Budget Special: Business Tax

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Budget Special: Business Tax


Overarching the changes to taxation in the budget was the Treasurer confirming the Government's commitment to its 10-year Enterprise Tax Plan to eventually reduce the company tax rate to 25% for all companies.  Whilst not a change in law it demonstrates a continuation of the existing strategy.

Research and Development Overhaul

The R&D tax incentive will change for income years starting on or after 1 July 2018.  The changes impact all entities irrespective of turnover level to varying degrees.

For companies with aggregated annual turnover below $20 million, the refundable R&D offset will be a premium of 13.5 percentage points above a claimant’s company tax rate. Cash refunds will be capped at $4 million per annum with residual balances carried forward as non-refundable tax offsets to future income years.

For companies with aggregated annual turnover over $20 million the return on R&D activity will be subject to tiering that is dependent on incremental activity.  This replaces the flat R&D tax offset currently in place.  The changes seek to tie the R&D offset to the incremental intensity of the expenditure by reference to the total expenditure for an income year.

The marginal R&D premium will be the claimant’s company tax rate plus:

R&D Offset Rate

R&D Intensity

4% added to the corporate tax rate

0% to 2%

6.5% added to the corporate tax rate

Above 2% to 5%

9% added to the corporate tax rate

Above 5% to 10%

12.5% added to the corporate tax rate

Above 10%

The maximum amount of R&D expenditure eligible for concessional R&D tax offsets will be increased to $150 million per annum (ie spend over $150million will not be eligible for R&D).

Land Banking

As a continuation in the Governments approach to increasing housing affordability with effect from 1 July 2019 deductions for expenses associated with holding vacant land will not be available. This will apply where the land is not genuinely held for the purpose of earning assessable income. 

Disallowed deductions will not be able to be carried forward for use in later income years, however, they may be available as a cost base item in certain circumstances.

MIT and AMIT Changes

From 1 July 2019 Managed Investment Trusts (MITs) and Attribution MITs (AMITs) will be prevented from applying the 50% capital gains discount at the trust level.   This is an anti avoidance measure designed to prevent beneficiaries accessing the CGT discount if they would not otherwise be eligible for it.  Gains distributed by MITs and AMITs will still be able to be discounted in the hands of the beneficiary if they are eligible.

Division 7A Changes

The long awaited changed in relation to Division 7A remain just that.  Further to the 2016-17 Federal Budget, the proposed changes to the rules concerning Division 7A which were flagged as commencing on 1 July 2018 have been deferred for 12 months to 1 July 2019, however, there has been no clarity as to what the changes will be.  There will also be a clarification that unpaid present entitlements are within the operation of Division 7A.

Instant Asset Write off

The existing instant asset write off for assets costing less than $20,000 threshold has been extended for a further 12 months to 30 June 2019 for small business entities (SBE). As a result, SBEs (ie turnover less than $25m in the 2017-18FY) will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 (subject to certain exceptions eg software).

The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2019.

Family Trusts

An anti avoidance measure will be introduced with effect from 1 July 2019 to apply tax at a rate equal to the top personal rate plus the Medicare Levy on certain trust distributions.  The changes will focus on closely held trusts that engage in circular trust distributions to family trusts.

Black Economy

From 1 July 2019, businesses will not be able to claim deductions for payments to their employees, such as wages where PAYG has not been withheld. Also, deductions for payments made by business to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG will be removed.