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The 2018–19 Federal Budget (the Budget) will be released at 7.30pm (AEST) on Tuesday, 8 May 2018. In the final week before we make the annual e-pilgrimage to www.budget.gov.au to download the Budget papers and the Treasurer’s accompanying speech, we have compiled a handy round-up of pre-Budget rumours and speculation. We also take stock of which of the most significant policy announcements from the past two Budgets have since become law or have been relegated to the political too-hard basket.
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What could the 2018–19 Budget bring us? |
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| Work related expenses | The Commissioner, at a recent tax industry conference, publicly aired his concerns about the over-claiming of work-related expenses (WREs). It is no secret that in the past few years the ATO has been focusing on unusually high WRE claims.
The Commissioner’s statements also include claims that over-claiming of WREs is more likely when the return is prepared by an agent that by a self-preparer. While this may come as a surprise to the profession, it paves the way for a possible legislative amendment to restrict WRE claims in some way. Whether this would take the form of a standard deduction (e.g. $1,000) or further rules around substantiation is a matter of speculation. |
| Main residence exemption | There is legislation currently before the Parliament which proposes to remove the entitlement to the CGT main residence exemption (MRE) for foreign residents (i.e. taxpayers who are non-residents at the time of the CGT event).
The MRE is the Government’s largest tax expenditure item (see below), and over the years there has often been speculation that the MRE could be limited for wealthier homeowners by imposing a threshold (e.g. $5 million) above which the capital gain would be taxable. |
| Personal tax cuts | Two years ago, the 2016–17 Federal Budget delivered a small personal tax cut for middle income earners — the lower threshold for the 37 per cent marginal tax rate was increased from $80,000 to $87,000 from 1 July 2016.
The maximum tax saving — for those on taxable incomes of $87,000 and above — was $315 a year or $6.05 per week. It is likely that the next Federal Election will be held within 12 months of this year’s Budget, and the Prime Minister, Malcom Turnbull, has speculated about further personal tax cuts. Will the Government again announce some modest tax relief for middle Australia? |
| Medicare Levy | The Treasurer, Scott Morrison, announced on 26 April 2018 that the Government has scrapped its 2017–18 Budget proposal to increase the Medicare Levy by 0.5 per cent (to 2.5 per cent) to fully fund the National Disability Insurance Scheme. This change in position will be reflected in the upcoming Budget. |
| R&D tax incentive | On 4 April 2018, the Treasurer announced that the Government will relaunch an R&D tax incentive ‘that is all about R&D additionality, things that would not have happened anyway, and rewarding the intensity of that effort’.
The Government has considered recommendations from its R&D Tax Incentive review, which was publicly released in September 2016, and we can expect to see its responses to these recommendations in the Budget. |
| Black economy | The Government first announced the creation of the Black Economy Taskforce in December 2016. The Taskforce’s Interim Report was publicly released on Budget night last year and a consultation paper outlining additional policy ideas was released on 2 August 2017.
The Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018 is currently before the House of Representatives and proposes to introduce two of the Taskforce’s interim recommendations. One of these is the proposal to extend the Taxable Payments Reporting regime to the courier and cleaning industries from 1 July 2018. We expect to see more Black Economy measures announced in this year’s Budget. |
| Refundable franking credits | In March 2018, the Federal Opposition made headlines by announcing a policy to scrap cash refunds for excess franking credits from 1 July 2019. Two weeks later, the policy was watered down with the announcement of the Pensioner Guarantee.
While the Government continues to say that it does not support this policy, many are of the view that it is not sustainable to continue to allow wealthy self managed superannuation funds (SMSF) to claim refundable franking credits. Is this an opportunity to restrict cash refunds to some extent to stem the $5 billion annual Budget outflow? |
| Staggered CGT discount | It has long been acknowledged that the availability of the CGT discount is very generous for a taxpayer who has held a CGT asset for at least 12 months but doesn’t progressively reward taxpayers who hold onto assets for much longer periods of time — the taxpayer who holds a CGT asset for 13 months is treated the same as one who holds a CGT asset for 20 years.
There have been suggestions over the years that the CGT discount should be modified to introduce a progressive CGT discount instead of a flat 50%. Under this approach, taxpayers would receive a larger CGT discount the longer the time they hold the asset — for example, one model could allow a 10% discount after 12 months; a 20% discount after 2 years; a 30% discount after 3 years; a 40% discount after 4 years; and a full 50% discount for 5 years or more. This would encourage taxpayers to invest for the longer term and self-fund their futures. |
| GST — rate and base | The Government released some modelling in early 2016 which considered the impact of increasing the rate of GST. Based on the conclusions of the modelling, the Government abandoned increasing the rate of GST.
