RSM Australia

Individuals

  • The 2% budget deficit levy on incomes over $180,000 will not be extended beyond its initial three years.  The levy will cease at the end of the 2016-17 year.
  • The Medicare Levy will increase by 0.5% to 2.5% from 1 July 2019.
  • The Medicare Levy low-income threshold for singles will be increased to $21,655 in the 2016-17 year.  The family income threshold (for couples with no children) will be increased to $36,541.  The threshold will increase by a further $3,356 for each dependent child.
  • A new set of repayment thresholds for students with a Higher Education Loan Program (HELP) debt will be introduced from 1 July 2018.  HELP debtors will be required to start repaying their debt when their annual income reaches $42,000 with a 1% repayment rate (under current legislation the repayment threshold for the 2017-18 year starts at $55,874 with a 4% repayment rate).
  • HELP debt repayment thresholds which are currently linked to Average Weekly Earnings (AWE), will be changed to align with the Consumer Price Index (CPI) from 1 July 2019.
  • Restrictions on depreciation deductions on plant and equipment will be introduced for owners of residential investment properties.
  • Travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017.
  • Increase in the Capital Gains Tax (CGT) discount from 50% to 60% on eligible residential rental properties. 

Income Tax Rates

Marginal tax rates will largely remain unchanged except for the cessation of the 2% budget deficit levy for taxpayers with a taxable income of $180,000 or more.  For a taxpayer with a taxable income of $250,000, the removal of the levy with result in a reduction in tax of $1,400.

The Medicare Levy will increase by 0.5% to 2.5% which means an increase in tax payable for taxpayers with a taxable income in excess of the Medicare low income thresholds.  A taxpayer with a taxable income of $60,000 will pay an extra $300 per year in tax.


Summary of Tax Rates & Thresholds

2016-17

(including the 2% temporary budget deficit levy, but excluding the 2% Medicare levy)

Taxable income $

Tax payable $

0 - 18,200

18,201 - 37,000

37,001 - 87,000

87,001 - 180,000

180,001+

Nil

Nil + 19% of excess over 18,200

3,572 + 32.5% of excess over 37,000

19,822 + 37% of excess over 87,000

54,232 + 47% of excess over $180,000


2017-18

(excluding the 2% Medicare Levy)

Taxable income $

Tax payable $

0 - 18,200

18,201 - 37,000

37,001 - 87,000

87,001 - 180,000

180,001+

Nil

Nil + 19% of excess over 18,200

3,572 + 32.5% of excess over 37,000

19,822 + 37% of excess over 87,000

54,232 + 45% of excess over $180,000


Changes to HELP Repayment Thresholds and Rates

Students will start to repay their HELP debts sooner under the proposed changes to the repayment thresholds and rates.

A new set of thresholds and repayment rates will be introduced from 1 July 2018 with the minimum repayment threshold commencing at $42,000 with a repayment rate of 1% (reduced from the budgeted threshold of $55,874 with a repayment rate of 4%).

The maximum repayment threshold will increase to $119,882 with a repayment rate of 10% (increased from $107,214 with a repayment rate of 8%).

In real terms this means a student with an annual taxable income of $42,000 in 2018-19 will be required to make a minimum repayment of $420 toward their HELP debt.  A student with an annual taxable income of $119,882 in the same year will be required to make a minimum repayment of $11,988.20.  For single income taxpayers with dependent children, the increase in the repayment thresholds may cause significant financial pressure, particularly when combined with the high cost of housing and child care costs.  Here’s hoping the proposed budget measures for housing affordability and child care assistance will help ease the burden for struggling students trying to improve their education and employment skills.


HELP repayment rates and thresholds

The current and proposed repayment rates and thresholds for 2018-19 are as follows:

Repayment rate

Current 2018-19 thresholds

Proposed new 2018-19 thresholds

1%

-

$42,000

1.5%

-

$44,520

2%

$51,957

$47,191

2.5%

-

$50,022

3%

-

$53,024

3.5%

-

$56,205

4%

$57,730

$59,577

4.5%

$64,307

$63,152

5%

$70,882

$66,941

5,5%

$74,608

$70,598

6%

$80,198

$75,215

6,5%

$86,856

$79,728

7%

$91,426

$84,512

7.5%

$100,614

$89,852

8%

$107,214

$94,957

8.5%

-

$100,655

9%

-

$106,694

9.5%

-

$113,096

10%

-

$119,882


Residential Investment Property Owners – The Big Losers

Residential investment property owners will be the big losers with proposed changes to deductions for:

  • depreciation on plant and equipment; and
  • deductions for travel expenses associated with inspecting, maintaining or collecting rent for a residential rental property.

