The 2017 Budget
The 2017 Budget was released last night with few surprises for individuals and small businesses. The government re-affirmed a number of superannuation changes alluded to prior to the budget and introduced a number of smaller measures that clients should be aware of in the lead up to 30 June.
Under the current law, a small business can claim an immediate tax deduction for ‘individual’ assets costing less than $20,000 (GST exclusive). This immediate deduction applies to assets acquired at or after 7:30pm on 12 May 2015 and ordered, used or installed ready for use by 30 June 2018.
This timeframe has now been extended to 30 June 2018 and will allow small businesses a further year to claim immediate deductions for assets under $20,000. For assets acquired before 12 May 2015 or after 30 June 2018, the immediate deduction can only be claimed if the asset’s value is below $1,000.
Capital gains tax (CGT)
The Budget announced a number of capital gains tax measures that are important to keep in mind, namely:
- the small business CGT concessions will be amended to ensure that the concessions cannot be utilised to shelter gains on assets held by small businesses which are unrelated to that small business (from 1 July 2017)
- individuals who invest in qualifying affordable housing will qualify for a 60% CGT discount on the sale of that property (increasing the 50% general discount), and
- foreign and temporary tax residents will not longer be able to access the main residence exemption from 7:30pm on 9 May 2017. In this respect however, foreign and temporary residents will be able to continue to access this exemption until 30 June 2019.
The impact of the budget on property investors and owners from 1 July 2017 include:
- travel expenses that were previously deductible where related to inspecting, maintaining or collecting rent for a residential rental property are no longer permitted. This is to counter taxpayers claiming such deductions without correct apportionment and where inappropriately claimed in circumstances where the travel was for private purposes
- foreign owners of residential property will now be hit with an annual levy where the property is underutilised and not occupied or genuinely made available for rent for at least six months per year. The amount will be equivalent to the relevant foreign investment application fee imposed at the time of acquisition and is designed to encourage properties being made available for rent and in turn increase the volume of rental stock in the housing
- a reduction in the CGT withholding threshold for foreign tax residents from $2 million to $750,000, from 1 July 2017, which will mean that most buyers in the capital cities will be required to obtain a clearance certificate at the time of settlement and advisers should be aware of this requirement to ensure clients do not overlook this requirement
- plant and equipment depreciation deductions to outlays by investors will be limited to such outlays actually incurred by that owner in residential real estate, which would include items such as mechanical fixtures or easily removable property like dishwashers and ceiling fans. Where existing property is sold, the value for acquisitions of plant and equipment will be reflected in the cost base for capital gains tax purposes by any subsequent buyers, and
- effective from 1 July 2018, purchasers of newly constructed residential properties or new subdivisions will be required to remit GST directly to the Australian Taxation Office (ATO) as part of settlement. This will likely result in practical changes to settlement processes whereby purchases of property will withhold any GST payable (which would otherwise have been paid to the seller as part of the purchase price) to make arrangements for direct remittance to the ATO.
As discussed previously on Inside Word, superannuation rules will undergo major legislative reform from 1 July 2017. The Budget has announced a small number of superannuation measures to assist with the implementation process of these changes to superannuation laws.
From 1 July 2017:
- if your client is aged 65 or over, they will be entitled to make a non-concessional contribution of up to $300,000 towards their superannuation fund, and
- the outstanding balance of limited recourse borrowing arrangements (LBRAs) will be included in a member’s total superannuation balance and counted towards the $1.6 million transfer balance cap (to the extent those payments are paid out of accumulation phase).
The integrity measures for LRBAs will have a significant impact on self managed super funds which have LRBA properties in pension phase which require amounts to be commuted from accumulation phase to fund repayments of the borrowings. However, there are structuring options which could allow LRBA properties to be transferred out superannuation without capital gains or duty prior to 1 July 2017. Look out for a further publication from us on this.
In addition, from 1 July 2018:
- amendments will be made to the non-arm’s length income provisions which will effectively reduce opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings through lower expenses, and
- a ‘first home super saver scheme’ will be introduced – allowing first home buyers to make additional voluntary contributions to their superannuation funds and withdraw those contributions for a first home deposit (along with associated deemed earnings).
It is also worth noting that the current tax relief for merging superannuation funds will be extended up until 1 July 2020.
Personal income tax – and implications for business
From a personal income tax perspective, one of the few changes of note coming out of the 2017 budget was the increase in the Medicare levy, which effective 1 July 2019, will increase by half a percentage point from 2.0% to 2.5%. Other tax rates that are linked to the top personal tax rate will also increase correspondingly. Importantly, exemptions from the Medicare levy continue to remain in place and low income earners may continue to receive relief through existing measures.
Also of note is the fact that the Medicare levy surcharge (MLS) remains unchanged (and therefore continues to apply only to those without private health insurance), despite some suggestions the 2017 budget may extend the MLS to particular high-income earners with private health insurance.
The increase in the Medicare levy highlights the difference between the general and small business company tax rates and the top marginal rates for individuals, continuing the incentive to restructure business operations from trust to corporate structures.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.