Personal income tax measures
Limiting plant and equipment depreciation deductions to outlays actually incurred by investors – for residential investment properties acquired from Budget night on 9 May 2017
From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential properties. Plant and equipment items are usually mechanical fixtures, or those that can be ‘easily’ removed from a property such as dishwashers and ceiling fans. 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. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors.
This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value.
No deduction for travel expenses for residential rental properties
From 1 July 2017, the Government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.
This is an integrity measure to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes. This measure will not prevent investors from claiming a deduction for costs incurred in engaging third parties, such as real estate agents, for property management services.
Changes affecting the Higher Education Loan Program (‘HELP’)
The Government will revise 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% repayment rate and a maximum threshold of $119,882 with a 10% repayment rate.
By way of background, for 2017/18, the minimum threshold is $55,874 and the minimum repayment rate is 4%. The maximum threshold for 2017/18 is $103,766 with an 8% repayment rate.
Medicare levy-related changes
Increasing the Medicare levy low-income thresholds
The Government will increase the Medicare levy low-income thresholds for singles, families and seniors and pensioners from the 2017 income year.
- The threshold for singles will be increased to $21,655.
- The family threshold will be increased to $36,541 plus $3,356 for each dependent child or student.
- For single seniors and pensioners, the threshold will be increased to $34,244.
- The family threshold for seniors and pensioners will be increased to $47,670 plus $3,356 for each dependent child or student.
Increase in the Medicare levy from 1 July 2019
From 1 July 2019, the Government will increase the Medicare levy from 2% to 2.5% of taxable income.
Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased. Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.
Measures affecting small businesses
Extending the $20,000 immediate write-off for small business
Under current law, the $20,000 immediate write-off ends on 30 June 2017. However, the Government has proposed to extend the concession by 12 months to 30 June 2018 for businesses with an aggregated annual turnover less than $10 million.
This means 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.
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool (SBE pool) and depreciated at 15% in the first income year and 30% each income year thereafter.
The pool balance can also be immediately deducted if the balance is less than $20,000 over this period.
Further, 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 and the balance at which the pool can be immediately deducted will revert back to $1,000.
New integrity measure for the small business CGT concessions
The Government will amend the small business CGT concessions with effect from 1 July 2017 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 proposed amendment is targeted at taxpayers who are able to access these 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.
First home superannuation saver scheme
The Government will encourage home ownership by allowing first homebuyers to ‘build a deposit’ inside their superannuation fund, as follows:
- Voluntary superannuation contributions of up to $15,000 per year, and $30,000 in total, can be contributed by first homebuyers from 1 July 2017. The contribution must be within existing concessional and non-concessional caps. Concessional contributions are taxed at 15% in the fund and earnings on contributions are taxed at 15% in the fund.
- These contributions can then be withdrawn, along with associated deemed earnings, for a first home deposit, from 1 July 2018 onwards. Concessional contributions and earnings that are withdrawn will be taxed at the taxpayer’s marginal rate less a 30% offset. When non-concessional contributions (‘NCCs’) are withdrawn, they will not be taxed.
Combined with the existing concessional tax treatment of contributions and earnings, this will provide an incentive that will enable first homebuyers to build savings more quickly for a home deposit. Note that, both members of a couple can take advantage of this measure to buy their first home together.
Limited recourse borrowing arrangements (‘LRBAs’)
From 1 July 2017, the Government will include the use of LRBAs in a member’s total superannuation balance and transfer balance cap. Both of these concepts were initially proposed as part of the 2016/17 Federal Budget and are now legislated to apply from 1 July 2017.
By way of background, the concept of total superannuation balance is used to limit the ability of a fund member to make NCCs into superannuation (among other things) and the transfer balance rules are designed to limit the value that a fund member is able to transfer into the tax-exempt pension phase to $1.6 million.
LRBAs can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap. As such, the outstanding balance of a LRBA will 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.
Individuals aged 65 or over able to contribute the proceeds of downsizing into superannuation
From 1 July 2018, the Government will allow a person aged 65 or over to make a NCC of up to $300,000.00 from the proceeds of selling their home. These NCCs will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million balance test for making NCCs.
This measure will apply to sales of a principal residence owned for the past ten or more years and both members of a couple will be able to take advantage of this measure for the same home.
This measure reduces a barrier to downsizing for older people. Encouraging downsizing may enable more effective use of the housing stock by freeing up larger homes for younger, growing families.
Note: It is unclear how this measure will affect the assets test for aged pension purposes.
The above information is intended to highlight the 2017/18 budget changes and is general in nature. This article does not constitute taxation advice. At the time of publication, the proposed changes have not been given royal assent and as such are not law and may be subject to change.