Personal tax rates: staged seven-year
reform plan starting from 2018–2019
In the 2018–2019
Budget, the Government announced staged tax relief for low and middle income
earners. The Government is proposing a major seven-year, three-step plan to
reform personal income tax.
Step 1 will see a new, non-refundable low
and middle income tax offset from 2018–2019 to 2021–2022, designed to provide
tax relief of up to $530 for each of those years. The offset will be delivered
on assessment after an individual submits their tax return, and will be in
addition to the existing low income tax offset (LITO).
The low and
middle income tax offset will provide a benefit of up to $200 for taxpayers
with taxable income of $37,000 or less. Between $37,000 and $48,000 of taxable
income, the value of the offset will increase at a rate of three cents per
dollar to the maximum benefit of $530. Taxpayers with taxable incomes from
$48,000 to $90,000 will be eligible for the maximum benefit of $530. From
$90,001 to $125,333 of taxable income, the offset will phase out at a rate of
1.5 cents per dollar.
Step 2 will increase the top threshold
of the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018. In
2022–2023, the top threshold of the 19% bracket will increase from $37,000 to
$41,000 and the LITO will increase from $445 to $645. The increased LITO will
be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and
$41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000
and $66,667. The top threshold of the 32.5% bracket will increase from $90,000
to $120,000 from 1 July 2022.
Step 3: from 1 July 2024, the top
threshold of the 32.5% bracket will increase from $120,000 to $200,000,
removing the 37% tax bracket completely. Taxpayers will pay the top marginal
tax rate of 45% from taxable incomes exceeding $200,000 and the 32.5% tax
bracket will apply to taxable incomes of $41,001 to $200,000.
says this means that around 94% of all taxpayers are projected to face a marginal
tax rate of 32.5% or less in 2024–2025.
Medicare levy, 2017–2018 tax
had proposed to increase the Medicare levy from 2% to 2.5% from
1 July 2019, but has decided not to proceed with this. Presumably the
Bills to do this, which are currently before Parliament, will be removed. In an
address on 26 April 2018 to the Australian Business Economists in
Sydney, the Treasurer said that, due to the improving economy and fiscal
position, the Government is "now in a position to give our guarantee to
Australians living with a disability and their families and carers that all
planned expenditure on the National Disability Insurance Scheme (NDIS) will be
able to be met in this year’s Budget and beyond without any longer having to
increase the Medicare levy”.
At the same
time, it has been reported that Shadow Treasurer Chris Bowen has announced that
Labor will not proceed with its proposal to increase the Medicare levy by 0.5%
(to 2.5%) on those earning above $87,000.
The tax rates and thresholds for the 2017–2018 year remain
$20,000 instant asset write-off for SBEs extended by 12 months
The Government will extend the current instant asset write-off
($20,000 threshold) for small business entities (SBEs) by 12 months to
30 June 2019. This applies to businesses with aggregated annual
turnover less than $10 million.
The threshold amount was due to return to $1,000 on
1 July 2018. As a result of this announcement, SBEs will be able to
immediately deduct purchases of eligible depreciating assets costing less than
$20,000 that are acquired between 1 July 2017 and
30 June 2019 and first used or installed ready for use by
30 June 2019 for a taxable purpose. Only a few assets are not eligible
for the instant asset write-off or other simplified depreciation rules (eg
horticultural plants and in-house software).
Assets valued at $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 can also be immediately deducted if the balance is less
than $20,000 over this period (including existing pools).
The current "lock out” laws for the simplified depreciation
rules (which prevent small businesses from re-entering the simplified
depreciation regime for five years if they opt out) will continue to be
suspended until 30 June 2019.
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 2019.
While the extension of the write-off will be welcomed, SBEs of
course need to have the cash-flow to enable them to spend the $20,000 in the
Anti-avoidance rules: family trust circular distributions
The Government will extend specific anti-avoidance rules that apply
to other closely held trusts that engage in circular trust distributions to
Currently, where family trusts act as beneficiaries of each
other in a round-robin arrangement, a distribution can ultimately be returned
to the original trustee in a way that avoids any tax being paid on that amount.
The measure will allow ATO to pursue family trusts that engage in these
arrangements and impose tax on such distributions at a rate equal to the top
personal rate plus the Medicare levy.
This measure applies from 1 July 2019.
Deductions disallowed for holding vacant land
The Government will disallow deductions for expenses
associated with holding vacant land. Where the land is not genuinely held for
the purpose of earning assessable income, expenses such as interest costs will
be denied. It is hoped this measure will reduce the tax incentives for land
banking which limit the use of land for housing or other development.
The measure will apply to both land held for residential and
commercial purposes. However, the "carrying on a business” test would generally
exclude land held for a commercial development. It will not apply to expenses
associated with holding land that are incurred after:
property has been constructed on the land, it has received approval to be
occupied and available for rent; or
land is being used by the owner to carry on a business, including a business of
Disallowed deductions will not be able to be carried forward
for use in later income years. Expenses for which deductions will be denied
could be included in the cost base if it would ordinarily be a cost base
element (ie borrowing costs and council rates) for CGT purposes. However, if
the denied deductions are for expenses would not ordinarily be a cost base
element, they cannot be included in the cost base.
This measure applies from 1 July 2019.
