If you’re expecting major reforms from this year’s budget, the experts at Thomson Reuters suggest you might be out of luck. Here are their tips for what SMEs can expect.
According to Thomson Reuters’ Senior Tax Writer, Ian Murray-Jones, the Turnbull government has switched its focus from delivering major reforms to short-term wins as it begins the process of setting itself up for the next election.
“The government is going to be holding off giving away too much because they want to push through the corporate tax cuts which are going to remove $60 billion from the budget,” Murray-Jones suggests.
The pledge to progressively reduce the tax rate for all companies to 25% by 2026–27 is a hangover from the Turnbull government’s first budget, handed down in 2016.
“That was a really big thing for this government — it was central to everything — and it didn’t go through. So, everything else looks slightly peripheral,” Murray-Jones explains.
That said, Murray-Jones suggests the government heads into the May 8 budget with a narrowing budget deficit, giving it a small opportunity to deliver some pre-election budget sweeteners.
Improved deficit but don’t crack the champagne yet
The Mid-Year Economic and Fiscal Outlook in late 2017 has shown a $5.8 billion improvement since the last budget, with the deficit sitting at 23.6 billion. The majority of this improvement can be attributed to stronger commodity prices and higher forecasts for company tax.
However, forecasting commodity prices is difficult and wage growth has been more subdued than expected since last budget (0.25% lower).
Thomson Reuters Australia Senior Tax Writer, Stuart Jones, said this all meant the government had little margin for error with budget sweeteners.
“It is also a reminder that the improving budget position hasn’t been ‘hard won’, and instead represents a windfall from global economic activity that can quickly evaporate,” Jones adds.
Will this be the government’s last budget before the election? This remains unclear. However, the opposition is wasting no time in announcing their plans which include abolishing cash refunds for shareholders with excess franking credits in order to save the budget more than $5 billion a year.
Labor is also promising changes to negative gearing and capital gains tax (CGT), and a 30% tax on distributions from family trusts.
Meanwhile, key stakeholders are keeping up the pressure for reform.
The Tax Institute has weighed in on CGT in its pre-budget submission, proposing a discount reduction.
“A significant reduction of the discount available on capital gains derived by individuals from the current 50% (to 20-25%) would allow for reductions of marginal tax rates on income,” it stated.
Chartered Accountants Australia and New Zealand, meanwhile, has reiterated calls for fundamental changes to “uncompetitive” corporate tax and personal income tax settings.
“We urge the government not to make piecemeal changes to the tax system in this budget. Such changes risk portraying the government as populist and devoid of any big picture, long-term strategy,” the professional body stated in its pre-budget submission.
So, what can we expect?
Jones believes the government will need to come up with something positive for the average worker,
“Don’t be surprised to see a small, but welcome, tweak to the personal tax rates and thresholds,” he says, warning that any changes were unlikely to be as significant as those made in 2016, when the 32.5% personal tax threshold increased from $80,000 to $87,000.”
“That measure cost the government $4 billion, so don’t expect anything more than a token ‘sandwich and milkshake’ tax cut in a non-election year.”
Will work-related expenses be standardised?
Earlier this year the Australian Tax Office (ATO) flagged a crackdown on work-related expense claims, saying rorting was costing the budget more than $2.5 billion a year.
2018 may well be the year when we finally see a firm announcement on a standard tax deduction, likely in the ballpark of $500, for work-related expenses.
“The government has tantalised taxpayers with the prospect of a standard tax deduction for work-related expenses … it’s long been recognised as an important element towards a system of pre-filled tax returns,” Jones said.
Goodbye $20,000 instant asset write-off?
In what is perhaps the biggest impact for SMEs, the $20,000 instant asset write-off for businesses is set to end on June 30, 2018. From that time, the threshold will revert to $1,000.
However in March last year, Labor announced its own “permanent” accelerated depreciation policy, which would see businesses receive an immediate 20% tax deduction for new eligible assets worth more than $20,000.
The pressure is now on the government to extend its existing measure beyond July 1, 2018.
Company tax talk
Further changes to the company tax rate are unlikely to be announced in this year’s budget but Jones said to “watch for any fine-tuning to win support from the cross benches”.
“In the face of the US tax reforms, the government may be reinvigorated to push for a further reduction in the corporate tax rate to maintain international competitiveness against the US rate of 21%,” he said.
Ending superannuation suffering
Following the major reform announcement last year, the super industry can expect this budget to include some refinements aimed at addressing unanticipated consequences.
“Watch for changes to reduce the complexity surrounding death benefit planning under the new $1.6m pension cap,” said Jones.
“In a welcome move, the ATO has already extended the lodgement date for SMSF annual returns to June 30, 2018. This has provided some breathing space for SMSF trustees and advisers.”