Personal tax cuts: low–mid tax offset increase now; more rate changes from 2022
In the 2019–2020 Federal Budget, the Coalition Government announced its intention to provide further reductions in tax through the non-refundable low and middle income tax offset (LMITO).
Under the changes, the maximum reduction in an eligible individual’s tax from the LMITO will increase from $530 to $1,080 per year. The base amount will increase from $200 to $255 per year for 2018–2019, 2019–2020, 2020–2021 and 2021–2022 income years. In summary:
Rate and threshold changes from 2022 and beyond
From 1 July 2022, the Government proposes to increase the top threshold of the 19% personal income tax bracket from $41,000 to $45,000.
Also from 1 July 2022, the Government proposes to increase the low income tax offset (LITO) from $645 to $700. The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of$37,500 and $45,000 (instead of at 6.5 cents per dollar between taxable incomes of $37,000 and $41,000 as previously legislated). LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of
$45,000 and $66,667.
Together, the increased top threshold of the 19% personal income tax bracket and the changes to LITO would lock in the tax reduction provided by LMITO, when LMITO is removed.
From 2024–2025, the Government intends to reduce the 32.5% marginal tax rate to 30%. This will more closely align the middle personal income tax bracket with corporate tax rates.
In 2024–2025 an entire tax bracket – the 37% tax bracket – will be abolished under the Government’s already-legislated plan. With these changes, by 2024–2025 around 94% of Australian taxpayers are projected to face a marginal tax rate of 30% or less.
Therefore, under the changes announced in the Budget, from 2024–2025 there would only be three personal income tax rates: 19%, 30% and 45%. From 1 July 2024, taxpayers earning between $45,000 and $200,000 will face a marginal tax rate of 30%.
The Government says these changes will maintain a progressive tax system. It is projected that in 2024– 2025 around 60% of all personal income tax will be paid by the highest earning 20% of taxpayers – which is broadly similar to that cohort’s share if 2017–2018 rates and thresholds were left unchanged. The share of personal income tax paid also remains similar for the top 1%, 5% and 10% of taxpayers.
Under its Budget announcements, the Government says an individual with taxable income of $200,000 may be earning 4.4 times more income than an individual with taxable income of $45,000, but in 2024– 2025 the higher-income person will pay around 10 times more tax.
Medicare levy low-income thresholds for 2018–2019
For the 2018–2019 income year, the Medicare levy low-income threshold for singles will be increased to $22,398 (up from $21,980 for 2017–2018). For couples with no children, the family income threshold will be increased to $37,794 (up from $37,089 for 2017– 2018). The additional amount of threshold for each dependent child or student will be increased to $3,471 (up from $3,406).
For single seniors and pensioners eligible for the seniors and pensioners tax offset (SAPTO), the Medicare levy low-income threshold will be increased to $35,418 (up from $34,758 for 2017–2018). The family threshold for seniors and pensioners will be increased to $49,304 (up from $48,385), plus $3,471 for each dependent child or student.
The increased thresholds will apply to the 2018–2019 and later income years. Note that legislation is required to amend the thresholds, so a Bill will be introduced shortly.
Social security income automatic reporting via Single Touch Payroll
The Government intends to automate the reporting of individuals’ employment income for social security purposes through Single Touch Payroll (STP).
From 1 July 2020, income support recipients who are employed will report income they receive during the fortnight, rather than calculating and reporting their earnings. Each fortnight, income data received through an expansion of STP data-sharing arrangements will also be shared with the Department of Human Services, for recipients with employers utilising STP.
This measure will assist income support recipients by greatly reducing the likelihood of them receiving an overpayment of income support payments (and subsequently being required to repay it).
The measure is expected to save $2.1 billion over five years from 2018–2019. The Government says the efficiencies from this measure will be derived through more accurate reporting of incomes. This measure will not change income support eligibility criteria or maximum payment rates. The resulting efficiencies will be redirected by the Government to repair the Budget and fund policy priorities.
The Government will provide $82.4 million over four years from 2019–2020 to the ATO and the Department of Veterans’ Affairs to support the expansion of the data collected through STP by the ATO and the use of this data by Commonwealth agencies.
STP data will be expanded to include more information about gross pay amounts and other details. These changes will reduce the compliance burden for employers and individuals reporting information to multiple Government agencies.
Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
Things to get right this FBT season
Fringe benefits tax (FBT) returns will soon be due and as always, it’s vital to make sure you use the latest rates and rely on the correct information.
FBT rates have recently been updated for the year, and a range of other factors may need to be considered, including using the best car parking valuations, correctly identifying which travel expenses are deductible, considering how FBT applies to your arrangements with employees and independent contractors, and making sure you keep within the entertainment benefits rules. Another issue to keep an eye on is employees’ private use of work vehicles.
