Overseas investors have been very heavily impacted and the most surprising part of the budget is the increase in the property settlement tax by 2.5% to 12.5% but also the reduction of the threshold to $750,000. This means that an overseas investor will need to pay tax on a purchase of any property that exceeds $750,000.
The Government has also dealt the first blow to the much talked about negative gearing on investment properties. As their first step, deductions for travel to inspecting rental properties or collecting rent will cease. Based on recent history, with the removal of other offsets and deductions, you can expect further reductions in other areas in the future.
For Business
$20k immediate deduction extended for another year
| Date of effect : | Extended until 30 June 2018 |
The $20,000 immediate deduction threshold for assets purchased by businesses with an aggregated turnover of under $10 million will be extended.
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 re-entering 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.
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.
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.
Who collects the GST on residential property & subdivisions
| Date of effect : | 1 July 2018 |
Under new integrity measures, property developers will no longer manage the GST on sales of newly constructed residential properties or new subdivisions. Instead, the Government will require purchasers to remit the GST directly to the ATO as part of the settlement process.
It seems that under current law (where the GST is included in the purchase price and the developer remits the GST to the ATO), some developers are failing to remit the GST to the ATO despite having claimed GST credits on their construction costs.
The Government expects that as most purchasers use conveyancing services to complete their purchase, they should experience minimal practical impact from these changes.
The practical effect for developers is that they will not have the GST they would have collected to assist with cashflow between the period between settlement and when they would normally remit it to the ATO.
Many new residential properties and subdivided lots are sold under the GST margin scheme which allows the developer to calculate the GST based on the difference between their purchase price and sale price rather than GST applying to the full sale proceeds. It is not clear how this will work under the proposed new rules and whether the purchaser will be able to rely on calculations performed by the developer to meet their obligations with the ATO.
Small business CGT concessions tightened
| Date of effect : | 1 July 2017 |
The small business CGT concessions will be tightened to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business.
The Government is concerned that some taxpayers are accessing the concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.
The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million. The higher small business entity turnover threshold of $10 million will not apply to these concessions.
Levy on businesses employing foreign workers on skilled visa
| Date of effect : | March 2018 |
Businesses that employ foreign workers on certain skilled visas will pay a new levy that will be channelled into the Skilling Australians Fund. The new levies replace and increase the existing training benchmark financial obligations, generating an estimated $1.2 billion over 4 years.
For businesses with a turnover less than $10 million p.a.
Businesses with turnover of less than $10 million per year will make an upfront payment of $1,200 per visa per year for each employee on a Temporary Skill Shortage visa and make a one off payment of $3,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
For businesses with a turnover of $10 million or more p.a.
Businesses with turnover of $10 million or more per year will be required to make an upfront payment of $1,800 per visa year for each employee on a Temporary Skill Shortage visa and make a one off payment of $5,000 for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
Small business CGT concessions tightened
| Date of effect : | 1 July 2017 |
The small business CGT (Capital Gains Tax) concessions will be tightened to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business.
The Government is concerned that some taxpayers are accessing the concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.
The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million. The higher small business entity turnover threshold of $10 million will not apply to these concessions.
Encouraging over 65’s 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.
First home owners to use super contributions to save for a deposit
| Date of effect : | 1 July 2017 – contributions
1 July 2018 – 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.
Deductibility of investment property travel costs to end
| Date of effect : | From 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.
Depreciation deductions limited
| Date of effect : | From 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 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.
Foreign investors charged for leaving properties vacant
| Date of effect : | From 7:30PM (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.
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 however that is about to change.
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.
Foreign ownership in new dwellings restricted
| Date of effect : | From 7:30PM (AEST) on 9 May 2017 |
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.