In what is likely to be the final Budget before the Federal Election, tax cuts are again being used to woo voters.
The centrepiece of the May 2018 Budget is a new 7-year personal tax plan consisting of a three-step process involving immediate tax relief, protection from bracket creep and simplification of the tax system.
Personal tax cuts
The initial change will commence on 1 July 2018, with immediate tax relief for those earning up to $90,000. However, the tax relief will not appear in weekly pay packets as it comes in the form of a tax offset, rather than a cut in tax rates. Under the plan, taxpayers on wages of up to $37,000 a year will gain a further tax offset of $200 on top of existing tax offsets. Taxpayers earning between $48,000 and $90,000 will receive the maximum $530 non-refundable Low and Middle Income Tax Offset, while for those earning over $90,000 the offset will taper off before reaching zero for those earning over $125,333.
Eliminating bracket creep
The second part of the personal tax plan involves a move designed to eventually eliminate bracket creep for taxpayers. This involves raising the threshold at which the 37 per cent tax rate applies from $87,000 to $90,001 from 1 July 2018.
Further threshold changes will be made in 2022-23, with the $37,000 bracket threshold rising to $41,001 and the $90,000 threshold being lifted to $120,001. The Low and Middle Income Tax Offset will disappear, while the Low Income Tax Offset will increase from $445 to $645.
Changing the tax system
In July 2024, the 37 per cent tax bracket will be eliminated, leaving only four tax brackets. The threshold for the top marginal tax rate will rise to $200,001. Elimination of the 37 per cent tax bracket will result in all taxpayers earning between $41,001 and $200,000 paying a flat tax rate of 32.5 per cent.
With these new thresholds, 94 per cent of workers will be in the same tax bracket, leaving only those earning over $200,001 paying the top marginal tax rate of 45 per cent.
Medicare levy ditched
The Budget confirmed the Government would not be proceeding with the planned 0.5 per cent rise in the Medicare levy. The Medicare levy low-income threshold for singles will rise to $21,980 for 2017-18.
Win for small business
The popular $20,000 instant asset write-off has received yet another lease of life, with another one-year extension announced in this year's Budget. Small businesses with a turnover of under $10 million will continue to be able to claim an immediate tax deduction for capital equipment purchases until 30 June 2019.
GST reporting will also be streamlined, with the number of BAS GST questions reduced to three.
Black economy crackdown
New measures will be introduced to further crack down on tax avoidance in the 'black economy', with the outlawing of cash payments of $10,000 and over to businesses for goods and services.
From 1 July 2019, businesses will no longer be able to claim tax deductions for payments to employees such as wages if they do not withhold PAYG tax. This will also apply to contractor payments if the contractor does not provide an ABN and the business fails to withhold PAYG.
Crackdown on R&D tax breaks
There will be a new crackdown on the existing research and development (R&D) tax incentive to stop companies claiming tax breaks for conducting 'business-as-usual' activities. The overhaul is designed to restore integrity to the scheme and should save $2 billion over the next four years.
No deductions for holding vacant land
From 1 July 2019, tax deductions for any expenses associated with holding vacant land which is not genuinely held for earning assessable income will be disallowed. This will cover land held for residential or commercial purposes.
Partnership rules tightened
From Budget night, partners that alienate income by creating or dealing rights to their future partnership income will no longer be able to access the small business CGT concessions.
If you would like to discuss how any of these measures might impact your tax planning, please contact our office.