TIP: We can provide advice on these matters and more, and help get your FBT return lodged on time.
Tax concierge service available to small businesses
The Small Business Ombudsman, Kate Carnell, has announced that taxpayers wanting an external review of an adverse tax decision by the ATO through the Administrative Appeals Tribunal (AAT) can now contact the office of the Australian Small Business and Family Enterprise Ombudsman for assistance.
From 1 March 2019, small business owners without legal representation can access an hour with an experienced small business tax lawyer at a significantly reduced cost, subsidised by the office of the Ombudsman. Lawyers can review relevant documents and provide advice on the viability of an appeal. And should an appeal progress, the Ombudsman’s case managers will help the small business owner through the process.
Small business taxation decisions will be finalised within 28 days from the date of a hearing at the AAT.
ATO small business benchmarks updated
The ATO has released its latest small business benchmarks, providing over 100 different industries with average cost of sales and average total expenses. Businesses can see clearly what the relevant benchmarks are for their industry. The benchmark data is drawn from over 1.5 million small businesses around Australia.
Business owners can use the benchmarks to gauge the strength of their business and keep an eye on their competition.
The benchmarks also help the ATO identify small businesses that may be doing the wrong thing and not properly reporting some or all of their income.
TIP: Using the business performance check tool in the ATO app is the quickest and easiest way to work out how your small business compares to the benchmarks. Search for “Australian Taxation Office” on the App Store or Google Play.
Early recovery of small business tax debts: ATO to be scrutinised
Minister for Small and Family Business Michaelia Cash has asked Australian Small Business and Family Enterprise Ombudsman Kate Carnell to look into the ATO’s practices in pursuing early recovery of tax debts from small businesses who are in dispute with the ATO.
The Minister said she was determined to make sure the ATO treats small businesses fairly.
“Early recovery can be devastating for a small business, and is particularly damaging when the small business disputes the recovery and then goes on to win the case,” she said.
The Ombudsman will look into the extent of the problem to gather a holistic picture of how current systems impact people running small businesses. The scrutiny will focus on historical cases and will not include live cases currently before the Administrative Appeals Tribunal.
Compensation for defective ATO administration: review announced
Mr Robert Cornall, a former Secretary of the Attorney- General’s Department, will lead a review of the Scheme for the Compensation for Detriment Caused by Defective Administration (the CDDA Scheme).
The CDDA Scheme allows Commonwealth Government agencies (including the ATO) to pay discretionary compensation when a person or an organisation suffers as a result of defective administration but there is no legal requirement to make a payment.
Mr Cornall’s review will consider the consistency of the ATO’s CDDA Scheme processes for small businesses, the timeliness of decisions, how effectively findings are communicated, how independent decision-making can be best achieved in future, and the adequacy of compensation for small businesses that have suffered an economic and/or personal loss as a consequence of the ATO’s actions.
Single Touch Payroll: low-cost solutions now available
Single Touch Payroll (STP) is a payday reporting arrangement where employers need to send their tax and superannuation information to the ATO from their payroll or accounting software each time they pay their employees. STP reporting started gradually from 1 July 2018, and it will be required for all small employers (with fewer than 20 employees) from 1 July 2019.
A range of no-cost and low-cost STP solutions are now coming into the market. The solutions are required to be affordable (costing less than $10 per month), take only minutes to complete each pay period and not require the employer to maintain the software. They will best suit micro employers (with one to four employees) who need to report through STP but do not currently have payroll software.
Super guarantee amnesty not yet law: ATO will apply existing law
The ATO reminds businesses to be aware that under the current law, if they have missed a superannuation payment or haven’t paid employees’ super on time, they are required to lodge a superannuation guarantee (SG) charge statement.
Until law giving effect to the proposed superannuation guarantee amnesty is enacted, the ATO says it will continue to apply the existing law, including applying the mandatory administration component ($20 per employee per period) to SG charge statements lodged by employers.
The Bill containing the amnesty was still before the Senate when Parliament most recently concluded on 22 February 2019.
If it is eventually passed into law, the proposed amnesty will be a one-off opportunity for employers to self-correct their past SG non-compliance without penalty. It is intended to be available for 12 months from 24 May 2018 to 23 May 2019. The ATO will apply the new law (if it is passed) retrospectively to eligible voluntary disclosures made during this period.
ATO finds 90% error rate in sample of rental property claims
ATO Commissioner Chris Jordan has advised that as part of the ATO’s broad random enquiry program, its auditors have recently completed over 300 audits on rental property tax deduction claims and “found errors in almost nine out of 10 returns reviewed”.
