Removing CGT discount at trust level Management Investment Trusts (MIT) and Attribution MITs (AMIT) will no longer be able to apply the 50% discount on capital gains at the trust level. This means that net capital gains from the sale of assets held for greater than 12 months will no longer be discounted at the trust level but rather at the investor/beneficiary level. This is an integrity measure intended to prevent individuals, who might not otherwise be entitled to the 50% CGT discount, from receiving the benefit of the 50% CGT discount when applied at the trust level. It also ensures that AMITs and MITs continue to act as genuine flow through entities rather than entities providing unintended tax benefits to ineligible recipients. AMITs and MITs can still distribute capital gains to beneficiaries however the CGT discount will be determined at the individual level and taxed in the hands of the beneficiaries. This change will apply to payments made from 1 July WINNER The Government LOSER Investors in AMITs and MITs Case study MIT A has 10 investors of which 2 have held their units in the MIT for less than 12 months. The MIT makes a capital gain on the sale of a building (which it has held 5 years) and distributes the net capital gain to its beneficiaries. Under the current rules, MIT A would disclose the non-assessable CGT discount component before distributing the net capital gain to its 10 investors. Under the proposed rules, this MIT will have to distribute the capital gain to the investors gross of the CGT discount. The individuals will then assess their eligibility for the CGT discount before calculating their net capital gain. This result would exclude the 2 beneficiaries from accessing the CGT discount as they have not satisfied the 12-month holding rule. 12 RSM AUSTRALIA

13 CIRCULAR TRUST DISTRIBUTIONS TO FAMILY TRUSTS Rules that permit Family Trusts to defer tax on trust income through round robin distributions will be removed from 1 July Trustees of closely held trusts are currently subject to beneficiary reporting requirements, designed to ensure the ATO receives information on income distributed by one trust to another trust, and also the amount of any tax-preferred income distributed. If the trustee fails to satisfy the beneficiary and income reporting requirements, the trustee is assessed to Trustee Beneficiary Non-Disclosure Tax (TBNT) in respect of the untaxed part of the share of net income of the trust. The TBNT rate is the top marginal rate plus Medicare Levy (currently 47%). These beneficiary reporting rules currently prevent closely held trusts from entering into round robin distributions where income ends up back in the hands of the original trust in an untaxed form. An illustration of this arrangement is set out below: Trusts that have made a Family Trust Election are currently excluded from these rules, meaning these trusts can currently enter into round robin arrangements to defer tax on trust income. The Government has announced that this loophole will be closed for Family Trusts from 1 July WINNER This is an integrity measure, and the Government expects to recover $20M over forward estimates. Taxpayers already doing the right thing will be no worse off by the rule changes, although there may be additional administration and reporting required for Family Trusts. LOSER Taxpayers who are currently exploiting this loophole. Example: Round robin distribution A chain of three trusts exists (Trust A, Trust B and Trust C), each of which is a closely held trust. The trustee of Trust B is a beneficiary of Trust A, and the trustee of Trust C is a beneficiary of Trust B. The trustee of Trust A is presently entitled to the income of Trust C. Trust A $10,000 Trust B $10,000 $10,000 Trust C BUDGET

