Last night, Treasurer Scott Morrison handed down the 2018-19 Budget.   Several key changes were announced which impact business, and these are highlighted below.

Instant Asset $20,000 Write Off Extended

The Government will extend the current instant asset write-off ($20,000 threshold) for small business entities to 30 June 2019. This applies to businesses with aggregated annual turnover less than $10 million.

SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 acquired between 1 July 2017 and 30 June 2019, providing they are first used or ready for use by 30 June 2019 for a taxable purpose. Some assets are not eligible for the instant asset write-off  such as horticultural plants and in-house software.  If in doubt, please ask your PJT advisor.

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business pool and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

Please talk to us about any purchases of assets to ensure that the asset falls under the definition of the eligible assets.

The current 'lock out' laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt out) will continue to be suspended until 30 June 2019.

At this stage, the instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2019.

Company Tax Cuts

Part of the Enterprise Tax Plan already in force is the lower company tax rate of 27.5%  which from 1 July 2018 will increase from the current $25 million turnover threshold to $50 million turnover.

Further corporate tax cuts are planned in the coming decade to eventually flatten the company tax rate to 25% for businesses of all turnover thresholds by 2026-27, however these are still subject to passing the Senate.

Tax Rules – Anti Avoidance for Circular Trust Distributions now apply to Family Trusts

A particular anti avoidance rule which applies to closely held trusts engaging in circular trust distributions, will be extended to Family Trusts as of 1 July 2019.   Where Family Trusts act as beneficiaries of each other in a “round robin” arrangement, a distribution can be ultimately returned to the original trustee, which avoids tax being paid on that amount.  This measure enables the ATO to pursue family trusts which engage in such arrangements, by extending the anti-avoidance rule.  Tax imposed on such distributions will be at a rate equal to the top personal tax rate plus the Medicare levy.

R&D tax incentive overhaul

In response to the recommendations of the 2016 Review of the R&D Tax Incentive, the Government will amend the incentive with changes to apply for income years starting on or after 1 July 2018.

For companies with aggregated annual turnover of $20 million or more, the Government will introduce an R&D premium that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure, as a proportion of total expenditure for the year. The marginal R&D premium will be the claimant's company tax rate plus:

  • 4 percentage points for R&D expenditure between 0% to 2% R&D intensity;
  • 5 percentage points for R&D expenditure above 2% to 5% R&D intensity;
  • 9 percentage points for R&D expenditure above 5% to 10% R&D intensity; and
  • 5 percentage points for R&D expenditure above 10% R&D intensity.

The R&D expenditure threshold will also change - the maximum amount of R&D expenditure eligible for concessional R&D tax offsets will be increased from $100 million to $150 million per annum.

For companies with aggregated annual turnover below $20 million, the refundable R&D offset will be a premium of 13.5 percentage points above a claimant's company tax rate. Cash refunds from the refundable R&D tax offset will be capped at $4 million per annum. R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years.

Refundable R&D tax offsets from R&D expenditure on clinical trials will not count towards the cap.

The Government aims to further improve the integrity of the R&D program by implementing stronger compliance and administrative measures. These include increased resourcing for the ATO and Department of Industry, Innovation and Science, which will be used to undertake greater enforcement activity and provide improved program guidance to participants. Other changes include

  • Improving the transparency of the program by enabling the ATO to publicly disclose claimant details and the R&D expenditure they have claimed
  • Limits on time extensions to complete R&D registrations
  • Amendments to technical provisions (such as the feedstock and clawback rules and the general anti avoidance rules).

Application of Div 7A to UPEs – Private Company Loan Rules

Unpaid present entitlements (UPEs) between a trust and a private company will be caught by the Div 7A private company loan rules from 1 July 2019.

A UPE arises where a related private company becomes entitled to a share of trust income as a beneficiary, but has not been paid that amount.

Division 7A requires that any monies paid to related taxpayers be taxed unless it is a loan as structured under Div 7A.   This measure will ensure any UPEs are treated the same.

