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Tax Reform: Highlights from the Federal Budget 2018-19

08.05.2018

On Tuesday, 8 May 2018, Treasurer Scott Morrison handed down the 2018-19 Federal Budget (the Budget). It was a budget with promises to deliver a stronger economy, more jobs, essential services and backing for businesses to invest. The Treasurer confirmed that the Government continues to implement its ten year $75 billion investment in transport infrastructure – which includes investing $24.5 billion into new major transport projects and initiatives, such as the Melbourne Airport Rail Link, the Bruce Highway, Perth Metronet and Pacific Highway Coffs Harbour Bypass.

There was no major tax reform in the Budget, but as with every budget there were a number of tax changes announced. In this MinterEllison tax bulletin, we highlight the key tax measures which have emerged in the Budget, focusing on business taxpayers and those measures which have been announced for the first time on Budget night.


Key takeouts


The Federal Budget was released tonight, with no significant unexpected tax reforms.

 

There was a focus on overhauling research and development tax incentives.

 

Other business taxation measures focused on thin capitalisation, small business and private trusts.

 

A number of previously announced tax measures were referred to, including the stapled structure proposals.

 

There was also a focus on funding major transport projects and initiatives.

 

Economics

The Treasurer reported an underlying cash balance deficit of $14.5 billion for the year ended 30 June 2019, which is projected to improve to a $2.2 billion surplus by 2020. The Government has forecast that payments as a share of GDP will return to below the 30‒year average of 24.8% in 2020‒21, the first time this has occurred since 2012‒13 as a result of savings measures totalling $41 billion since the last election.

Growth is estimated to be 3% in the year ended 30 June 2019 and 3% in 2020, supporting the Government's multi-step seven-year personal tax relief plan.
Among the more significant tax changes outlined in the Budget, the Government has announced the following:

Large Business taxation measures

Overhaul of the Research and Development (R&D) Tax Incentive

The Government has elected to adopt a number of the recommendations of the Finkel review, in order to refocus the R&D Tax Incentive and encourage large business to increase their levels of R&D activity. A number of administrative changes have also been proposed to reduce inappropriate R&D claims.

For large businesses with greater than $20m turnover, the R&D Tax Incentive premium will be tied to the 'intensity' of R&D which is determined by reference to the proportion of R&D related expenditure to total company expenditure. The higher the R&D intensity, the higher the R&D premium.

The R&D premium is added to the company's tax rate to determine the tax offset - as shown in the table below. As the premium is over and above the claimant's tax rate, any future reductions in the company tax rate will be accompanied by reductions to the R&D incentive.

 

R&D Intensity R&D tax offset
Corporate tax rate of 27.5%  Corporate tax rate of 30%
 0-2% (first 2%)  31.5% 34% 
 2-5% (next 3%)  34%  36.5%
 5-10% (next 5%)  36.5%  39%
 Above 10% (amounts >10%)  40%  42.5%

 

Surprisingly, a 'collaboration premium' for collaborating with publicly funded research institutions, which had been expected in some quarters, has not eventuated at this stage.

In addition to changes to the rate, the maximum threshold for R&D Tax Incentive premium for large businesses has also been increased from $100 million to $150 million.

A number of other changes are proposed to improve efficiency and administration

  • Allowing the ATO to publish names and details of R&D claimants, and amounts claimed.
  • Allowing Innovation and Science Australia (ISA), which administers part of the program, to provide binding public findings to provide guidance to R&D claimants. It is not clear whether these binding public findings will be binding only on the ISA (similar to ATO rulings), or whether they will also be binding on claimants.
  • Imposing a three month limit on extensions of time from due dates for applications, registrations and reviews.
  • Strengthening R&D specific anti-avoidance rules.
  • Providing additional resources to police R&D claims.

The changes will apply to income years commencing on or after 1 July 2018.

Significant Global Entities

The definition of a 'significant global entity' (SGE) will be amended.

The current definition only applies where an entity is a member of a group headed by a public company or a private company required to provide consolidated financial statements.