14 SUPERANNUATION Full refund of imputation credits maintained Maintaining imputation credit refundability Increasing maximum SMSF member numbers to 6 Three yearly SMSF audits Tweaking contribution rules for new retirees and high income earners Imputation credit refundability The Treasurer confirmed that no changes would be made to the refund of excess imputation credits. This position is at odds with current Labor Party policy of disallowing refunds of excess imputation credits (with some exemptions). Many Self Managed Super Funds (SMSFs) receive imputation credit refunds which provides additional income to the fund to meet their cash flow obligations. Increasing maximum SMSF membership to 6 This measure was announced in advance of the budget by the Minister for Revenue & Financial Services Kelly O Dwyer. The increase in maximum member numbers of an SMSF will take effect from 1 July The maximum number of SMSF members is currently 4, which does provide some limitations for family members. In order for a fund to be an SMSF, it is necessary that all members are trustees of the fund or directors of the corporate trustee. As is the case for existing funds, any new members will need to be included as a trustee if the membership expands. The trustee of an SMSF with more than 4 members will generally need to be a company, with all the members a director of the company. Some of the State Trustee Acts limit the number of individual trustees of a trust to 4 individuals, however a corporate trustee is not limited in the number of directors it can have. Three yearly SMSF audits SMSFs are required to be audited each financial year by a qualified SMSF auditor. The significant taxation concessions provided to the superannuation industry require SMSF trustees to comply with applicable legislation and regulations in relation to SMSFs. An independent SMSF audit provides a check in the system that SMSF trustees are complying with their obligations. SMSF audits will need to be conducted three yearly for SMSF s with good record keeping and compliance history. The exact nature of this proposed change will be subject to industry consultation and apply from 1 July It is also unclear as to whether the audit would only need to be conducted on the year in which the audit is undertaken or whether the current year and two previous years would need to be audited. Industry consultation on this measure will provide more detail on what constitutes a good compliance record, but it may extend beyond the SMSF itself to the SMSF trustees, requiring them to have good compliance records, and their personal tax affairs in order. New retiree contributions Currently, once an individual turns 65, a work test of 40 hours in a period of not more than 30 days is required to be met in order for contributions to be made to superannuation. With effect from 1 July 2019, the work test requirement will be removed for retirees for the first year the work test is not met. Personal voluntary contributions will be able to be made to superannuation in that year provided the members balance is less than $300,000. Contributions from multiple employers Individuals earning in excess of $263,157 will have the option of opting out of the Superannuation Guarantee system with one employer. Employees currently in this situation generally exceed their concessional contributions cap of $25,000, which ultimately results in an excess concessions contributions tax assessment plus a shortfall interest on the amount of unpaid tax. 14 RSM AUSTRALIA

15 WINNER Stability Larger families SMSFs with a good compliance history LOSER None Case studies Increasing SMSF membership Trish and Bill are currently members of their own SMSF. They have three children that are all involved in the family business. They have wanted their children to join the SMSF as members as they have all been part of the financial management of the family business. From 1 July 2019, all of the children will be able to become members of the SMSF and would also need to be directors of the trustee company. The expansion of the fund membership could allow the family to pool greater resources which may allow for larger asset purchases. Consideration should be given to the potential future impact of a family dispute requiring members to exit the fund or if one of the members was going through a separation and the SMSF assets are potentially split with the former spouse. Recent retiree Rob retires in May 2020 at the age of 66. At this point in time he completely retires from working and will not be earning any income. In October 2020 Rob receives an inheritance, which he would like to contribute to superannuation. Rob will be eligible to make a contribution to superannuation of up to his non-concessional cap of $100,000 and will not be required to meet a work test. This will allow Rob to get some of this unexpected capital into his superannuation to help fund retirement. Surgeon Ann-Maree is a surgeon who spends most of her time working for one hospital, and her income is in excess of $263,157 for this hospital. She also works for another hospital from time to time in an income year. As Ann-Maree will exceed her $25,000 concessional contribution limit with the first employer, she will have the ability to elect not to receive superannuation guarantee contributions from the second employer and may be able to negotiate receiving this amount as part of her wage rather than a superannuation contribution. This would result in Ann-Maree receiving what would have been the superannuation guarantee contributions in her wage from the second employer which would be taxed at her marginal tax rate. Her personal tax rate and the rate applicable to the excess contribution within the superannuation fund would be the same, however shortfall interest charge would be imposed on the excess superannuation contribution. BUDGET

