“Above all, this is an honest budget,” Mr Morrison said. “It is honest about our challenges and opportunities. It does not pretend to do things with money we do not have.’’ In describing the budget as a “responsible” document based on the principles of “fairness, security and opportunity”, the Treasurer however faced questions over how the Medicare Levy increase squared with his claim to ease the cost of living on workers. The ALP has said it would engage with the government about the increase in the Medicare levy. The shadow treasurer, Chis Bowen told the ABC on Tuesday night the ALP would take its time to consider the impact, because it was a tax increase which would hit every working Australian. However, he noted the increase was happening at the same time as the government removed the deficit levy from higher income earners.
Small businesses with turnover of up to $10m meanwhile will get an extension of the $20,000 instant asset write-off for a further 12 months.
With surging house prices in Sydney and Melbourne, there are a number of measures, albeit modest, designed to improve housing affordability, including:
- An unexpected tightening of deductions now available under negative gearing;
- An increase in the capital gains tax discount from 50% to 60% for resident investors prepared to develop affordable housing;
- A tax break for first home buyers on savings for a housing deposit, albeit thorough superannuation; and
- Encouraging older Australians to free-up larger properties by allowing people aged over 65 to make a non-concessional contribution of up to $300,000 if they sell the family home.
Foreign investors, on the other hand will face new imposts, including:
- a levy of $5,000 if they fail to occupy or lease property they own for at least half the year; and
- Changes to Australia’s foreign resident capital gains tax (CGT) regime will:
- deny foreign and temporary tax residents access to the CGT main residence exemption;
- increase the CGT withholding rate for foreign tax residents from 10 per cent to 12.5 per cent, from 1 July 2017; and
- reduce the CGT withholding threshold for foreign tax residents from $2 million to $750,000 from 1 July 2017.
- Developers will be prevented from selling more than 50% of new developments to overseas buyers.
In what has already been described as a ‘centre left tax and spend budget’ the Treasurer may be seen to have made a decisive move away from the unpopular savings measures of Tony Abbott’s 2014 budget. Despite imposing some additional welfare cuts, by investing in health, infrastructure and school education, whilst hitting the big banks, he would also appear to have tackled a number of the areas in which the ALP was mounting a sustained attack and inflicting some damage. As telegraphed extensively before the budget, the government has also stepped up its investment in infrastructure. However, it may also have laid the groundwork for its political recovery.
We encourage you to contact your Walker Wayland NSW advisor if you wish to discuss any aspects of the Budget further.
- Individuals and Families
- Small Business
- Large Companies and International Taxation
- Housing Affordability
- GST and Other Taxes
- Tax Integrity and Other Measures
Medicare levy to increase from 2% to 2.5%
The Medicare levy will be increased from 2.0% to 2.5% of taxable income from 1 July 2019. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.
Low income earners will continue to receive relief from the Medicare levy through the low income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.
It is noted this coincides with the removal of the budget repair levy for high income earners.
Medicare levy – low income thresholds to increase
The Medicare levy low-income thresholds for singles, families, and seniors and pensioners will increase from the 2016/17 income year.
The increased thresholds are as per the following table:
|Single Seniors & Pensioners
|Family Seniors & Pensioners
New HELP repayment thresholds and rates to be introduced
A new set of repayment thresholds and rates under the higher education loan program (HELP) will be introduced from 1 July 2018.
A new minimum repayment threshold of $42,000 will be established with a 1% repayment rate. Currently, the minimum repayment threshold for the 2017/18 year is $55,874 with a repayment rate of 4%.
A maximum threshold of $119,882 with a 10% repayment rate will also be introduced. Currently, the maximum repayment threshold for the 2017/18 year is $103,766 with a repayment rate of 8%.
Family Tax Benefit Part A
The Government is implementing a consistent 30 cents in the dollar income test taper for Family Tax Benefit Part A families with a household income in excess of the Higher Income Free Area (currently $94,316) from 1 July 2018.
This will ensure that higher income families are subject to the same income test taper rates.
Family Tax Benefit Part A payments will also be affected by the introduction of new compliance arrangements for the No Jab No Pay (NJNP) and Healthy Start for School (HSS) policies, to ensure that all families receiving Family Tax Benefit (FTB) Part A are encouraged to meet immunisation and health check requirements.
From 1 July 2018, families who do not meet the NJNP and HSS requirements will have around $28 per child withheld from their fortnightly rate of FTB Part A.