The definition will now be expanded to include members of large multinational groups headed by private companies, trusts and partnerships. It will also include members of groups that are headed by investment entities. What is meant by investment entities is not altogether clear at this stage.

The amendments are not, in our opinion, controversial as they arguably ensure the application of these tax integrity measures operate as intended - so that multinational businesses ultimately owned by private entities or investment entities are not inadvertently excluded from their reach.

These changes will be relevant in determining whether an entity is required to prepare country-by-country (CbC) reports, and whether it is subject to the application of tax integrity measures such as the Diverted Profits Tax (DPT) and Multinational Anti-Avoidance Law (MAAL).

The changes will apply to income years commencing on or after 1 July 2018.

Stapled Structures

The Government simply re-announced its proposed stapled structure changes, which were originally announced on 27 March 2018. There are extensive changes in these announcements, that go well beyond stapled structures, with one of the main changes being that the corporate tax rate (currently 30%) will be applied to certain distributions to non-residents by Managed Investment Trusts (MITs) where those distributions represent trading income which has been converted into passive income.

MITs

In a further minor tweak to the MIT/AMIT regimes, MITs and AMITs will be prevented from applying the 50% capital gains tax (CGT) discount at the trust level from 1 July 2019.

This measure is not surprising as it was generally considered an anomaly that beneficiaries that are not otherwise entitled to the CGT discount in their own right would be able to obtain the indirect benefit of the discount via it applying at the trust level.

Thin Capitalisation

In a relatively significant, but somewhat expected, change to the thin capitalisation rules, they will be tightened so that it will only be possible to revalue assets for thin capitalisation purposes if the revaluation is also included in an entity's financial statements.

Currently it is possible for a company to revalue its assets for thin capitalisation purposes, even though the assets remain in the entity's financial statements at their historic cost (such as internally generated goodwill).

There is often a reluctance to include such revaluations in the financial statements, because they change regularly, and impact the P&L via increased depreciation and amortisation charges.

This asymmetry between a taxpayer's accounts and thin capitalisation position has been a matter of contention between some taxpayers and the ATO.

This change will adversely impact a number of industries, but in our experience the mining and oil and gas sectors are the most significant users of the revaluation method. The measure will apply to income years commencing after 1 July 2019.

GST and hotel bookings

Continuing its recent charge against offshore suppliers, the Government announced it will close an exemption that allows offshore sellers of hotel accommodation in Australia to disregard such sales when calculating their GST turnover. The measure will apply to sales made from 1 July 2019, with transitional provisions applying to all sales made prior to this date.

Currently, offshore sellers of Australian hotel accommodation are exempt from including such sales in their GST turnover, often meaning that they may not be required to register for GST. In line with similar measures targeting offshore suppliers, the aim of this measure is to level the playing field between Australian and offshore suppliers, so that the same GST considerations should apply whether or not the hotel accommodation is booked through an Australian or offshore seller.

Under this proposed measure, the onus will be on non-resident suppliers to register for GST where their GST turnover is A$75,000 or more and to collect and remit GST on their supplies of bookings of Australian hotel accommodation. No draft legislation has been released with the Budget, but we anticipate amendments will be made at least to remove the specific exemptions contained in the GST turnover provisions. This change will require the unanimous agreement of the States and Territories prior to enactment.

It will be interesting to see how this measure will be implemented and enforced. We anticipate there will be similar challenges regarding the enforcement of this measure as are currently being experienced with the enforcement of the enacted measures affecting offshore suppliers of digital products and low value goods. 

Digital Economy

The Government will soon release a discussion paper that will explore options for taxing digital business in Australia.

Small business and private trust related taxation measures

Overhaul of the R&D Tax Incentive – small business changes

Changes have also been made to the R&D Tax Incentive which will impact on small businesses which rely on the incentive.

The refund available to small business (less than $20m turnover) will be capped at $4 million per year, with excess amounts to be carried forward as a non-refundable tax offset in subsequent years.