Any UPEs will now need a loan agreement to ensure they are not taxed in accordance with Div 7A.

Deductions disallowed for holding vacant land

From 1 July 2019, the Government will disallow deductions for expenses associated with holding vacant land, including residential and commercial land.

Where the land is not for the purpose of earning assessable income, expenses such as interest or Council costs will be denied.

The aim is to reduce the tax incentives for land banking which limit the use of land for housing or other developments.

It will not apply to expenses that are incurred after:

  • A property has been constructed on the land, it has received approval to be occupied and available for rent; or
  • The land is being used by the owner to carry on a business, such as primary production.

Disallowed deductions will not be able to be carried forward for use in later income years, however such expenses could be included in the cost base for CGT purposes.

No tax deduction for non-compliant PAYG and contractor payments

From 1 July 2019, businesses will not be able to claim deductions for payments to their employees (such as wages) where they have not withheld any amount of PAYG from these payments, despite any PAYG withholding requirements applying.

The Government intends to remove deductions for payments made by businesses to contractors, where the contractor does not provide an ABN and the business does not withhold any amount of PAYG.

This targets a lot of businesses who consider someone a contractor, when in fact, they should be withholding PAYG.  This is a big issue in the building industry also.  We recommend that all contractor relationships be reviewed in light of this.

GST: offshore suppliers of Australian hotel accommodation

Offshore suppliers will be required to include supplies of hotel accommodation in Australia when calculating their GST turnover from 1 July 2019.

Currently offshore suppliers are not required to include such supplies in the calculation.  The situation now is that both Australian and foreign consumers are increasingly booking Australian hotel rooms though online services which are based offshore. The Government quite rightly points out that the same GST treatment should be applied regardless of whether accommodation is booked through a domestic or offshore company. Obviously, no GST will be charged by a foreign resident supplier if it is not required to register for Australian GST purposes (and chooses not to register).

The change can be seen as part of the Government's move to capture offshore supplies and suppliers in the Australian GST net (most relevantly through the Netflix tax, but also including the soon-to-commence low value imported goods measures).

The measure will apply to sales made on or after 1 July 2019 (ie next year). Sales that occur before 1 July 2019 will not be subject to the measure – even if the stay at the hotel occurs after this date

Black economy and tax evasion

A number of measures were introduced in a bid to crack down on tax evasion, the black market and the cash economy. These include -

  • Extra resources for enforcement agencies to detect and disrupt black economy participants.
  • The Government’s procurement procedures will be changed from 1 July 2019. Businesses seeking to tender for Australian Government contracts over $4 million will need to provide a statement of compliance with their tax obligations.
  • Plans for the controversial new identification systems for company directors (DINs) will progress.
  • Businesses can no longer receive cash payments over  $10,000 for goods and services from 1 July 2019.
  • The Tax Practitioners Board will receive additional funding to enforce the compliance of tax agents.

Taxable Payments Reporting System Expanded

The Government will extend the taxable payments reporting system (TPRS) to the following industries:

  • security providers and investigation services;
  • road freight transport; and
  • computer system design and related services.

This will extend the TPRS requirements already applying to the building and construction industry. The TPRS requirements will also be extended, from 1 July 2018, to the cleaning and courier industries under measures contained in the Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018.

The reporting requirements will apply from 1 July 2019 (ie next year), with the first annual report required in August 2020.

Craft Brewers have an even playing field

The alcohol excise refund scheme cap will increase from $30,000 to $100,000 per financial year from 1 July 2019, and lower excise rates will apply for smaller beer kegs making micro brewers more competitive with the large multinationals.

Tobacco Duties Payable on Importation

In an effort to crack down on the illicit tobacco market in Australia, tobacco duties and taxes will now be payable upon importation. A new multi agency task force will also be introduced to reduce the black market cigarette trade.

Please reach out to your trusted PJT Advisor for advice on your business in relation to any of the budget changes announced this week.