The recent Federal Election saw the Coalition led by Scott Morrison returned to government. While this means that Labor’s controversial tax policies have been put on ice, it’s time to revisit the government’s tax agenda and what this means for you.
Labor’s tax policy agenda will likely be shelved following the unexpected election result. This means we may not again see the extent of tax raising proposed again in the near term, with the following measures likely to be dropped as Labor policy:
- Removal of negative gearing on all new investments other than new residential property
- Removal of refundable franking credits
- Reduction of the CGT discount from 50% to 25%
- Minimum tax rate of 30% on distributions made by discretionary trusts; and
- Capping of $3,000 on an individual’s tax deductions for managing their tax affairs.
Changes to personal income tax brackets
The Coalition is committed to its election promise to reduce personal income taxes for Australian taxpayers by:
- Increasing the maximum Low-and Middle-Income Tax Offset (“LMITO”) from $530 to $1,080 to provide immediate tax relief to low and middle income taxpayers;
- From 2022-23, increasing the 19% tax bracket from $37,000 to $45,000; and
- From 2024-25, a significant “flattening” of the tax brackets by abolishing the 32.5% and 37% brackets in favour of a single 30% tax bracket that will apply to income over $45,000 up to $200,000.
As a result of the plan, if it can be enacted in its current form, 94% of Australian taxpayers will have a marginal tax rate of 30% or less in 2024-25.
The government is intending to push through the initial tranche of tax relief through the increased LMITO once parliament resumes, subject to receiving support from key crossbench senators, or possibly even bi-partisan support.
Division 7A amendments
The government has previously announced it will substantially overhaul the current Division 7A measures impacting the treatment of current and prior year private company loans, use of private company assets and unpaid present entitlements from trusts. The changes are proposed to:
- Simplify the Division 7A loan rules for easier compliance;
- Require all existing 7 and 25-year loans to change to a duration of 10 years and align their calculations with the minimum interest rate for commercial transactions;
- Simplify the private company asset use rule by introducing safe harbour measures; and
- Ensure unpaid present entitlements from trusts fall within Division 7A.
The government appears committed to implementing the changes although it has announced that the measures will be delayed until 2020. We expect this will provide scope for further consultation on the changes, particularly the retrospective and transitional aspects of the rules.
Given the government’s commitment to these measures, we strongly recommend that you start identifying and planning for potential consequences arising from these measures with your tax advisers.
Originally announced under the 2018-19 Federal Budget, the government proposed significant changes to the R&D tax incentives available to taxpayers – broadly, these proposed changes were aimed at reducing the R&D refundable tax offset to 41% from 43.5% (for companies with aggregate turnover of <$20 million) and for large companies (>$20 million turnover), changing the R&D tax incentive available to be dependent on the proportion of R&D expenditure as compared to total expenditure, referred to as “R&D intensity”.
Draft legislation was referred by the Senate to the Economics Legislation Committee which recommended in February 2019 that consideration of the bill be deferred until further examination. There has been no official comment on the status of the draft legislation and whether the government will pursue the proposed changes in their current form. Given the outcome of the election and the Senate recommendations that further studies be done on the impact of the proposed changes to Business Expenditure on R&D (BERD), it is unlikely that we will see the re-introduction of such changes imminently, however it is probable that changes to the R&D tax incentive program in its current form will be revisited in the near future.
Instant asset write-off
As announced in the Budget, an extension to the instant asset write-off measure has already been implemented, which enables companies with a turnover of up to $50 million to instantly write-off assets costing up to $30,000.
The extended scheme applies to asset purchases after 2 April 2019, and applies to assets that are used, or installed ready for use, before 30 June 2020.
Increased funding for the ATO to pursue taxpayers
As part of a bid to strengthen Australia’s tax framework, the recent Federal Budget included significant additional funding to the ATO which is aimed at:
- Extending the operations of the Tax Avoidance Taskforce to 2023;
- Increasing the ATO’s data analytics abilities;
- On time payment of tax and superannuation liabilities by large corporate entities; and
- Assisting with debt recovery
The increased funding to the ATO makes its crystal clear that the government is intent on strengthening the integrity of Australia’s tax system as well as ensuring multinationals and large businesses pay their “fair share” of tax. From a corporate perspective, it’s important to ensure that:
- All mid to large corporates, including any taxpayers that would be included within the top 1,000 taxpayers, review or implement tax governance procedures to ensure there is an appropriate framework in place to provide assurance to the ATO under the “justified trust” concept.
- Multinationals should carefully scrutinise their international transactions to ensure that they do not fall foul of the various integrity measures that have been enacted in the last few years, such as the Multinational Anti-avoidance Law, Diverted Profits Tax and the Hybrid Mismatch rules.
Final thoughts on the role that tax will play in this term of government
While tax was not a significant focus for the Coalition leading up to the election, we see tax increasingly becoming a high priority for the government following its unexpected election win. Initially, there will be a strong desire to push through the “unfinished business” of implementing the personal tax cuts and wrapping up the other outstanding measures discussed above.
Beyond that, we see demands for broader tax reform becoming louder as this term progresses, and the possibility of new proposals for reform being seriously contemplated by this government in the lead up to next election. Just what that might look like is hard to say at this stage, but we are unlikely to see policies that restrict negative gearing and franking credits revisited in the foreseeable future.
For more information
If you have any questions or think these measures may affect you, please contact your local RSM tax adviser.