On 17 December 2018, the Government released the Mid-Year Economic and Fiscal Outlook 2018–19 (MYEFO). The MYEFO provides updated information on the Government’s fiscal position and includes policy decisions taken since the 2018–19 Federal Budget was handed down on 8 May 2018.

The key tax announcements and measures contained in the MYEFO are summarised below.

Previously known measures

Corporate tax cuts for large companies

Background

The Government’s original Enterprise Tax Plan — which was announced as part of the 2016–17 Federal Budget — proposed to reduce the corporate tax rate for all companies to 25 per cent over a 10-year period by progressively phasing in the lower tax rate from 2019–20 to 2026–27.

Following the defeat of the Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 in the Senate on 22 August 2018, the former Prime Minister, the Minister for Finance and the former Treasurer announced in a joint press conference on 22 August 2018 that the Government would not proceed with the tax cuts for large companies.

Note

Our Banter Blog titled Certainty at last for base rate entities … or not? from 3 October 2018 explains the enacted measures which apply to companies with an aggregated turnover of less than $50 million.

MYEFO announcement

The Government has confirmed in the MYEFO that it will not proceed with reducing the tax rate for companies with an aggregated turnover of $50 million or more, as announced on 22 August 2018. These companies will remain on the 30 per cent tax rate.

Fast-tracked tax cuts for small and medium companies

Background

Following the delivery of a reduced tax rate for companies with an aggregated turnover of less than $50 million from 1 July 2017, the Government fast-tracked these changes in October 2018 by delivering this tax relief five years earlier than planned.

Unincorporated businesses with aggregated turnover of less than $5 million will benefit via the small business income tax offset (SBITO) from an increase in the discount rate.

Our Banter Blog titled Ten-year plan for corporate tax cuts has now been fast tracked from 31 October 2018 explains in more detail how:

(a)       the tax rate for companies that are base rate entities will decrease from its current rate of 27.5 per cent to:

• 26 per cent in 2020–21 (instead of in 2025–26);
• 25 per cent from 2021–22 (instead of from 2026–27); and

(b)          the SBITO discount rate will increase from its current rate of 8 per cent to:

• 13 per cent in 2020–21 (instead of in 2025–26);
• 16 per cent in 2021–22 (instead of from 2026–27).

Note

A $1,000 cap still applies to the SBITO.

MYEFO Announcement

The Government has confirmed in the MYEFO that the reduction of the corporate tax rate and the increase in the SBITO discount have been fast-tracked.

GST and feminine hygiene products

Background

Feminine hygiene products were not GST-free goods prior to 2019 and were therefore subject to GST. On 3 October 2018, the Commonwealth, states and territories agreed at a Council on Federal Financial Relations meeting to remove GST from feminine hygiene products.

The A New Tax System (Goods and Services Tax) (GST-free Health Goods) Determination 2018 was registered on 28 November 2018 and declares certain feminine hygiene products to be GST-free from 1 January 2019.

MYEFO Announcement

The GST-free treatment of feminine hygiene products was confirmed by the Government in the MYEFO.

Date of effect: 1 January 2019

Self-assessment of effective life for intangible assets

Background

Schedule 2 to the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 proposed to allow taxpayers the choice to self-assess the effective life of certain intangible depreciating assets they start to hold on or after 1 July 2016.

Note

This Bill also proposes to supplement the existing ‘same business test’ with an alternative ‘similar business test’ (for losses made from 1 July 2015) for the purposes of working out whether a company can deduct tax losses incurred and net capital losses made in previous income years.

On 5 December 2018, the Senate agreed to a Government amendment to remove Schedule 2 from the Bill. Given the proposed application date of 1 July 2016, the likely further delay in the passage of the Bill and a lack of parliamentary support, the Government decided not to proceed with the measure, in order to eliminate the current uncertainty for taxpayers. By omitting Schedule 2, taxpayers will no longer be allowed to avail themselves of this self-assessment option.

Status of measure

The Bill was introduced into Parliament on 30 March 2017 and has been before the Senate since 22 June 2017. The Bill is now required to return to the House to consider the amendments made by the Senate on 5 December 2018. Accordingly, the Bill remains in limbo until at least 12 February 2019.

MYEFO Announcement

The Government has confirmed in the MYEFO that it will not proceed with this unlegislated measure from the MYEFO 2015–16 which would have allowed taxpayers the choice to self-assess the effective life of certain intangible depreciating assets.

Superannuation — simplifying the work test exemption for recent retirees

Background

In the 2018–19 Federal Budget, the Government announced that it would provide a one-year exemption from the ‘work test’ to allow eligible recent retirees to boost their superannuation balances.

