Personal Income Tax
There are no changes to the individual tax rates this year. However, the Temporary Budget Repair Levy that was introduced in the 2014-15 Federal Budget will cease on 30 June 2017. This levy was 2% of an individual’s taxable income that exceeded $180,000. The effective top marginal tax rate for individuals reduces to 47% for the 2017 financial year (down from 49% last year). This provides a small tax relief for high earning individuals. The Government intends to increase the Medicare Levy from 2% to 2.5% but this will not come into effect until 1 July 2019.
Individuals that own or intend to invest in residential rental properties will be affected from this year’s budget. From 1 July 2017, travel expense deductions related to rental properties are no longer allowed in individual tax returns. This includes travel for inspections, maintenance and rental income collection. The Government was not satisfied that taxpayers were claiming travel deductions correctly and private travel was not being apportioned. Deductions will still be available for investors that use real estate agents to manage their rental properties.
Depreciation deductions will no longer be allowed on removable type assets attached to a residential rental property purchased after 9 May 2017. The allocation of the purchase price between the property and the component assets would ordinarily be performed by a qualified quantity surveyor. Depreciation deductions are available on subsequent acquisitions of plant and equipment for the rental property. This applies on a prospective basis so depreciation deductions made prior 9 May 2017 will continue until the asset is sold or has reached the end of its effective life. For capital gain tax (CGT) purposes, the entire purchase price of the rental property will now be allocated to the cost base.
Small Business Concessions
There has been little focus on small businesses in this year’s budget. The Government has extended the instant deduction on assets costing less than $20,000 for a further twelve months to 30 June 2018. This is available to businesses with an aggregated annual turnover of less than $10 million. The asset must be first used of installed ready for use by 30 June 2018 to be eligible. As before, the small business depreciation pool will be available for assets costing $20,000 or more and immediately deducted if the pool balance falls under the threshold in the 2017 financial year. From 1 July 2018, the threshold will revert back to $1,000 for the immediate deduction and immediate pool balance deduction.
From 1 July 2017, the Government will tighten access to small business CGT concessions. These concessions will no longer be available for assets that are unrelated to a small business. This measure is aimed at taxpayers with an ownership interest in larger business entities that may currently be excluded from the eligibility test. The small business CGT concession thresholds remain to be aggregated turnover of less than $2 million or net assets of less than $6 million.
From 1 July 2018, a person aged 65 or over will be able to make a non-concessional contribution to super of up to $300,000 from the proceeds of downsizing their home. This measure was brought in to reduce barriers for retirees that want to downsize their home. It also improves the housing market for young or growing families. The non-concessional contribution is available in addition to the existing superannuation rule and caps. The property must be the principal residence and owned for at least ten years. Couples are able to contribute $300,000 each for the same home. Unfortunately, the proceeds from this measure are not proposed to be exempt from the Age Pension assets test.
The Government is encouraging first home buyers to use superannuation as a means of saving to purchase a first home. From 1 July 2017, first home buyers can make voluntary contributions of up to $15,000 per year and $30,000 total to their superannuation. Contributions must be within existing contribution limits of $25,000 per annum. Concessional contributions and earnings are taxes at 15% in the fund. From 1 July 2018, these contributions and deemed earnings can be withdrawn for a first home deposit. Concessional contributions and earnings withdrawn will be taxed at the marginal rate less a 30% offset. Non-concessional contributions withdrawn will not be taxed.
From 1 July 2018, the Government will introduce a separate integrity measure to reduce opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings. The non-arm’s length provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.
The Government has focused on affordable housing for Australian residents in this year’s budget. From 1 January 2018, resident individuals can benefit from an increase in the CGT discount from 50% to 60% by investing in qualifying affordable housing. In order to qualify the following criteria must be satisfied:
- The investment must be held for at least three years.
- Housing must be provided to low to moderate income tenants with rent charged at a discount below the private rental market rate.
- The affordable housing must be managed through a registered community housing provider.
From 1 July 2017, Managed Investment Trust (MITs) vehicles 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.
MITs will need to meet specific criteria to access these concessions:
- 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.
GST on Property Transactions
From 1 July 2018, purchasers of new residential homes or land in new subdivisions are required to remit the GST on the sale directly to the ATO as part of the property settlement process. The Government has identified some property developers are failing to remit the GST on their sales, despite claiming credits for GST incurred on development costs. Given most purchasers use conveyancers to assist with the transfer and settlement of properties, the Government believes this change should not represent a significant additional burden for purchasers.
Foreign Resident Investors
Foreign resident investors have been targeted in the Government’s housing affordability measures. Foreign tax residents and temporary tax residents will no longer be able to access the CGT main residence exemption. The exemption will be available to those that have purchased a property prior 9 May 2017 but only until 30 June 2019.
From 1 July 2017, changes will also apply to the Foreign Resident CGT Withholding Regime. The CGT withholding rate increases from 10% to 12%. The CGT withholding threshold for property value reduces from $2 million to $750,000.
The CGT asset test for foreign tax residents will now include associates. A CGT liability can no longer be avoided by the disaggregation of indirect interests in Australian real property.
From 9 May 2017, an annual levy of at least $5,000 will be imposed to foreign investors if they own a residential property and is not occupied or available to rent for at least six months of the year. Exemptions apply if the property is reasonably unavailable to the rental market.
From 9 May 2017, a 50% cap is introduced on foreign ownership in new residential developments. This cap will be implemented as part of the New Dwelling Exemption Certificate process.
The purpose of these measures is to encourage foreign owners to make residential properties available and increases dwellings for Australians to occupy.
Taxable Payment Reporting
From 1 July 2018, The Government will extend the Taxable Payments Reporting regime to contractors in the courier and cleaning industries. The Taxable Payments Reporting regime already exists in the building and construction industry. The ATO uses this information to detect mismatches between payments made to contractors and the income declared by those contractors, and to identify contractors who are incorrectly dealing with their GST obligations.
Businesses in the courier and cleaning industries will need to ensure that they collect this information from 1 July 2018 to complete the first annual report due in August 2019.