16 INNOVATION REFORMING THE R&D TAX INCENTIVE The budget has positioned Australian Innovation as the fall guy to generate cost savings. The cuts and caps will restrict the R&D Tax support that an Australian business can receive, and many businesses will be looking at overseas R&D incentives from 1 July The changes result in: reducing and capping the benefits for small business significantly reducing the benefits for SMEs to a point that makes it almost pointless very cleverly reducing the benefit for large businesses while increasing the cap The Treasurer stated in the budget speech that it was a budget to stop other countries from cutting our lunch. As we will see below, the budget is encouraging Australian innovators to go offshore to seek support. The changes are based on: For companies with an aggregated annual turnover of less than $20 million, reducing the benefit from 43.5% to 41.5% (based on a 27.5% corporate tax rate) and capping the cash refund at $4 million per year (this cap excludes R&D tax offsets for clinical trials). For companies with an aggregated annual turnover of $20 million or more, removing the current 38.5% R&D Tax rate (which provides a benefit of 8.5% based on 30% corporate tax rate) and introducing a tiered R&D rate, based on an R&D Intensity threshold that will be calculated using the company s R&D expenditure as a proportion of total company expenditure for the year: 4% for R&D expenditure up to 2% of R&D intensity 6.5% for R&D expenditure above 2% up to 5% of R&D intensity 9% for R&D expenditure above 5% up to 10% of R&D intensity 12.5% for R&D expenditure above 10% of R&D intensity The maximum amount of R&D expenditure eligible for R&D benefits will be $150 million, which is an increase in the current cap of $100 million. The changes have also announced: strengthening integrity and administration legislation (with no details disclosing what these are) increased funding for the regulators to enforce the R&D Tax legislation and development of additional guidance material the publishing by the ATO of claimant company names and the amount of their R&D claims 16 RSM AUSTRALIA

17 WINNER The winners from this budget are overseas economies that are interested in building innovation into their work force. It has never been easier for companies to carry out R&D in overseas locations and consultants that help companies with this transition will be looking forward to talking with Australian businesses and showing them what other governments offer to support innovation. Case studies LOSER Australian innovation is at a dark cross road. This budget indicates that the Government has given up even pretending that it cares about Innovation. Small Business and startups (aggregated annual turnover of less than $20 million): A growing IT company that incurs $4.5M on R&D expenditure will have a reduction in its net tax benefit of $112,500. This means that the company will be paying $112,500 more in tax. Tech start-up spending $2M on R&D will receive a reduction in its cash rebate of $50,000 The reduction in R&D benefit for each of the companies in the above examples could very well lead to reduced employment. SMEs (aggregated annual turnover of $20 million or more): An established communications technology business that has a long term ongoing R&D program, R&D expenditure is $1.5M with total expenditure of $15M, this will result in a new R&D tax benefit reduction of $18,750 (equivalent to a 1.25% reduction of the R&D benefit from 8.5% to 7.25%) A global IT platform with Australian Innovation and R&D spend of $2M and total business costs of $70M, will have a reduced R&D tax benefit of $75,000 (equivalent to an R&D benefit of 4.75% versus the current 8.5%) The above are real world examples of reduced R&D benefit to quality Australian privately owned businesses that have a sophisticated and managed approach to R&D. While the reductions may not seem significant, the effect could discourage innovation. Large Corporates: Australia s largest corporates and R&D spending companies will have a reduced R&D tax benefit. The tiered R&D rate will not benefit these companies because the R&D expenditure cap of $150M is significantly under the 2% R&D intensity threshold. Companies like Telstra, CBA and BHP will have a reduction in their annual after tax R&D benefit of $2.5M. Other very large Australian companies that are high R&D spenders, such as CSL, will also receive a reduced R&D benefit as their 5% R&D intensity rate cannot exceed the $150M cap. This reduces their annual after tax R&D benefit by $1M. The budget states that the changes will refocus large companies to undertake more R&D due to the tiered rates. However the above examples clearly show that the intensity thresholds are completely unachievable and the cap will kick in well before the companies are able to achieve any marginal R&D rate benefits. If these companies want to seek additional benefits, other countries will gladly assist them with innovation incentives and support. BUDGET

