It’s budget season yet again.
Every second analyst seems keen to list all of the proposed changes. Here we have a slightly different approach. We highlight the real world impact of the budget on the people most significantly affected by the proposed measures.
I’m in the lower to middle income tax bracket
The government is pushing ahead with its plans of cutting the average rate of tax over a period of seven years. By 2024 you can expect taxpayers across the board to be paying less tax, with the 37% tax bracket to be removed altogether.
From 1 July 2018:
- A new non-refundable Low and Middle Income Tax Offset (LMITO) providing you tax relief of up to $530 if you earn up to $90,000. This will be in addition to the existing Low Income Tax Offset (LITO).
- The upper threshold of the 32.5% tax bracket will increase from $87,000 to $90,000.
From 1 July 2022:
- Low Income Tax Offset (LITO) increases from $445 to $645.
- The upper threshold of the 19% tax bracket increases from $37,000 to $41,000.
- The upper threshold of the 32.5 % tax bracket increases from $90,000 to $120,000.
From 1 July 2024:
- The 37% tax bracket is removed completely.
- The upper threshold of the 32.5% tax bracket increases to $200,000.
- If you earn more than $200,000, you will pay the top marginal tax rate of 45% (excluding the Medicare Levy).
The Medicare levy will stay at 2%, as the Government has shelved proposals to increase it to 2.5%, yet the low-income threshold will rise.
The Medicare Levy low-income threshold for the 2017-18 income year:
- Singles: increased to $21,980 (up from $21,655 in 2016-17).
- Couples with no children: increased to $37,089 (up from $36,541 in 2016-17).
- For each dependent child or student: increased to $3,406 (up from $3,356 in 2016-17).
- Single seniors and pensioners eligible for the Seniors & Pensioners Tax Offset: increased to $34,758 (up from $34,244 in 2016-17).
- Seniors and pensioners with family: increased to $48,385 (up from $47,670), plus $3,406 for each dependent child or student.
How will this impact you as a taxpayer in the here and now? While lower-middle income earners will receive up to $530 extra in their pockets, you’ll need to consider whether this makes any real impact in light of stringent new rules and costs impacting businesses and individuals. For example, the Government aims to spend $130.8 million on increasing the ATO’s ability to target individuals and tax agents who do not comply with new tax measures from 1 July 2018. We explore these new rules and costs below.
I’m in the higher-income tax bracket.
While these proposed changes seek to provide immediate and long-term tax relief to individuals in the lower-middle income bracket, it’s important to note that this will in turn impact you if you are a high earner. Lower-middle income cuts effectively lead to high-income tax cuts over the next 7 years, and, combined with how you manage your dividends if you run a company, this set of cuts could see you paying significantly less tax in the long-run as a high-income individual.
I operate a small business
It’s important to take into consideration the impact of measures designed to boost the operations of SMEs:
- The instant asset write-off scheme was supposed to end 30 June 2018. It has now been extended for another year. This means you can write-off up to $20,000 of asset expenses.
- A small business simplified depreciation pool will stay open for assets costing greater than $20,000. This means assets placed in the pool may be initially depreciated at 15% and 30% for each income year thereafter. Furthermore, the rules that locked out businesses from depreciation (by restricting access for five years for small businesses who previously have opted out of the simplified depreciation rules) will remain suspended until 30 June 2019.
This helps you spend more on your business. It helps capital intensive firms. It will subsidise your cash flow in equipment and materials. Such measures give small businesses more room to move when planning cash flow.
But you will also need to make adjustments in other areas of your business which may make life more difficult or add an extra cost to your operations.
- Significant changes to payroll, including Single Touch Payroll rulings outlined prior to the Budget, will impact the way you pay your employees. This will have a significant impact on you if you lack up-to-date software and systems or deal largely in cash, which we explore in more detail below.
- From 1 July 2019, deductions will be denied for payments to contractors that do not supply an ABN and business does not withhold PAYG.
These measures add another layer of compliance on the tax planning of small businesses, and so you need to take into account the costs of making adjustments to remain compliant when measuring the potential benefits from Budget measures related to depreciation and asset write-offs.
I own vacant land
The benefits you might garner from tax cuts and asset measures may be further diminished if you hold vacant land. Integrity measures will discourage land owners from holding vacant land from 1 July 2019, denying you income tax deductions for expenses such as interest and council rates.
I am keen to invest in innovation
Innovation has been a key topic in Government policy discussions related to industry in Australia. But in light of the recent perception of wide-spread rorting of government grants geared toward boosting the research and development of businesses, the government is seeking to narrow your capacity to access and benefit from government grants designed to encourage innovation.
