Tax Update – May 2019

In this month’s tax update as we near the Australian Federal Election, we examine where the 2019-20 Federal Budget left us, and the pivotal policies from the Australian Labor Party (ALP) on tax, superannuation, and business.  The full version also covers the ATO’s increased focus on rental deductions.

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Budget 2019-20: The pre-election announcements that are now law

Extension and increase to the instant asset write-o

  • increase to the threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure (instant asset write-off) from $25,000 to $30,000; and
  • businesses with an aggregated turnover of $10 million or more but less than $50 million can access the instant asset write-off for depreciating assets and certain related expenditure costing less than $30,000.

For assets costing $30,000 or more

For small businesses (aggregated turnover under $10m), assets costing $30,000 or more can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter.  If the closing balance of the pool, adjusted for current year depreciation deductions (i.e., these are added back), is less than $30,000 at the end of the income year, then the remaining pool balance can be written off as well.

Read our full 2019-20 Budget Summary

A Labor Government on Tax & Superannuation

Tax on investment property

In general, taxpayers are able to deduct from their assessable income any expenses they incur generating or producing that income.  An investment is negatively geared when the cost of owning the asset is more than the return.

Currently, a number of capital gains tax (CGT) exemptions potentially apply to investment property.  For Australian resident individuals, a 50% CGT discount applies to net capital gains made on investments held for longer than 12 months.

Labor’s plan seeks to:

  • Limit negative gearing to new housing from 1 January 2020.  Investments made prior to this date are to be exempted.
  • Halve the capital gains tax discount for all assets purchased after 1 January 2020.

Dividend imputation and the impact on self-funded retirees

The measure, as announced, would apply to individuals and superannuation funds, and exclude Australian Government pension and allowance recipients, and tax-exempt bodies such as charities and universities.  SMSFs with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.  The policy is intended to apply from 1 July 2019.

How does the system currently work?

For example, an SMSF owns shares in a company.  The company pays the SMSF a fully-franked dividend of $7,000.  The dividend statement says there is a franking credit of $3,000.  The $3,000 represents the tax the company has already paid on its profits.  This means the profit before company tax was subtracted, would have been $10,000 ($7,000 + $3,000).  The SMSF must declare $10,000 worth of income and will receive the $3,000 as an offset.

Who will be impacted by the change?

Based on information from Treasury, 85% of the value of franking credit refunds go to individuals with a taxable income below $87,000.  That is, 97% of taxpayers receiving refunds have a taxable income below $87,000.  And, more than half of those receiving a franking credit refund have a taxable income below the tax-free threshold of $18,200.  Around 40% of SMSFs receive a franking credit refund.

The Parliamentary Budget Office has also outlined what behavioural changes they expect to see in the market as a result of making franking credits non-refundable.  These include:

  • Individuals – shifting from shares to alternative investment arrangements (including to investments within superannuation), and couples shifting the ownership of shares from the lower income earner to the higher income earner such that the higher income earner can utilise the franking credits as a non-refundable tax offset.
  • Superannuation funds – rolling assets from a fund with negative net tax to a fund with positive net tax, changing funds’ asset portfolio allocations or changing the membership structure of the fund, in order to maximise the utilisation of franking credits.
  • Companies – changing the amount of dividends distributed (and profits withheld) or the level of dividend franking due to the decrease in the value of franking credits for some shareholders.

Minimum of 30% tax on discretionary trust distributions

There are around 690,500 discretionary trusts, also known as family trusts, in Australia.  Discretionary trusts are popular as the trustee has the discretion on how to pay the income or capital of the trust to the beneficiaries – beneficiaries do not have an interest in the trust.  Income can be apportioned by the trust to the beneficiaries on a discretionary basis, for example, to beneficiaries on a lower income tax bracket.

The ALP reforms address the ability for distributions to be channeled to beneficiaries in low-income tax brackets.  Instead, a new standard minimum rate of tax for discretionary trust distributions to mature beneficiaries (aged over 18) of 30% will apply.

Tightening of superannuation framework

ALP Policy makes changes in a series of areas.  These include:

  • Non-concessional contributions – the non-concessional contributions cap (the amount you can contribute to super from your after-tax income), will be reduced to $75,000 from $100,000.
  • Division 293 tax – High-income earners pay an additional 15% tax on their concessional taxed contributions to superannuation.  Currently, the threshold at which this tax applies is $250,000.  The ALP intends to reduce this threshold to $200,000.
  • Remove the ability to ‘catch up’ superannuation concessional contributions – Individuals with a total superannuation balance of less than $500,000 just before the start of the financial year can top up their concessional contributions in that financial year by using their unused concessional contribution cap amounts carried forward from the previous five years.  This measure can only be applied to unused cap amounts from the 2018-19 year.  The ALP intends to remove the ability to use unused cap amounts.
  • Remove measures expanding tax deductibility for super contributions – Under the super reform measures, the ‘substantially self-employed test’ (‘10% test’) was removed.  This enabled taxpayers, regardless of their work status (but otherwise eligible to contribute) to claim a tax deduction on their personal super contributions.  The ALP intends to unwind these reforms.

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If this article has raised questions regarding your personal situation, please contact one of our team of experts on +61 8 6555 9500.

This article contains information that is general in nature.  It is not intended to be advice and you should consider your personal situation and needs before making any decision based on this information.