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Budget Update 2018-2019

Late last night, Scott Morrison (Federal Treasurer), unveiled his highly anticipated Federal Budget for 2018/19. The Budget emphasises on personal tax cuts, investments in road and railway infrastructure, and measures to responsibly repair the budget deficit. Additionally, the Budget addresses changes to Superannuation, business taxation and methods to tackle the Black Economy.

INDIVIDUALS

  • A three-step, seven-year plan will be implemented to introduce a low and middle income tax (LMITO) offset to provide relief from bracket creep and to remove the 37% personal income tax bracket.
  • The LMITO will be introduced as a non-refundable tax offset of up to $530 to resident low and middle income taxpayers from 2018/19 to 2021/22.
  • The Medicare Levy low-income threshold will increase for the 2017/18 income year for singles, families, seniors and pensioners.
  • The increase in the Medicare Levy from 2% to 2.5% of taxable income as proposed in the 2017/18 Budget will not be implemented.
  • No changes to rules around work-related deductions.

 

BUSINESS INCOME TAX

  • Major changes to the R&D tax incentive will commence for income years starting 1 July 2018. A maximum cash refund will apply for some entities.
  • The $20,000 instant (capital) asset write-off deduction for small businesses will be extended by another year to 30 June 2019.
  • Amendments to Div 7A will reinforce the unpaid present entitlements (UPE) rules from 1 July 2019. This date is also the start date of targeted amendments to Div 7A.
  • Deductions will be denied for expenses associated with holding vacant land not genuinely used to earn assessable income.
  • From 1 July 2019, payments to employees and contractors are no longer deductible where the amounts paid did not have PAYG withheld, despite the PAYG withholding requirements applying to these payments.
  • Tax exempt entities that become taxable after 8 May 2018 will not be able to claim tax deductions that arise on the repayment of the principal of a concessional loan.
  • The 50% capital gains discount for managed investment trusts (MITs) and attribution MITs (AMITs) will be removed at the trust level.
  • The concessional tax rates for the income of minors from testamentary trusts will not be available for trust assets unrelated to the deceased estate.

 

SUPERANNUATION

  • The maximum number of allowable members in SMSFs and small APRA funds will be increased to six members from 1 July 2019.
  • The annual audit requirement for SMSFs with a history of good compliance will be changed to a three yearly requirement.
  • Individuals who have multiple employers and whose income exceeds $263,157 will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018.
  • Effective from 1 July 2018, individuals must confirm in their income tax returns that they have complied with the “notice of intent” requirements in relation to their personal superannuation contributions.
  • For people aged 65-74 with superannuation balances below $300,000, an exemption from the work test for voluntary contributions to superannuation will apply for the first year that they do not meet the work test requirements. This will be introduced from 1 July 2019.
  • Insurance arrangements for certain superannuation members (e.g. young people and low-income earners) will be changed from being a default framework to being offered on an opt-in basis.
  • Passive fees charged by superannuation funds on accounts with balances below $6,000 will be capped at 3% annually, and exit fees on all superannuation accounts will be banned.

 

TACKLING THE BLACK ECONOMY

  • A package will be introduced to reform the corporations and tax laws to deter and disrupt illegal phoenix activity and black economy activity.
  • The taxable payments reporting system for payments made to contractors will expand to include road freight transport, security services, and computer system design industries, effective from 1 July 2019.
  • From 1 July 2019, business seeking to tender for Australian government contracts above $4 million (including GST) will need to provide a statement of compliance with their tax obligations.
  • From 1 July 2019, businesses can no longer receive cash payments for goods and services above $10,000.

 

OTHER MATTERS

  • The luxury car tax on cars re-imported into Australia following a refurbishment overseas, will be removed from 1 January 2019.
  • Measures will be introduced to combat illicit tobacco in Australia, including collecting tobacco duties and taxes upon importation.
  • Customs tariffs will be removed from placebos and clinical trial kits that are imported into Australia, effective from 1 July 2018.
  • Access to refunds of indirect taxes, including GST, fuel and alcohol taxes under the Indirect Tax Concession Scheme has been extended.
  • There are no changes to negative gearing, dividend imputation/franking and GST.
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New FBT rates for the 2018/19 FBT year

Editor: The ATO has released Taxation Determinations setting out the following rates for the FBT year commencing on 1 April 2018.

