Unsurprisingly for a Federal Budget in an election year, the 2019-2020 Budget contains limited tax reform measures or new announcements. This reflects a trend in recent years for substantive tax reforms and measures to be announced piecemeal during the Parliamentary cycle or as a part of the Mid Year Economic and Fiscal Outlook report.
Corporate taxpayers can continue to expect ATO scrutiny of their Australian operations given the substantial funding announced by the Government.
Personal income taxes are now reformed such that there is a mega tax bracket between $45,000 and $200,000 subject to a 30% marginal tax rate.
The instant asset write off will be extended to medium sized businesses and the threshold increased from $25,000 to $30,000 per asset representing a significant investment by the Government in small businesses.
Besides the return to a Budget surplus for the first time in 12 years, clearly, the headline tax announcement are the proposed changes to the personal income tax rates and the respective income tax brackets.
Consistent with the Government’s recent economic narrative, announcements as they apply respectively to large and small business reinforce the message that large business pay its “fair share” of tax (cue the increase in funding to the ATO’s Tax Avoidance Taskforce) whilst small businesses (this concept now extended to medium businesses with turnover of less than $50m) are to receive additional concessions such as an increase in threshold for instant asset write-off from $25,000 to $30,000 on a per asset basis. Also, the recent trend for superannuation fund mergers may continue to accelerate with the announcement to make the tax relief available for super fund mergers permanent.
Along with the addition of several new jurisdictions in the Tax Information Exchange Agreement list, a welcome development for bilateral investment is the announcement that the terms of the Australia/Israel Double Tax Agreement have been agreed. This should help unlock investment opportunities particularly in the Tech and Agri-Tech sectors for both Australian and Israeli investors alike.
A final matter which should not go unnoticed is that the status of a number of important pieces of legislation before Parliament remains unclear. It would be hoped that the major parties over the course of the imminent election campaign make clear what their respective intentions are in connection with these outstanding reforms.
With the Federal election looming, our tax team reflects on the policies announced by both the Federal Government and Australian Labor Party and how this will impact business.
Economics and Infrastructure
The Budget surplus is forecast to hit $7.1 billion in the 2019-2020 financial year. Despite outlining surpluses worth $31.7 billion over the four years to June 2022, deficits worth $364.5 billion since 2008 are not expected to be repaid within the decade. Net Government debt as a share of GDP is expected to fall from 42% to 18%.
With a Federal election to be announced shortly, the Government announced increases in spending on healthcare and committed $100 billion to infrastructure projects over the next decade. Predicted economic growth of 2.25% in 2018 - 2019 is forecasted to increase to 3% by 2021-2022 supported by exports and personal tax cuts for low and middle income earners.
In that regard, given the quantum and nature of the infrastructure expenditure announced, it would appear the scope of the concept of significant economic infrastructure for the purposes of the stapled securities reforms announced last year will most probably be tested in the coming immediate term.
Extension and expansion of the ATO Tax Avoidance Taskforce on Large Corporates, Multinationals and High Wealth Individuals
The Government will provide an additional $1 billion over 4 years from 2019-2020 to the ATO to extend the operation of the Tax Avoidance Taskforce and to expand the Taskforce's programs and market coverage. This is a significant increase from funding provided to the Taskforce at its inception following the 2016 budget. At that time, the Government had previously funded the Taskforce with $679 million over four years. As a result, the ATO has reported a collection of over $5.6 billion in tax in its first two years of operation.
The Government has specifically noted that this measure will allow the Taskforce to expand these activities, including increasing its scrutiny of specialist tax advisors and intermediaries that promote tax avoidance schemes and strategies.
Australian Managed Investment Trusts (MITS) – Updated list of info exchange countries
The Government have announced that they will update the list of countries whose residents are able to access the reduced MIT withholding tax rate by adding the following countries to the 114 other jurisdictions on the list: Curacao, Lebanon, Nauru, Pakistan, Panama, Peru, Qatar and the United Arab Emirates.
The updated list will be effective from 1 January 2020.
