So what tax laws are sitting in the Parliament for our hard working MPs to consider in the last sitting week before the May Budget?
- A bill that has been in the Parliament for 4 days less than a year that supplements the ‘same business test’ with a ‘similar business test’ and to provide taxpayers with the choice to self-assess the effective life of certain intangible depreciating assets they start to hold on or after 1 July 2016… Its not like anyone has completed a 2017 tax return already!!!
- A Bill to transfer the regulator role for early release of superannuation benefits on compassionate grounds from the Chief Executive Medicare to the Commissioner.
- A Bill that prohibits the production, distribution, possession and use of sales suppression tools and also requires entities that provide courier or cleaning services to report details of transactions that involve engaging other entities to undertake those courier or cleaning services for them.
- A Bill that provides that a corporate tax entity will not qualify for the lower 27.5 per cent corporate tax rate if more than 80 per cent of its assessable income is income of a passive nature.
- A Bill that progressively extends the lower 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 financial year; and further reduce the corporate tax rate in stages so that by the 2026-27 financial year, the corporate tax rate for all entities will be 25 per cent.
- A Bill that removes the entitlement to the capital gains tax main residence exemption for foreign residents.
- A Bill that requires purchasers of new residential premises and subdivisions of potential residential land to make a payment of part of the purchase price to the ATO.
Add to this some changes to tax concessions for Venture Capital, the Banking Levy, new whistle blower protections, a new Junior Mineral Exploration incentive, tax consolidation fixes, and a lot of minor super changes (can’t use salary sacrificed super to meet SGC requirements and those under EBAs must get a choice of super form)…
As almost all of these were announced in last years budget (some in the budget from the year before), wouldn’t it be great if they finalised these in the last sitting week before we get the next budget with an entirely new set of announcements!!!!
As I have commented on before, the Opposition has announced that if there is a change in the Government, they will stop almost all refunds of excess imputation credits. Resident individuals or super funds will still be able to use the imputation credits to reduce the tax they have to pay. However, if their tax reaches zero and they still have unused imputation credits, in effect they have excess imputation credits, they will not be able to get a cash refund for the excess credits.
The only entities that will still be able to get these cash refunds are income tax exempt charities and not-for-profit institutions with deductible gift recipient status.
But what effect will this have?
Importantly, this change will put SMSFs at a disadvantage to APRA regulated funds when it comes to share ownership. As APRA funds are treated as a single entity they normally have enough other income to offset their imputation credits against so they get the full value of any imputation credits. But an SMSF that is heavily invested in listed shares will find a substantial reduction in returns if they can no longer obtain the refund of the excess imputation credits.
To own shares in an SMSF, and to use all their imputation credits on these shares, the trustee will need to have income from sources other than franked dividend that is greater than the franked dividend income. If an SMSF gets a $70 fully franked dividend they will need an additional $100 of income from other sources (unfranked dividends, rent, interest…) to use all the $30 of imputation credits on the $70 dividend.
So having an SMSF with a majority of share ownership might not be advisable any more as they could roll the amount into a retail or industry fund that gets the benefit of all of the imputation credits. And there are funds that allow an effective investment in majority listed shares. But what is the benefit of doing this?
Take the example of an SMSF and a retail fund that get a $70 fully franked dividend. The dividend is grossed up to $100 and the tax payable on it is $15. but neither pays the tax due to the imputation credit. At this point both the SMSF and the retail fund have $70. The retail fund uses the remaining $15 imputation credit to reduce tax on other income, which is credited to the member, so giving the member of the retail fund $85. This means the return on listed shares can be as much as 21% higher through a retail fund than an SMSF (but this will be lower if there is other income in the SMSF).
The days of the financial advisor who is a great stock picker and puts everyone in an SMSF and has every SMSF with a majority of listed shares might be over after the next election. Even the best stock picker is going to struggle if they start at as much as 21% behind.
“A FAIRER TAX SYSTEM: DIVIDEND IMPUTATION REFORM”, Media Release, Shadow Treasurer Chris Bowen, Chrisbowen.net, 13 March 2018
The ALP don’t appear to be scared to take some radical tax changes to the next election.
Today they announced removing the ability to get excess imputation credits refunded… There will be some very unhappy SMSF and retirees (and charities) who get lots of cash each year from the ATO in the form of refunded imputation credits.
But that is nowhere near all they want to change… and isn’t it funny that all the changes raise taxes…
- Removing the ability to get excess imputation credits refunded;
- They want to remove negative gearing deductions that can be applied against PAYGW income on all assets except new residential property;
- They want to reduce the CGT discount to 25%;
- They want to introduce a minimum 30% tax on discretionary trust distributions;
- They want to limit the 27.5% company tax rate to Small Business Entities (turnover less than $10m);
- They want to limit deductions for tax advice to $3,000 for non business entities;
- Decrease the threshold at which the Division 293 tax applies to $250,000;
- PERHAPS add back the temporary budget levy to get the highest marginal tax rate to 49% (I doubt they will actually do this); and
- Changes to large business taxation like removing the safe harbour rule from thin capitalisation so that businesses can only use the worldwide gearing ratio, change the MEC rules for consolidated groups, reduce the public reporting rules for private companies from $200 million to $100 million, and make the country by country transfer pricing documentation publicly available.
