All eyes and ears will be on Canberra this 8 May 2018 as the government hands down its annual Federal Budget.
Some of the tax measures expected to be included in the budget include personal income tax cuts and R&D concession changes. The government currently faces opposition to its corporate tax cuts for medium and large businesses, which were announced two Budgets ago. The tax measures in the upcoming Budget may make the controversial measure palatable to those opposed who are calling for “wider tax reform”. As it is possibly the government’s last budget before an election, voters may come out as the winners.
Individual tax cuts are expected to be introduced, particularly for low and middle income earners. These cuts, like the company tax cuts, are expected be phased over a 10-year period, seeking to tackle the problem of bracket creep.
Having indicated that the proposed Medicare levy 0.5% increase (slated to commence from the 2019/20 income year) will not proceed, it is unlikely that more changes would follow, other than the annual release of low-income thresholds.
The government is unlikely to touch negative gearing or the CGT discount as it continues to oppose Labor policies to reign in negative gearing for new properties and halve the discount to 25%. Most of the government’s housing affordability package from the 2017 Budget has been enacted, including the First Home Super Saver scheme, while remaining measures are in legislation before parliament. Whether there will be new measures or expansions of these measures will be a space to watch. Housing affordability is still a significant issue for voters.
Despite being a hot-button audit focus area for the ATO, a parliamentary committee report had recommended no changes be made to the current rules permitting individuals to claim tax deductions for work-related expenses. A replacement standard deduction for employees is unlikely to be proposed.
Small business entities
Often described as the “engine room” of the economy, small businesses enjoy a range of incentives, including a lower corporate tax rate. More businesses now come within the definition of “small business”. Requests for the instant asset write off for assets costing less than $20,000 to be made a permanent feature may be heeded (the temporary increase to $20,000 is due to expire on 30 June 2018 and will return to $1,000 unless a further change is proposed). Although small business owners and their tax advisers have to be mindful of different turnover thresholds ($10m for most incentives, $5m for the small business tax offset and $2m to access the CGT concessions), it is unlikely that the thresholds will be revised to a single standard threshold.
R&D tax incentive
Strong words such as “relaunch” and “overhaul” used by the Treasurer indicate significant changes to the existing R&D incentive following recommendations in the Finkel review. Experts are anticipating changes to eligibility for software development activities and tightening of claims for the concession for what is “ordinary business expenditure”. The changes to this concession are further discussed in an article by Gilbert + Tobin: “2018 R&D tax incentive changes: the overhaul, the tweaks, and the elephant” published in Issue 16 of CCH Tax Week.
Company tax cuts
It remains to be seen whether the government will continue to press for company tax cuts for the third budget in a row.
The Budget is the government’s opportunity to continue framing its tax policy and may yet surprise voters with some goodies. It will certainly be setting itself up for a tax battle against Labor who have proposed rather controversial measures of their own, including abolishing dividend franking credit refunds for most taxpayers.