Tax Update - Reduced company tax eligibility / Rental Property deductions
Reduced company tax rate eligibility
The Government has released exposure draft legislation that explains when a company will be entitled to the lower tax rate of 27.5% for the 2016-17 income year.
There are 3 tests that will need to be satisfied each year in order to claim the lower company tax rate:
- The company carries on a business;
- The turnover of the company is less than the turnover threshold for that income year. The turnover threshold increases annually from $10 million in the 2016-17 income year to $25 million in the 2017-18 income year and $50 million in the 2018-19 income year. There is currently a Bill before Parliament which would see this threshold increasing progressively to $1 billion in the 2022-23 year; and
- The company does not have passive income of 80% or more of its total assessable income for that income year.
Passive income includes for example, dividends, interest, royalties, rent, capital gains and partnership and trust distributions attributable to passive sources.
Therefore a corporate beneficiary of a family trust that carries on an active business can take advantage of the lower tax rate. A similar tracing approach applies to dividends received from companies in which a shareholding of at least 10 per cent is held.
A tax rate of 30% continues to apply to companies that don’t meet the above criteria.
RESIDENTIAL RENTAL PROPERTIES
(a) Travel expenses no longer deductible
Legislation has been introduced into Parliament to deny all travel expenses incurred on or after 1 July 2017 by individuals, self-managed superannuation funds, and partnerships relating to inspecting, maintaining, or collecting rent for “residential premises used as residential accommodation”. The expenditure cannot also be included in the cost base of the property for capital gains tax purposes.
Ineligible expenses from 1 July 2017 include, car, airfares, meals and accommodation that relate to rental property inspection, maintenance, rent collection, attending body corporate meetings etc.
This change won’t affect travel expenses incurred by entities such as companies, public unit trusts and managed investment trusts. The ATO also state that this change won’t apply to travel expenses incurred in carrying on a business - for example, investors who are in the business of buying residential properties for rental and owners of certain serviced apartments.
(b) Depreciation on second hand assets no longer deductible
Legislation has been introduced into parliament to provide that depreciation is no longer deductible from 1 July 2017 for “previously used” assets acquired after 7.30pm on 9 May 2017 in “residential premises used for residential accommodation”.
This means residential property investors who purchase a second hand property with depreciable assets after 9 May 2017, or buy second hand assets for an existing rental property will be denied a deduction for depreciation. However, the costs will be included in the cost base when the property is eventually sold.
Where a residential property investor purchases a brand new property from a developer after 9 May 2017, or installs new depreciable items to an existing property (e.g. a new how water heater or new carpet), a depreciation deduction can be claimed.
The ATO state that this change won’t apply to residential premises used in carrying on a business - For example, investors who are in the business of buying residential properties for rental and owners of certain serviced apartments. Also excluded are residential properties owned by entities such as companies, public unit trusts and managed investment trusts.
This change also doesn’t affect an investor’s ability to claim the capital works component (deductions available for the wear and tear of the building structure and fixed items). Depreciation of plant and equipment for non-residential/commercial properties is also unaffected.
(c) Main residence exemption for non-residents
Exposure draft legislation has been released, which if introduced into parliament in the form of an exposure draft, will deny the capital gains tax main residence exemption to all individuals who are non-residents at the time the property is sold.
The exposure draft is so wide it denies the main residence exemption to Australian residents who are deemed to dispose of their main residence at the time of becoming a non-resident.
This change is intended to apply from 7.30pm on 9 May 2017.
(d) First home super saver scheme
Legislation has been introduced into parliament to establish the First Home Super Save Scheme. Under the scheme, voluntary superannuation contributions made by individuals from 1 July 2017 (subject to existing super caps) can be withdrawn for a first home deposit starting from 1 July 2018.
The scheme provides for up to $15,000 of voluntary contributions per year (or $30,000 in total) to be withdrawn from super plus a deemed earnings amount. Both members of a couple are entitled to benefit under the scheme. Voluntary contributions include:
- Undeducted (non-concessional) personal contributions
- Deducted (concessional) personal contributions
- Salary sacrifice contributions (concessional)
Most working individuals will either make concessional contributions as salary sacrifice or personal deductions to be claimed in their tax returns. These contributions will be taxed at the superfund rate of 15%, and when withdrawn will be taxed to the individual at their marginal rate of tax (including the Medicare levy), less a 30% tax offset.
To be eligible for the scheme, individuals must be at least 18 years of age, not used the scheme before, and never previously owned a property in Australia. If one member of a couple has previously owned a property, that person is ineligible.