Do you employ foreign workers?
The Budget initiates a new levy on businesses who hire foreign workers. In an attempt to curb the influx of foreign employees, the government’s new levy requires a business to pay an annual cost for each of the foreign workers it hires.
This change comes on the back of the replacement of the controversial 457 visas, or Temporary Work Visas, with a new temporary visa scheme. The new scheme increases the costs of applying for a temporary work visa and limits the capacity of foreigners to apply by narrowing the skills-shortage list.
How will it impact me?
For example, Mr Beef runs Butcher Z. He has hired a number of foreign workers for a variety of roles to manage meat preparation, butchery services, delivery, and customer service. Now, with the cancellation of the 457 visa, he realises that some of these workers have skill- sets that are no longer deemed to be in short supply, and so they cannot use these skill-sets to apply for the new temporary work visas. Furthermore, for those foreign employees who do have the skill-sets that allow them to apply for the new visa, there will be increased application costs plus an added annual payment.
What should I do?
This creates an obvious headache for businesses that hire foreign workers, not to mention for the foreign employees currently on temporary visas. As a business owner, your best way forward is to treat this as an ideal time to revisit your staffing structure in its entirety. With the help of your business advisor, ask yourself the following questions:
- What is the financial cost of hiring foreign workers, both in the short term and in the long term (in light of the annual levy)?
- Will my business struggle to find local workers with comparable skills?
- Can I restructure my staff and distribute both local and foreign workers across roles in my business in a cost-effective manner? Are there opportunities to outsource certain functions?
- How can I conduct performance appraisals to determine the true value of my staff to my business in both the short term and the long term?
Do you pay income tax?
There are a number of new measures in the Budget that impact income tax:
- The Medicare levy will increase from 2% to 2.5% from 1 July 2019.
- The 2% budget repair levy on individuals with taxable incomes over $180,000 will cease from 1 July 2017.
- From 1 July 2017, the costs of travelling to investment properties that you rent out can no longer be claimed back as a tax deduction.
- From 1 July 2017, depreciation deductions on the value of plant and equipment at investment properties will be limited to purchases made after the acquisition of the property.
How will this impact me?
The 0.5% increase in tax brought on by the new Medicare Levy simply needs to be worn by all taxpayers from 1 July 2019. The other measures, however, have a more precise impact.
For example, Mr Sand earns $190,000 a year. His wife, Mrs Sand, earns $80,000 a year. They both live in Sydney, but they rent out a house in Brisbane as well as a small laundry on the Gold Coast. They fly to Queensland and visit these properties twice a year. From 1 July 2017, Mr Sand will pay $3,800 less in income tax once the budget repair levy ceases to apply. However, also from the 1 July 2017, Mr and Mrs Sand will not be able to claim back the travel costs of their trips to Queensland as tax deductions. Also, they used to claim a deduction on the depreciating costs of all the equipment in the coffee shop on Gold Coast, including equipment and infrastructure that was extant when they first bought the property. From 1 July 2017, they will only be able claim depreciation deductions on the dishwasher, coffee machines, cutlery, and rugs, since these were the bought after the property was originally purchased.
What should I do?
- Factor the increase in the Medicare levy into your planning from 1 July 20192.
- If you are likely to earn over $180,000 in 2017, consider whether there are any sources of income that can be deferred to the next year. Since you will see a 2% reduction in tax from that date, why not save money and see if you can delay your income until the reduction kicks in?
- Consider if you can still afford to travel as often to visit your investment properties. Also, while this targets local housing, it may significantly impact your ability to travel overseas to inspect your investments in foreign housing.
- Factor in your new inability to claim depreciation deductions on plant and equipment that was in your investment prior to the purchase, especially in regards to your plans to buy new equipment for properties that you rent out.
Do you run a small business?
Changes to the small business tax landscape go beyond the 2017 Budget.
Recently, the government has changed the definition of small business from business with an annual turnover of $2 million to those with an annual turnover of $10 million. This means a whole raft of companies can now consider themselves small businesses for the first time.