Still more than a year to the election, which it looks like the ALP will win with a comfortable majority, and this will be our new tax system from possibly 1 July 2019…
Individuals who are foreign residents at the time a CGT event occurs to a dwelling (or for a compulsory acquisition a part of a dwelling) in which they have an ownership interest are not entitled to the CGT main residence exemption.
The Bill making this change is before the Parliament (Treasury Laws Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2018).
Not much has changes…
Vicki acquired a dwelling in Australia on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so.
On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On
15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019.
The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling.
Note: This outcome is not affected by:
- Vicki previously using the dwelling as her main residence; and
- the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from
1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).
The grandfathering is still the same. If you owned the property before 10 May 2017 and sell it before 30 June 2019 you still get the MRE. It looks like there will be lots of properties on the market in early 2019.
The Bill introducing the “GST withholding” on new residential property is here. You can find it in Schedule 5 of the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018. In summary…
Where an entity (the supplier) makes a taxable supply of new residential premises or a subdivision of potential residential land by way of sale or long term lease, the recipient of the supply (the purchaser) is required to make a payment of part of the consideration to the ATO directly, prior to or at the time consideration is first provided for the supply (other than as a deposit).
This is not exactly the same as the draft law released last year.
For example, it now only applies to new residential premises, other than those created through a substantial renovation and commercial residential premises; or subdivisions of potential residential land (This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not currently contain any residential premises).
Also, a withholding obligation does not apply if the recipient of the taxable supply is registered for GST, and acquires the potential residential land for a creditable purpose.
Where a purchaser receives a taxable supply to which the withholding obligation applies, they are required to pay to the Commissioner an amount on or before the day that consideration for the supply (other than consideration provided as a deposit) is first provided, or if the parties are associates and no consideration is provided, on the day the supply is made.
AND HERE IS THE BIG CHANGE…
The proportion of the contract price that must be withheld differs based on whether the margin scheme applies to the supply.
If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price or price.
If the margin scheme applies to the taxable supply, the purchaser must withhold 7 per cent of the contract price or price, or a greater amount that has been determined by the Minister in a legislative instrument. However, any determination by the Minister cannot require more than 9 per cent of the contract price or price to be withheld, which prevents an amount being set in excess of the GST payable on the supply.
If the amount is not at arms length it is 10% of the market value. And if there is one amount covering residential property and other stuff that cannot be separated it is 10% on the entire amount.
There is still a notification requirement such that the seller has to inform the purchaser of the obligation to withhold, but the time frame for this is now at the discretion of the Commissioner (not 14 days as it was in the draft).
And apart from where the withholding was made by mistake, there is no way for a developer to get any amount fo Get back except through the normal Activity Statement process – the withheld GST is treated as a credit on the next BAS.
In the May budget there were some changes announced that relate to our favourite CGT concession, the Small Business CGT Concessions in Division 152. At the time I had no idea what these changes would be but now we know.
The Government has released draft legislation to make these changes and they are designed to ensure that taxpayers cannot sell interests in either large businesses or passive entities and get these concessions.
First, the amendments only apply where the capital gain we want to reduce is as the result of selling a CGT asset that is a share in a company or an interest in a trust.
Where this is the case the taxpayer selling the share or the unit must own 20% of the shares or the units in the object entity, or be the spouse of someone who owns such a 20%, or be owned by these to people at least at 90%. This is the current rules
But there are are now four additional rules the Government wants to apply to avoid taxpayers inappropriately claiming the Small Business CGT Concessions when they sell a share or a unit.
The four additional test are:
- If the taxpayer does not satisfy the maximum net asset value test, meaning they must be a small business entity with turnover of less than $2 million, the relevant CGT small business entity must have carried on a business just prior to the CGT event. This means if the business has stopped, then they should not be able to get the Small BUSINESS CGT Concessions;
- The object entity, being the entity that the shares or the units are in, must have carried on a business just prior to the CGT event. Therefore if a taxpayer that is carrying on a business sells shares or units in an entity that is not carrying on a business, then they should not be able to get the Small BUSINESS CGT Concessions;
- The object entity must either be a CGT small business entity or satisfy the maximum net asset value test. If the object entity is massive and I sell my interest in it I should not be able to get the SMALL Business CGT Concessions
- The share or interest must satisfy a modified active asset test that looks through shares and interests in trusts to the activities and assets of the underlying entities to ensure the underlying assets at at least 80% active. If the underlying assets are passive, then they should not be able to get the Small BUSINESS CGT Concessions.
Two heterosexual Irish men marry to avoid inheritance tax on property…
Perhaps in Australia we could see two heterosexual same sex “mates” getting married just before the death of one of them to avoid tax payable on a super death benefit by becoming a dependent as they are a spouse of the deceased, even if there is not a dependent relationship between them.