Please find our summary of the 2017 Budget.

Federal Budget 2017

 

Overview

 

The Federal Treasurer, Scott Morrison, has released his second Budget. We focus on those measures that are likely to be of greatest interest to our clients.

Key Points

From 1 July 2019, the Medicare levy will be increased to 2.5% (currently 2%) to fund the National Disability Insurance Scheme.

As we expected, a focus is housing affordability. Some key measures include, from 1 July 2018:

  • A person aged 65 or over will be able to make a non-concessional contribution to superannuation of up to $300,000 from the proceeds of selling their home. For us at Hudson Gore this is the biggest news to come out of the budget. See Superannuation sections for further details.
  • First home buyers will be able to withdraw voluntary contributions to superannuation made from 1 July 2017, along with associated deemed earnings, for a first home deposit.

Also expected was the introduction of a new one-stop shop for external dispute resolution for financial services and superannuation. This new arrangement will replace the existing ombudsman schemes and the Superannuation Complaints Tribunal.

Summary

Financial Services

A more accountable and Competitive Banking System – improving external dispute resolution The Australian Financial Complaints Authority (AFCA), a new one-stop shop for external dispute resolution, will be introduced.

 

Bank Levy

Major banking levy The Government will introduce a major bank levy (the levy) for Authorised Deposit-taking Institutions (ADIs), from 1 July 2017. The levy will be an annualised rate of 0.06 per cent on loan facilities such as corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. The levy will raise $6.2 billion over the forward estimates period, on the basis that this represents a fair additional contribution from our major banks and will assist with budget repair. Not surprisingly the big four majors have already signalled that the banks will pass on this cost to customers, so effectively this levy will act as a tax hike.

Superannuation

Contributing the proceeds of downsizing to superannuation

A person aged 65 or over will be able to make a non-concessional contribution to superannuation of up to $300,000 from the proceeds of selling their home from 1 July 2018.

These contributions are:

  • in addition to those permitted under existing rules and caps
  • exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions.

The measure:

  • applies to sales of a principal residence owned for the past ten or more years.
  • is available to both members of a couple for the same home. (Effectively $600k to super)

SMSF

Integrity of limited recourse borrowing arrangements

From 1 July 2017, the use of limited recourse borrowing arrangements (LRBA) will be included in a member’s total superannuation balance and transfer balance cap. The outstanding balance of a LRBA will now be included in a member’s annual total superannuation balance and the repayment of the principal and interest of a LRBA from a member’s accumulation account will be a credit in the member’s transfer balance account.

Integrity of non-arm’s length arrangements

From 1 July 2018, the non-arm’s length income provisions that apply to superannuation will ensure that expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis. This will limit the opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.

Tax

Increasing the Medicare levy low-income thresholds

The Medicare levy low-income thresholds for singles, families and seniors and pensioners will be increased from the 2016-17 income year as follows:

  • Singles – increased to $21,655
  • Family – increased to $36,541 plus $3,356 for each dependent child or student
  • For single seniors and pensioners –- increased to $34,244
  • For seniors and pensioners – increased to $47,670 plus $3,356 for each dependent child or student.

Increase in the Medicare levy

The Medicare levy will be increased from 2.0 to 2.5 per cent of taxable income from 1 July 2019 to ensure the National Disability Insurance Scheme (NDIS) is fully funded. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.

Child care rebate – upper income threshold The Government will achieve savings of $119.3 million over three years from 2018-19 by better targeting the Child Care Subsidy only to families with incomes below $350,000 per annum (in 2017-18 terms). The upper income threshold of $350,000 per annum will be indexed annually by CPI from 1 July 2018.

Disallow the deduction of travel expenses for residential rental property

From 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed. This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.

Limit plant and equipment depreciation deductions to outlays actually incurred by investors

From 1 July 2017, plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties. These changes will apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) 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. Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction 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.

Improving the small business capital gains tax concessions

The Government will amend the small business capital gains tax (CGT) concessions 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. This measure will take effect from 1 July 2017.

Extending the immediate deductibility threshold for small businesses Small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2018. Only a few assets are not eligible (such as horticultural plants and in-house software). Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool (the pool) and depreciated at 15 per cent in the first income year and 30 per cent 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). 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.