The ATO is seeing incorrect interest claims for entire investment loans where the loan has been refinanced for private purposes, incorrect classification of capital works as repairs and maintenance, and taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent.
The ATO’s next area of focus will be rental income and related deductions, to help taxpayers report the right information, claim only the amounts they are entitled to, and “close the tax gap”.
Property used for storage an active asset for small business CGT concession purposes
The Administrative Appeals Tribunal (AAT) has decided that a property a small business owner used to store materials, tools and other equipment was an active asset for the purpose of the small business capital gains tax (CGT) concessions.
The taxpayer carried on a business of building, bricklaying and paving through a family trust. He owned a block of land used to store work tools, equipment and materials, and to park work vehicles and trailers. There was no business signage on the property.
After the property was sold in October 2016, the ATO issued a private ruling that the taxpayer was not entitled to apply the small business CGT concessions to the capital gain because the property was not an “active business asset”.
However, the AAT concluded that the business use of the land was far from minimal, and more than incidental to carrying on the business. This meant the CGT concessions could be applied.
Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
Family or discretionary trusts have long been used by business owners to shield assets from litigation and to utilise members of a family group on lower marginal tax rates. However, one question that seems to be becoming more prevalent from all clients is, when looking at structuring a property portfolio, with a long term view in mind, should we be buying through a trust?
To help make that decision, we always like to list the advantages and disadvantages of any structure before deciding which structure to choose. This is to ensure there is complete understanding of any future implications.
First we will look at who can be a party to a trust:
Generally an unrelated individual, a settlor is the person who “settles” the trust, by providing a settled sum to the trustee. Usually around $10 is deemed sufficient for the trust to be created.
The person or entity responsible for the growth and care of the trust.
Beneficiaries receive taxable distributions from the trust and ensure the trustee is doing their job.
An appointor has the power to change the trustee if it chooses (usually an accountant/lawyer that establishes the trust).
With increased marketing of “no win, no fee” solicitors, people are becoming more and more inclined to seek legal representation if issues arise. Under a family trust with a corporate trustee, properties are held by the trust, so are shielded from creditors, bankruptcy and divorce.
Unlike owning a property in an individual name, a discretionary trust gives the trustee, by way of resolution, the flexibility each year to allocate net income to a family member on a lower marginal tax rate. This also applies to the distribution of capital gains tax. For example, if a property was purchased through a trust and held through the family life cycle until a child reaches 18, the property could be sold and the capital gain distributed to the child, greatly reducing any tax liability if both parents are working.
A family trust with a corporate trustee allows a seamless transfer of wealth to future generations by allocating the shares and nominating the directorship of the corporate trustee, in accordance with your will.
Capital gains tax discount
Unlike a company, a family trust still receives the 50% capital gains tax discount if an asset is held longer than 12 months. For example, if a property increases in value by $100,000 and is sold after 12 months, ignoring other costs, $50,000 in capital gains income would be distributed to beneficiaries as opposed to $100,000.
High establishment costs, increased ongoing costs and compliance
The establishment costs are around $1,800, including stamp duty, trust deed, corporate trustee and company constitution. There will also be an ongoing ASIC annual review fee of around $250 per year, an annual set of Financial Statements and a tax return will need to be completed for the trust. This starts at around $550 and can increase depending on the complexity of the transactions running through the trust. A cost/benefit analysis should be conducted prior to the creation of the structure.
Lower land tax thresholds
If you are looking to buy property, the land tax thresholds are significantly lower. For example, NSW has a nil threshold for family trusts, meaning you pay land tax on the first dollar value of the unimproved land, at 1.6%. QLD is slightly different, with the threshold being reduced from $600,000 for an individual to $350,000 for a trust.
Land tax would need to be taken into consideration on a property by property basis, to determine the best ownership structure.
Losses are quarantined in the trust until such time as there is a profit. Unlike getting a tax break for negative gearing in your own name, losses cannot be distributed out of the trust.
Losses can reduce future net income and capital gains however, so are not lost when incurred
Distributions do affect government benefits - this needs to be kept in mind when deciding on beneficiaries that receive net income.
The establishment of a trust to purchase property should not be undertaken without first seeking advice from your accountant and solicitor, to determine if the structure will be right for your overall wealth creation strategy and how it will affect your estate plan upon your passing.
P. Liddy & Associates
Please contact us for more information:
P. Liddy & Asscociates
Suite 6, Level 2, 64 Croydon Street, Cronulla NSW 2230
P.O. Box 505, Cronulla NSW 2230
Tel: (02) 9544 0722 Fax: (02) 9544 0922
General Advice Warning
The article is provided for general information only and the author and P. Liddy and Associates are not engaged to render professional advice or services through this article. The author and P. Liddy and Associates expressly disclaim all and any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.