18 18 RSM AUSTRALIA Helping you move forward with confidence

19 TAX COMPLIANCE TAX COMPLIANCE AND INTEGRITY Increased funding for ATO compliance initiatives Increased reporting obligations under the Taxable Payments Reporting System This budget contains an increase in funding for the ATO to further its compliance activities. Specifically, the ATO will be given $133.7 million to bolster its debt collection efforts. This will assist with both the level and timeliness of unpaid tax and superannuation debts. The ATO will also be given $318.5 million over four years to implement new strategies to combat the black economy. This will encompass mobile strike teams, audit teams, a Black Economy Hotline, improved data analytics and educational activities. This is estimated to have a gain to the revenue of $3 billion over the forward estimates. The Government will also address illegal phoenix activities by introducing new phoenix offences, restricting the ability of directors to avoid liability and/or prosecution, extending the existing director penalty regime to GST, luxury car tax and wine equalisation tax, and expanding the ATO s power to retain refunds where there are outstanding tax obligations. In addition, the taxable payments reporting system will be extended to the following industries: Security providers and investigation services Road freight transport Computer system design and related services This comes on the back of the introduction of the regime in with respect to the building and construction industry, and the extension to contractors in the courier and cleaning industries in the budget. WINNER Employees, in relation to the collection of unpaid PAYG-Withholding and superannuation States and Territories, in relation to increased GST collections LOSER Directors, in relation to increased liability Business, in relation to increased administration associated with the taxable payments reporting system BUDGET

20 INDUSTRIES AGRIBUSINESS In a relatively quiet budget for farmers, many will be pleased that generous tax concessions implemented two years ago will continue, but disappointed that a key wish-list item has been overlooked. With the $20,000 instant asset write-off extended to 30 June 2019, small business farmers (annual turnover less than $10 million) will continue to enjoy immediate deductions for any new or second-hand assets costing less than $20,000 (GST exclusive) This concession had been due to reduce to $1,000 from 1 July 2018, so farmers looking to invest in new machinery over the next year will be pleased to see the continuation of this write-off. There have been no changes to the generous concessions which allow farmers to deduct in full any spending on water infrastructure and fencing and obtain a 3 year write-off for fodder storage assets such as hay sheds. Many farmers will benefit from the personal income tax cuts to be phased in from 1 July 2018 as well as the cancellation of the proposed Medicare levy increase. Users of GPS technology will appreciate the investment to improve the accuracy of GPS data to within 10 centimetres, including areas without mobile phone coverage. Farmers should be aware that announced changes to disallow tax deductions on vacant land do not apply to land where a primary production business is being carried on. A key wish-list item for the industry is an increase in the thresholds to apply the small business capital gains tax concessions. As land prices have generally risen substantially over the last 10 years, thresholds to access the capital gains concessions have remained static, preventing more and more farming families from accessing the concessions. Capital gains tax can be a significant impediment to succession planning, with the cost preventing ownership of many farms from passing to the next generation. Farmers will be disappointed to find there has again been no change to the thresholds of $2 million annual turnover or $6 million of net assets. Farmers who distribute business profits to a bucket company will need to review their strategy to ensure compliance in light of announced changes to commence from 1 July CASE STUDY ABC Farm Trust has an annual turnover of $4 million and in the 2018/19 financial year purchases the following assets: $8,000 Ag Bike $30,000 of new fencing $50,000 of new water tanks and associated pumps $12,000 second hand utility The ABC Farm Trust will be able to claim the full $100,000 of asset purchases as a deduction in the 2018/19 financial year. Had the $20,000 instant asset write-off not been extended for a further 12 months, deductions for the cost of the Ag bike and Utility would have been reduced to just of 15% of the purchase price. HEALTH AND AGED CARE $130.2 billion funding over 5 years for Public Hospitals Increased funding for aged care places and home care packages $1.3 billion for the National Health and Medical Industry Growth Plan $275.4 million for Health and Medical Research The Government will provide $130.2 billion over 5 years from to the States and Territories for public hospital services after the expiry of the current agreement on 30 June The Government has also committed to continue the existing Activity Based Funding Arrangements, including: the existing 45% of growth in hospital services existing 6.5% per annum growth cap to the Commonwealth s contribution The Government will also provide $50m in and again in for a Health Innovation Fund to fund trials that support preventative health innovation and better use of health data. In the area of Home Care, the Government is looking to implement new policies to support people staying at home longer. This will include: 20 RSM AUSTRALIA