Housing Affordability

First home super saver scheme

From 1 July 2018, first home buyers will be able to withdraw voluntary contributions to superannuation made from 1 July 2017, along with associated deemed earnings, for a first home deposit. Under the measure, up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30 per cent offset. Both members of a couple can take advantage of this measure to buy their first home together.

Affordable housing through Managed Investment Trusts

The Government will enable Managed Investment Trusts (MITs) to invest in affordable housing. For investors to receive concessional taxation treatment through a MIT, the affordable housing must be available for rent for at least 10 years.

Key points: • MIT will be able to acquire, construct or redevelop the property

. • Must derive at least 80 per cent of its assessable income from affordable housing.

  • Up to 20 per cent of the income of the MIT may be derived from other eligible investment activities permitted under the existing MIT rules in the income tax law.
  • Qualifying housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate.

Under the MIT withholding tax regime:

  • Non-resident investors are generally subject to a reduced rate of tax if they are a resident of a country with which Australia has an effective exchange of information treaty.
  • Non-resident investors are generally subject to a 15 per cent final withholding tax rate on fund payments from the MIT.
  • Resident investors are taxed at their marginal tax rates, with capital gains remaining eligible for the capital gains tax discount.

In addition:

  • If the 20 per cent or 80 per cent requirements are not met, the non-resident investor will be liable to pay withholding tax at 30 per cent on investment returns for that income year (rather than the concessional rate of, generally, 15 per cent that would apply without breach).
  • Properties held for rent as affordable housing for less than 10 years will be subject to a 30 per cent withholding tax rate on the net capital gains arising from the disposal of those assets. This measure will apply from income years starting on or after 1 July 2017.

Expanding tax incentives for investments in affordable housing

From 1 January 2018, the capital gains tax discount for resident individuals who elect to invest in qualifying affordable housing will be 60% (rather than 50%).

To qualify for the higher discount:

  • Housing must be: » provided to low to moderate income tenants » managed through a registered community housing provider and the investment held for a minimum period of three years.
  • Rent must be charged at a discount below the private rental market rate.

 

Annual charge on foreign owners of underutilised residential property

Foreign owners of residential property that is not occupied or genuinely available on the rental market for at least six months per year, will be subject to a new charge. 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. This measure will apply to foreign persons who make a foreign investment application for residential property from 7:30PM (AEST) on 9 May 2017.

Capital gains tax changes for foreign investor’s foreign resident capital gains tax (CGT) regime changes:

  • Foreign and temporary tax residents will be denied access to the CGT main residence exemption from 7:30PM (AEST) on 9 May 2017, however existing properties held prior to this date will be grandfathered until 30 June 2019.
  • CGT withholding rate for foreign tax residents will be increased from 10.0 per cent to 12.5 per cent, from 1 July 2017.
  • CGT withholding threshold for foreign tax residents will be reduced from $2 million to $750,000, from 1 July 2017.
  • the principal asset test will apply to an associate inclusive basis from 7:30PM (AEST) on 9 May 2017, for foreign tax residents with indirect interests in Australian real property.

 

 

 

Higher Education

A more sustainable higher education sector

This measure includes:

  • introducing an efficiency dividend of 2.5 per cent in 2018 and 2019 on the Commonwealth Grant Scheme (CGS)
  • rebalancing contributions toward course fees by increasing student contributions through the Higher Education Loan Program (HELP) by 7.5 per cent (1.82 per cent annually over four years from 2018), with a commensurate reduction in funding universities receive under CGS. Student contributions will increase for all Commonwealth supported students from 1 January 2018 regardless of when they began their study
  • ceasing the Commonwealth loading for enabling programs and replacing it with a student contribution through HELP
  • revising the income thresholds for repayment of HELP debt, repayment rates and the indexation of repayment thresholds from 1 July 2018. A new minimum threshold of $42,000 will be established with a 1 per cent repayment rate and a maximum threshold of $119,882 with a 10 per cent repayment rate.

For further information on the 2017 Federal Budget measures, please visit www.budget.gov.au.

 

 

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