Tax Planning Season – Choose Your Federal Budget
We are now in May and that signals the start of the year-end tax planning season. With a federal election coming up on Saturday 18 May, it’s a very unusual tax planning season. Normally the Federal Budget is handed down in May, and it is usually a document that we can reasonably rely on in formulating some tax planning strategies. Due to the upcoming election, however, the Budget was delivered on 2 April 2019. While this gives us some extra time to consider the tax related budget proposals and how they might impact on our clients, there is a high degree of uncertainty around who will form government following the election. For this reason, we also need to consider the opposition’s Budget Reply.
While remaining apolitical, we have attempted to explain below the key tax and superannuation related measures proposed by both the Coalition and the ALP. It may be worth noting that with a three year government term, another election will need to be called by May 2022. In other words, proposals that extend past that date may rely on a new government continuing to support them.
Personal Income Tax Cuts
Both the Coalition and the ALP are proposing cuts to income tax for individuals. This is achieved by increasing the Low and Middle Income Tax Offset (LaMITO), increasing tax thresholds, and reducing tax rates.
The increased LaMITO applies from 1 July 2018 (ie the current tax year). The table below shows the changes proposed by both the Coalition and the ALP.
|Taxable Income||Current LaMITO||Coalition Proposed LaMITO||ALP Proposed LaMITO|
|Up to $37,000||$200||$255||$350|
|$37,001 to $48,000||$200 plus 3c for every dollar above $37,000||$255 plus 7.5c for every dollar above $37,000||$350 plus 6.63c for every dollar above $37,000|
|$48,001 to $90,000||$530||$1,080||$1,080|
|$90,001 to $125,333||$530 minus 1.5c for every dollar above $90,000||$1,080 minus 3c for every dollar above $90,000||$1,080 minus 3c for every dollar above $90,000|
|$125,334 and above||Nil||Top threshold increased to $126,000 before it cuts out||Top threshold increased to $126,000 before it cuts out|
Changes to Thresholds and Rates
The Coalition has proposed increases in tax thresholds and cuts to tax rates, some of which will start from 1 July 2022. Ultimately, by 2024/25 they propose that the top marginal rate of 45% will only apply to those earning over $200,000, and for the bracket earning between $45,000 and $200,000, a tax rate of 30% will apply.
The ALP have not committed to these changes.
Instant Asset Write-off threshold
The Coalition proposed increasing the instant asset write-off from $25,000 to $30,000, and extending it to businesses with a turnover of up to $50 million (previously only applied to businesses with turnover up to $10 million). This will apply from 2 April 2019 until 30 June 2020.
The ALP supported this proposal, and it has already been passed into law.
The ALP have additionally proposed, from 1 July 2020, a 20% tax deduction in the first year for all businesses investing in equipment above $20,000. This would seem to now only impact those businesses with turnover exceeding $50 million.
Loans from Companies to Shareholders
Some proposals to change the way the tax law treats loans from companies to shareholders had previously been proposed to apply from 1 July 2019. The Coalition has deferred these changes, and they will now not apply until 1 July 2020. These rules and their potential impact are quite complex, and we’ll explain them further during tax planning to those who may be effected, however it is good news that there is now another year to address them.
Luxury Car Tax Refunds for Primary Producers and Tourism Operators
For vehicles purchased from 1 July 2019, the Coalition proposes that eligible primary producers and tourism operators will be able to apply for a refund of any luxury car tax paid up to a maximum of $10,000 (up from the current amount of $3,000).
The ALP have reconfirmed their proposal to limit negative gearing to new housing and existing arrangements. Losses from new investments will only be able to be used to offset investment income tax liabilities, or carried forward to offset the final capital gain on the investment.
The proposed measure will only apply to new investments commencing from 1 January 2020, and losses from investments made before this date will still be able to be deducted against other income.
The ALP has previously announced a proposal to end cash refunds for excess imputation credits for individuals and superannuation funds. They have, however, stated that recipients of Centrelink and DVA pensions and allowances will still be able to receive imputation credit refunds. This will extend to Self Managed Superannuation Funds where at least one member receives such a payment before 28 March 2018.
This measure is proposed to start from 1 July 2019.
Capital Gains Tax
The ALP have previously proposed to halve the CGT discount for all assets. This would reduce the CGT discount for assets held longer than 12 months from the current 50% down to 25%.
This new measure would not apply to investments made before the commencement date, and will also not affect investments made by superannuation funds. The CGT discount also won’t change for small business assets.
The proposed measure will only apply to assets purchased after a yet-to-be-determined date after the election. All investments made before this date will not be affected by the change.