On 2 October 2018, exposure draft legislation and draft regulations titled Treasury Laws Amendment (Measures for a later sitting) Bill 2018: Work test exemption for recent retirees was released for comment. The regulations, once registered, will allow Australians aged 65 to 74 with a total superannuation balance of less than $300,000 to make voluntary non-concessional contributions — up to the non-concessional cap of $300,000 under the three-year bring-forward rule — for 12 months from the end of the financial year in which they last met the work test.

Further information is available in the Assistant Treasurer’s media release Work Test Exemption for Recent Retirees of 7 December 2018.

MYEFO Announcement

This policy was confirmed by the Government in the MYEFO.

Date of effect: 1 July 2019

New measures

Proposed SG Amnesty

Background

On 24 May 2018, the Government announced a proposed 12-month Superannuation Guarantee (SG) Amnesty to allow non-complying employers to self-correct any unpaid SG amounts dating back to 1992. The Amnesty period is proposed to start on 24 May 2018 and end on 23 May 2019.

Our Banter Blogs titled The New Superannuation Guarantee Amnesty from 13 June 2018, SG Amnesty — Q&A from 14 August 2018 and The SG Amnesty: What should employers do? from 14 September 2018 explain the proposed measures.

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 — which has been before the Senate since 25 June 2018 — proposes to impose a minimum penalty on employers who could have come forward during the Amnesty period but did not and are subsequently caught.

MYEFO Announcement

The Government has announced in the MYEFO that it will increase the minimum penalty from (what was proposed to be) 50 per cent to 100 per cent of the SG charge for employers who could have come forward under the SG Amnesty but did not and were subsequently caught.

Proposed cash payment limit

Background

In the 2018–19 Federal Budget, and in response to the Black Economy Taskforce Final Report, the Government proposed an Economy-Wide Cash Payment Limit of $10,000. The Final Report recommended (Recommendation 3.1) the introduction of a cash payment limit that removes the ability of any individual or business to make a single transaction in cash in excess of $10,000 to businesses for goods and services. Transactions in excess of this amount would need to be made through the electronic payment system or by cheque.

On 25 May 2018, the Government released a consultation paper titled Introducing an Economy-Wide Cash Payment Limit which seeks views on the proposed cash payment limit of $10,000 for payments to businesses for goods and services.

Date of effect: 1 July 2019

MYEFO Announcement

The Government has announced in the MYEFO that the start date for the 2018–19 Budget measure Black Economy Package — introduction of an economy-wide cash payment limit will be revised from 1 July 2019 to 1 January 2020.

Revised date of effect: 1 January 2020

Genuine Redundancy Payments – aligning access to the tax-free component with the Age Pension age

Background

Currently, individuals aged 65 and over are not eligible to receive a genuine redundancy payment (GRP), including the tax-free component, because of their age at the time of their dismissal. This means that, due to their age, some older Australians cannot access either the Age Pension (currently age 65.5 and rising to age 67 by 1 July 2023) or the tax-free component of GRPs.

MYEFO Announcement

The Government has announced in the MYEFO that it will align the age below which individuals can receive GRPs with the Age Pension qualifying age. This means that all individuals below the Age Pension qualifying age will have access to the tax-free component of a GRP that currently applies to individuals aged under 65 years.

Date of effect: 1 July 2019

Disclosure of business tax debts

Background

As part of the MYEFO 2016–17 released on 19 December 2016, the Government  announced that it would improve the transparency of taxation debts by allowing the Commissioner of Taxation to disclose business tax debt information to credit reporting bureaus where the business:

1.           has not engaged with the ATO to manage their debt; and
2.           has a tax debt, of which at least $10,000 is overdue and has been owing for more than 90 days.

MYEFO Announcement

The Government has announced in the MYEFO that it will amend the proposed measure by:

• increasing the threshold of business tax debts that can be disclosed to credit reporting bureaus from $10,000 to $100,000;
• introducing a requirement that the Minister consult with the Australian Information Commissioner before changes to the reporting criteria are made; and
• amending the start date of the measure to the day after Royal Assent of the enabling legislation.

The higher threshold of $100,000 will minimise the impact on businesses with smaller tax debts while targeting higher risk tax debt.

ATO funding for GST compliance activities

The Government will provide $466.9 million in funding to the ATO over four years from 2019–20 to extend its range of GST compliance activities. This measure is estimated to bring in $2.9 billion in GST revenue over the forward estimates period.

The funding will allow the ATO to undertake additional compliance activities and help the ATO develop more analytical tools to combat emerging risks to the GST system.

That’s a wrap!