Effectively, you will get less from the R&D Tax Incentive. In addition to recent integrity measures, companies with an annual turnover of less than $20 million will see the offset rate reduced from 43.5% to 41%. Taking into account the effective tax rate of 27.5%, this leaves a benefit of 13.5% for your innovation investment. Cash refunds for small R&D companies will also be capped at $4 million per annum. Big innovators, with group turnover of $20 million or more, face added integrity measures and an offset, to be dictated by your R&D intensity, which effectively could be as low as 4%. The rate of your non-refundable offset will still be calculated according to your company’s tax rate (27.5 per cent where group turnover for 2018-19 is between $20 million and $50 million, and 30 per cent where it exceeds $50 million) but will also be based on percentage points (between 4 to 12.5) based on how much you spend on R&D in relation to your total expenditure.
These significant changes start from 1 July 2018. This raises the issue of whether you need to use what little time you have in this financial year to reshape your R&D planning and investment immediately.
I run a business that uses cash
The Government has not been shy about its endeavours to target the Black Economy. They will pour money into the ATO to investigate compliance. Expect new mobile strike teams, a Black Economy Hotline, and improved government data analytics and training activities.
In addition to a number of measures in the past, effectively these Budget proposals will make it harder for you to deal in cash.
Rigid reporting measures
- Taxable payments reporting that initially focused on the construction industry will expand. Do you run a business and hire staff in security, IT, road freight, cleaning, or the courier industry? Expect to adopt a new reporting regime to avoid penalties.
Increased scrutiny on company registration
- $19.3 million will be spent to improve the way the existing Companies Register, Australian Business Register and the Business Names Register interact.
Limit on cash payments
- Businesses will effectively be limited to spending no more than $10,000 in cash in the purchase of goods and services. This is a huge practical change, especially for those in industries such as construction and retail who buy supplies and tools in bulk, and often in cash. It will effectively end current cash practices between you and your suppliers. Transactions with financial institutions or consumer-to- consumer non-business transactions will not be affected.
Crackdown on cash wages and PAYG payments
- If you pay your employees in cash you will not receive deductions unless you follow PAYG deduction protocols, which, in light of other payroll measures, effectively makes it almost impossible for many businesses to pay in cash. The days of paying from the till are gone. The common practice of explaining away cash for wages during audits (thus getting a deduction) is finished. Fair Work stipulations (and the failure to meet them) will also become more transparent since everything you do with payroll will be recorded.
- In conjunction, you will not be able claim a tax deduction for payments to employees or contractors if you fail to deduct tax and remit it to the ATO under the PAYG regime. In light of the new Single Touch Payroll software requirements outlined prior to the Budget, this is yet another reason why you will find it incredibly difficult to pay cash to your employees or deal with contractors who do not have an ABN or up-to-date payroll reporting systems. Effectively, it’s an incentive toward putting your money in the bank.
What do you do? By 1 July 2018, you’ll need to update your procedures if they are not already in line with budgetary proposals and measures announced previously. This covers changes to your tax reporting, accounting, software, record-keeping, and payroll systems. As you can imagine, this may well call for an operational revolution for some businesses, and will require investment in professional services and software.
You’ll not only need to manage your reporting systems more effectively, you’ll also need to invest time and money into analysing and documenting your operations. If you want to meet PAYG obligations, for example, you’ll need to not only record transactions through Single Touch Payroll, but you’ll need to properly work out when to withhold tax. You’ll need to identify this for employees, contractors, foreign employees, and Australians working overseas, and know how to report this accurately to the ATO under the revised reporting regimes. Since all of these systems will be closely scrutinised by the ATO, you are far more likely to be caught out for non-compliance.
I’m the Director of a company
The Director Penalty Regime has already had an impact on your liability in your ownership of a company. Now, the regime will extend to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company’s debts to the ATO in respect of those taxes. While the effective date has not been set, it is vital that you understand the new scope of your exposure to the risks. You’ll need to review your internal controls to better plan for how you might be held financially and personally responsible for your company’s performance and tax.
My business may need to shut down
The Government plans to extend its current scrutiny of Phoenix activity. When you consider how you might wind-down your company or deal with bankruptcy, phoenixing laws place the onus of transparency and tax compliance on you. Under new measures announced in the Budget 2018, Directors will not be able to backdate resignations, the capacity to resign will be limited, and creditors will have reduced voting powers.
In addition to the extension of the DPN to cover the GST, this means you need to be more careful and precise in how you manage the wind-down of your company or plan for it in the future.
What’s the bottom line?
The consensus is the Federal Budget 2018 poses no major shift to the tax landscape. Rather, it’s ethos is akin to small carrots, big whip; incentives are proposed here and there for certain groups, while new compliance measures are set to ensure everyone is more precise with their tax procedure. You should discuss with your business advisor or tax accountant whether or not the incentives outweigh the costs of compliance, or whether you will pay more for the necessary changes to your business operations than you will receive from individual tax cuts and company rebates.
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.