Wealth Management

The 2017-18 Federal Budget delivered a series of measures to attempt to please as many people as possible. It tackles the issues currently in focus across the Australian community – gaps in healthcare, first home ownership, foreign workers, investment and bank accountability to name a few of the pressure points. It also delivers an economic ‘sugar hit’ in the form of $75 billion in infrastructure projects. Key measures are summarised below:

Federal Budget changes to Superannuation

The use of the superannuation regime to provide incentives to resolve public housing issues is an interesting measure and one that will spark a lot of debate and interest.

Encouraging the over 65s to downsize

Date of effect: 1 July 2018

If you are 65 or over, the Government will allow you to make a non-concessional contribution of up to $300,000 from the proceeds of selling your home from 1 July 2018. This non-concessional contribution will be excluded from the existing age test, work test and the $1.6 million balance threshold (but will not be exempt from the $1.6m transfer balance cap).

Interestingly, the Government is enabling “both members of a couple” to take advantage of the concession for the same home. So, if you have joint ownership of the property and meet the other criteria, both people can make a non-concessional contribution up to $300,000 ($600,000 per couple).

The measure will apply to sales of a principal residence owned for the past ten or more years.

Sale proceeds contributed to superannuation under this measure will count towards the Age Pension assets test.

If you are 65 or over, the Government will allow you to make a non-concessional contribution of up to $300,000 from the proceeds of selling your home from 1 July 2018. This non-concessional contribution will be excluded from the existing age test, work test and the $1.6 million balance threshold (but will not be exempt from the $1.6m transfer balance cap).

Interestingly, the Government is enabling “both members of a couple” to take advantage of the concession for the same home. So, if you have joint ownership of the property and meet the other criteria, both people can make a non-concessional contribution up to $300,000 ($600,000 per couple).

The measure will apply to sales of a principal residence owned for the past ten or more years.

Sale proceeds contributed to superannuation under this measure will count towards the Age Pension assets test.

First home owners to use super contributions to save for a deposit

Date of effect: 1 July 2017 – for contributions and 1 July 2018 – for withdrawals

Under the First Home Super Savers Scheme, would be first home owners will be able to withdraw voluntary contributions they make to super for a deposit. In practice, first home buyers will be able to save for a deposit by salary sacrificing into their superannuation fund over and above their normal compulsory superannuation contributions.

If the individual is self-employed or their employer will not allow contributions to be salary sacrificed the Government will allow these people to claim a deduction for voluntary contributions made under the scheme.

The Government will allow future voluntary contributions to superannuation made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings. The earnings that can be released will be calculated using a deemed rate of return based on the 90-day Bank Bill rate plus 3 percentage points (the same way the Shortfall Interest Charge is calculated).

Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30% offset. Combined with the existing concessional tax treatment of contributions and earnings, this is intended to provide an incentive that will enable first home buyers to build savings more quickly for a home deposit. In reality, the benefits of using the scheme could be relatively small for those on low income levels as salary sacrificing arrangements and additional deductions tend to be much more beneficial for those on higher incomes.

Under the measure, up to $15,000 per year and $30,000 in total can be contributed within existing caps. Withdrawals will be allowed from 1 July 2018 onwards. Both members of a couple can take advantage of this measure to buy their first home together.

It will be interesting to see how popular this scheme is with first home buyers. Some individuals may be wary of contributing additional funds into superannuation especially if they are not absolutely confident that they will be able to save a deposit for a home in the near future.

Federal Budget changes for Investors

The Government is very keen for private investors – including large scale investors and superannuation funds – to be a part of the solution to Australia’s housing affordability crisis. A series of new measures target investment opportunities to expand the availability of affordable rental properties.

CGT concession for investments in affordable housing

Date of effect: 1 January 2018

The Capital Gains Tax (CGT) discount will be increased for individuals who choose to invest in affordable housing. The current 50% discount will increase by 10% to 60% for resident individuals who elect to invest in qualifying affordable housing. Non-residents are no longer eligible for the CGT discount.

To qualify for the higher discount, housing must be provided to low to moderate income tenants, with rent 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 held for a minimum period of 3 years. The additional 10% discount will be pro-rated for periods where the property is not used for affordable housing purposes.

The higher discount would also flow through to resident individuals investing in qualifying affordable housing held by Managed Investment Trusts.