Originally, the government planned to lower the corporate tax rate to 25% by 2027. This lowered rate was to be consistent for all companies no matter their size. Now, in changes announced prior to the 2017 Budget, only companies with a turnover of less than $50 million will see their tax rate reduced to 25% by 2027. This proposed change will occur in the following stages:
| Corporate tax rate | Year | Size of Business |
|---|---|---|
| 27.5% | 2017 | Turnover less than $10m |
| 27.5% | 2018 | Turnover less than $25m |
| 27.5% | 2019-2024 | Turnover less than $50m |
| 27% | 2025 | Turnover less than $50m |
| 26% | 2026 | Turnover less than $50m |
| 25% | 2027 | Turnover less than $50m |
Also, the immediate access write off scheme which gave small businesses a tax break for assets worth less than $20,000 has been extended. This tax break was originally available only until 30 June 2017, but under the 2017 Budget access has been extended to 30 June 2018.
The ATO has recently made changes to small business benchmarks, which they use to measure the financial performance of a business in order to determine whether or not possible audit action should be undertaken.
How does this impact me?
For example, Miss Shoe owns and manages Degree Institute, an education provider with annual turnover of $9 million. She is now eligible to be considered a small business, and so must make new choices in regards to her expenses and tax. She has until 30 June 2018 to write-off $20,000 worth of assets – should she spend that money on new furniture, books, and the like? Or is it better for her to invest this money elsewhere, such as on her staff? How will the reduction in the tax rate over the new few years impact the value of the write-off and her capacity to spend in general? Also, if she does start spending more money, will that cause Degree Institute to exceed the new ATO benchmarks, and perhaps trigger an audit by the ATO?
What should I do?
- Are you a business with turnover between $2 million and $10 million? Then you may need to adjust to the new benefits and offsets available to small businesses.
- Consider your capital replacement plans. You now have added time to purchase and write off assets worth up to $20,000. It can be an attractive write off, but it is important to consider whether the money can be better spent elsewhere, whether the new tax rates will leave you with additional cash flow, and whether spending this money will be impacted by your industry’s benchmarks monitored by the ATO.
Are you a foreigner who wants to buy and sell residential property in Australia?
In light of the well-publicised housing affordability crisis in Australia, the government is keen to target foreign property investors with new measures in the 2017 Budget.
- Foreign owners of residential property, purchased after 7.30pm on the 9th of May 2017, will incur an annual charge if they do not make this property available on the market for at least 6 months per year. This charge will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor. These fees start at $5,000 and progressively go up depending on the cost of the property.
- Foreign and temporary tax residents will no longer be able to access the CGT main residence exemption from 9 May 2017.
- The CGT withholding rate for foreigner tax residents will go up from 10% to 12.5% from 1 July 2017.
- The CGT withholding threshold for foreign tax residents will be reduced from $2 million to $750,000 from 1 July 2017.
- Foreign investments in new property developments will be capped at 50%; property developers will need to apply for a new dwelling exemption certificate.
How does this impact me?
For example, Mr Hand, a Singaporean citizen, has plans to invest in the property market in Sydney. He plans to buy a block of flats in Liverpool and purchase a home for himself in Drummoyne. He will divide his time between living in Singapore and Sydney, since he plans to live and work in Sydney on a temporary work visa. In light of these new changes, he will now have to consider the costs of purchasing property in Sydney. He will pay $5,000 per year on the properties purchased since they were all residential properties. He will no longer benefit from the CGT exemption on his house in Drummoyne. Moreover, he plans to sell his block of flats in the near future, but the lowering of the CGT withholding threshold means he may get less from the sale. Also, he can only sell 50% of the block of flats to foreigners, which restricts his ability to find buyers in Singapore.
What should I do?
It is important for foreign investors to honestly revaluate the attractiveness of the Australian property market, and measure the return on their investment in terms of its financial and personal reward. You now face additional costs on residential properties, particularly on those which remain vacant and unrented, and may receive less at the point of sale. Likewise, when you do seek to sell the property, the 50% cap on foreigner buyers means you have a significantly smaller market of buyers for your property.