Now that the Federal Parliament has risen for the summer break, this is an opportune time to take stock of the key outstanding tax and superannuation measures.

According to the draft Parliamentary sittings for 2019, Parliament is scheduled to next sit on 12 February 2019. The next election must be held by 18 May 2019 for half of the State Senators, and on or before 2 November 2019 for the House of Representatives and Territory Senators (although it is expected that, to avoid holding two elections next year, a general election will be held on either 11 or 18 May 2019).

This has brought forward the timing of the 2019–20 Federal Budget which is ordinarily handed down on the second Tuesday in May; due to the timing of the election, the Budget is currently scheduled for Tuesday 2 April 2019.

This means there are just 10 Parliamentary sitting days between now and the election. Further, there will be no sitting days in June (when the postal and absentee votes will be counted, and the ministers sworn in, etc.), Parliament is in Winter recess during July then returns for the Spring sittings on 12 August 2019. This means that there will be only 10 sitting days in the next eight months.

With limited sitting days next year, the Parliament will be under enormous pressure to clear the backlog of bills while properly considering highly technical tax and superannuation bills in an ideally measured and not rushed manner.

Outstanding tax and superannuation Bills

Single Touch Payroll

The Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 proposes to extend STP reporting to all employers from 1 July 2019.

There has been much public commentary about the apparent passage of the STP legislation through the Parliament on 5 December 2018. Legislation to extend STP to all employers from 1 July 2019 has passed the Senate, but with proposed amendments to other measures (relating to deductible gift recipients (DGRs) contained in the same Bill.

Status of measure

The Bill must return to the House of Representatives to consider the DGR amendments. As the Parliament has risen for the year, the next opportunity for the House to hear the Bill will be 12 February 2019.

If the Parliament does not resume prior to the election, or the Bill is not passed by the Parliament before the election is called, the Bill will be ‘prorogued’ (i.e. it will lapse) and a returning Coalition government or an incoming Labor government would need to reintroduce the Bill and negotiate its re-passage through both houses of the Parliament.

ATO activity

STP reporting has been required for substantial employers (20 or more employees) since 1 July 2018, and the ATO continues to support larger employers in their transition to STP reporting by encouraging employers with deferrals ending to start reporting and promoting STP to those employers who can voluntarily come on board.

The Commissioner has released a video which explains the ATO’s approach to STP for smaller employers.

The ATO has published a list of companies that intend to offer a range of simple to use, low-maintenance, low-cost (less than $10 per month) STP reporting solutions to the micro employer (1–4 employees) market from early 2019. Micro employers will need to report through STP but may not currently have STP-compliant payroll software. See www.ato.gov.au/STPsolutions for more information.

Main residence exemption changes for non-residents

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 proposes to remove the entitlement to the main residence exemption for taxpayers who are non-residents at the time of the CGT event. The measures were first announced in the 2017–18 Federal Budget on 9 May 2017 and apply to CGT events happening from that date. A transitional rule applies until 30 June 2019 for properties that were held at the time of the announcement.

One of our senior tax trainers, Robyn Jacobson, has been a leading advocate for the past year in lobbying the Government, The Treasury and the independent cross-benchers in the Senate to amend the Bill to remove the draconian, retrospective impact of these measures on Australian expatriates and deceased estates. Further information about the impact of these measures is available in our Banter Blog from 28 March 2018.

Robyn has repeatedly called for one of two concessions to be incorporated into the measures (both are based on existing provisions):

• reset the cost base of the property to its market value on the day the taxpayer becomes a non-resident so that the capital gain is calculated only on the increase in value since they ceased to be a resident — this approach arguably produces a fairer outcome (as the taxpayer only loses the exemption for the period of non-residency having regard to the increase in its value during this period) and doesn’t require taxpayers to have kept cost base records from when they acquired the property, but by its nature is subjective and valuations could be open to challenge by the Commissioner; or
• allow a partial exemption for the number of days the taxpayer was a resident and lived in the dwelling as their main residence — this approach is simpler to calculate, but requires the taxpayer to have retained the necessary records to establish the cost base of the property from when they acquired it, which in practice is unlikely.

Status of measure

The Bill was introduced into Parliament on 8 February 2018 and has been before the Senate since 19 March 2018.

As Parliament has risen for the year and does not resume until 12 February 2019, affected property owners will have just four months from when Parliament resumes (with no assurance of certainty from that time) to sell their homes tax-free before the expiration of the 30 June 2019 transitional period. This is not enough time when there is no certainty on the final form of the measures.