A drug testing trial for 5,000 new welfare recipients will be introduced. JobSeeker recipients who test positive would be placed on the Cashless Debit Card for their welfare payments and be subjected to further tests and possible referral for treatment.
Other welfare measures include:
- Strengthening the verification requirements for single parents seeking welfare;
- a crackdown on those attempting to collect multiple payments;
- stricter residency rules for new migrants to access Australian pensions; and
- denying welfare for a disability caused solely by a person’s substance abuse.
Whilst the government did not make a large number of changes in the small business tax environment, there were some noteworthy outcomes.
$20,000 Instant Asset Write-off Prolonged
The ability for small business entities to apply the $20,000 instant asset write-off for eligible assets has been extended for a further 12 months, to 30 June 2018. Businesses with an aggregated annual turnover of $10 million or less will be able to access the write-off.
Currently it is proposed that from 1 July 2018 the instant write-off threshold will revert back to $1,000. Small business entities may still use the general pool rules for assets costing in excess of $20,000, accessing a 15% depreciation rate in the first year, and 30% thereafter. Closing general pool balances below $20,000 can continue to be written off.
Certain specific assets, such as horticultural plants and in-house software will continue to be excluded from the $20,000 instant asset write-off. The rules suspending small businesses from re-entering the simplified depreciation regime for five years if they opt out will continue to be suspended until 30 June 2018.
Tightening the Small Business Capital Gains Tax (CGT) concessions
The government has alluded to tightening its focus on the small business CGT concessions from 1 July 2017, the idea being to prevent taxpayers from using the concessions for assets unrelated to their small business. The specific mechanisms by which this will be achieved are yet to be elaborated on.
Importantly, the small business entity turnover test for the small business CGT concessions will remain at $2 million in aggregated annual turnover. The $6 million maximum net asset value (MNAV) test will also remain unchanged.
Tax integrity package – multinational anti-avoidance law broadened
The government has announced it will prevent the use of foreign trusts and partnerships in corporate structures to minimise Australian income tax, extending the scope of the multinational anti-avoidance law (Income Tax Assessment Act 1936 s177DA).
With retrospective effect from its date of commencement on 1 January 2016, the multinational anti-avoidance law will be amended so that it applies to:
- corporate structures that involve the interposition of partnerships that have any foreign resident partners;
- trusts that have any foreign resident trustees; and
- foreign trusts that temporarily have their central management and control in Australia.
Major bank levy to be introduced
A major bank levy (the levy) will be introduced for authorised deposit taking institutions (ADIs), with licensed entity liabilities of at least $100b, from 1 July 2017. The levy is forecast to raise $6.2b over the forward estimates period and is designed to assist with budget repair and to provide a more level playing field for smaller banks and non-bank competitors.
The levy will only impact the five biggest banks being Commonwealth Bank, Westpac, ANZ, NAB and Macquarie Bank. It will be calculated quarterly as 0.015% of an ADI’s licensed entity liabilities as at each quarterly reporting date mandated by the Australian Prudential Regulation Authority (APRA). This equates to an annualised rate of 0.06%.
Liabilities subject to the levy will include items such as corporate bonds, commercial paper, certificates of deposit, and Tier-2 capital instruments. The levy will not apply to the following liabilities: additional Tier-1 capital, and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme. It will not be levied on mortgages.
Superannuation funds and insurance companies will not be subject to the levy.
Skilling Australians Fund levy introduced
From March 2018, businesses that employ foreign workers on certain skilled visas will be required to pay a levy that will provide revenue for a new Skilling Australians Fund.
Businesses with turnover of less than $10m per year will be required to make an upfront payment of $1,200 per visa per year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $3,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
Businesses with turnover of $10m or more per year will be required to make an upfront payment of $1,800 per visa per year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $5,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
The new levy will replace the current training benchmark financial obligations for employers of workers on Temporary Work (Skilled) (subclass 457) visas, which are being abolished, and permanent Employer Nomination Scheme (subclass 186) Direct Entry stream visas.
Integrity of limited recourse borrowing arrangements
From 1 July 2017, the Government will include the use of limited recourse borrowing arrangements (LRBA) in a member’s total superannuation balance and transfer balance cap.
LRBA can be used to circumvent contribution caps, effectively transferring growth in assets from the accumulation phase to the retirement phase, whilst not being captured by the transfer balance cap.