Depreciation on Plant & Equipment

From 1 July 2017, the Federal Government will limit deductions for depreciation of plant and equipment to outlays actually incurred by investors in residential investment properties.  In the past, taxpayers who purchased a residential investment property could claim a deduction for depreciation of plant and based on depreciation reports provided by licensed quantity surveyors irrespective of tax deductions claimed by previous owners.

Investors who purchase plant and equipment (e.g. dishwashers, window treatments, light fittings etc) after 9 May 2017 will be able to claim depreciation over the effective life of the asset.  Subsequent owners of the property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.

The proposed changes will apply on a prospective basis with existing investments grandfathered, so if you are concerned that you will no longer be able to claim a deduction using your quantity surveyor report, don’t panic.  Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts entered into at 7.30pm AEST on 9 May 2017) will continue to give rise to deductions for depreciation until either the taxpayer no longer owns the asset or the asset reaches the end of its useful life.


Travel Expenses

In response to Federal Government concerns that owners of residential investment properties may be claiming travel costs without correctly apportioning costs or have claimed private travel costs, travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017.

This may have a significant impact on residential investment property owners who self manage properties they own in rural areas, mining towns or interstate.  Taxpayers who legitimately incur travel expenses to regularly inspect or undertake maintenance at properties in rural, remote or interstate locations may need to find a reputable property manager to manage the property in order to obtain a deduction for costs associated with holding and renting the property.


CGT discount increased for affordable housing investments

The CGT discount will be increased from 50% to 60% for Australian resident individuals investing in qualifying affordable housing.

The conditions to access the 60% discount include:

  • the housing must be provided to low to moderate income tenants
  • rent must be charged at a discount below the private rental market rate
  • the affordable housing must be managed through a registered community housing provider; and
  • the investment must be held for a minimum period of three years.

Whilst the 10% increase in the CGT discount appears to be an incentive to invest in affordable housing, the rather onerous conditions may deter those taxpayers seeking to generate market rental income and/or a capital return on their investment.

Winners

High income earners with a taxable income of $180,000 or more will be the real winners with the removal of the 2% budget deficit levy.

Losers

Students and residential investment property owners will be the main losers under the proposed budget changes.


Case Study
Rob and Cathy own a number of rental properties in Port Hedland in Western Australia.  The properties are owned as joint tenants.  With the downturn in the mining sector, rental income generated from the properties has decreased substantially so in order to reduce costs, Rob and Cathy have decided to manage the properties without the assistance of a rental property manager.  Rob and Cathy travel to Port Hedland once a quarter to inspect the properties, undertake maintenance and collect outstanding rent where necessary.

Typical costs incurred by Rob and Cathy each quarter include:

Flights

2,000

Accommodation

700

Meals

500

Car Hire

600

 

3,800

Rob and Cathy incur travel expenses relating to the properties of approximately $15,200 per year.  Prior to 1 July 2017, Rob and Cathy have claimed a tax deduction of approximately $7,600 each in relation to the rental properties.

Assuming Rob and Cathy both have an average tax rate of 30%, a tax deduction of $7,600 would result in a reduction of tax payable of $2,280 each.  If Rob and Cathy continue to manage the properties post 1 July 2017, they will have additional tax payable between them in the 2018 year of $4,560.


GST Measures

The Budget 2017-18 contained only a few GST measures, most of which were very specific and targeted.

Significantly, two of the measures announced change the basic way the GST is collected and remitted by placing the obligation on the buyers (rather than the sellers) to remit the GST, a so-called reverse charge. This could potentially increase GST compliance costs.

Perhaps the most interesting and wide ranging measure is the so-called integrity measure with regards to property transactions.

Key POINTS

  • GST Reverse charge to apply to certain property transactions
  • Removing the double taxation of GST on digital currency

GST on property transactions

From 1 July 2018, the Government will strengthen compliance with the GST law by requiring purchasers of newly constructed residential properties or new subdivisions to remit the GST directly to the ATO as part of settlement.

