May 10, 2017
OneLedger is again here to bring you the highlights from the 2017 budget. Amidst falling polls and a world rallying against the political elite, this budget had to be a fair one – and it was. It requires everyone to do their share in bringing the budget back to surplus, from individual taxpayers all the way up to the multinationals. You could be forgiven for thinking this budget came from the other side of the floor, with a raid on bank’s booming profits and infrastructure spending strongly on the agenda. Again, there is a real lack of reform as our governments continue to be hindered by slender majorities.
Innovation is incredibly important to our future prosperity. Creating new knowledge, disrupting traditional industries and creating new ones will be the next wave of success for Australians. Whilst still a priority, it appears to have lost ground to some of the more primal political wins in infrastructure and health. Scott Morrison did not refer to the Ideas Boom once. The Ideas Boom was the centerpiece of the last budget and the hallmark of Malcolm Turnbull. We sincerely hope it comes back on the agenda.
The Lib’s path to surplus requires everyone’s input and rely on some uncertain assumptions. The forward estimates assume increases in tax receipts. With cuts to company and business taxes, this requires personal incomes to increase when wage growth is at record lows. The Medicare Levy increase of 0.5%, set to affect nearly all Australians, will provide some of this revenue. As this has been earmarked for health funding such as the NDIS, it is hard to identify where the additional revenue will come from.
Please find below the key parts of the budget that will affect Australian businesses:
Small Business Tax Cuts
Whilst a part of the last budget, many of the tax cuts promised faced severe opposition in Parliament. Recent deals brokered have watered down the company tax cuts promised however small business is still set to benefit. The company tax rates for small businesses with turnover up to $10m will be cut to 27.5% commencing 1 July 2016. From 1 July 2017, companies with a turnover of $25m will also be able to access this lower tax rate.
This threshold will be increased to $50m for the 2019 financial year, a significant jump from $2m in the 2016 financial year.
Having passed, it will allow for many more businesses to be included in the definition of small business, deliver a lower company tax rate and provide immediate cash benefits through reduced Pay As You Go Tax Instalments from 1 July 2016.
More businesses will also now be able to make use of the $20k immediate asset write off. This will be extended a further year to 30 June 2018.
OL Comment – Reducing the tax burden for small business allows them to re-invest this additional money into their business and people. We welcome the certainty that we now have around company tax rates and look forward to guiding companies through the changes.
Crowd Sourced Equity Funding (CSEF)
Draft legislation has been released to allow private companies to access CSEF. Previously this has only been available to public companies.
Currently, private companies can only seek to raise capital from existing shareholders and employees subject to caps. This law will allow these companies to raise capital through CSF offers.
Private companies raising capital via CSF offerings will be subject to stricter compliance than those not offering them, but this is to be expected given the greater public interest.
OL Comment – Providing greater access to funding for private companies is crucial in growing our start up sector. Currently Australia lags behind other countries in this regard and we welcome the chance to comment on the draft legislation released.
Reducing Red Tape
$300 million over two years will be put to reducing red tape. This incentive payment will be provided to state and territory governments through the National Partnership on Regulatory Reform. This has come off the back of promises to reduce $1b of government red tape each year.
OL Comment – New business often find unnecessary or convoluted government process a hurdle to opening business. Whether applying for a food truck permit or planning application, often the time lost is overly burdensome on new businesses. We hope that this measure incentivizes government to reduce red tape on small businesses.
From 1 July 2017, the GST treatment of digital currency will be aligned with money. Currently digital currency is treated as property.
This resulted in a potential double imposition of GST. For example, when someone bought Bitcoin from an Australian enterprise, you may be charged GST on top of the value of the Bitcoin. You may be liable again when you sell it for goods and services.
This treatment change will mean digital currency is treated the same as money.
OL Comment – The initial treatment of digital currency as property resulted in a severe mismatch between international treatment and local treatment of digital currency. Commercially, many digital currency exchanges left Australia as Australian purchasers of digital currency would naturally shift to overseas providers. This resulted in lost businesses and jobs for Australia. Whilst this has now been rectified, we would like to see some further encouragement to bring back what has been lost.
Foreign Resident CGT Withholding
Property transactions currently require a 10% withholding tax to be paid to the ATO where the vendor is not an Australian resident. This applies to all taxable Australian property with a value over $2 million.
This budget seeks to increase the withholding rate to 12% and decrease the value of property to $750,000.
This will vastly widen the net of properties that this measure applies to.