The outstanding balance of an LRBA will now be included in a member’s annual total superannuation balance and the repayment of the principal and interest of an LRBA from a member’s accumulation account will be included as a credit in the member’s transfer balance account.
Improving integrity of non-arm’s length arrangements
From 1 July 2018, the Government will reduce opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.
The non-arm’s length income provisions will be amended to ensure expenses that would normally arise in a commercial transaction are considered in concluding whether a transaction is on a non-arm’s length basis
Extending tax relief for merging superannuation funds until 1 July 2020
The availability of tax relief for superannuation funds where capital and revenue losses are transferred to a new merged fund, deferring the taxation consequences associated with those gains and losses is to be extended though to 1 July 2020.
Super for first home savers
The Government intends to provide an incentive to enable first home buyers to build savings faster by accessing the low tax environment of superannuation. This measure is intended to encourage home ownership by allowing voluntary contributions to superannuation made by first home buyers from 1 July 2017, along with associated deemed earnings, to be withdrawn for a first home deposit.
Contributions can be made from 1 July 2017 and a total of $30,000 can be contributed, with a maximum of $15,000 in a year, within existing caps.
Withdrawals will be allowed from 1 July 2018 onwards. Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30 per cent offset.
This is intended to enable first home buyers to build savings more quickly for a home deposit and both members of a couple can take advantage of this measure to buy their first home.
Superannuation concession for downsizing
The Government will encourage older Australians to free up housing stock by enabling downsizers over the age of 65 to make a non-concessional contribution of up to $300,000 into their superannuation fund from the proceeds of the sale of their principal home. This measure will apply to sales of a principal residence owned for the past ten or more years.
These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions.
Both members of a couple will be able to take advantage of this measure for the same home.
This measure is aimed at reducing a barrier to downsizing for older people, and enabling more effective use of the housing stock by freeing up larger homes for younger, growing families.
Capital gains tax discount
The Government announced the capital gains tax discount will be increased from 50% to 60% for resident Australians who choose to invest in affordable housing.
From 1 July 2017, the Government will enable Managed Investment Trusts (MITs) to invest in affordable housing. MITs allow investors to pool their funds to invest in primarily passive investments and have them managed by a professional manager. The MIT will be able to acquire, construct or redevelop the property but must derive at least 80 per cent of its assessable income from affordable housing.
Qualifying housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate. For investors to receive concessional taxation treatment through a MIT, the affordable housing must be available for rent for at least 10 years.
Under the MIT withholding tax regime, non-resident investors that are a resident of a country with which Australia has an effective exchange of information treaty are subject to a reduced rate of withholding tax (generally 15%) on fund payments from the MIT. Resident investors are taxed at their marginal tax rates, with capital gains remaining eligible for the capital gains tax discount.
Up to 20 per cent of the income of the MIT may be derived from other eligible investment activities permitted under the existing MIT rules in the income tax law. If this is breached, or less than 80 per cent of the MIT’s income is from affordable housing in an income year, the non-resident investor will be liable to pay withholding tax at 30 per cent on investment returns for that income year.
Properties held for rent as affordable housing for less than 10 years will be subject to a 30 per cent withholding tax rate on the net capital gains arising from the disposal of those assets.
Deductions for travel expenses
From 1 July 2017, the Government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property. This measure is aimed at ensuring tax concessions are better targeted by addressing concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes.
However expenses of engaging third parties such as real estate agents for property management services will remain deductible.
New limits to plant and equipment deductions
With effect from 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate. This integrity measure is intended to address concerns that some items of plant and equipment are being depreciated by successive investors in excess of their actual value. The items are usually mechanical fixtures or those which can be easily removed from a property such as dishwashers and ceiling fans.
Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors. The changes will apply prospectively, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30pm (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
Changes for foreign home owners
The Government will introduce an annual charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months a year.
The charge will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor and will apply to foreigners who make a foreign investment application for residential property from 7:30PM (AEST) on 9 May 2017.
It is intended to encourage foreign owners of residential property to make properties available for rent where they are not a resident and so increase the dwellings available for Australians to live in.
The Government will also extend Australia’s foreign resident capital gains tax (CGT) regime by:
- denying foreign and temporary tax residents access to the CGT main residence exemption from 7:30PM (AEST) on 9 May 2017, however existing properties held before this will be grandfathered until 30 June 2019;
- increasing the CGT withholding rate for foreign tax residents from 10 per cent to 12.5 per cent from 1 July 2017; and
- reducing the CGT withholding threshold for foreign tax residents from $2 million to $750,000 from 1 July 2017.