Under the current law (where the GST is included in the purchase price, the developer remits the GST to the ATO), some developers are failing to remit the GST to the ATO despite having claimed GST credits on their construction costs. The Government is of the view that, as most purchasers use conveyancing services to complete their purchase, they should experience minimal impact from these changes.

This is a quantum change to the way that the GST system works and puts the responsibility to remit the GST onto the purchaser who is unlikely to be “carrying on an enterprise” or registered for GST.

Case Study
Mikaela and Joey engage a well-known home builder to build their dream home. The house and land package they agree to is for a total value of $850,000. Under the proposed new legislation, after 1 July 2018, Mikaela and Joey will have to remit the GST included in the amount to the ATO.

Normally it would be the builder who has the liability to remit the GST.

This raises some interesting practical aspects.

  • How do Mikaela and Joey know whether or not the seller has a GST liability, especially if they are buying land from a developer?
  • How do they know how much GST is included in the amount, as the builder may have calculated the GST liability using the margin scheme?
  • Even if they do use a conveyancing service to complete their purchase, how is the amount remitted, and how is the amount matched with the builder?​
  • Who will be liable if the GST is incorrect?

GST — removing the double taxation of digital currency

The Government will align the GST treatment of digital currency (such as Bitcoin) with money, from 1 July 2017.

Digital currency is currently treated as intangible property for GST purposes. Consequently, consumers who use digital currencies as payment can effectively bear GST twice: once on the purchase of the digital currency, and again on its use in exchange for other goods and services subject to GST.

This measure will ensure purchases of digital currency are no longer subject to the GST. The government expects that removing double taxation on digital currencies will remove an obstacle for the Financial Technology (Fintech) sector to grow in Australia.


Foreign Resident Housing Investment

The Government has taken aim at foreign property owners under the guise of affordable housing measures.

After the former Labor Government removed the 50% CGT Discount for non-residents in the 2012-13 Budget, the Coalition Government has upped the ante by ensuring that foreign residents and temporary residents reach further into their pockets where they hold real property in Australia.

Changes that will impact on foreign resident and temporary residents include:

  • Removal of the main residence exemption for foreign residents and temporary residents from 7:30pm on 9 May 2017, with transitional arrangements in place for existing holdings until 30 June 2019;
  • A levy being charged on properties acquired by foreign residents after 9 May 2017 where the property is not occupied or not genuinely available on the rental market for at least six months per year;
  • A 50% limit will be placed on foreign ownership in new multi-storey developments with at least 50 dwellings;

The foreign resident CGT withholding rate will be increased from 10% to 12.5%, with the withholding threshold being lowered from $2 million to $750,000.

Case study
Magenta is a temporary resident working in Australia on a working visa.  On 1 June 2017 he buys a house in Carlton in Melbourne, Victoria to live in whilst he works as a concierge at an upmarket hotel.
He leaves Australia to return home to Transylvania in June 2018, leaving the property vacant as he is contemplating returning to Australia in the near future.
Family issues cause Magenta to abandon his plans to return to Australia, and in February 2019 he places his Carlton property on the market for sale.
If Magenta was an Australian resident, he would have been entitled to a full CGT exemption on the sale of his property.

Instead, Magenta will be liable for CGT on any gain on the sale of the property, despite it being his main residence, and he will not be entitled to the 50% CGT discount to reduce his capital gain despite holding the property for more than 12 months.
Magenta will be liable for the underutilised property levy in the 2018 year, as he did not have the property available for rent for more than six months of the year.
Finally, he will lose 12.5% of the sale proceeds due to the foreign resident CGT withholding tax being applied at settlement.  The tax is non final, and Magenta can lodge an Australian income tax return to claim a credit for the tax against his actual CGT liability.


Learn more about Federal Budget 2017-18:

 << BUDGET INSIGHTS 

 << DOWNLOAD BUDGET REPORT 

Authors

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Con Paoliello

Director, Tax Services

E: con.paoliello@rsm.com.au

T: +61 8 9261 9100


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Corey Beat

Principal, Tax Services

E: corey.beat@rsm.com.au

T: +61 8 9261 9507


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Joanne Wynne

Principal, Tax Services

E: joanne.wynne@rsm.com.au

T: +61 8 9261 9453


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Ross Watson

Principal, Tax Services

E: ross.watson@rsm.com.au

T: +61 8 9261 9100


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Tony Ince

Senior Analyst, Tax Services

E: tony.ince@rsm.com.au

T: +61 8 9261 9417


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