This cap on the refundable component of the offset will be a significant change for small and medium businesses investing in research projects.

Clinical trials will be exempt from this threshold.

Division 7A integrity rule

The law will be amended to ensure that where a related private company beneficiary is made entitled to a share of trust income but is not paid that amount, this will come within the scope of Division 7A from 1 July 2019. In Taxation Ruling TR 2010/3 (TR 2010/3), the Commissioner currently takes the view that 'unpaid present entitlements' of a private company are capable of becoming loans that are subject to Division 7A. It will be interesting to see if the proposed law reflects the Commissioner's current view in TR 2010/3 or whether that view is limited. The Government announced that the start date of the Ten Year Enterprise Tax Plan — targeted amendments to Division 7A measure that was announced in the 2016-17 Budget will be extended from 1 July 2018 to 1 July 2019.

Circular trust distributions

A specific anti-avoidance rule that applies to closely held trusts that engage in circular trust distributions will be extended to family trusts. Broadly, the measure will impose tax on certain distributions (at the top marginal tax rate plus Medicare levy) where family trusts that are beneficiaries of each other 'round robin' such distributions in arrangements that avoid tax being paid on the amount. This is not a surprising measure given the Commissioner's focus on trusts and his concerns with 'profit washing' schemes.

Higher instant asset write-off threshold for small business permanent

In the 2017-2018 Budget, the current asset write-off concession for small business entities has been extended to 30 June 2018. The earlier intention of the extension would allow small businesses that acquire eligible depreciating assets (up to $20,000) prior to 30 June 2018 to claim a 100% immediate deduction for their cost. It was announced in the Budget that the $20,000 threshold will be extended for a further year to assets first used or installed ready for use by 30 June 2019. The extended measure will only be available to entities with a turnover of less than $10 million.

Personal taxation measures

Personal Income Tax Plan

The Government announced the 'Personal Income Tax Plan' which over the next 7 years aims to deliver lower, fairer and simpler personal income tax in Australia via 3 steps:

Step 1: Introduction of the Low and Middle Income Tax Offset

The Low and Middle Income Tax Offset is a non-refundable tax offset that will be available for the income years ending 30 June 2019 to 30 June 2022. The offset will depend on the amount of taxable income earned by an individual taxpayer in a given income year.

The Government has confirmed that the Low and Middle Income Tax Offset will be a tax benefit that will be available in addition to the existing Low Income Tax Offset.

Step 2: Bracket creep relief for middle income earners

The Government will implement the following measures designed to protect middle income earners from bracket creep:

  • From 1 July 2018, the top threshold of the 32.5% personal income tax bracket will be increased from $87,000 to $90,000, which will then be further increased from 1 July 2022 to $120,000.
  • From 1 July 2022, the tax offset in Step 1 will be locked in by an increase in the 19% personal income tax bracket to $41,000; and
  • The Low Income Tax Offset will be withdrawn at a rate of 6.5 cents per dollar for taxable income from $37,000 to $41,000 and at a rate of 1.5 cents per dollar for taxable income from $41,001 to $66,667.

Step 3: Simpler personal income tax system

The Government proposes to simplify the current personal income tax system from 1 July 2024 by removing the 37% tax bracket and increasing the top threshold of the 32.5% personal income tax bracket from $120,000 (increased under step 2) to $200,000. As a result, the 32.5% tax bracket will apply to taxable incomes between $41,001 to $200,000. The top marginal tax rate of 45% (unchanged from the current top marginal tax rate) will apply to taxable incomes exceeding $200,000.

As an example, for an individual with taxable income of $200,000, these changes would result in tax saving of approximately $7,000 when comparing the year ended 30 June 2020 and the year ended 30 June 2025 (excluding Medicare levy).

Medicare levy

The Government has confirmed that it will not increase the Medicare levy from the current rate of 2 percent to 2.5 percent from 1 July 2019 whilst increasing the thresholds for singles, families and pensioners.

