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Federal Budget Highlights: 2019-20

02.04.2019

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.


Key takeouts


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.

Opposition’s Budget Reply

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.

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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.

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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:

  • Dividends: It is noted that the following concessional rates appear to be deliberately designed to enhance the flow of capital between Australia and Israel:
    • 0% if the beneficial owner holds directly less than 10% of the voting power in the paying company and the beneficial owner is a political subdivision, a local authority, a government investment fund, the Reserve Bank of Australia, the Bank of Israel , a recognised pension fund deriving the dividends from carrying on complying superannuation activities;
    • 5% if the beneficial owner is a company which holds at least 10% of the voting power in the paying company throughout a 365 day period;
    • 15% in all other cases;
    • REITs may be taxed in both Australia and Israel.
  • Interest: generally 5% withholding tax for superannuation funds and financial institutions (subject to the back-to-back exception), otherwise 10%
  • Royalties: generally shall not exceed 5% of the gross amount of the royalties.

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:

  • Confirm that the rules will apply to MEC (multiple entry consolidated) groups and trusts: The clarification on how the hybrid mismatch rules will apply to MEC groups and trusts appear to be directed to ensuring that the Base Erosion and Profit Shifting initiative implemented by the OECD (the initiative from which the hybrid mismatch rules are derived) applies to all types of entities that comprise the Australian tax system.
  • Limit the meaning of foreign tax: Currently the hybrid mismatch rules do not provide a definition of the meaning of "foreign tax", which creates uncertainty in determining the scope of these provisions when analysing foreign tax outcomes. It remains to be seen how this new definition might operate.
  • Allow the application of the integrity rule where other provisions have applied: The integrity rules do not provide guidance on how they interact with other integrity provisions in the Australian tax law. The announced amendment appears directed to clarifying that the integrity measure will also apply even if other measures also have application to the relevant circumstances.

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.

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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:

  • for taxable income of $37,000 or less, an LMITO of $255 will be available;
  • between taxable incomes of $37,000 and $48,000, the LMITO will increase at a rate of 7.5 cents per dollar up to the maximum offset of $1,080;
  • between taxable incomes of $48,000 and $90,000, a maximum offset of $1,080 will be available; and
  • for taxable incomes of $90,000 to $126,000, the offset will phase out at a rate of 3 cents per dollar.

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:

  1. From 1 July 2022, the 19% personal income tax bracket will apply to taxable income between $18,200 and $45,000, instead of $18,200 and $41,000, as currently legislated; and
  2. The new Low Income Tax Offset (LITO) will be increased from $645 to $700. The increase will now be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000, instead of at 6.5 cents per dollar between taxable incomes of $37,000 and $41,000 as currently legislated under the PITP. The LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 to $66,667.

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

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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.

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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).

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A number of superannuation measures were announced as part of the Budget, including:

  • Merging superannuation funds – Tax relief for merging superannuation funds to transfer revenue and capital losses to a new merged fund, and to defer tax consequences on gains and losses from revenue and capital assets is now permanent.
  • Superannuations contributions work test The current work test is removed for those aged 65 and 66. The current work test requires that people aged over 65 work for a minimum of 40 hours over a 30 day period in the financial year before they can make voluntary contributions to their superannuation account. The work test will continue to apply to those aged over 66.
  • Non-concessional contributions  Individuals aged 65 or 66 will now be able to make up to three years of non-concessional contributions under the bring-forward rule. Those over the age of 66 are still unable to make such contributions.
  • Spouse contributions age limit increase – The limit will be increased to 74 years.
  • ATO funding for integrity measures $42.1 million over 4 years has been provided to recover unpaid tax and superannuation liabilities, focusing on timely payment of large business and high wealth individuals tax and superannuation liabilities and reflecting the recent focus on worker entitlements.

What does this mean for business?

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