OL Comment – Having assisted vendors and purchasers with this legislation change, the process appears to be robust and simple. We support the measure and look forward to helping clients with what will become a normal part of the property transaction process in Australia.
Foreign and temporary residents will no longer be able to access the CGT main residence exemption.
Foreign owners of Australian property will also be charged $5,000 where their property is not available for rent for at least half of the year. This has been referred to as the ‘ghost’ tax.
OL Comment – The above measures make sense in the context of the original policy intention of the Main Residence Exemption. Data on ghost property numbers is often not readily available. It will be interesting to see how this impost impacts the rental market.
GST on Property
Purchasers of new Australian property or new subdivisions will be required to pay the GST portion of the purchase price directly to the ATO rather than the vendor. This is expected to begin from 1 July 2018.
Currently the developer of the property would receive the GST and then remit this to the ATO. This change will see the settlement process direct the GST straight to the ATO instead.
OL Comment – Whilst this measure protects the GST tax base for the government, we expect it to have ramifications for property developers. Understanding the cash flow impacts and making the necessary changes in their feasibility models.
The Government will revise the income thresholds for repayment of HELP debt, repayment rates and the indexation of repayment thresholds from 1 July 2018. A new minimum threshold of $42,000 will be established with a 1% repayment rate and a maximum threshold of $119,882 with a 10% repayment rate. Australian residents living overseas will no longer be exempt from this repayment threshold.
For 2017/2018 the minimum threshold is $55,874 with a minimum repayment rate of 4%.The maximum threshold for 2017/18 is $103,766 with an 8% repayment rate.
OL comment – The HELP threshold reduction would make the HELP program more sustainable in the long term. It is there to provide support and ensure that every Australian has the opportunity to study.
From 1 July 2019, the Medicare levy will increase from 2% to 2.5% of taxable income. Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles ($21,655), families ($36,541), pensioners and seniors ($34,244). The current exemptions from the Medicare levy will also remain in place.
A portion of revenue raised through the Medicare levy will be injected into a National Disability Insurance Scheme (NDIS) savings fund.
Taxable payments reporting system
The taxable payments reporting system was introduced in the 2012-13 financial year where businesses in the building and construction industry are required to report to the ATO all payments they make to contractors within the industry.
From 1 July 2018, this will be extended to contractors in the courier and cleaning sectors.
OL Comment – a broader industry coverage is welcomed in assisting contractors to correctly report their income.
First Home Saver
Incentives for Australians to save for their first home have been introduced through the First Home Super Saver Scheme. The Scheme encourages first home buyers to save for a deposit by making concessional contributions to their superannuation account. These contributions will be taxed at 15% as opposed to higher marginal rates. First home buyers can voluntarily contribute up to $15,000 per year or $30,000 in total from 1 July 2017 and withdraw these funds for a deposit from 1 July 2018. These withdrawals will be taxed at marginal rates less a 30% offset and only these funds are eligible for withdrawal (super guarantee contributions remain inaccessible).
The Scheme allows couples to individually save for a deposit and then combine these savings to purchase their first home together.
OL Comment – Due to increased housing prices, along with other factors (*cough smashed avo*), many young Australians are finding it difficult to pursue the great Australian dream of purchasing their first home. This Scheme provides immediate tax advantages for saving for a deposit, however this will be recouped on withdrawal of the contributions. Despite this, it is likely to be a more effective method of saving for a first home deposit than through a traditional bank account.
The Government is limiting certain deductions in relation to residential rental properties. From 1 July 2017, deductions for travel expenses incurred by investors for inspection and maintenance will be disallowed. This prevention measure does not extend to agent costs.
Deductions for plant and equipment depreciation will also be limited in the future. This category is defined by items that can be easily removed, such as dishwashers, ovens etc. Investors will still be eligible to claim deductions for depreciation over the asset’s effective life for items purchased after 9 May 2017, however they will be unable to claim deductions related to assets purchased by a previous owner of the property. Rather, these existing plant and equipment items will form part of the property’s cost base for CGT purposes. Existing assets held will not be affected.
OL Comment – These are integrity measures to limit unreasonable deductions claimed by investors without significantly impacting negative gearing.
Women in STEM
The Government is investing $13 million over five years to encourage more women to choose and stay in science, technology, engineering and mathematics (STEM) research, related careers, start-ups and entrepreneurial firms. This forms part of their commitment to ongoing investment in innovation, science and research.
Reforms to existing employee share schemes will also assist start-ups in retaining employees.
OL Comment – Employees are integral resources in any organization. Providing funding to encourage staff retention and gender equality in innovative fields will provide greater opportunities for women.