The Government will apply the principal asset test on an associate inclusive basis from 7:30PM (AEST) on 9 May 2017, for foreign tax residents with indirect interests in Australian real property. This will ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property.
Foreign ownership cap
The Government will introduce a 50 per cent cap on foreign ownership in new developments through a condition on New Dwelling Exemption Certificates, where the application for the certificate was made from 7:30PM (AEST) on 9 May 2017.
This measure will ensure that a minimum proportion of developments are available for Australians to purchase. Current New Dwelling Exemption Certificates granted to property developers, which act as a pre-approval allowing the sale of new dwellings in a specified development to foreign persons without each foreign purchaser seeking their own foreign investment approval, do not limit the amount of sales that may be made to foreign purchasers.
The Government will provide funding to the Treasury to establish the National Housing Finance and Investment Corporation (NHFIC) which will operate an affordable housing bond aggregator. This is intended to provide cheaper and longer term finance for community housing providers by aggregating their borrowing requirements and issuing bonds to the wholesale market at a lower cost and longer tenor than bank finance.
National Housing Infrastructure Facility
The new National Housing Finance and Investment Corporation will administer a $1 billion National Housing Infrastructure Facility, which will provide financial assistance to local government from 2018-19 for infrastructure that supports new housing, particularly affordable housing. The NHIF will provide financial assistance over five years from 2018-19, including concessional loans, grants, and other financial instruments.
New National Housing and Homelessness Agreement
The Government will work with States and Territories to reform the National Affordable Housing Agreement and provide ongoing indexed funding for a new National Housing and Homelessness Agreement (NHHA) from 2018. The Government will provide additional funds over three years from 2018-19 to fund ongoing homelessness support services, with funding to be matched by State and Territory governments.
The Government will provide $6 million over four years from 2017-18 towards a national rollout of the Homes for Homes initiative, established by The Big Issue to encourage property vendors to donate 0.1 per cent of sale proceeds to fund social and affordable housing projects across Australia.
Social Impact Investments
The Government will provide funding over 10 years from 2017-18 to partner State and Territory Governments to trial Social Impact Investments in funding some innovative programs aimed at improving housing and welfare outcomes for young people at risk of homelessness. The trial will target priority groups, including those supported by specialist homelessness services, leaving the out-of-home care system or institutions such as juvenile detention.
Purchasers of new residential properties to remit GST
Purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO as part of settlement from 1 July 2018.
Under the current law (where the GST is included in the purchase price and the developer remits the GST to the ATO), some developers are failing to remit the GST to the ATO despite having claimed GST credits on their construction costs. The new measure is an integrity measure to strengthen compliance with the GST law.
GST – removing the double taxation of digital currency
The Budget aligns the GST treatment of digital currency (such as Bitcoin) with money from 1 July 2017.
Digital currency is currently treated as intangible property for GST purposes. Consumers who use digital currencies as payment can effectively bear GST twice: once on the purchase of the digital currency and again on its use in exchange for other goods and services subject to GST.
This measure will ensure purchases of digital currency are no longer subject to the GST. Removing double taxation on digital currencies will remove an obstacle for the Financial Technology (Fintech) sector to grow in Australia. It is estimated to have a small impact on GST collections and associated payments to the States and Territories over the forward estimates period.
Diplomatic concessions under Indirect Tax Concession Scheme extended
Access to refunds of indirect tax (including GST, fuel and alcohol taxes) under the Indirect Tax Concession Scheme has been extended to the diplomatic and consular representations of Belarus, Cuba, Zambia and Ethiopia. The diplomatic and consular representations of Mauritius and Thailand have had their access expanded.
These concessions are provided in accordance with Australia’s international obligations in relation to diplomatic missions and consular posts. Each of these changes will have effect from a time specified by the Minister for Foreign Affairs.
Foreign investment framework to be clarified and simplified
The foreign investment framework will be clarified and simplified with effect from 1 July 2017. This will make foreign investor obligations clearer, and allow for more efficient allocation of Foreign Investment Review Board (FIRB) screening resources to higher risk cases.
