Personal Income Tax Changes

1. Personal income tax plan

The Government will introduce a seven-year, three-step, personal income tax plan, as follows:

Step 1: Targeted tax relief to low and middle income earners.

The Government will introduce the Low and Middle Income Tax Offset, a non-refundable tax offset of up to $530 per annum to Australian resident low and middle income taxpayers. The offset will be available for the 2019, 2020, 2021 and 2022 income years and will be received as a lump sum on assessment after an individual lodges their tax return.

• Taxpayers with taxable incomes of $37,000 or less will receive a benefit of up to $200;
• The maximum offset of $530 will apply to taxpayers with taxable incomes between $48,000 and $90,000;
• For taxpayers with taxable income in excess of $90,001 will phase out at a rate of 1.5cents per dollar.

Step 2: Protecting middle income Australians from bracket creep.

The Government has proposed the following changes to the personal income tax rates:

1. From 1 July 2018, the Government will increase the top threshold of the 32.5% personal income tax bracket from $87,000 to $90,000. Medicare Levy is not included.
2. From 1 July 2022, the Government will:

• extend the 19% personal income tax bracket from $37,000 to $41,000; and
• further increase the top threshold of the 32.5% personal income tax bracket from $90,000 to $120,000.

Step 3: Ensuring Australians pay less tax by making the system simpler.

In the third step of the Personal Income Tax Plan the Government will simplify and flatten the personal tax system by removing the 37% tax bracket entirely.

From 1 July 2024, the Government will extend the top threshold of the 32.5% personal income tax bracket from $120,000 to $200,000. The 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000 and taxpayers with taxable incomes exceeding $200,000 will pay tax at the top marginal rate of 45%.

2. Changes to the Medicare levy low-income thresholds

 The Government will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from the 2018 income year, as follows:

• The threshold for singles will be increased from $21,655 to $21,980;
• The family threshold for will be increased from $36,541 to $37,089;
• The threshold for single seniors and pensioners will be increased from $34,244 to $34,758; and
• The family threshold for seniors and pensioners will be increased from $47,670 to $48,385.

TAX TIP – Medicare levy to remain unchanged.

The Government has announced that it will not proceed with the previously announced increase in the Medicare levy from 2% to 2.5% of taxable income from 1 July 2019. Consequential changes to other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also not proceed.

Changes Affecting Business

3. Extending the $20,000 immediate write-off for small business

The Government will extend the $20,000 immediate write-off for small business by a further 12-months to 30 June 2019 for businesses with aggregated annual turnover less than $10 million.

Small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2019. Only a few assets are not eligible (such as 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 small business simplified depreciation 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).

4. Removing tax deductibility of payments where withholding obligations have been disregarded

From 1 July 2019, businesses will no longer be able to claim a deduction for the following payments:

• Payments to their employees such as wages where they have not withheld any amount of PAYG from these payments (i.e., despite the fact the PAYG withholding requirements apply).
• Payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (despite the withholding requirements applying). 

5. Introduction of an economy-wide cash payment limit

From 1 July 2019, the Government will introduce a limit of $10,000 for cash payments made to businesses for goods and services.

Currently, large undocumented cash payments can be used to avoid tax or to launder money from criminal activity. This measure will require transactions over a threshold to be made through an electronic payment system or cheque. Transactions with financial institutions or consumer to consumer non-business transactions will not be affected.

6. Expanding the contractor payment reporting system.

The contractor payment reporting system was first introduced in the building and construction industry and extended to the cleaning and courier industries.

Under the contractor payment reporting system, businesses are required to report payments to contractors to the ATO. The Government has announced it will further expand the contractor payment reporting system to the following industries:

• security providers and investigation services;
• road freight transport; and
• computer system design and related services.

 Superannuation Related Changes

7. Exemption from the work test for voluntary contributions

From 1 July 2019, the Government will introduce an exemption from the work test for voluntary contributions to superannuation, for people aged 65-74 with superannuation balances below $300,000, in the first year that they do not meet the work test requirements.

8. Three-yearly audit cycle for some SMSFs.

From 1 July 2019, the Government will change the annual audit requirement to a three-yearly requirement for SMSFs with a history of good record-keeping and compliance. This measure will reduce red tape for 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.

9. Increasing the maximum number of allowable members in an SMSF and small APRA fund

From 1 July 2019, the Government will increase the maximum number of allowable members in new and existing SMSFS and small APRA funds from four to six. This will provide greater flexibility for joint management of retirement savings, in particular for large families.

10. Preventing inadvertent concessional cap breaches by certain employees

From 1 July 2018, the Government will allow individuals whose income exceeds $263,157, and who have multiple employers, to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG).

The measure will allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory SG contributions. Employees who use this measure could negotiate to receive additional income, which is taxed at marginal tax rates.

Other Changes

11. Research and development tax incentive

The Government will amend the research and development (R&D) tax incentive to better target the program and improve its integrity and fiscal affordability with effect from 1 July 2018.

For companies with aggregated annual turnover of $20 million or more, the Government will introduce an R&D premium that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.

For companies with aggregated annual turnover below $20 million, the refundable R&D offset will be a premium of 13.5 percentage points above a claimant’s company tax rate. Cash refunds from the refundable R&D tax offset will be capped at $4 million per annum.

R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years. Refundable R&D tax offsets from R&D expenditure on clinical trials will not count towards the cap.

12. Division 7A changes

From 1 July 2019, the Government will ensure that unpaid present entitlements (‘UPEs’) come within the scope of Division 7A of the ITAA 1936. This will apply where a related private company is made entitled to a share of trust income as a beneficiary but has not been paid.

13. Reforms to combat illegal phoenixing

The Government will reform the corporations and tax laws and provide the regulators with additional tools to assist them to deter and disrupt illegal phoenix activity.

14. Deductions denied for vacant land

From 1 July 2019, the Government will deny deductions for expenses associated with holding vacant residential or commercial land, including interest incurred to finance the acquisition of the land.

Deductions for expenses associated with holding the land will be available once a property has been constructed on the land, it has received approval to be occupied and is available for rent. Denied deductions will not be able to be carried forward for use in later income years, however, denied deductions can be included in the cost base of the land (but only if the expense qualifies as an element of cost base under the usual rules).

This proposed measure is intended to apply to all entities (e.g., individuals, trusts, companies) however an exclusion applies for vacant land that is held by an entity that is carrying on a business, which would include a business of primary production.