Partnerships: enhancing integrity of concessions
Partners that alienate their income by creating, assigning or
otherwise dealing in rights to the future income of a partnership will no
longer be able to access the small business capital gains tax (CGT) concessions
in relation to these rights.
The Government said this measure will prevent taxpayers,
including large partnerships, inappropriately accessing the CGT small business
concessions in relation to their assignment to an entity of a right to the
future income of a partnership, without giving that entity any role in the
There are no changes to the small business CGT concessions
themselves. The concessions will continue to be available to eligible small
businesses with an aggregated annual turnover of less than $2 million or
net assets less than $6 million.
These measures will apply from 7:30PM (AEST) on
8 May 2018.
SMSF member limit to increase from
four to six
The Budget confirmed that the maximum number of allowable
members in new and existing self managed superannuation funds (SMSFs) and small
APRA funds will be expanded from four to six members from
1 July 2019.
The proposed increase to the maximum number of SMSF members
seeks to provide greater flexibility for large families to jointly manage
Extra SMSF members to provide
s 17A(1)(a) of the Superannuation
Industry (Supervision) Act 1993 (SIS Act) requires an SMSF to have fewer
than five members. In addition, each member must be a trustee of the fund (or a
director of the corporate trustee). This seeks to ensure that all members are
fully involved and equally responsible for fund decisions and investments.
proposal to allow up to six SMSF members may assist those with larger
families to implement intergenerational solutions for managing long-term,
capital intensive investments, such as commercial property and business real
property. For example, allowing an extra two members provides an opportunity to
improve a fund’s cash flow by using the contributions of the younger members to
make pension payments to the members in retirement phase, without needing to
sell a long-term investment.
As each member must
be a trustee of the fund, a decision to add extra members should not be taken
lightly as it can add complexity to the fund’s management and investment
strategy. A change to the membership of an SMSF will alter the trustee
arrangements which can impact who controls the fund in the event of a dispute.
This is especially relevant in the event of the death of a member, as the surviving
trustees have considerable discretion as to the payment of the deceased’s super
benefits (subject to any binding death benefit nomination).
Labor’s dividend imputation policy
Allowing up to six SMSF members may assist some
SMSFs to implement strategies to guard against Labor’s proposal to end cash
refunds of excess franking credits from 1 July 2019. SMSFs in
tax-exempt pension phase are expected to feel the brunt of Labor’s proposal,
although an exemption was subsequently announced for SMSFs with at least one
Government pensioner or allowance recipient before 28 March 2018.
To avoid wasting non-refundable franking credits, Labor’s
proposal would create an incentive for SMSFs in pension phase to add additional
accumulation phase members (eg adult children) who could effectively make some
use of the excess franking credits within the fund. That is, the excess
franking credits would be used to absorb some of the 15% contributions tax in
relation to the accumulation members. For example, the proposal to increase the
maximum number of SMSF members from four to six would enable a typical two-member
fund in pension phase to admit up to four adult children as members. If those
adult children are making concessional contributions up to the maximum of
$25,000 per year, the fund could use the excess franking credits to offset up
to $15,000 (four x $25,000 x 15%) in contributions tax each year for the adult
This strategy would essentially replicate, to the extent
possible, the position of large APRA funds under Labor’s policy. APRA funds
typically have more contributing members and diverse income sources (beyond
franked dividends) that can usually fully absorb the franking credits.
As already noted, a decision to add additional members to an
SMSF may add complexity to the management and control of the fund.
This would require professional advice for the specific circumstances of the
fund and its members.
Superannuation work test exemption for contributions by recent retirees
The Government will introduce an exemption from the work test
for voluntary superannuation contributions by individuals aged 65–74 with
superannuation balances below $300,000 in the first year that they do not meet
the work test requirements.
the work test in reg 7.04 of the Superannuation
Industry (Supervision) Regulations 1994 (SIS Regulations) restricts the
ability to make voluntary superannuation contributions for those aged 65–74 to
individuals who self-report as working a minimum of 40 hours in any 30-day
period in the financial year. The measure will give recent retirees additional
flexibilities to get their financial affairs in order in transition to
retirement. It will apply from 1 July 2019.
SMSF audit cycle of three years for funds with good compliance history
annual audit requirement for SMSFs will be extend to a three-yearly cycle for
funds with a history of good record-keeping and compliance.
measure will apply to SMSF trustees that have a history of three consecutive
years of clear audit reports and that have lodged the fund’s annual returns in
a timely manner.
measure will start on 1 July 2019. The Government said it will
undertake consultation to ensure a smooth implementation.
Super fees to be capped at 3% for small accounts, exit fees banned
fees charged by superannuation funds will be capped at 3% for small accounts
with balances below $6,000, while exit fees will be banned for all
superannuation accounts from 1 July 2019. These measures form part of
the Government’s Protecting Your Super Package.
Government will also ban exit fees on all superannuation accounts. The proposed ban on exit fees will also benefit
members looking to rollover their super accounts to a different fund, or who
hold multiple accounts and see exit fees as a barrier to consolidating
Superannuation insurance opt-in
rule for younger and low-balance members
The Government will
change the insurance arrangements for certain cohorts of superannuation members
from 1 July 2019. Under the proposed changes, insurance within
superannuation will move from a default framework to be offered on an opt-in
with low balances of less than $6,000;
under the age of 25 years; and
with inactive accounts that have not received a contribution in 13 months