Australian Federal Budget Review - May 2017

This year Australians get no dramatic changes to the tax laws but the Turnbull government has done a lot of tidying up. The most prolific changes are to personal taxes, but some important announcements that affect businesses and investors, especially foreign investors, were also made. Here are some of the highlights from this year’s budget…

BUSINESS TAXATION

1. HIGHER INSTANT ASSET WRITE OFF FOR SBE’s EXTENDED

The Government will extend the current instant asset write-off threshold ($20,000) for small business entities (SBEs) by 12 months until 30 June 2018. SBEs will be businesses with aggregated annual turnover of less than $10m (the new laws to increase the threshold from $2m to $10m should come into effect shortly). The threshold amount was due to return to $1,000 on 1 July 2017. 

As a result of this announcement, SBEs will be able to immediately deduct the cost of eligible depreciating assets purchased for less than $20,000. The assets must be are acquired by 30 June 2018 and first used or installed ready for use by 30 June 2018 for a taxable purpose. Only a few assets are not eligible for the instant asset write-off, for example horticultural plants and in house software. 

Assets purchased for $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool (including existing pools) can also be immediately deducted if the balance is less than $20,000 over this period. 

The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2018. 

Suspension of lock out rules extended 

The suspension of the “lock out” rules for the simplified depreciation regime will be extended by 12 months until 30 June 2018. The “lock out” rules prevent SBEs from reentering the simplified depreciation regime for 5 years if they opt out.

2. RESTRICTION ON DEPRECIATION DEDUCTIONS

From 1 July 2017, the Government will limit depreciation deductions on “plant and equipment” to costs actually incurred by investors in residential investment properties. Plant and equipment items are usually mechanical fixtures or those which can be “easily” removed from a property such as dishwashers and ceiling fans.

This is an integrity measure to address concerns that some “plant and equipment” items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors. 

Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. 

Existing investments grandfathered 

These changes will apply on a prospective basis and will not impact existing investments. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30 pm (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor (including subsequent investors) no longer owns the asset, or the asset reaches the end of its effective life.

3. CGT SMALL BUSINESS CONCESSIONS TIGHTENED

The Government will amend the small business CGT concessions to deny eligibility for assets which are unrelated to the small business. Division 152 of ITAA 1997 provides 4 concessions to eliminate, reduce and/or provide a roll-over for a capital gain made on a CGT asset that has been used in a “small” business. These concessions are:

  • the “15-year exemption”;
  • the “50% reduction”; 
  • the “retirement exemption”; and 
  • the “roll-over” concession.

Under the existing rules, some taxpayers are able to access these concessions for assets which are unrelated to their small business, eg through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.

The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2m or business assets less than $6m.

The measure is proposed to start on 1 July 2017 and is integrity measure aimed at the in appropriate avoidance of income tax.

The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2018.

When the aggregated turnover threshold for a SBE increases to $10m (as from 2016-17), SBEs with an aggregated turnover of between $2m and $10m will benefit from the $20,000 instant asset write-off concession.

4. CHANGES AFFECTING FOREIGN INVESTORS

Australia’s foreign resident capital gains tax regime will be extended by:

  • denying foreign and temporary tax residents access to the CGT main residence exemption from 9 May 2017;
  • increasing the CGT withholding rate for foreign tax residents from 10% to 12.5% from 1 July 2017; and
  • reducing the CGT withholding threshold for foreign tax residents from $2m to $750,000 as from 1 July 2017.

5. BUSINESS TO PAY LEVY ON 186 AND 187 VISAS

From March 2018, businesses that employ foreign workers on 186 and 187 skilled visas will be required to pay a levy that will provide revenue for a new Skilling Australians Fund.

Businesses with turnover of less than $10m per year will be required to make an upfront payment of $1,200 per visa per year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $3,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.

Businesses with turnover of $10m or more per year will be required to make an upfront payment of $1,800 per visa year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $5,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.

The levy will replace the current training benchmark financial obligations for employers of workers on Temporary Work (Skilled) (subclass 457) visas, which are being abolished, and permanent Employer Nomination Scheme (subclass 186) Direct Entry stream visas.

6. NO DEDUCTION FOR RESIDENTIAL RENTAL PROPERTY TRAVEL EXPENSES

Travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017.

 The purpose of this measure is to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes.

This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will continue to be deductible

6. GST

There were 2 interesting GST measures contained in the 2017-18 Federal Budget, specifically affecting digital currencies and purchasers of new residential properties.

The Government intends to make changes to the way things like Bitcoin are currently treated, which gives rise to double taxation - once on the purchase of the digital currency and again on its use in exchange for other goods and services subject to GST. The Government now intends to treat such currencies as money. The changes will be designed to ensure that purchases of digital currency are not subject to GST – eliminating the double tax issue.

The Government will require purchasers of new residential property or new subdivisions to remit the GST liability on such sales directly to the Tax Office. Currently, GST is included in the purchase price and it is the developer who remits any GST. However, some developers are failing to remit the GST (despite having claimed GST credits on their construction costs). Under the new measures, purchasers not only are required to remit the GST, they would be able to work out a developer’s margin on the property they purchased! 

DOWNLOAD THE FEDERAL BUDGET REVIEW | MAY 2017


Contact our Tax Consulting experts

If you have any questions about the above article, please contact our Tax Consulting experts:

Tony Nunes

B.COM, LLB, LLM, M.TAX, CTA

Client Director

P: (02) 9233 8866

E: tony.nunes@kellypartners.com.au


Disclaimer:

While we have made every attempt to ensure that the information contained in this article has been obtained from reliable sources, Kelly+Partners is not responsible for any errors or omissions, or for the results obtained from the use of this information.