Investment opportunities for Managed Investment Trusts in affordable housing

Date of effect: Income years starting on or after 1 July 2017

Managed Investment Trusts (MIT) will be able to set up to acquire, construct or redevelop property to hold as affordable housing. In order for investors to receive concessional taxation treatment through a MIT, the affordable housing must be available for rent for at least 10 years.

This is one area of the property market where the Government is actively encouraging rather than discouraging foreign investors.

MITs allow investors to pool their funds to invest in primarily passive investments and have them managed by a professional manager. The MIT will be able to acquire, construct or redevelop the property but must derive at least 80% of its assessable income from affordable housing. Qualifying housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate.

Under the MIT withholding tax regime, non-resident investors are generally subject to a reduced rate of tax if they are a resident of a country with which Australia has an effective exchange of information treaty. Non-resident investors are generally subject to a 15% final withholding tax rate on fund payments from the MIT. Resident investors are taxed at their marginal tax rates, with capital gains remaining eligible for the capital gains tax discount.

Up to 20% of the income of the MIT may be derived from other eligible investment activities permitted under the existing MIT rules in the income tax law. If this is breached, or less than 80% of the MIT’s income is from affordable housing in an income year, the non-resident investor will be liable to pay withholding tax at 30% on investment returns for that income year.

Properties held for rent as affordable housing for less than 10 years will be subject to a 30% withholding tax rate on the net capital gains arising from the disposal of those assets.

Deductibility of investment property travel costs to end

Date of effect: 1 July 2017

The days of writing-off the costs of travel to and from your residential investment property are about to end. The Government has moved to disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.

It seems that policing this area to ensure taxpayers apportion expenses correctly (and don’t claim a deduction for their holidays), just got too hard.

Depreciation deductions limited

Date of effect: 1 July 2017 – Grandfathering from 7:30pm, 9 May 2017

The Government is concerned that some plant and equipment items in residential rental properties are being depreciated by successive investors in excess of their actual value.

This integrity measure will limit plant and equipment depreciation deductions to outlays actually incurred by residential rental property owners. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors.

Investors who directly purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim depreciation deductions over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. The portion of the purchase price that reflects the value of these items will simply form part of the cost base of the property and will reduce capital gains made on future disposal of the property.

These changes apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties at 9 May 2017 (including contracts already entered into) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

Plant and equipment items are usually mechanical fixtures or those that can be ‘easily’ removed from a property such as dishwashers and ceiling fans

How will this affect off-plan properties?

Note that the depreciation deduction limit does not apply to building costs of property which means you should still be able to claim a substantial tax benefit from depreciation allowances.

Whilst clarification is being sort, we believe that brand new plant and equipment for off the plan property purchases may still be deductible.

Hence making no or at worst case little difference to tax benefits that apply to off the plan property purchases.

Foreign investors charged for leaving properties vacant

Date of effect: From 7:30 pm (AEST) on 9 May 2017

Foreign owners of residential Australian property will incur a charge if their property is not occupied or genuinely available on the rental market for at least 6 months per year. The charge will be levied annually and will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor. The charge imposed is expected to be at least $5,000.

This measure will apply to foreign persons who make a foreign investment application for residential property from the Budget announcement, 7:30PM (AEST) on 9 May 2017. This suggests that the new rules do not appear to apply to existing properties.

Capital gains tax changes imposed on foreign and temporary residents

The Government has announced a series of changes to how the Capital Gains Tax regime applies to foreign and temporary tax residents.

Main residence exemption no longer applies to foreign and temporary residents

Date of effect: From 7:30 pm (AEST) on 9 May 2017

Foreign and temporary residents will be excluded from the main residence exemption. The main residence exemption excludes private homes from capital gains tax.

Generally, a full exemption should be available if the following conditions are met:

The taxpayer is an individual who is selling a dwelling or an ownership interest in a dwelling; The dwelling has been the taxpayer’s home for the entire ownership period;

The dwelling has not been used to produce assessable income; and

The dwelling is situated on land that is 2 hectares or less.

The exemption is currently available regardless of the residency status of the vendor or whether the property is located in Australia or overseas. These new measures change the position to prevent foreign and temporary residents from accessing the main residence exemption.

