Tax policy update
By now I am sure you have heard all about the most unexpected election result in some time – at least since 1993. As unbelievable as it seemed pre-election, there are plenty of analysts out and about explaining how we (they) should have seen it all along. I guess that’s what they are paid to do. Our view over the last few months, taking account of the budget in April and election promises by both sides was to wait and see – we advocated no drastic changes in response to what were expected to be Labor ‘reforms’ based on the lack of certainty that they would win or even if they did, would be able to pass a hostile Senate.
Given the Coalition hold at this election, we are now looking at a path ahead with little substantial changes for our clients. There were the tax cuts announced in the April budget that the government needs to pass the Senate, being:
2019 tax year – low and middle income families to have their tax liability reduced by up to $2,160 (for dual income families). This offset scales up from $55 for those earning up to $30,000 pa to the full amount ($1,080 per income earner) for those earning up to $90,000. The offset then phases out for those earning more than $126,000. This extra offset is expected to be in place until the end of the 2022 year.
2023 tax year – the 32.5% marginal tax rate band will increase from applying to income of up to $90,000 to income of up to $120,000 (tax saving for those with income of $120,000 or more would be $1,350. Given this comes in post the next election it’s hard to get too excited about.
2025 tax year – the 37% marginal tax rate band would be removed, such that those on income between $45,000 and $200,000 would have a marginal tax rate of 30% (which was 32.5%). Once again, given there is at least 1 election between now and then, it is hard to get too excited about this.
**Other announcements of note include: **
The small business instant asset write off will be increased to $30,000 and will be available to business with turnover of up to $50 million. These changes are in effect now (from 2nd April 2019) and will run until 30 June 2020. Note that before that date, the write off for businesses with up to $10 million in turnover was $25,000 after 29 January 2019 and before that date the maximum value was $20,000.
First home buyers will be able to supplement their deposits of at least 5% by accessing ‘The First Home Loan Deposit Scheme’. Details to be provided as it was an election promise not a budget announcement.
Promise of no changes to superannuation tax (for how long though?) and the Coalition will make an attempt to allow 6 member self managed funds (current limit is 4 members in a fund).
**The changes coming up that were already set in stone include: **
For this income year (2019), the lower company tax rate of 27.5% applies to companies with turnover of up to $50 million. The rate for these companies will decrease in coming years, to 26% for the 2021 year and 25% for the 2022 year. These changes enable companies to accumulate profits for reinvestment in their businesses at a lower rate (company rate for all other companies is 30%) but comes with the warning that those companies can only distribute franking credits at the same rate, which means that shareholders of those companies may be exposed to higher ‘top up’ tax.
The 32.5% marginal tax rate for individuals now applies to incomes of up to $90,000 (was $87,000)
R&D concessions were tightened in the previous budget, and include measures to reduce the refundable offset by limiting the rate to the company rate plus 13.5% and introducing a $4 million cap on refunds.
**And to round out the coverage of tax policy as it impacts on our clients, we will be keeping a watching brief on: **
Proposed changes to Division 7A, in particular the proposed changes to the treatment of ‘old’ company loans and entitlements – being pre 2009 unpaid entitlements from trusts to companies and even pre 1997 loans by companies to their shareholders (and associates). There are many privately held companies and their shareholders that will be impacted by any changes to these old loans and entitlements and that impact could be quite significant for some, with the need to pay dividends in many cases that will lead to ‘top up’ tax being payable by shareholders.
Changes to R&D concessions are expected though the detail is still to be provided. It was conspicuous that the most recent budget included significant savings from the program however no real details have yet been provided. Clarification around the treatment of software development is still anticipated.
While that seems a bit of change to consider in the future, it could have been a whole lot more – no need to be worried (for now) about minimum tax rate on trust distribution, the removal of refunds of franking credits, the reduction in the CGT discount, the removal of negative gearing – at least until the next election campaign.