 

FBT:  Benchmark interest rate

The benchmark interest rate for the 2018/19 FBT year is 5.20% p.a., which is used to calculate the taxable value of:

  • a loan fringe benefit; and
  • a car fringe benefit where an employer chooses to value the benefit using the operating cost method.

Example

On 1 April 2018, an employer lends an employee $50,000 for five years at an interest rate of 5% p.a., with interest being charged and paid 6 monthly, and no principal repaid until the end of the loan.

The actual interest payable by the employee for the current year is $2,500 ($50,000 × 5%).  The notional interest, with a 5.20% benchmark rate, is $2,600.

Therefore, the taxable value of the loan fringe benefit is $100 (i.e., $2,600 – $2,500).

FBT: Cents per kilometre basis

The rates to be applied where the cents per kilometre basis is used for the 2018/19 FBT year in respect of the private use of a vehicle (other than a car) are:

Engine capacity Rate per kilometre
0 – 2,500cc 54 cents
Over 2,500cc 65 cents
Motorcycles 16 cents

 

FBT: Record keeping exemption threshold

The small business record keeping exemption threshold for the 2018/19 FBT year is $8,552.

Editor: The ATO has also released Taxation Determinations setting out the indexation factors to value non-remote housing, and the amounts the ATO considers reasonable for food and drink expenses incurred by employees receiving a living-away-from-home allowance (LAFHA) fringe benefit, for the FBT year commencing on 1 April 2018.

 

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Employee denied deductions for work-related expenses

An employee photographer has been denied deductions for travel expenses (when travelling with his family), and other purported work related expenses.

The AAT held that the travel expenses were primarily incurred for the purposes of a family trip or holiday and were therefore non-deductible, as they were private and domestic in nature.

Also, in relation to the taxpayer’s reliance on bank statements in the absence of invoices and receipts, the AAT observed that “evidence of the mere transfer of funds, be it by way of bank transfer or by any other means, is not sufficiently informative of the actual character of an expense”, so the other disputed expenses could not be claimed as allowable deductions.

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Get ready for Single Touch Payroll

Single Touch Payroll (or ‘STP’) is mandatory for ‘substantial employers’ (being those with 20 or more employees) from 1 July 2018.

All employers are required to count the number of employees on their payroll on 1 April 2018 to find out if they are a substantial employer (note that this can be done after 1 April, but they need to count the employees who were on their payroll on 1 April).

They must count each employee (not the full time equivalent), including full-time, part-time and casual employees, as well as those employees based overseas or absent or on leave (paid or unpaid).

Employers that are part of a company group must include the total number of employees employed by all member companies of the wholly-owned group.

However, employers don’t have to include the following in the headcount:

  • any employees who ceased work before 1 April;
  • casual employees who did not work in March;
  • independent contractors;
  • staff provided by a third-party labour hire organisation;
  • company directors or office holders; or
  • religious practitioners.

Note that, although directors, office holders and religious practitioners are not included in the headcount, if the employer starts reporting through STP, the payment information of these individuals will need to be reported (because the payments are subject to withholding and are currently reported in the Individual non-business payment summary).

Employers don’t need to send the ATO the headcount information, but they may want to keep a copy for their own records.

Once an employer becomes a substantial employer, they will need to continue reporting through STP even if their employee numbers drop to 19 or less (unless they apply for and are granted an exemption).

Editor: Please contact our office if you need any assistance regarding the new STP regime.

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Continued ATO focus on holiday home rentals

The ATO has recently advised that they are “setting their sights on the large number of mistakes, errors and false claims made by rental property owners who use their own property for personal holidays”.

While it confirms that the private use of holiday homes by friends and family is entirely legitimate, the ATO states that such use reduces a taxpayer’s ability to earn income from the property, and therefore impacts on (i.e., reduces) the amount of claimable deductions.

As a result, the ATO has reminded holiday home owners that:

  • They can only claim deductions for a holiday home with respect to periods it is genuinely available for rent.
  • They cannot place unreasonable conditions on prospective tenants/renters, set rental rates above market value, or fail to advertise a holiday home in a manner that targets people who would be interested in it and still claim that the property was genuinely available for rent.
  • Where a property is rented to friends or relatives at ‘mates rates’, they can only claim deductions for expenses up to the amount of the income received.
  • Property owners whose claims are disproportionate to the income received can expect greater scrutiny from the ATO.
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GST withholding measures now law

Legislation has been passed to “clamp down” on GST evasion in the property development sector.