In an Accountants Daily article published on 7 December 2018, Robyn continues to express her concerns regarding the significant delays and ongoing uncertainty for Australian expatriates and deceased estates. Robyn is now calling for an extension to the transitional period to 30 June 2020 to provide taxpayers with more time to make the significant financial decision of whether, and when, they sell their property.

SG Amnesty

On 24 May 2018, the Government announced a proposed Superannuation Guarantee (SG) Amnesty to allow employers to allow non-complying employers to self-correct any unpaid SG amounts dating back to 1992. Our Banter Blogs titled The New Superannuation Guarantee Amnesty from 13 June 2018, SG Amnesty — Q&A from 14 August 2018 and The SG Amnesty: What should employers do? from 14 September 2018 explain the proposed measures.

We take the position in our most recent blog that employers should consider making a voluntary disclosure of unpaid SG amounts without waiting to find out whether the SG Amnesty becomes law because:

• they will either get a better deal on penalties if the new law doesn’t pass (although the amount won’t be deductible, but that is the current law anyway) or be protected under the Amnesty if it does pass; and
• it is an inescapable fact that the superannuation funds of the affected employee(s) have been deprived of the outstanding SG amounts which employers were always required to pay under the law.

Status of measure

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 won’t be considered again by the Parliament until, at the earliest, 12 February 2019, and given that the Opposition does not support the Amnesty, it is doubtful whether the SG Amnesty will ever pass into law.

We are now more than six months into a 12-month amnesty which expires on 23 May 2019 without any certainty as to whether the Amnesty will be available and whether any disclosures made to the ATO since 24 May 2018 are covered by the Amnesty.

Enterprise Incentives measures

Company losses — similar business test

Schedule 1 to the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 (‘the Bill’) proposes to supplement the existing ‘same business test’ with an alternative ‘similar business test’ for the purposes of working out whether a company can deduct tax losses incurred and net capital losses made in previous income years. The ‘similar business test’ is proposed to apply to tax losses and net capital losses made from 1 July 2015. On 5 December 2018, the Senate accepted the measures in Schedule 1.

Self-assessment of effective life for intangible assets

Schedule 2 to the Bill proposed to allow taxpayers the choice to self-assess the effective life of certain intangible depreciating assets they start to hold on or after 1 July 2016. However, on 5 December 2018, the Senate agreed to a Government amendment to remove Schedule 2 from the Bill.

Given the proposed application date of 1 July 2016 and the likely further delay in the passage of the Bill, the Government decided not to proceed with the measure, in order to eliminate the current uncertainty for taxpayers. By omitting Schedule 2, the Bill will no longer allow taxpayers to avail themselves of this self-assessment option.

Status of measure

The Bill was introduced into Parliament on 30 March 2017 and has been before the Senate since 22 June 2017. The Bill is now required to return to the House to consider the amendments made by the Senate on 5 December 2018. Accordingly, the Bill remains in limbo until at least 12 February 2019.

Changes to R&D tax offset

The Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 proposes to make significant changes to the R&D tax offset from 1 July 2018 including to:

• permanently increase the R&D expenditure threshold from $100 million to $150 million;
• cap the refundability of the R&D tax offset at $4 million per annum;
• link the R&D tax offset for refundable R&D tax offset claimants (companies with a turnover of less than $20 million) to their corporate tax rates plus a 13.5 percentage point premium;
• increase the targeting of the R&D tax incentive to larger R&D entities (companies with a turnover of $20 million or more) with high levels of R&D intensity;
• extend the concept of tax benefits in the general anti-avoidance rule in Part IVA of the ITAA 1936 to include the R&D tax offset;
• remake and consolidate provisions relating to clawback of R&D recoupments and feedstock adjustments; and
• introduce a new uniform clawback rule that applies for recoupments, feedstock adjustments and balancing adjustment amounts that are included in an R&D entity’s assessable income.

Status of measure

The Bill was introduced into Parliament on 20 September 2018. As the Parliament has risen for the year, the next opportunity for the House of Representatives to consider the Bill will be 12 February 2019.

Other key outstanding measures before the Parliament

The following key measures are currently before the Parliament.

Draft tax and superannuation measures

The following measures are in exposure draft or discussion paper form and are yet to be introduced as Bills into Parliament.

On 25 October 2018, the Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Act 2018 (the Act) received Royal Assent as Act No. 134 of 2018. The Act amends various taxation Acts to accelerate:

1. the reduction of the corporate tax rate for corporate tax entities that are base rate entities; and
2. the increase in the income tax offset for unincorporated small businesses.