The amended framework will allow the foreign investment framework to operate more efficiently by facilitating business investment and reducing unnecessary red tape by:
- refining the type of developed commercial property subject to the lower $55m threshold by removing low sensitivity applications from the meaning of “sensitive land”;
- improving the treatment of residential applications by allowing failed off-the-plan purchases to be considered as “new”;
- overcoming limitations with the existing exemption certificate system for individual residential real estate purchases and amending the treatment of residential land used for a commercial purpose;
- streamlining and simplifying foreign investment business application fees, including legislating existing fee waiver arrangements;
- introducing a new exemption certificate that applies to low risk foreign investors;
- clarifying the treatment of developed solar and wind farms; and
- restoring the previous arrangement whereby companies with significant foreign custodian holdings (i.e. legal rather than equitable interest holders) are not subject to notification requirements.
Aligning tax treatment of “roll your own” tobacco and cigarettes
The taxation of “roll your own” (“RYO”) tobacco and other products (e.g. cigars) will be adjusted so that manufactured cigarettes and RYO tobacco cigarettes receive comparable tax treatment. The adjustment to the rates of duty will better align the tax on tobacco regardless of its form.
The adjustment will be phased in over four years, from 2017 to 2020, to match the timing of the previously legislated 12.5% tobacco tax increases, which occur on 1 September each year. The first of the four annual changes will occur on 1 September 2017.
Tax integrity package – banks using hybrids for tax minimisation
New integrity rules will apply OECD hybrid mismatch rules to hybrid tax mismatches that occur in cross-border transactions relating to regulatory capital known as additional Tier 1 (AT1). The measure is intended to clamp down on aggressive structures used by banks and financial institutions for tax minimisation by:
- preventing returns on AT1 capital from carrying franking credits where such returns are tax deductible in a foreign jurisdiction; and
- where the AT1 capital is not wholly used in the offshore operations of the issuer, requiring the franking account of the issuer to be debited as if the returns were to be franked.
The measure will apply to returns on AT1 instruments paid from the later of 1 January 2018 or six months after assent, subject to transitional arrangements. These transitional arrangements will apply to AT1 instruments issued before 7.30pm (AEST) on 9 May 2017 such that the measure will not apply to returns paid before the next call date of the instrument occurring after 7.30pm (AEST) on 9 May 2017.
Interim report into black economy
The government has accepted the following recommendations by the Black Economy Taskforce for immediate action:
- extending the taxable payment reporting system (TPRS) to two high-risk industries – cleaning and couriers – to ensure payments made to contractors in these sectors are reported to the ATO;
- banning the manufacture, distribution, possession, use or sale of sales suppression technology. This technology allows businesses to understate their income and has been identified as a threat to the integrity of the tax system; and
- providing funding for ATO audit and lodgement activities to better target black economy risks.
Payments reporting extended to couriers and cleaners
The government will extend the taxable payments reporting system (TPRS) to contractors in the courier and cleaning industries. The measure will have effect from 1 July 2018.
The TPRS is a transparency measure that already operates in the building and construction industry, where it has resulted in improved contractor compliance. Under the TPRS, businesses are required to report payments they make to contractors (individual and total for the year) to the ATO.
This measure brings payments to contractors in the courier and cleaning industries into line with wages paid to similar workers, which are reported to the ATO. Businesses in these industries will need to ensure that they collect information from 1 July 2018, with the first annual report required in August 2019.
Sales suppression technology to be prohibited
The government will act to prohibit the manufacture, distribution, possession, use or sale of electronic point of sale (POS) sales suppression technology and software. The prohibition will have effect from the date of assent of the enabling legislation.
Such technology and software delete selected transactions from electronic records in POS equipment thereby allowing businesses to understate their income. The income from these transactions is not reported to the ATO, and tax on the income is not paid.
Black Economy Taskforce funding extended
The government will provide additional funds to extend the ATO’s audit and compliance programs targeting black economy risks by providing a further year of funding for the ATO’s “Strengthening Foundations” and “Level Playing Field” programs.
“Strengthening Foundations” focuses on businesses with a turnover between $2m and $15m that have disengaged from the tax system. The “Level Playing Field” program involves audit, review and intensive follow up and targets small businesses with turnover below $2m.
These programs are directed at changing black economy and related behaviours such as non-lodgement, omission of income and non-payment of employer obligations.
Funding to address serious and organised tax crime
The government will provide funding to the ATO to target serious and organised crime in the tax system. This extends an existing measure by a further four years to 30 June 2021.
Publicising tax integrity measures
In a campaign intended to demonstrate Australia’s international leadership in addressing multinational tax avoidance, the government will provide $8.1m over two years from 2016-17 to communicate the key tax integrity measures to the Australian business community and the general public.