From 1 July 2018, purchasers of new residential premises and new residential subdivisions will generally be required to withhold the GST on the purchase price at settlement and pay it directly to the ATO.

Property developers will also need to give written notification to purchasers regarding whether or not they need to withhold.

The new obligations are primarily aimed at ending the practice of some developers collecting GST on new properties before dissolving their business prior to remitting such tax to the ATO.

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No need to actually ‘downsize’ for ‘downsizer contributions’

From 1 July 2018, individuals aged 65 or over may use the proceeds from the sale of an eligible dwelling that was their main residence to make superannuation contributions (referred to as ‘downsizer contributions’), up to a maximum of $300,000 per person (i.e., up to $600,000 per couple), without having to satisfy the age or gainful employment tests that usually apply.

This measure was announced in the 2017/18 Federal Budget, and aims to provide an incentive for older Australians to ‘downsize’ their home.

This, in turn, is expected to reduce pressure on housing affordability by freeing up stocks of larger homes for growing families.

Importantly, it should be noted that there is no requirement for an individual to actually ‘downsize’ by acquiring a smaller property, or to even acquire another property at all.

In this regard, all that is required is that the individual (or their spouse) ‘downsizes’ by selling their ‘main residence’.

The individual can then move into any living situation that suits them, such as aged care, a retirement village, a bigger or smaller dwelling than the one sold, a rental property, or living with family.

Also, the property sold does not need to have been the individual’s (or their spouse’s) main residence during their entire ownership of it, provided the property was owned for at least 10 years and was their main residence at some time during the ownership period.  Therefore, the sale of an investment property that at one stage was their main residence may enable an individual (or their spouse) to make downsizer contributions.

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Commissioner’s speech highlights ATO’s focus areas

Recently, the Commissioner of Taxation highlighted the areas in which the ATO has recently increased its focus, including:

  • undeclared income;
  • individuals’ unexplained wealth or lifestyle;
  • incorrectly claimed private expenses;
  • unpaid superannuation guarantee; and
  • cash-only businesses and those with low usage of merchant banking facilities, with black economy visits to over 2,600 businesses across 8 locations in 2017.

The Commissioner also highlighted ongoing ATO concern with respect to the predicted ‘work-related expense claim gap’, which (at least by the ATO’s estimates) could amount to being greater than the ‘large corporate tax gap’ of $2.5 billion of lost revenue.

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Inactive ABNs will be cancelled by the ATO

The ATO has recently advised that, in an effort to maintain accurate data, the Australian Business Register (or ‘ABR’) periodically checks its records for Australian Business Numbers (‘ABNs’) and automatically cancels those that appear inactive.

Ultimately, a taxpayer’s ABN may be cancelled if they:

  • have told the ATO they stopped their business activity;
  • declared no business income in the last two years; or
  • have not lodged a BAS or an income tax return in more than two years.

To avoid cancellation, the ATO has reminded taxpayers that they need to bring their lodgments up to date, and have reminded sole traders that, regardless of their income, they need to lodge the individual tax return with the supplementary section, as well as the business and professional items schedule.

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Super guarantee payable on ‘public holidays’ and ‘additional hours’!

The Federal Court has held that superannuation guarantee contributions were payable with respect to the ‘additional hours’ and ‘public holidays’ component of annualised salaries paid by BlueScope Steel, on the basis that these particular components formed part of ordinary time earnings (‘OTE’).

Under an enterprise agreement, primarily due to the specific working environment, the employees in question were required to be available (at short notice) 365 days per year and 24 hours per day, including a requirement to work additional hours and public holidays.

As such, the employees were paid an annualised salary, which was made up of a base rate, as well as a component which absorbed all additional payments, such as penalty rates, allowances, public holiday loadings and pay-outs, and payment for additional hours worked outside the normal rostered hours.

However, when paying superannuation, adjustments were made to the annualised salary, so that the additional hours and public holiday components were not included by BlueScope Steel as OTE for superannuation guarantee purposes.

Decision

The Federal Court did not agree with the employer’s adjustments, instead finding that, under the circumstances, the ‘additional hours’ and ‘public holidays’ formed part of an employee’s ‘ordinary hours of work’ and, therefore, were considered OTE for superannuation guarantee purposes.

This remained the case whether or not the employee actually worked the additional hours or the public holidays.

That is, the ordinary conditions of the employee’s work required them to be available outside their rostered shifts and on public holidays (on short notice) and, as this was factored into their annual salary, they were considered ordinary hours for these particular employees.