Superannuation measures

A number of superannuation measures were announced as part of the Budget. They include:

  • Increasing ATO funding to improve the integrity of the 'notice of intent' (NOI) processes for claiming personal superannuation contribution tax deductions.
  • Currently, an individual who does not complete an NOI for personal superannuation contributions is not taxed on the contribution as:
    1. the contribution is not taxed at the individual's personal tax rate; and
    2. without an NOI, the contribution is not taxed at the appropriate 15% rate by the individual’s superannuation fund.
  • From 1 July 2019, increasing the maximum number of allowable members in new and existing self-managed superannuation funds (SMSFs) from four to six. 
  • Allowing individuals whose income exceeds $263,157 and have multiple employers to nominate that their wages from certain employers are not subject to superannuation guarantee charge (SGC) from 1 July 2018. This will allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory superannuation guarantee contributions. Breaching the cap otherwise results in these individuals being liable to pay excess contributions tax, as well as a shortfall interest charge.

The annual audit requirement for superannuation funds will change to a three-yearly requirement for SMSFs with a 'history of good record-keeping and compliance'. It appears an SMSF will qualify for this concession if their trustee has a history of three consecutive years of clear audit reports and have lodged the fund's annual returns in a timely manner. The measure is to commence on 1 July 2019.

Black economy measures

Further expansion of taxable payments reporting

The Government will further expand the taxable payments reporting system (TPRS) for payments to contractors in the security services, investigation services, road freight transport and computer system design industries.

The TPRS requires businesses to report total payments made to contractors each year to the ATO thus bringing these payments into line with wages.

The measure will have effect from 1 July 2019 and businesses will need to ensure they collect information from this date with the first annual report required in August 2020.

Removing tax deductibility of non-compliant payments

As part of the Black Economy Package, which aims to provide integrity to the tax system, businesses will no longer be able to claim deductions for the following payments:

  • Payments to employees (such as wages) where the business has not withheld any amount of PAYG from these payments; and
  • Payments to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG.

These measures were well supported by various submissions to the Black Economy Taskforce and clearly create a financial disincentive for businesses engaging in black economy behaviour. This measure will take effect from 1 July 2019 and, while it is estimated to have a negligible gain to revenue over the coming periods, its main objective of ensuring greater compliance with tax obligations should be realised.

Previously announced measures

The Budget also included references to previously announced measures as follows (including links to the prior announcements):

Measure Most recent previous announcement Commencement date
Stapled structures - tightening concessions for foreign investors

See above
Treasurer announcement, 'Levelling the playing field for Australian investors: Taxation of Stapled Structures', 27 March 2018

ATO webpage, including administrative treatment
Thin capitalisation changes will take effect from 1 July 2018. All other changes will take effect from 1 July 2019.

For existing arrangements, a transitional period of at least seven years will be available for all measures except the thin capitalisation changes.
Company Tax — taxation of financial arrangements — regulation reform

Reforms to the TOFA rules designed to reduce the scope of the rules, decrease compliance costs and increase certainty.
Minister for Revenue and Financial Services announcement, 'Taxation of Financial Arrangements reform', 22 December 2017

ATO webpage, including administrative treatment
Changes will commence on or after the date of Royal Assent of the enabling legislation.
Company Tax — income tax consolidation

Tax consolidation integrity measures which were previously enacted by Income Tax Consolidation Integrity) Bill 2018 including:

- Integrity rules which prevented non-residents from ‘churning’ assets between consolidated groups to generate double deductions (Measure 1).

- Removal of adjustments relating to deferred tax liabilities from the consolidation entry and exit tax cost-setting rules (Measure 2).
Minister for Revenue and Financial Services announcement, 'Closing tax consolidation loopholes', 22 March 2018

ATO webpage, including administrative treatment 
Measure 1 applies from 14 May 2013.

Measure 2 applies from the date of introduction of amending legislation to Parliament (Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018 was introduced to the House of Representatives on 15 February 2018).

Questions 

If you need further information about any of the key announcements, please contact any member of the MinterEllison tax team.

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Tax

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