Taxation of Discretionary Trust Distributions
Way back in July 2017, Bill Shorten announced that the ALP planned to introduce a standard minimum 30% tax rate from 1 July 2019 for discretionary trust distributions to adult beneficiaries. Currently, a trust distribution to an adult that has no other income (eg an adult child at university) of up to $18,200 is free of tax, and a distribution of up to $37,000 would attract tax of $3,572 (exc Medicare levy). The new rule, if imposed, would mean that a distribution of $18,200 would be subject to tax of $5,460, while a $37,000 distribution would result in tax of $11,100 (exc Medicare levy).
The proposal won’t apply to farm trusts, charitable and philanthropic trusts, testamentary trusts, or to non-discretionary trusts.
Lowering the threshold for Div 293 Tax
Taxpayers with income and taxable superannuation contributions totalling above $250,000 in a financial year are subject to an additional tax of 15% on concessional contributions. This is applied to the proportion of taxable contributions above the $250,000 threshold. The ALP propose to reduce the threshold to $200,000. The commencement date for this proposal is not yet known.
Removal of the work test and extension of the Bring-forward cap for some taxpayers
From 1 July 2020 the Coalition propose that people aged 65 and 66 will not need to satisfy a work test to be able to make superannuation contributions. Under current rules they can only make contributions if they work a minimum of 40 hours over a 30 day period. Those aged 67 to 74 would still be subject to the current rules.
From the same date, those people will also be able to make up to three years’ worth of non-concessional contributions. By doing this, they can contribute up to $300,000 of non-concessional contributions in a single year.
The ALP are unlikely to commit to this, and in fact have proposed a reduction in the non-concessional contribution cap from the current annual cap of $100,000 down to $75,000. Again the commencement date of this is not yet known.
Increase in age limit for spouse contributions
From 1 July 2020, the Coalition propose that the age limit for spouse superannuation contributions will be increased from 69 to 75 years. The contributing spouse is eligible to claim a spouse tax offset of up to $540.
Simplifying Superannuation Fund Reporting
From 1 July 2020, the Coalition propose that superannuation funds will be able to choose their preferred method for calculating exempt current pension income (ie the component of income of the Fund that is not subject to tax). The requirement for a superannuation fund that is 100% in pension mode to obtain an actuarial certificate will also be removed.
Phasing down the Superannuation Guarantee Threshold
The ALP propose to eliminate the threshold under which Superannuation Guarantee contributions need to be paid for employees. That threshold is currently $450 per calendar month. It would reduce to $350 from 1 July 2020, and be eradicated from 1 July 2024.
Increasing the Rate of Superannuation Guarantee
The ALP have committed to increase the rate of Superannuation Guarantee contributions from the current 9.5%, up to 12%. At this stage, the effective date of this change is unknown.
Superannuation Guarantee on Paid Parental Leave
With effect from 1 July 2020, the ALP propose that Superannuation Guarantee contributions will need to be paid on government funded Paid Parental Leave and Dad and Partner pay.
WHAT YOU CAN GLEAN FROM THE ABOVE FOR YEAR END TAX PLANNING
- Regardless of who wins the election, individual tax payable by anyone earning less than $126,000 will be a little lower commencing from the current tax year.
- Regardless of who wins the election, businesses with turnover of up to $50 million can benefit from the instant asset write off by acquiring one or more assets costing up to $30,000 per asset.
- If you’re a primary producer or tourism operator looking at buying a luxury car, you might want to defer your purchase until after 1 July 2019. If the Coalition win the election, the refund of luxury car tax is proposed to increase from $3,000 to $10,000.
- If you have plans to buy investment assets like shares or real estate, you might want to consider doing so sooner rather than later, especially if you intend to negatively gear. If the ALP win the election, investments in place before the 1 January 2020 abolition of negative gearing, and investments made before the yet-to-be-determined commencement date of the reduced CGT discount will be grandfathered under the pre-existing rules.
- If the taxation of discretionary trusts proposal comes to fruition, you should carefully consider the entity through which you make your passive investments. For many, it would become more tax effective for a lower income spouse to invest rather than investing via a discretionary trust.
- If you don’t have a will that includes establishment of a testamentary trust, you should consider updating it. A testamentary trust is excluded from the proposed changes to taxation of discretionary trusts, so will continue to be a useful structure for holding investments in the long term.
It is likely that many more announcements will occur over the weeks leading up to the election. We suggest you pay attention to the news, and of course contact us should you have any queries or concerns about how any proposal might impact on your personal situation.