Are you an Australian Citizen Living Overseas?
The above changes target foreign investors and buyers of residential property, but they may impact Australian citizens also. If you live and work overseas, and so pay tax overseas, then the new CGT exemption may not be a worthwhile incentive for you to sell your residential property in Australia. As the threshold for CGT withholding has come down, you may also not get the full value of the sale.
Are you an Australian Property Developer, Investor, or Home Buyer?
The government is not only targeting foreign investors. The 2017 Budget also aims to incentivise local property development and investment.
- The CGT discount rate for investments into qualifying affordable housing has gone up from 50% to 60%. This is housing which is provided to people at discounted rates, operated through a registered community housing provider and managed by a Managed Investment Trust.
- From 1 July 2017, first home buyers can make concessional contributions to super which can be later taken out and put into a deposit on a first home.
- From 1 July 2018 the government will require the purchasers of newly constructed developments to remit the GST on the purchase to the ATO. In the past it was the developers’ responsibility but the ATO is concerned that developers are not remitting the GST on new developments.
How will this impact me?
For example, the Miss Horizon and Mr Sunset are good friends and work colleagues with very different needs in the property market. Both are affected by these changes. Miss Horizon knows she needs a deposit of at least $100,000 dollars to buy an apartment in a convenient location. She now needs to decide if she should save the money she earns from her job, or ask her employer to make concessional contributions to her super fund which she can later withdraw for her deposit. Also, she now must manage the costs and paperwork of paying GST if she does eventually purchase a newly constructed home. As for Mr Sunset, he needs to now consider his position as a property investor and developer. He will get a considerable exemption on CGT if he invests in qualifying affordable housing. He also faces a change in his cash flow should he develop a new property and sell it, since he no longer can collect the GST on the sale.
What should I do?
These changes in the 2017 Budget simply adjust the decision making process for property developers, investors, and home buyers.
- Investors: Should I invest in qualified affordable housing? There is considerable benefit in the CGT exemption, but this housing delivers less rent and so provides less cash flow.
- Developers: Now that you no longer collect the GST in the total cost when you sell a new property, how will your cash flow be affected? This applies especially if you need to pay down debt on the sales of the properties.
- First Home Buyers: Are you a good saver? The benefit of putting more of your income directly into your super fund, apart from having to pay less tax, is that you are no longer responsible for controlling your expenses and savings – you cannot touch that money until you withdraw it for a deposit on a new home. But if you can control your expenditure, then perhaps it is better for you to claim your full pay and put money aside for your deposit.
- All Buyers of Property: Anyone who buys newly constructed property from 1 July 2018 must now manage paying the GST, which adds to the paperwork of buying a residential property.
Are you over 65 and looking to sell?
If you are over 65 and sell your homes, you can make a non-concessional contribution to your super of up to $300,000 from the proceeds of sale. This is attractive because the returns in your super fund attract a lower rate of tax.
For example, Mr and Mrs Candle are 65 and decide to downsize. They sell their house in Cremorne and move to a townhouse on the Central Coast. Having extra cash, they invest it in a super fund. They lose less money on tax and since they can withdraw it fairly soon when they retire, they end up saving money.
Do you operate a ‘cash in hand’ business?
The government is looking to crack down on the cash economy.
- Businesses in the courier and cleaning industry must report the amounts they pay to contractors each year from 1 July 2018. Previously, this only applied to participants in the construction industry.
- $32 million in additional funding will be given to the ATO in a single year to extend its compliance on the cash and black economy
- The government will prohibit technology companies that produce Point of Sales software from including data suppression technologies in their software.
What should I do?
- Courier and cleaning companies should go over their documentation, particular in regards to contractors, and be ready to accurately report the amounts they pay to their contractors by 1 July 2018.
- If you work in retail and hospitality, ensure that you are aware of ATO benchmarks, lodgement dates, and reporting requirements. There is far less leeway, and a greater likelihood of being caught out for non-compliance.
- Avoid use of any sort of data suppression in Point of Sales software.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.