The Morrison Government’s 2019 Federal Budget is light on negative policy announcements or any real measures to reform our tax and superannuation systems. Benefiting from booming tax collections, they have announced a forecast return to a budget surplus from next year whilst also spending big on infrastructure, the environment, and announcing a range of new tax cuts over and above those already enacted to take effect in the coming years.
We have selected the top 9 tax and superannuation announcements we believe will be of most interest to our clients and colleagues. Whilst we have given our top 10 list in prior years, we were unable to select a suitable 10th announcement this year.
Whether any of these announcements ultimately become law will depend on the outcome of the upcoming Federal Election and the new composition of the Australian Senate post 1 July 2019.
Please get in touch if you would like to discuss any of these announced measures and how they might apply to your circumstances.
Personal Income Tax Announcements
A number of measures to further reduce personal income tax for low and middle income earners have been announced. These are in addition to tax cuts previously announced and legislated to take effect over the 2019 through 2025 income years.
1. Reduction to income tax for low and middle income earners
The Low and Middle Income Tax Offset (LMITO) was first introduced in the 2018 Federal Budget. Under the proposed changes in the 2019 budget, the reduction in tax from the LMITO will increase from a maximum of $530 to $1,080 per annum, and the base amount will increase from $200 to $255 per annum, for the 2019, 2020, 2021 and 2022 income years.
The LMITO will now be available in full for taxpayers with a taxable income between $48,000 and $90,000 and will phase out to nil once a taxpayer’s taxable income reaches $126,000.
2. Reducing the 32.5% marginal tax rate to 30% from the 2025 income year
This announced change would not take effect for some 5 years. Under already enacted law, the 37% marginal tax bracket will be abolished from the 2025 income year meaning taxpayers will jump from the 32.5% tax rate to 45% once their taxable income reaches $200,000. This new measure aligns the 32.5% marginal tax rate to the higher corporate tax rate of 30%, meaning taxpayers will jump will from 30% to 45% on reaching this level of taxable income.
The government believes only 6% of taxpayers will fall into the top marginal tax rate bracket.
3. Increasing the upper threshold for the 19% marginal tax rate from $41,000 to $45,000 from the 2023 income year
This announced change would not take effect for some 3 years. Under already enacted law, the threshold at which taxpayers move from the 19% marginal tax rate to the 32.5% rate will increase to $41,000 from the 2023 income year. This new measure will increase the threshold to $45,000.
In conjunction with this measure, the Low Income Tax Offset (LITO – not to be confused with LMITO referred to above) will increase from $645, as legislated currently, to $700 and phase out at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000, and then at the rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.
These two changes together are intended to lock-in the tax reduction provided by the LMITO when that concession ends in the 2022 income year.
Small Business Tax Announcements
There are two significant tax announcements in the small business space, both beneficial to taxpayers.
4. An expanded instant asset write-off concession for small businesses from 7:30 on 2 April 2019 (budget night) until 30 June 2020
Small and medium sized businesses with an aggregated turnover of up to $50 million will be able to immediately deduct for tax purposes eligible depreciable assets costing less than $30,000 (per asset) provided such assets are first used, or installed ready for use, between 7:30pm on budget night and 30 June 2020.
This represents two changes to the existing concession: an increase in the current legislated asset threshold from $20,000 to $30,000 (which has been announced to increase to $25,000 though not yet enacted); and an increase in the turnover of an eligible business from $10 million to $50 million.
In our view these two changes together may be of particular interest to the motor vehicle retail industry as they will bring many commonly purchased business vehicles, and larger businesses more likely to purchase them, within the scope of an immediate tax write-off.
5. Deferral of proposed changes to Division 7a for private companies
Whilst this announcement impacts private companies generally, Division 7a often arises in a small business context. Extensive changes to Division 7a, to apply from 1 July 2019, were proposed in a Government consultation paper released in October 2018. These proposed changes would impact many small and medium businesses in Australia either operating through a corporate structure or distributing to a corporate beneficiary via a trust structure.