Existing properties held prior to 9 May will be grandfathered until 30 June 2019. However, it remains to be seen whether partial relief will be available to those who have been residents of Australia for part of the period they owned the property and whether this change will apply to Australian residents who were classified as a foreign resident for part of the ownership period.

Foreign resident CGT withholding rate increased and threshold reduced

Date of effect: From 1 July 2017

When someone buys Australian real property (ie, land and buildings) they are currently required to remit 10% of the purchase price directly to the ATO as part of the settlement process unless the vendor provides a certificate from the ATO indicating that they are an Australian resident. These rules do not currently apply if the property is worth less than $2 million.

From 1 July 2017 the CGT withholding rate under these rules will increase by 2.5% to 12.5%.

Also, the CGT withholding threshold for foreign tax residents will reduce from $2 million to $750,000, capturing a much wider pool of taxpayers and property transactions.

Australian property held through companies and trusts

Date of effect: From 7:30 pm (AEST) on 9 May 2017

When a non-resident or temporary resident sells shares in a company or units in a trust this is not generally subject to Australian CGT unless:

  • The taxpayer and their associates hold at least 10% of the shares in the company or units in the trust; and
  • More than 50% of the total market value of the company or trust’s assets is attributable to land and buildings in Australia and certain mining, quarrying or prospecting rights relating to Australia (the principal asset test).The principal asset test will be changed to take into account assets held by associates of the company or trust rather than only considering assets held by the company or trust. The change will apply from the Budget announcement (7:30PM (AEST) on 9 May 2017).

This will ensure that foreign residents cannot avoid an Australian CGT liability by splitting indirect interests in Australian real property.

Foreign ownership in new dwellings restricted

Date of effect: From 7:30 pm (AEST) on 9 May 2017

A 50% cap will be imposed on foreign ownership in new developments. In effect, any new development will need to ensure that less than 50% of the purchasers are foreign residents.

The cap will be a condition of New Dwelling Exemption Certificates from the night of the Budget announcement (7:30PM (AEST) on 9 May 2017). New Dwelling Exemption Certificates are granted to property developers and act as a pre-approval allowing the sale of new dwellings in a specified development to foreign persons without each foreign purchaser seeking their own foreign investment approval. The current certificates do not limit the amount of sales that may be made to foreign purchasers.

Foreign investment framework changes

Date of effect: From 1 July 2017

The Government intends to make a series of changes to Australia’s foreign investment framework, including:

  • refining the type of developed commercial property subject to the lower $55 million threshold by removing low sensitivity applications from the meaning of sensitive land;
  • improving the treatment of residential applications by allowing failed off-the-plan purchases to be considered as ‘new’; overcoming limitations with the existing exemption certificate system for individual residential real estate purchases and amending the treatment of residential land used for a commercial purpose;
  • streamlining and simplifying foreign investment business application fees, including legislating existing fee waiver arrangements;
  • introducing a new exemption certificate that applies to low risk foreign investors;
  • clarifying the treatment of developed solar and wind farms; and
  • restoring the previous arrangement where companies with significant foreign custodian holdings (that is, legal rather than equitable interest holders) are not subject to notification requirements.
  • In general the changes should streamline the rules.
  • Federal Budget changes for individuals and families

Increase in the Medicare Levy

Date of effect: 1 July 2019

From 1 July 2019, the Medicare Levy will increase to 2.5% of taxable income (up from 2%) raising an estimated $8.2 billion across the 3 years from introduction.

Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.

Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.

The measure is to inject funds into a savings fund for the National Disability Insurance Scheme.

Medicare low-income threshold increased

Date of effect: 2016-17 income year

The Medicare levy low-income thresholds for singles, families and seniors and pensioners will increase to take account of movements in the CPI:

  2016-17 Threshold
  Singles $21,655
  Families $36,541 plus $3,356 for each dependent child or 
  Single seniors and pensioners $34,244
  Family threshold for seniors and pensioners $47,670 plus $3,356 for each dependent child or student

Help with energy bills

Date of effect: 20 June 2017

As part of the deal to pass the Enterprise Tax Bill containing the business tax reductions and other measures for small business, the Government agreed to assist with energy bills.

A one-off Energy Assistance Payment will be made in 2016-17 of $75 for single recipients and $125 per couple for those eligible for qualifying payments on 20 June 2017 and who are resident in Australia.