New Australia – Israel tax treaty
The Australia Israel tax treaty (DTA) was signed on 28 March 2019. The DTA will enter into force, subject to the domestic requirements of each jurisdiction for the passage of legislation. The DTA will enter into effect on the next occurring 1 January for withholding taxes, 1 April for Fringe Benefits Taxes, and 1 July for all other taxes after the DTA enters into force.
The DTA adopts many of the measures set out in the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to prevent Base Erosion and Profit Shifting (MLI). Briefly, the proposed withholding tax rates are as follows:
Tax Integrity – clarifying the operation of the hybrid mismatch rules
The recently enacted hybrid mismatch rules are a complex set of integrity measures which contain several issues requiring clarification and which the Government has now attempted to address. Specific details remain limited, however our observations are that the amendments will:
It is proposed that the amendments will apply to income years starting on or after 1 January 2019. The amendments to the integrity measure will apply to income years starting on or after 2 April 2019.
Personal income tax cuts: Personal Income Tax Plan
We referred to the 'Personal Income Tax Plan' (PITP) in last year's Budget update.
The Government announced that it will extend the PITP relief as follows.
Step 1: Introduction of the Low and Middle Income Tax Offset
The Low and Middle Income Tax Offset (LMITO) was introduced as a non-refundable tax offset available for the income years ending 30 June 2019 to 30 June 2022. The offset depends on the amount of taxable income earned by an individual taxpayer in a given income year.
The Government will provide for a further reduction in tax provided through the LMITO by increasing the available offset so that:
The LMITO will be available via assessment after individuals lodge their tax returns for the income years ending 30 June 2019 to 30 June 2022, at which point the LMITO will be replaced by the changes discussed at Step 2 below.
Step 2: Bracket creep relief for middle income earners
The following changes are proposed to Step 2 of the PITP:
Step 3: Simpler personal income tax system
The Government now proposes to go one step further than the original PITP by lowering the existing 32.5% rate to 30%. As a result, from 1 July 2024, a tax bracket of 30% will apply to taxable income between $41,001 and $200,000. The top marginal tax rate of 45% (unchanged from the current top marginal tax rate) will apply to taxable income exceeding $200,000.
Increase to the Medicare levy for low-income thresholds
The Government proposes to increase the Medicare levy thresholds for singles, families and pensioners to account for recent movements in the Consumer Price Index.
Broadly the thresholds will be increased as follows:
Singles: From $21,980 to $22,398
Families: From $37,089 to $37,794
Single seniors and pensioners: $34,758 to $35,418
Expansion of instant asset write-off
The instant asset write off will be extended to medium sized businesses and the threshold increased from $25,000 to $30,000 per asset.
The new threshold will apply to small businesses with aggregated turnover of up to $10 million from 2 April 2019 until the end of the measure on 30 June 2020. The existing threshold of $25,000 continues to apply to assets that are first used, or installed ready for use prior to 2 April 2019.
Medium businesses with turnover between $10 million and $50 million will gain access to the instant asset write off for assets up to the threshold of $30,000 that are first used, or installed ready for use, from 2 April 2019 to 30 June 2020.
Amendments to Division 7A deferred
We reported in last year's Budget update that a measure was announced to clarify the operation of the Division 7A integrity rule with effect from 1 July 2019.
Since then, the Government released a consultation paper seeking feedback from stakeholders. The feedback highlighted that Division 7A is a complex area of the tax law and raised implementation issues warranting further consideration.
On this basis, this year's Budget announced that any amendments to Division 7A will be deferred until 1 July 2020 to allow for further consultation and to refine the Government's approach to Division 7A.
Given the uncertainty around the potential changes to Division 7A (and the fast approaching year-end), the deferral of the effective date of any changes is welcomed.
Goods & Services tax (GST)
There were no announced GST changes or measures.
Luxury Car Tax – relief for farmers and tourism operators
Primary producers and tourism operators are set to benefit from increased luxury car tax refunds.
For vehicles acquired on or after 1 July 2019, the maximum luxury car tax refund will be increased from $3,000 to $10,000 for eligible primary producers and tourism operators.
The proposed changes will only affect the maximum refund available – no changes will be made to the eligibility criteria or the types of eligible vehicles (eligible four-wheel and all-wheel drive vehicles).
A number of superannuation measures were announced as part of the Budget, including: