The Turnbull Government has sought to balance its political reality with developing a strategy for Australia’s future.
Faced with the political reality of not being able to pass substantive legislative reform, the Government has focused instead on infrastructure spending and social issues in this year’s Budget.
This Budget continues the intent of gradually returning to surplus over the medium term, with the Budget expected to balance in 2021, remaining in surplus thereafter. In making these assumptions, the Government is relying on continued strong commodity prices, and forecast increases to both wages and GDP.
Significant investment of $75 billion towards key infrastructure projects over the next 10 years, focused around road, rail and airport investments, will contribute to the Government’s effort to drive jobs and growth.
The Budget contained a very limited number of measures related to the SME business sector, individual taxpayers and investors. These measures are outlined below.
Personal income tax
There are no changes to personal income tax rates proposed in the Budget. This means that the 2% Temporary Budget Repair Levy will end on 30 June 2017.
Due to the removal of the Temporary Budget Repair Levy from 1 July 2017, the effective top marginal tax rate for the 30 June 2017-18 income year will be 47% including the 2% Medicare Levy (down from 49% for the 30 June 2016-17 income year).
The Treasurer announced the Medicare Levy would increase from 2% to 2.5% with effect from 1 July 2019 and low-income thresholds for singles, families, seniors and pensioners would be increased for the 2017-18 income year to take account of inflation.
Contributing proceeds from downsizing into superannuation.
The Government announced that from 1 July 2018, a person aged 65 and over will be permitted to make a non-concessional contribution to superannuation of up to $300,000, ($600,000 for a couple) from the proceeds of selling a principal residence owned for the past ten or more years.
The contributions are stated to be in addition to contributions currently permitted under existing contribution rules.
The contributions are stated to be exempt from the existing age test, work test and the $1.6 million balance test for non-concessional contributions that may otherwise prohibit the contributions being accepted by the superannuation fund under the current rules.
There is a lot of details that remains unclear, including how downsizing will be defined and whether you will be required to contribute the actual proceeds from the property sale.
Superannuation borrowing arrangements.
From 1 July 2017, an individual’s superannuation balance may be affected by borrowing arrangements entered into by a superannuation fund.
The effect of the measure will be to increase what is counted in an individual’s total superannuation balance, and how the $1.6 million pension cap is measured.
This was announced prior to the Budget, including the release of draft legislation. According to the draft legislation, the changes will only apply to borrowings entered into on or after the commencement of the legislation.
First home super saver scheme
The Government announced a scheme that will allow first home buyers to use superannuation as a means of saving to purchase a first home.
Voluntary (salary sacrifice) contributions to superannuation made by first home buyers from 1 July 2017 will be able to be withdrawn from 1 July 2018 for a first home deposit, along with associated deemed earnings.
Up to $15,000 per year and $30,000 in total can be contributed within existing contribution limits of $25,000 per annum. Members of a couple will each have access to the scheme (taking this to potentially $60,000 in total).
Access to small business CGT concessions
The Government has announced it will tighten access to the small business CGT concessions from 1 July 2017.
As part of its tax integrity package, the Government’s proposed changes will deny access to the small business CGT concessions, for assets which are unrelated to a small business.
The small business CGT concessions will continue to be available to small businesses with aggregated turnover of less than $2 million or net assets of less than $6 million.
Instant asset write-off for small business entities
The Government has announced that it will extend the immediate deductibility for eligible assets costing less than $20,000, for further 12 months to 30 June 2018.$1,000.
The immediate write off applies to small business entities with an aggregated turnover of less than $10 million. In order to obtain the tax deduction, the asset must be first used or installed ready for use by 30 June 2018. After 30 June 2018, the threshold reverts back to $1,000.
Restricting residential investment property deductions
The Government has introduced two new measures to restrict the availability of deductions in respect of residential investment property.
In new measures, that will apply from 1 July 2017 (for plant and equipment acquired after 9 May 2017), depreciation deductions will no longer be allowed on removable type assets, typically plant and equipment, acquired with an existing residential investment property.
Depreciation deductions will only be available for newly acquired assets, where the property owner directly incurs the expenditure (depreciation will not be available on items acquired by a previous owner).
Under this measure, the entire purchase price will be allocated to the property’s cost base for capital gains tax purposes, rather than being apportioned between the property, and removable assets such as carpets, dishwashers and air-conditioning units.
Legislation will also be introduced to limit deductions available for travel expenditure for inspecting, maintaining or collecting rent. Deductions were previously available for travel on an apportionment basis. Whilst these rules are being tightened, deductions will still be allowed for investors using real estate agents to manage investment properties on their behalf.
Although the Government has not specifically targeted negative gearing, these measures (in effect) target tax deductions and the tax effectiveness of holding rental properties.
New tax incentives for investing in affordable housing
The Government has introduced tax incentives to encourage investment in affordable accommodation for low to moderate income households. This includes specific incentives for Managed Investment Trust (MIT) vehicles, as well as a CGT concession for resident investors who invest in these schemes.
From 1 July 2017, MITs will have the ability to acquire, construct or redevelop property to hold as affordable housing. Investors in these vehicles may therefore access concessional taxation treatment. In order for investors to gain access to these tax concessions, MITs will need to meet specific criteria prescribed under the new rules, these include:
- The affordable housing must be available for rent for at least 10 years
- The MIT must derive at least 80% of its assessable income from affordable housing
- Up to 20% of the MIT’s income may be derived from other eligible investment activities
- Qualifying housing must be provided to low to moderate income tenants
- Rents must be charged at a discount below the private rental market
These proposals will provide an opportunity for a new asset class to be held by managed funds.
No doubt fund managers will be looking closely at the requirements for these new vehicles over coming months.
Should you have any queries in relation to the Budget please do not hesitate to call your usual hmh contact.