Federal Budget June 2017 Update

The government has recently handed down the Budget for the 2017/2018 financial year. Read on for the impact on small businesses and personal taxation.

No change to personal tax rates; Budget deficit levy to end

The 2017–2018 Federal Budget contained no changes to the personal income tax rates and thresholds. This means that the 2% budget deficit levy on incomes over $180,000 will not be extended beyond its initial three years, and will cease on 30 June 2017.

The tax rates for foreign residents for 2017–2018 will be the same as those for 2016–2017, except that the top marginal rate will be 45%, reflecting the removal of the 2% temporary budget deficit levy.

The currently legislated low income tax offset (LITO) rates have not changed.

Medicare levy increase to 2.5% from 1 July 2019

The Government will increase the Medicare levy to 2.5% from 1 July 2019 (up 0.5% from the current 2% Medicare levy) to ensure the National Disability Insurance Scheme (NDIS) is fully funded and to guarantee Medicare. Other tax rates that are linked to the top personal tax rate, such as the FBT rate, will also be increased.

Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.

The increase in the Medicare levy is estimated to raise $8.2 billion over the forward estimates, being the net impact across all heads of revenue, not just the Medicare levy. The Government said it will credit $9.1 billion to the NDIS Savings Fund Special Account when it is established.

Low income thresholds for 2016–2017

The Medicare levy low-income threshold for singles will be increased to $21,655 (up from $21,335 for 2015–2016). For couples with no children, the family income threshold will be increased to $36,541 (up from $36,001 for 2015–2016). The additional amount of threshold for each dependent child or student will be increased to $3,356 (up from $3,306).

For singles eligible for the Seniors and Pensioners Tax Offset, the Medicare levy low-income threshold will be increased to $34,244 (up from $33,738 for 2015–2016). The family threshold for seniors and pensioners will be increased to $47,670 plus $3,356 for each dependent child or student.

Major bank levy from 1 July 2017

The Government will introduce a major bank levy for authorised deposit-taking institutions (ADIs) with licensed entity liabilities of at least $100 billion from 1 July 2017. The threshold will be indexed to grow in line with nominal gross domestic product.

The levy will be calculated quarterly as 0.015% of an ADI's licensed entity liabilities as at each APRA mandated quarterly reporting date (for an annualised rate of 0.06%).

Liabilities subject to the levy will include items such as corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. The levy will not apply to the following liabilities: additional Tier 1 capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme.

The levy is expected to raise $6.2 billion over the forward estimates period, net of interactions with other taxes (principally corporate income taxes). The Government believes this represents a fair additional contribution from Australia's major banks and will assist with budget repair.

Government commits to remainder of 10-year package to reduce company tax rate

The Budget confirmed the Government's intention to re-introduce the remaining elements of its 10-year Enterprise Tax Plan.

Legislative amendments already passed by the Senate will see the corporate tax rate reduced for companies with a turnover less than $50 million. These Senate amendments are set to be approved by the House of Representatives as part of the Budget sittings. The Government said it remains committed to its 10-year Enterprise Tax Plan to eventually reduce the company tax rate to 25% for all companies.

In the 2016–2017 financial year, the reduced corporate tax rate of 27.5% will apply for businesses with an aggregated turnover of less than $10 million; $25 million turnover in 2017–2018; and $50 million turnover from 2018–2019. This effectively implements the first three years of the Government's plan.

As per the trajectory in the Budget, the corporate tax rate will also be further reduced in stages, starting from 1 July 2024, so that it will eventually fall to 25% by the 2026–2027 financial year for businesses with an aggregated turnover of less than $50 million.

Small business measures

In addition to the reduced company tax rate, the Enterprise Tax Plan Bill includes measures to:

  • increase the small business entity aggregated turnover threshold to $10 million from 1 July 2016 – but the threshold for accessing the CGT small business concessions will remain at $2 million; and
  • increase the unincorporated small business tax discount from 5% to 16% over a 10-year period –- the threshold for accessing the discount will be $5 million (aggregated turnover).

The increase in the small business entity aggregated turnover threshold will enable a greater number of businesses to access concessions such as the simplified depreciation and trading stock rules and a two-year (instead of four-year) review period for amending assessments.

Higher instant asset write-off threshold for small business extended

The Government will extend the current instant asset write-off ($20,000 threshold) for small business entities (SBEs) by 12 months to 30 June 2018.

The threshold amount was due to return to $1,000 on 1 July 2017. As a result of this announcement, SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are acquired between 1 July 2017 and 30 June 2018 and first used or installed ready for use by 30 June 2018 for a taxable purpose. Only a few assets are not eligible for the instant asset write-off (or other simplified depreciation rules), for example 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 general small business 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).

The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2018.

Note that when the SBE changes in the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 receive assent, the aggregated turnover threshold for a SBE will increase to $10 million (from 2016–2017). Accordingly, SBEs with aggregated turnover between $2 million and $10 million will benefit from the $20,000 instant asset write-off concession.

Housing Affordability

The 2017–2018 Budget contained a number of measures designed to improve Australians' access to secure and affordable housing across the housing spectrum. These include:

  • strengthening the CGT rules to reduce the risk that foreign investors avoid paying CGT in Australia;
  • introducing a 50% cap on pre-approved foreign ownership in new developments;
  • applying an annual charge to foreign owners who leave residential property unoccupied or not available for rent for six months or more each year;
  • easing restrictions that are contributing to the supply of housing falling behind population growth and encouraging a more responsive housing market;
  • improving outcomes in social housing and homelessness;
  • assisting first home buyers to build a deposit inside superannuation; and
  • allowing older Australians to contribute downsizing proceeds into superannuation.

Increased CGT discount for investments in affordable housing

From 1 January 2018 the CGT discount for individuals will be increased from 50% to 60% for gains relating to investments in qualifying affordable housing.

To qualify for the higher discount, housing must be provided to low to moderate income tenants, with rent charged at a discount to the private rental market rate. Tenant eligibility will be based on household income thresholds and household composition.

The affordable housing must be managed through a registered community housing provider and the investment held for a minimum period of 3 years. Any period before the time a property was purchased when it was used for affordable housing purposes will count towards the buyer's qualifying investment period (provided the previous owner did not claim the additional discount).

The additional discount will be pro-rated for periods where the property is not used for affordable housing purposes.

The higher discount will flow through to resident individuals investing in qualifying affordable housing through a managed investment trusts.

The increased discount is not limited to investments in new affordable housing. This means that investors who elect to supply their existing properties for affordable housing will qualify for the additional discount provided the investment meets the eligibility requirements.

The Government will consult further on the implementation of this policy, including on the precise definition of affordable housing and tenant eligibility, and what qualifies as rent charged below the market rate.