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April 3, 2019
Australia’s 2019/20 Federal Budget: A detailed review
The Australian Federal Budget 2019/20 was delivered on 2 April 2019 by the Federal Treasurer Josh Frydenberg.
EY’s Australian web page outlines the economic and policy issues, together with a podcast discussion of the budget. The budget, delivered ahead of an imminent federal election, has balanced some stimulus for the economy while banking the outcomes from a stronger than expected economy.
This Tax Alert focuses on the announced key tax measures, to assist taxpayers with planning and compliance processes.
Business tax measures include:
A major focus of the budget is further personal tax reform to include:
The further personal tax cuts “will lower taxes for hard-working Australians” and address Australia’s high personal marginal tax rates which are reached at a lower multiple of average weekly earnings than for other countries.
The Government sees these measures as “fiscally affordable over the forward estimates and medium-term, with … sustained surpluses projected over the medium term.” The projected impact of these measures is AU$158 billion1 through to 2029/30 (Budget Paper 1, Box 2), assuming that current policy settings do not change. These policies will clearly be monitored by future governments.
The budget has been delivered against the background of many key tax and superannuation measures from previous budgets not having progressed to law, including measures with retrospective application and others with proposed commencement from 1 July 2019.
Tax changes announced in the Budget
This Tax Alert outlines the key tax changes, categorized into changes affecting:
Business tax measures
Expansion of asset write-off rules for small and medium businesses for assets acquired after Budget night
A further expansion of the existing asset write-off rules for business assets was announced for assets acquired from 2 April 2019. Amendments to the Bill for the Government’s 29 January 2019 announced changes to these rules were quickly introduced into Parliament for this expansion.
The instant asset write-off threshold will increase from $25,000 to $30,000 for businesses that have an aggregated turnover of less than $50m annually (previously $10m).
The new rules apply to separate asset purchases, first used or installed ready for use, from 2 April 2019 until 30 June 2020. The simplified depreciation pool measures continue to apply to small businesses where asset acquisitions are outside of the above concessions.
Business with <$10 million turnover will need to take care to ensure the correct thresholds are applied to assets acquired during the 2019 year, to account for different rules for assets first used or installed:
Clarifying the operation of the hybrid mismatch rules
A number of minor amendments to Australia’s hybrid mismatch rules are proposed. The amendments will apply to income years commencing on or after 1 January 2019 (the start date of the hybrid mismatch rules), with the exception that the amendments to the integrity rule will apply to income years commencing on or after 2 April 2019.
The proposed amendments are expected to strengthen the application of the hybrid mismatch rules by:
Funding ATO Tax Avoidance Taskforce
The Government will provide $1.0 billion over four years from 2019/20, to the Australian Taxation Office (ATO) to extend and expand the operation of the Tax Avoidance Taskforce focused on large corporates, multinationals and high wealth individuals.
The measure is estimated to increase tax collections by $4.6 billion resulting in a net gain to the budget of $3.6 billion over the forward estimates period.
The Tax Avoidance Taskforce undertakes compliance activities targeting multinationals, large public and private groups, trusts and high wealth individuals. This funding is expected to result in further increases in ATO examination activity.
Black economy measure to strengthen the Australian Business Number (ABN) system – from 2021 and 2022
In order to retain their ABN, ABN holders will be required:
ABN holders will need to prepare for these new compliance obligations.
Private company integrity measures deferred
The start date for proposed changes to the Division 7A private company integrity rules announced in the 2017/18 and 2018/19 Budgets will be further deferred to 1 July 2020 to allow further time to consult on Treasury’s October 2018 discussion paper.
Export Market Development Grant – Increased funding
The Export Market Development Grants (EMDG) scheme sees a welcome increase of $60m over three years ($20m annually) from 2019/20. As a result, the EMDG funding for 2019/20 will increase from $130m to $150m.
Research and development (R&D) tax incentive – Ongoing uncertainty
With no mention in the Budget, there remains ongoing uncertainty in relation to the R&D Tax Incentive changes proposed in last year’s budget (which included a new R&D intensity test, expenditure caps, and a decrease in the rate of incentive). Following referral to a Senate committee, which suggested further review is needed, the legislation has yet to pass into law.
Budget projections show a further decrease of $1.3b in the cost of the R&D program, over the forward estimates reflecting a decrease in the size and number of claimants in the program. This is in addition to the previously announced savings from the proposed changes (originally estimated at $2.4b, revised March 2019 to $1.6b).
Luxury car tax relief for farmers and tourism operators
From 1 July 2019, farmers and tourism operators will be entitled to claim a luxury car tax refund of up to $10,000 in respect of the purchase of any eligible four-wheel drive or all-wheel drive car (an increase from the current maximum refund amount of $3,000).
Financial services and real estate
Updated list of Information Exchange Countries
The list of Information Exchange Countries will be expanded on 1 July 2020 to add Curacao, Lebanon, Nauru, Pakistan, Panama, Peru, Qatar and the United Arab Emirates. Then, distributions from managed investment trusts (MITs) to these countries that are currently subject to the 30% withholding tax rate may qualify for the lower 15% withholding tax.
Unfortunately, there is no mention of Hong Kong, at this stage. It is expected that Hong Kong will be added at a later time.
Relevant foreign investors should factor in this favorable change when making investment decisions. MITs and their custodians and administrators will need to update systems.
The tax centerpiece of the Budget is staged personal income tax relief, building on the Government’s legislated 2018/19 Personal Income Tax Plan, to provide tax relief to low and middle-income earners. The below graph illustrates how the relief impacts taxpayers for the 2018/19 to 2021/22 years.
Individuals and employers should ensure that personal income tax rate changes are factored into tax planning, payroll and compliance processes
Increasing the non-refundable low and middle-income tax offset (LMITO)
The reduction in tax provided by LMITO will increase from a maximum of $530 to $1,080 annually and the base amount will increase from $200 to $255 annually from the current 2018/19 year. Taxpayers with taxable income:
Low income tax offset (LITO) increase
* Rates take previously announced 2018/19 personal tax cuts into account, new changes marked in bold.
* Rates do not include Medicare levy of 2%.
Medicare levy threshold increases
The Medicare levy thresholds will also be adjusted from the 2018/19 income year.
Superannuation member reforms from 1 July 2020
A number of measures intended to improve superannuation flexibility for older Australians are proposed from 1 July 2020 as follows:
Superannuation fund reforms
Reducing red tape for Superannuation Fund Trustees
Permanent tax relief for merging superannuation funds
1. Currency references in this Alert are to AU$.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Sydney
Ernst & Young (Australia), Melbourne
Ernst & Young (Australia), Perth
Ernst & Young (Australia), Canberra
Ernst & Young (Australia), Brisbane
Ernst & Young (Australia), Auckland
Ernst & Young LLP (United States), Australian Tax Desk, New York
Ernst & Young LLP (United Kingdom), Australian Tax Desk, London