The myriad of GST concessions and exemptions has long been a source of political and consumer debate. Many commentators have long agreed that eventually the rate of GST should increase, but this needs to be balanced with the impact on low-income earners for whom an increase in the rate of GST is regressive. Even if the Government decides to propose an increase in the rate, or a widening of the base, of GST, any change to either still necessitates the unanimous agreement of all of the States and Territories — not only to a change in federal GST policy but also to a potential reallocation of GST funds. |
| Limit on number of SMSF members | On 27 April 2018, the Minister for Revenue and Financial Services, Kelly O’Dwyer, announced that, as part of the upcoming Budget, the Government will:
These changes will allow for greater flexibility and ensure SMSFs remain compelling retirement savings vehicles into the future, and allow SMSF members to initiate and receive rollovers electronically between an APRA fund and their SMSF. |
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Every year, the Treasury releases its Tax Expenditures Statement which lists key expenditures and provides estimates of the benefit to taxpayers for that income year. The 2017 Tax Expenditures Statement, released on 25 January 2018, contains 289 tax expenditures. A quick look at some of the most significant measures may provide an insight as to the areas on which the Government might focus to balance the budget.
This table contains a selection of key measures in the list of the 30 largest tax expenditures for the 2017–18 income year.
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| Rank in list | Key tax expenditure | Estimated revenue foregone ($m) |
|---|---|---|
| 1 | Main residence CGT exemption — discount component | 40,500 |
| 2 | Main residence CGT exemption | 33,500 |
| 3 | Superannuation fund earnings — concessional taxation | 19,250 |
| 4 | Superannuation contributions — concessional taxation | 16,900 |
| 5 | CGT discount for individuals and trusts | 10,270 |
| 6 | GST exemption — food | 7,100 |
| 7 | GST exemption — education | 4,550 |
| 8 | GST exemption — health — medical and health services | 4,100 |
| 9 | GST — financial supplies — input taxed treatment | 3,400 |
| 21 | CGT for superannuation funds — concessional taxation | 1,350 |
| 23 | Lower company tax rate | 1,300 |
| 25 | Small business entity simplified depreciation rules | 1,200 |
| 27 | Capital works deductions | 1,040 |
| 28 | Seniors and pensioners tax offset | 1,000 |
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It will be no surprise to readers that a Budget announcement does not guarantee that the policy proposal will transpire into reality. A Budget measure may:
Any of these outcomes can happen very quickly after the announcement or they may take years.
We now consider some of the most significant tax and superannuation policy announcements in each of the past two Federal Budgets and their status.
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| 2017–18 Federal Budget (delivered on 9 May 2017) | |
|---|---|
| Budget measure | Status at the time of writing |
Remove main residence exemption for foreign residents
Proposed start date: 7.30pm (AEST) on 9 May 2017 |
Before Parliament
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 is currently before the Senate. |
Amend the small business CGT concession rules to ensure that they can only be accessed in relation to assets used in a small business or ownership interests in a small business
Proposed start date: 1 July 2017 |
Before Parliament
The Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 is currently before the House of Representatives. |
Allow individuals aged 65 and over to contribute downsizing proceeds into superannuation
Start date: 1 July 2018 |
Enacted law
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Act 2017 received Royal Assent on 13 December 2017. |
Introduce the First Home Super Saver Scheme
Start date: 1 July 2017 |
Enacted law
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Act 2017 and the First Home Super Saver Tax Act 2017 received Royal Assent on 13 December 2017. |
Introduce GST withholding for purchasers of newly constructed residential properties
Start date: 1 July 2018 |
Enacted law
The Treasury Laws Amendment (2018 Measures No. 1) Act 2018 received Royal Assent on 29 March 2018. |
Disallow residential rental property deductions for travel expenses
Start date: 1 July 2017 |
Enacted law
The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 received Royal Assent on 30 November 2017. |
Limit residential rental depreciation deductions
Start date: 1 July 2017 |
Enacted law
The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 received Royal Assent on 30 November 2017. |
Introduce an annual charge on foreign owners of vacant residential property
Start date: 7.30pm (AEST) on 9 May 2017 |
Enacted law
The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 received Royal Assent on 30 November 2017. |
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| 2016–17 Federal Budget (delivered on 3 May 2016) | |
|---|---|
| Budget measure | State of play |
Reduce the company tax rate for all companies to 25 per cent over ten years
Start date: 1 July 2016(further changes in the Base Rate Entities Bill are proposed to commence from 1 July 2017) |
Enacted law | Before Parliament
The Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 received Royal Assent on 19 May 2017. It implemented the corporate tax cut only for companies with an aggregated turnover of less than $50 million. The Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 and the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018 are currently before the Senate. |
Targeted amendments to Division 7A, including a self-correction mechanism, safe-harbour rules and simplified loan arrangements
Proposed start date: 1 July 2018 |
Nothing since Budget announcement
Since the announcement on 3 May 2016, no further detail, including draft legislation, has been released. The Budget announcement was based on recommendations made in the Board of Taxation’s Post-Implementation Review of Division 7A of Part III of the Income Tax Assessment Act 1936 report (released on 4 June 2015). |
Increase small business entity threshold to $10m (with some exceptions)
Start date: 1 July 2016 |
Enacted law
The Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 received Royal Assent on 19 May 2017 |
Introduce a $1.6 million transfer balance cap on the accumulated superannuation that can be transferred into retirement phase
Start date: 1 July 2017 |
Enacted law
The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 received Royal Assent on 29 November 2016. |
Introduce a diverted profits tax for companies with global turnover of $1 billion or more
Start date: 1 July 2017 |
Enacted law
The Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017 and the Diverted Profits Tax Act 2017 received Royal Assent on 4 April 2017. |
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