Qualifying payments include the Age Pension, Disability Support Pension, Parenting Payment Single, the Veterans’ Service Pension and the Veterans’ Income Support Supplement, Veterans’ disability payments, War Widow(er)s Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.

Child care subsidy limited

Date of effect: From 2018-19 income years

The Child Care Subsidy will be limited to families with incomes below $350,000 per annum. This upper income threshold will be indexed annually from 1 July 2018.

Indexation paused on Family Tax Benefit payments

Date of effect: 1 July 2017

The Family Tax Benefit payment rates will remain static for the next two years until indexation resumes on 1 July 2019.

Family Tax Benefit A changes

Date of effect: 1 July 2018

A consistent 30 cents in the dollar income test taper for Family Tax Benefit Part A families with a household income in excess of the Higher Income Free Area (currently $94,316) will apply from 1 July 2018.

In addition, the increase to the Family Tax Benefit A announced as part of the 2015-16 Mid Year Economic review will not proceed.

Tougher residency requirements for pensioners

Date of effect: 1 July 2018

The residency requirements will be strengthened for access to the Age Pension and the Disability Support Pension.

Claimants will be required to have 15 years of continuous Australian residence before being eligible to receive the Age Pension or DSP unless they have either:

  10 years continuous Australian residence, with five years of this residence being during their working life (16 years of age to Age Pension age); or
  10 years continuous Australian residence, without having received an activity tested income support payment for a cumulative period of five years.

Existing exemptions for DSP applicants who acquire their disability in Australia will continue to apply.

Penalties introduced for Work for the Dole and jobseekers

A new demerit system will be introduced to tackle deliberately non-compliant job seekers. Each failure without a reasonable excuse will result in payment suspension until re-engagement, and accrual of demerit points. Individuals who accrue four demerits in six months will enter a three-strike Intensive Compliance Phase, in which they will face escalating penalties.

They will:

  lose 50% of their fortnightly payment for their first strike without a reasonable excuse;
  lose 100% of their fortnightly payment for their second strike; and
  have their payment cancelled for four weeks for their third strike.

Working Age Payments consolidated

A new Jobseeker payment will transition and replace seven working age payments and allowances – Newstart Allowance, Sickness Allowance, Widow Allowance, Partner Allowance, Widow B pension, Wife Pension, and Bereavement Allowance. In addition, the Government intends to introduce new participation requirements.

Higher education fees increased

Student contributions to the Higher Education Loan Program will increase by 7.5% over 4 years from 1 January 2018.

In addition, the threshold at which students start to pay back student loans will be reduced 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.

hanges are also being made to the Commonwealth Grants Scheme with an efficiency dividend of 2.5% introduced in 2018 and 2019. In addition, access to the CGS will end for permanent residents and to most New Zealand residents – these students will be able to access concessional loans instead. The changes apply to students enrolled from 1 January 2018.

Federal Budget Changes to Business

$20k immediate deduction extended for another year

Date of effect: Extended until 30 June 2018,/p>

The $20,000* immediate deduction threshold for assets purchased by businesses with an aggregated turnover of under $10 million will be extended until 30 June 2018. Assets will need to be used or installed ready for use by 30 June 2018 to qualify for the higher threshold.

Assets costing $20,000 or more can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. If the closing balance of the pool, adjusted for current year depreciation deductions (ie, these are added back), is less than $20,000 at 30 June 2018 then the remaining pool balance can be written off as well.

The instant asset write-off only applies to certain depreciable assets. There are some assets, like horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc., that don’t qualify.

The current ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from reentering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2018.

From 1 July 2018, the immediate deductibility threshold will revert back to $1,000.

* $20,000 exclusive of GST for GST registered businesses. $20,000 inclusive of GST for businesses not registered for GST.

Contractors in the courier and cleaning industries face greater compliance

Date of effect: 1 July 2018

The building industry has faced enhanced compliance and reporting for some time through the taxable payments reporting system. Now it’s the turn of contractors in the courier and cleaning industry.

Under the taxable payments reporting system, businesses are required to report payments they make to contractors (individual and total for the year) to the ATO.

Businesses in these industries will need to collect information from 1 July 2018, with the first annual report required to be lodged in August 2019. Details required to be maintained by the business include:

ABN (where known)

  Gross amount you paid for the financial year (this is the total amount paid includ)
  Total GST included in the gross amount you paid.