2017 budget - What does it mean for Peer Wealth clients?
After last year’s wide-reaching and complex superannuation changes, this year’s Budget didn’t announce any big ticket tax reforms. A number of significant tax changes were announced which we will explain below.
Interestingly, the Government is very optimistic on the future of the Australian economy. It was reported that the current cash balance deficit is $29.4bn in the 2017-18 financial year. This is projected to return to a $7.4bn surplus by 2020-21. This is due to a growth in household consumption, exports and a transition to non-mining business investment. This is supported by an increase in forecast tax receipts by increasing the Medicare Levy, introducing a major bank level and improving the integrity of GST on property transactions.
Company tax rates continuing to decrease;
$20k instant asset write-off for small business entities extended by 12 months to 30 June 2018;
Medicare Levy is increasing by 0.5% to 2.5%;
2% budget deficit levy ends 30/06/2017;
First home super saver scheme – salary sacrificing available to help save a home deposit;
Ability to contribute $300k into super from proceeds of downsizing a home;
HELP repayment threshold decreasing to $42k, repayment rates increasing;
Taxable payments reporting extended to courier and cleaning businesses;
Restriction on depreciation deductions for residential real estate investors;
Travel expenses for residential rental properties disallowed from 1/7/2017;
Purchases to pay GST on new residential premises;
$32M provided to the Tax Office to fund black economy audits;
Let’s take a look at these in more detail:
1. Company tax rates continuing to decrease;
The Government is committed to the 10-year Enterprise Tax Plan. They are going to re-introduce the remaining elements of this plan.
The changes that have been currently made (as changed by the Senate and waiting to be approved by the House of Reps) are summarised in the following table:
Income Year Annual Turnover Tax Rate
2017 $10M 27.50%
2018 $25M 27.50%
2019 $50M 27.50%
2020-2024 $50M 27.50%
2025 $50M 27%
2026 $50M 26%
2027+ $50M 25%
Additionally, from last year’s Budget, as passed by the Senate, outlines that from 1 July 2016, the small business entity turnover test will increase from $2M to $10M.
What does this mean? These businesses’ will have access to:
Lower corporate tax rates (see above)
Simplified depreciation rules, i.e. immediate write off for assets costing less than $20,000
Simplified trading stock rules
Simplified method of paying PAYG instalments
Simplified GST reporting
This does NOT affect the eligibility of small business capital gains tax concessions. This will remain available under its existing rules being the $2M turnover test or $6M net asset test.
Unincorporated businesses that have an annual turnover of less than $5M (currently $2M) will receive a tax discount. This will phase in over 10 years from 5% initially to 16%.
This is up to a maximum tax discount of $1,000 per individual in an income year.
2. $20k instant asset write-off for small business entities extended by 12 months to 30 June 2018;
The threshold was due to return back to $1,000 from 1 July 2017. Now, small business entities will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are purchased between 1 July 2017 and 30 June 2018. These assets need to be first used or installed ready for us by 30 June 2018.
From 1 July 2018, the threshold will return back to $1,000.
The good news is; the small business entity turnover test has increased to $10M as per the above table. Therefore, small businesses with turnover between $0 - $10M will now benefit from the $20k instant asset write-off concession.
3. Medicare Levy is increasing by 0.5% to 2.5%;
Medicare Levy will increase to 2.5% from 1 July 2019, up 0.5% from the current 2% levy.
This is to fund the National Disability Insurance Scheme (NDIS) and to guarantee Medicare is fully funded.
4. 2% budget deficit levy ends 30/06/2017;
For the past 3 years, tax payers with income over $180k have been paying a 2% budget deficit levy. This has essentially put their tax rates at 49%.
This 2% levy is due to cease at the end of the 2017 financial year, therefore, from 1 July 2017, tax payers with income over $180k will have a top marginal tax rate of 47% (moving to 47.5% when the Medicare levy increases from 1 July 2019)
5. First home super saver scheme – salary sacrificing available to help save a home deposit;
Individuals can make voluntary contributions of up to $15k per year and $30k in total to their superannuation to later withdraw to purchase a first home. The contributions into superannuation are only taxed at 15%, as opposed to individuals having this taxed at their marginal tax rates. Voluntary contributions and associated earnings that are withdrawn will be taxed at a person’s marginal tax rate less a 30% offset. Withdrawals will be allowed form 1 July 2018 onwards. The measure will assist first home buyers to save a deposit for their home faster.
6. Ability to contribute $300k into super from proceeds of downsizing a home;
From 1 July 2018, individuals aged 65 and over will be able to downsize their family home and place proceeds up to $300K per member into their superannuation fund without breaching any of the current superannuation caps, work test and age test. The measure will apply to a principal place of residence held for a minimum of 10 years. This means even if any individual has a total superannuation balance of $1.6M or more they will not be restrained from making an after-tax contribution with their house proceeds. This exemption also extends to the annual after-tax contribution limit which is current $100k.
7. HELP repayment threshold decreasing to $42k, repayment rates increasing;
From 1 January 2018, higher education HELP repayment changes have been announced. These changes are set to have students repay their HELP debt quicker.
Currently, HELP debtors are not required to start paying back their HELP loan until their annual income reaches $55,874 (in the 2018 year). These individuals are then required to make a repayment of 4% of their income, rising to 8% for people with incomes over $101,900.
Moving forward, the minimum repayment threshold will reduce to only $42,000 from 1 July 2018 with only a 1% repayment rate. The maximum threshold will increase to $119,882 and the repayment rate will be 10%.
8. Taxable payments reporting extended to courier and cleaning businesses;
Currently the system only covers supplies of building and contribution services to a purchaser who is carrying on a business that is primarily (over 50%) in the building and contribution industry.
Moving forward, from 1 July 2018, the Government will extend this to contractors in the courier and cleaning industries.
The purchased is required to give the Tax Office a report containing the suppliers name, ABN and total payments made to the supplier.
9. Restriction on depreciation deductions for residential real estate investors;
Currently the Government have concerns that some investors are claiming plant and equipment depreciation by successive investors in excess of their actual value.
Moving forward, investors who purchase plant & equipment for their residential investment property after 9 May 2017 will be able to claim deprecation over the effective life of the asset (as per usual).
Subsequent owners of the property will not be able to claim deductions for plant & equipment that was purchased by the previous owner. The costs will only form part of the cost base of the property for when the owner sells the property.
10. Travel expenses for residential rental properties disallowed from 1/7/2017;
The Government also has concerns that many taxpayers have been claiming travel expenses (to inspect, maintain or collect rent) that doesn’t correctly apportion a private percentage for the trip.
From 1 July 2017, no travel expenses will be able to be claimed for a residential rental property.
11. Purchases to pay GST on new residential premises;
Purchasers of newly constructed residential property will be required to pay the GST resulting from their transaction directly to the Tax Office on settlement.
Currently, GST is included on the purchase price by the seller/developer is required to remit the GST to the Tax Office. The Government is concerned with the amount of developers that are claiming GST credits on the construction costs but are not remitting the GST on the sale price.
These changes start on 1 July 2018.
12. $32M provided to the Tax Office to fund black economy audits;
The Government is committed to ensuring small businesses are paying their fair share of tax. The Government currently has two programs to help with this, the “Strengthening Foundations” and “Level Playing Field” programs.
Strengthening Foundations targets businesses with a turnover between $2M and $15M and the Level Playing Field targets businesses with a turnover below $2M.
They both target businesses that have ‘disengaged’ from the tax system, i.e. these tax payers have a history of non-lodgements, omission of income and non-payment of employer obligations like PAYGW and superannuation.