The Government received significant feedback on their consultation paper which, as stated in their budget papers, “highlighted that this is a complex area of the tax law and raised implementation issues that warrant further consideration”.
Accordingly, they have announced a deferral of 12 months, from 1 July 2019 to 1 July 2020, to the proposed start date of the changes in order allow additional time to further consult with stakeholders on the issues and to refine the implementation approach, including introducing appropriate transitional measures.
Whilst we consider changes to Division 7a are ultimately likely to be implemented, we welcome this sensible deferral which will provide many small business taxpayers and their advisers with sufficient time to provide input and work collaboratively to resolve the problems identified with the Government’s initial plan.
Tax Integrity Announcements
6. Strengthening the Australian Business Number (ABN) system
The Government will introduce changes requiring ABN holders:
- From 1 July 2021, where the ABN holder has an income tax obligation, to lodge their tax return; and
- From 1 July 2022, to confirm the accuracy of their details on the Australian Business Register annually.
We are not clear on the actual change proposed at the first bullet point given where an ABN holder has an income tax obligation, they are already required to lodge income tax returns. We presume further details will be made available in due course. It is possible the Government proposes to cancel ABNs where income tax obligations are not met. This would lead to difficulties in carrying on the taxpayer’s business. Please note however this is conjecture on our part and not clear from the budget papers.
7. Providing a further $1 billion to the ATO Tax Avoidance Taskforce
The Government will provide a further $1 billion over four years from the 2020 income year to expand the existing Tax Avoidance Taskforce. The taskforce undertakes compliance and enforcement activities targeting multinationals, large public and private groups, trusts and high wealth individuals.
With this change, the Government appears to have a particular focus on increasing the scrutiny of “specialist tax advisers” and spruikers of tax avoidance schemes and strategies.
8. Relaxing of the work test for superannuation contributions when aged 65 or 66 from 1 July 2020
The Government will allow voluntary superannuation contributions to be made by individuals aged 65 and 66 without needing to meet the work test from 1 July 2020. People aged 65 and 66 will also be able to utilise the 3 year bring-forward rule for non-concessional contributions, currently only available to people aged under 65.
Currently individuals aged 65 to 74 can only make voluntary superannuation contributions where they meet the work test in a given income year. This test is passed where an individual is gainfully employed for at least 40 hours in any 30 day period within an income year.
This measure is intended to align the ability to make voluntary superannuation contributions with the eligibility age for the age pension (scheduled to reach 67 from 1 July 2023).
9. Streamlining tax exemption calculations for superannuation funds paying retirement phase benefits (pensions) from 1 July 2020
The Government will simplify and streamline certain aspects of the calculation for Exempt Current Pension Income (ECPI) where a superannuation pays pensions to a member.
Currently there are two methods by which a superannuation fund can calculate its ECPI each year – the segregate method or the proportionate method. An SMSF with a member who has over $1.6m in total superannuation benefits and pays any member a pension must use the proportionate method and cannot elect the segregated method.
The Government will allow superannuation funds with both accumulation and retirement phase (pension) interests during a year to choose their preferred method of calculating ECPI.
The Government will also remove a technical requirement for superannuation funds to obtain an actuarial certificate to support an ECPI calculation using the proportionate method when all members of the fund are in retirement phase for all of the income year.
Although the budget paper does not specifically state these changes will apply to SMSFs, we presume both measures are intended to apply to SMSFs. We welcome these changes as sensible measures which will reduce a minor amount of red tape and increase flexibility for trustees.
Aaron is the tax partner at Baumgartners. He is a Chartered Tax Adviser with 18 years’ experience advising private and corporate clients on a wide range of tax and commercial matters. Aaron also represents clients in disputes with the Australian Tax Office and state revenue authorities. Aaron holds a Master of Taxation from UNSW and is an active member of the Taxation Institute of Australia.