As a result, the Government’s ‘Ten-Year Enterprise Tax Plan’ — which was announced as part of the 2016–17 Federal Budget and originally legislated to be implemented from 2016–17 to 2026–27 — has now been shortened by five years, with the minimum corporate tax rate (25 per cent) and the maximum small business income tax offset (16 per cent) taking effect from 2021–22 instead of from 2026–27.

Note

The Act progressed through Parliament (the Bill was before Parliament for just two days) to Royal Assent without amendment.

Fast tracking the lower tax rates for base rate entities

Background

The Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (the ETP Act), which received Royal Assent on 19 May 2017, amended the Income Tax Rates Act 1986 (the ITR Act) to progressively, over a 10-year period from 2016–17 to 2026–27, reduce the corporate tax rate for eligible companies with a turnover of less than $50 million from 27.5 per cent to 25 per cent.

The ETP Act also introduced the concept of a base rate entity (BRE), defined in s. 23AA of the ITR Act, as the criterion for the lower corporate tax rate. From the 2017–18 income year, only corporate tax entities which are BREs are eligible for the lower corporate tax rate. For the 2016–17 income year only, the 27.5 per cent tax rate applied to small business entities (SBE) as defined in s. 328-110 of the ITAA 1997.

The Act fast tracks the previously legislated reduction of the corporate tax rate for corporate tax entities that are BREs. The rate of 25 per cent will now apply from 2021–22 instead of from 2026–27.

Summary of acceleration of corporate tax cuts

* All other corporate tax entities are taxed at 30 per cent.

Implications — Impact on maximum franking rates

For a distribution paid in the 2016–17 and later income years, the maximum franking credits that a corporate tax entity can attach to a distribution is worked out by reference to its ‘corporate tax rate for imputation purposes’. This is broadly the entity’s corporate tax rate for the income year of the distribution, worked out on the assumption that its aggregated turnover, BRE passive income and assessable income are equal to those amounts for the previous income year.

This means that the acceleration of the implementation of the lower corporate tax rates will also impact on the maximum franking credits that an entity can attach to its distributions.

This will mean that:

• shareholders on marginal tax rates above that of the corporate tax rate will be subject to additional top-up tax on distributions they receive five years sooner; and
• an even higher proportion of franking credits will be trapped in the company’s franking account, due to the reduction in the maximum franking rate — at a franking rate of 27.5 per cent, more than 11 per cent of previous tax paid by the company at the 30 per cent rate is already trapped in the franking account; when the maximum franking rate drops to 25 per cent, five years sooner, more than 22 per cent of previous tax paid by the company at the 30 per cent rate is trapped in the franking account.

Implications — Impact on R&D tax offset rates

The earlier than originally scheduled reduction of the corporate tax rate will also impact on the rate of a company’s R&D tax offset. From 1 July 2019, the rate of the R&D tax offset will be based on a premium added to the company’s corporate tax rate; a lower tax rate means that the company will be entitled to a lower R&D tax offset rate.

Carry forward tax offset rules

The Act also amends the ETP Act to accelerate the implementation of consequential amendments to the carry forward tax offset rules in Div 65 of the ITAA 1997.

The amount of the excess tax offset — which arises when a company receives franking credits that exceed its income tax payable for an income year — to be carried forward for BREs is calculated in accordance with s. 65-30 of the ITAA 1997, by reference to the lower corporate tax rate. When applying a carried forward tax offset to reduce any unused or net exempt income, the reduction is calculated in accordance with s. 65-35(3A) of the ITAA 1997 and is based on the lower corporate rate if the entity is a BRE.

Fast tracking the increase in the small business income tax offset

Background

The small business income tax offset (SBITO) was introduced in the 2015–16 income year (Subdiv 328-F of the ITAA 1997). It entitles certain individuals to a tax offset equal to five per cent of their basic income tax liability relating to their total net small business income, capped at $1,000 per taxpayer per year.

Broadly, an individual is entitled to the SBITO if, in relation to the income year, they are an SBE or they derive assessable income from an unincorporated SBE (i.e. a partnership or a trust). For the purposes of the SBITO, an SBE is defined by reference to an aggregated turnover threshold of $5 million rather than the standard SBE aggregated turnover threshold of $10 million.

The ETP Act amended s. 328-360 of the ITAA 1997 to increase the rate of the SBITO over a 10-year period from the 2016–17 income year (to eight per cent) to the 2026–27 income year (to 16 per cent).

The Act fast tracks the previously legislated progressive increases to the SBITO rate as set out in the table below. The amendments are intended to provide small businesses that do not pay the corporate tax rate with an increased offset rate that is broadly equivalent to the reductions in the corporate tax rate.

Summary of accelerated increases to the SBITO

The SBITO will continue to be capped at $1,000 per individual per year.

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