2017 Federal budget
As you all know the Treasurer, Scott “Scomo” Morrison handed down the 2017 Federal Budget tonight. Tomorrow’s papers will of course put their spin on it as is their mandates. But tonight I will briefly discuss the key measures that impact both our business and private investor clients and their wealth building efforts …
Changes impacting Property Investors (and Quantity Surveyors)
From 1 July, you will no longer be able to claim a tax deduction for travel expenses incurred on inspecting, maintaining or collecting rent, for a residential rental property (though I assume from the wording that means you can still claim such expenses if the property is a commercial building).I’d be surprised if there were many property investors who feel this is a genuine imposition on them!Also from 1 July, depreciation will no longer be allowed on plant & equipment (or perhaps better described as furniture and fittings) acquired when you purchase a residential rental property … and with that single stroke of the pen, I suspect the Federal Government may have just killed the Property Depreciation Report industry! I hope I am wrong, but you wouldn’t want to be a Quantity Surveyor specialising in that service after tonights 2017 Federal Budget, I suspect it will be a sleepless night and a tough period ahead. Scary how your job, your business, potentially your livelihood and your future can be so dramatically impacted with one decision from the Federal Government! Again as I say, I hope I am wrong.From 1 January 2018 (a slightly strange commencement date) the Capital Gains Tax Discount will be increased for those who invest in qualifying affordable housing. The Discount will increase from 50% to 60%. However I must say, please think very long and hard about investing in such projects. They may have a noble intent, but the industry that has been created around these Government policies has seen a number of controversies and I would suggest questionable returns to many investors to-date!
Changes impacting Property Developers
Now this is an interesting one! From 1 July 2018, whenever someone purchases a new residential property or new subdivision, they will be required to pay the GST component of the purchase price, directly to the ATO! So what?Admittedly most people buying such property didn’t even know that part of what they were paying was GST to the Developer. Nor did they know that the Developer selling to them owed that portion of the sale price to the ATO. And that was all fine and it didn’t really matter to the purchaser, but …For the Developer, the GST was sometimes a way to help reduce their losses if the project was a failure. You see they had been claiming back GST from the ATO throughout the entire construction period, but then if their development didn’t make a profit, they would retain the GST on the sale and then liquidate and avoid paying the tax man.It sounds off, but it has been part of the property development game since GST came in, and now that the “opportunity” to minimise risk will be removed, Developers will want to make extra sure that a project will be a success.What it also means is more work for Settlement Agents. So, assuming they can on-charge for the extra work coming their way, it appears there has been a wealth switch tonight from Quantity Surveyors to Settlement Agents.
Changes impacting the Courier and Cleaning Industries
From the 2018/19 financial year, Courier and Cleaning business will have similar obligations as currently exist for businesses operating in the Construction Industry. It means these businesses will be burdened with even further tax reporting obligations which require the reporting of all payments made to contractors to the ATO (with the intention of reducing under reporting of taxable incomes).
Changes impacting Retailers
Its surprising this is even a thing, but “Sales suppression technology and software” will now be prohibited. What these means is that Point of Sales systems that allow a sale to be processed and recorded … and then deleted without a trace, hence allowing under reporting of income and under payment of tax … will no longer be allowed to be sold in Australia! Also, funding for the ATO’s Black Economy Taskforce audit and compliance activities (which has focused on Retailers to-date) will be extended until 30 June 2018.
Changes impacting those with Self-Managed Super Funds
Ok, ok, before you go off the handle about the constant changes to super and the Federal Government not being able to keep their hands out of the cookie jar, I can tell you the changes this year are minor, and pure common sense (and I don’t believe will actually impact any of our Clients who already manage their super in a conservative manner per our advice) …
Firstly the use of limited recourse borrowing arrangements will be included in a member’s total superannuation balance and transfer balance cap from 1 July 2017. What does that mean, it means you can’t use borrowing to get around the $1.6m cap on funds that can be tax free within your SMSF. Fair enough!
Secondly, opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings will be reduced from 1 July 2018. We didn’t know there were any such opportunities, least not any of consequence. As far as we were concerned, transactions on non-commercial terms were effectively already outlawed anyway (nor a good idea in the first place).
Changes impacting all Small Businesses
From next year, access to the Small Business CGT Concessions will be tightened to deny eligibility for assets which are unrelated to the small business.
Pretty much all our business Clients will have heard us talk about these concessions. They are a very big deal, and can mean a huge tax saving when you sell your business (or sometimes related assets) and everybody wants to qualify for them.
Having said that, as best we know, assets unrelated to the business never qualified for the concessions, so we aren’t sure what this announcement is really going to change. Obviously some smart Alec out there has come up with a technically correct, yet clearly not right, way to extend the concessions beyond their intended realm and this new law will kill it off.
And probably the 2017 Federal Budget announcement that our Small Business Clients will celebrate the most …
The $20,000 instant asset write-off for small business will be extended by 12 months to 30 June 2018!
So as long as your turnover is below $10m (a threshold which in itself was increased from $2m last year), just about all equipment and the like purchased for your business that costs less than $20,000 (so $21,999 including GST for those registered for GST) will get you an immediate tax deduction for the outgoing (please just don’t use it to buy another car you don’t need on 30 June just for the tax deduction).
And finally, Changes impacting Everyone
So from the 2019/20 tax year, we will all (virtually all) have a tax increase of half a percent. It will come in the form of an increase to the Medicare Levy from 2% to 2.5% (pretty certain I remember when Medicare was 1%, anyhow). The key result most people want to know about is the top tax rate after this change … Well it actually gets a little complicated …
Today the top tax rate is effectively 49% including the existing Medicare Levy of 2% plus a Temporary Budget Repair Levy of another 2% (the actual top tax rate, before the extra levies, is 45%).
However the Temporary Budget Repair Levy is slated to end this year (2017) and as best I can tell, that hasn’t changed. So from the 2017/18 year, the top tax rate inclusive of levies will reduce to 47%. So then when Medicare increases again in 2019/20 the top rate will become 47.5%, which is still actually less than what we are paying today. Got that?
There have also been two announcements regarding super that anyone (including those that don’t have a self-managed super fund) may consider taking advantage of:
- The first is an ability for older Australians who downsize their home to put extra money into Super (from the proceeds of the sale of that home). We will see how this plays out. Frankly, it is just one more complication that keeps accountants and financial planners in business (good for us I guess), with the net result for the individual ultimately being watered down. If only our super system could be simpler. And that’s not to mention the impact on your Pension from downsizing (assets previously exempt for Pension purposes, will no longer be so).
- The second is an ability for (mostly younger) Australians to put extra money into Super that can then be redrawn and used to purchase their first home. Again, its another complication to the super system with questionable benefit. Some diligent savers will be able to use it to save for their first home a little faster, but honestly I would be surprised if this measure is widely used, particularly her in WA. Lets wait and see.
Oh, and a couple other relatively minor items …
- The income threshold at which point you start paying the Medicare levy will increase (a little) from the 2016/17 income year (though don’t get excited, the threshold is low, and few of our Clients are under it.
- A new set of repayment thresholds and rates under the higher education loan program (HELP) will be introduced from 1 July 2018. In short, uni students will start paying back their uni loans sooner, and at a lower income level (though again, the threshold was already pretty low anyhow).
Please get in touch if there are any questions or anything important you think I missed?
Oh and want to know more, here are the 2017 Federal Budget Papers.