21 14,000 new high-level home care packages over 4 years 13,500 residential aged care places in addition to the 6,000 packaged delivered in the MYEFO 775 short term restorative care places in the Aged Care Approvals Round, with a $60 million capital investment to support new places In terms of Aged Care, the Government will provide $40 million in capital grants from for regional, rural and remote aged care facilities. The Government will also combine the Residential and Home Care programs from 1 July 2018 to better respond to changes in demand for these services. A new Aged Care Quality and Safety Commission will be established on 1 January 2019 at a cost of $253.8 million over 4 years. This is all part of the Government s aim to improve the quality of life for older Australians. Australia will be positioned as a global destination for the medical sector, including research and clinical trials. This will be funded from the Medical Research Future Fund, and will include: $500 million over 10 years committed to the Genomics Health Futures Mission, including $10.7 million for genomics research $240 million committed to the Frontier Health and Medical Research program $248 million for expanded clinical trial programs $125 million over 9 years to contribute to the Targeted Translation Research Accelerator for chronic conditions focused on diabetes and heart disease $94.3 million for biomedtech programs and industry research collaborations In addition, the Government will invest $275.4 million from the Medical Research Future Fund including: $125 million over 10 years to support priorities under the Fifth Mental Health and Suicide Prevention Plan $75 million over 4 years to extend the Rapid Applied Research Translation Program that supports Advanced Health Research Translation Centres $18.1 million over 4 years to support preventative health measures $39.8 million over 4 years for a Targeted Health System and Community Organisation Research program with a focus on comparative effectiveness $17.5 million over 4 years for Women s and Maternal Health research. PROPERTY Vacant Land Denying Tax Deductions Tax deductions for expenses associated with holding vacant land will be denied from 1 July 2019, where the land is not genuinely held for the purpose of earning assessable income. This includes, for example, interest costs and council rates. Denied deductions cannot be carried forward for use in future income years, but can be included in the land s CGT Cost Base if the amount is ordinarily a cost base element. It is noted that this measure will not apply to expenses incurred after: A property has been constructed on the land, it has received approval to be occupied and is available for rent The land is being used by the owner to carry on a business, including a business of primary production This measure will apply to land held for both residential and commercial purposes. The measure is intended to increase the supply of vacant land and a reduction in the price of residential housing and commercial property. CASE STUDY Dennis acquires a vacant block of land in a fast-growing neighbourhood for $200,000. He intends to develop the land. Dennis finances the acquisition by taking out a loan and incurs interest costs of $8,000. As Dennis does not derive any assessable income from holding the land, the interest costs cannot be claimed as a tax deduction. Instead, Dennis can include the interest cost in his CGT cost base of the land. These investments demonstrate the importance of Australia s health and medical research sectors. BUDGET

22 PROGRESS OF 2017 FEDERAL BUDGET MEASURES Which measures were enacted? Measure Summary Date Status HOUSING AFFORDABILITY MEASURES First home super saver scheme Super contributions from downsizing Travel expenses related to residential rental properties disallowed Depreciation deductions limited for residential rental properties CGT main residence exemption removed for foreign residents Expansion of foreign resident CGT withholding regime Foreign owned vacant residential properties: annual levy. Foreign ownership in new developments restricted to 50% Foreign resident CGT: principal asset test amended Voluntary contributions (both concessional and nonconcessional) of up to $15,000 per year or $30,000 in total can be made by individuals and withdrawn subsequently for a first home deposit. From 1st July 2018, anyone aged 65 or over can make nonconcessional contribution of up to $300,000 from the proceeds of sale of their principal residence that was owned for at least 10 years. From 1st July 2017, deductions will be disallowed for travel expenses related to inspecting, maintaining and collecting rent for a residential property. From 1 July 2017, the plant and equipment depreciation deductions will be limited to outlays incurred by investors in real residential real estate properties. Access to the exemption will be denied to foreign and temporary tax residents. Australian tax residents will not be affected. A grandfathering arrangement will apply for property acquired prior to 9th May 2017, with the change taking effect for these properties from 1st July For Australian real property and related interests valued at $750,000 or more, the CGT withholding rate will be increased to 12.5% Foreign owners with residential property not available on the rental market for at least half a year will be imposed a minimum levy of $5000. A 50% cap will be introduced through a condition on new dwelling exemption certificates for applicants from 7.30 pm (AEST) on 9th May Foreign tax residents with indirect interests in Australian real property will have the principal asset test applied on an associate inclusive basis. 1st July st July st July st July th May st July th May th May th May 2017 Enacted Enacted Enacted Enacted Introduced Enacted Enacted Effective Introduced 22 RSM AUSTRALIA