Read: Access full Federal Budget 2018-19 review here
Extension of the accelerated depreciation concession
Businesses with aggregated annual turnover of less than $10 million can obtain an immediate deduction for eligible assets purchased for less than $20,000. Prior to this measure’s initial implementation, immediate deductions were only available for asset purchases costing less than $1,000.
While there are some exclusions to what assets are considered ‘eligible assets’ for the purposes of the concessions, these are minimal in nature and include assets such as capital works (for which deductions are available under different tax rules), horticultural plants, assets allocated to a low-value pool prior to applying the simplified depreciation rules, in-house software and certain lease assets.
A small business simplified depreciation pool remains available to assets costing greater than $20,000, whereby assets placed in the pool may be initially depreciated at 15% and 30% for each income year thereafter. Where the pool’s written down value falls below the $20,000 threshold, it may also be eligible for an immediate deduction.
In addition to the above, the ‘lock out’ laws - which restrict access for five years to the simplified depreciation rules where a small business has previously opted out of them - will remain suspended until 30 June 2019.
This is a welcomed proposal, which can provide additional cash flow incentives to small business investing in capital assets.
Measures to discourage land banking
The Government has announced integrity measures to discourage land owners from holding vacant land, a process more commonly known as ‘land banking’. From 1 July 2019, income tax deductions will be denied for expenses associated with holding vacant land, such as interest expenses and council rates.
This measure has been introduced amid concerns income tax deductions are being improperly claimed for expenses relating to the holding of vacant land, where that land is not being genuinely held for the purpose of earning assessable income.
Two exclusions will be available: (1) where a property has been constructed on the land, it has received approval to be occupied and it is available for rent; and (2) in respect of land being used by the owner to carry on a business, including a business of primary production.
The second exclusion is important for development groups that hold land over a long period of time (e.g. where a PSP may take a number of years). In many cases, land can be held in separate SPV entities and therefore it will be critical for the Government to clarify that this exclusion can be available where a single entity is part of a group of entities carrying on business.
Where deductions are denied, the announcement states that expenditure may form part of the cost base of the asset for CGT purposes. However, as land can be held on revenue account e.g. as trading stock or as a revenue asset, it will also be important to ensure the measures allow denied deductions to be included in the revenue cost of land.
Deductions denied for non-compliant PAYG withholding
From 1 July 2019, taxpayers will be unable to claim tax deductions for wage and contractor payments they make where they have not withheld tax under the Pay-As-You-Go (PAYG) withholding regime when required to do so.
Under these proposed measures, the ability to claim a tax deduction for payments to employees or contractors will be denied if taxpayers fail to deduct tax and remit it to the ATO under the PAYG regime. This can occur where taxpayers make payments to employees (and thus fail to withhold PAYG), or make payments to contractors who do not quote an ABN (and thus fail to withhold PAYG).
Whilst the ATO currently has the power to impose penalties on offending taxpayers, the proposed measures further disincentivise ignoring or otherwise failing to meet PAYG obligations.
To ensure taxpayers meet their obligations under PAYG, it is necessary to correctly identify all circumstances where an obligation to withhold tax arises. This includes correctly identifying all persons who should be treated as employees (notwithstanding their purported treatment as contractors). It also includes instances where tax must be withheld on foreign employees working in Australia or when Australians are working overseas on international assignments. In addition, it is also imperative taxpayers identify those contractors who have not quoted ABNs to ensure that tax is withheld as required.
The introduction of Single Touch Payroll will mean payments made through payroll will be more closely scrutinised by the ATO, including instances where tax should have been withheld (but may not have been).
These newly announced measures add further impetus for all taxpayers to ensure they are compliant with their PAYG obligations going forward.
Thin capitalisation changes
The thin capitalisation rules will be amended by requiring entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.
This change aims to ensure asset valuations used to justify debt deductions are ‘robust’ - insofar as accounting principles are concerned. However, the change removes the flexibility allowed under the current law to enable the valuation for thin capitalisation purposes to more accurately align with commercial and economic values of assets, which may not necessarily be reflected in the carrying values in financial statements.
The Government will also ensure foreign controlled Australian consolidated entities and multiple-entry consolidated groups that control a foreign entity are treated as both outward and inward investment vehicles for thin capitalisation purposes. This means inbound investors can no longer access tests that were only intended for outward investors. This is a targeted measure that closes an existing loophole in the legislation and simply aligns the thin capitalisation rules with those that apply to non-consolidated groups.
These measures will apply to income years commencing on or after 1 July 2019, and are estimated to add revenue of $240 million over the forward estimates period.