The Assistant Treasurer has announced revised start dates for several tax measures, including some for which enabling legislation has yet to be introduced including targeted amendments to the Division 7A rules and removal of the CGT discount at the trust level for Managed Investment Trusts (MITs) and Attribution MITs. The Treasurer also confirmed a 1 July 2020 start date for new tax measures, which have been enacted, including small business tax cuts, the new Low and Middle Income Tax Offset and extension of the instant asset write-off.
Tax Measures - Confirmed 1 July 2020 start date
Small business tax cuts from 1 July 2020
From 1 July 2020, the company tax rate for incorporated small and family businesses with a turnover of less than $50 million will be reduced from 27.5% to 26%. A company must be a base rate entity to be eligible for the lower 27.5% company tax rate.
A company is a base rate entity if both of the following apply:
- they have a turnover less than the turnover threshold – which is $50 million for the 2018–19 income year
- 80% or less of their assessable income is base rate entity passive income (such as interest, portfolio dividends, rent, royalties and net capital gain).
Unincorporated businesses will also benefit as the rate of the small business income tax offset increases from 8% to 13%.
Low and Middle Income Tax Offset and Low Income Tax Offset
Low and middle-income earners will receive a benefit when they lodge returns from 1 July 2020 following last year’s 2019-20 Federal Budget in which the Government announced a new Low and Middle Income Tax Offset (LMITO), which applies from 1 July 2018 until 30 June 2022. Under the already legislated part of the plan, the LMITO will provide tax relief of up to $1080 at the end of each tax year to 2021-22.
From 1 July 2022, the LITO will be increased and the 32.5% tax bracket will be expanded from incomes of up to $90,000 to incomes of up to $120,000. This will supplant the need for LMITO, which will be rolled into the existing LITO.
Extension of the Instant Asset Write-Off
On 12 March 2020, the Government announced the expansion of the instant asset write-off scheme, in response to the COVID-19 pandemic to include assets worth $150,000 (up from $30,000) and businesses with an aggregated turnover of less than $500 million (up from $50 million).
On 9 June 2020, the Federal Treasurer announced that the current expansion of the instant asset write-off scheme, which was due to end on 1 July 2020, will be extended until 31 December 2020. All other conditions remain the same.
From 1 January 2021, onwards the asset threshold will revert to $1,000 and the instant write-off will only apply to small businesses with an aggregated turnover of less than $10 million.
Tax Measures - Deferred start dates
Div 7A targeted amendments
Targeted amendments to Division 7A (Div 7A) were first announced in the 2016–17 Federal Budget and followed by a review by the Board of Taxation in 2018 with the following proposed changes:
- simplified Division 7A loan rules to make it easier for taxpayers to comply;
- a self-correction mechanism to assist taxpayers to promptly rectify breaches of Division 7A;
- safe harbour rules for the use of assets to provide certainty and simplify compliance for taxpayers;
- technical amendments to improve the integrity and operation of Division 7A while providing increased certainty for taxpayers; and
- clarification that unpaid present entitlements (UPEs) come within the scope of Division 7A.
A discussion paper was then released by Treasury in 2019, with additional changes including a new 10-year loan model for all existing seven and 25-year loans and extension of the review period for Div 7A transactions to 14 years after the end of the income year in which the loan, payment or debt forgiveness gave rise or would have given rise to a deemed dividend. Draft law containing these amendments has yet to be introduced.
These changes were originally scheduled to come into effect from 1 July 2019 but were deferred in the 2019-20 Federal Budget to 1 July 2020. The start date has been revised again from 1 July 2020 to income years commencing on or after the date of Royal Assent of the enabling legislation.
Removal of the CGT discount at the trust level for Managed Investment Trusts (MITs) and Attribution MITs
In the 2018-19 Federal Budget, the Government announced that to ensure that Managed Investment Trusts (MITs) and Attribution Managed Investment Trusts (AMITs) operate as genuine flow-through vehicles, an integrity measure would be introduced to prevent MITs and AMITs from applying the 50 per cent capital gains tax (CGT) discount at the trust level.
MITs and AMITs that derive a capital gain will still be able to distribute this income as a capital gain that can be discounted in the hands of the beneficiary if they are eligible.
These changes were originally scheduled to come into effect from 1 July 2019, however, legislation containing these amendments has yet to be introduced and deferred to 1 July 2020. The start date has now been revised again from 1 July 2020 to income years commencing on or after the date of Royal Assent of the enabling legislation.
Streamlining requirements for calculation of exempt current pension income
The 2019-2020 Federal Budget included a number of measures targeted at reducing costs and simplifying reporting for superannuation funds by streamlining the administrative requirements for the calculation of exempt current pension income (ECPI) from 1 July 2020.
The Government confirmed the removal of a requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase for all of the income year.
Changes will also be made to allow superannuation fund trustees to choose their preferred method of calculating ECPI where there are interests in both the accumulation and retirement phases during an income year.
These changes were originally scheduled to come into effect from 1 July 2020 however legislation containing these amendments has yet to be introduced and the start date has now been deferred to 1 July 2021.
Compliance and administration changes to the Petroleum Resource Rent Tax
In 2017, the Government undertook a review of the design and operation of the Petroleum Resource Rent Tax (PRRT) and proposed a number of compliance and administration changes to the PRRT system.
The changes are as follows:
- Lowering of uplift rates that limit the scope for excessive compounding of deductions. For example, the uplift rate on exploration expenditure will be reduced from Long Term Bond Rate (LTBR)+15 percentage points to LTBR+5. Existing investments will be respected.
- Removal of onshore projects from the PRRT regime as since 2012 no onshore projects have been brought into the PRRT and in practice, it has been used to transfer exploration deductions to profitable offshore projects reducing PRRT payable.
Treasury will also commence a review into the regulations that determine the price of gas in integrated liquefied natural gas (LNG) projects for PRRT purposes, consulting with the industry and community.
These changes were originally scheduled to come into effect from 1 July 2019 but that start date has now been deferred to the income year commencing on or after 3 months after the date of Royal Assent of the enabling legislation.
The measures that take effect from 1 July 2020 and thereafter impact a range of taxpayers from individuals to small businesses and large companies. Contact your local BDO tax practitioner to work through the changes to either maximise their benefit or mitigate their impact.
Low and middle-income earners will receive a benefit when they lodge returns from 1 July 2020 owing to the new LMITO. Meanwhile, the changes to allow superannuation fund trustees with interests in both the accumulation and retirement phases during an income year to choose their preferred method of calculating ECPI will allow greater flexibility for making superannuation contributions from 1 July 2021.
Small businesses should take note of the new tax cuts that took effect on 1 July 2020 as well as the extension of the instant asset write-off scheme until 31 December 2020, which is less than six months away. Whilst we cannot confirm the changes to Div 7A will be brought in as proposed, taxpayers should consider how they could impact their loan and cashflow arrangements once they are introduced.
The news is less positive for MITs that should be aware that removal of the CGT discount once legislated will result in a higher final withholding tax amount and prevent non-resident beneficiaries who are not entitled to the capital gains discount in their own right from benefiting from the discount at the trust level. Whether it acts as a disincentive for foreign investors remains to be seen.
Finally, companies engaged in oil and gas projects should note that further to the proposed amendments to PRRT regime, the ATO has released additional guidance on its administration of the PRRT, which will remove a key element of uncertainty impacting future investment decisions in the industry, especially during the turbulent market owing to the COVID-19 pandemic.