With the 2018 Australian federal budget, a major attraction was the extension of a tax incentive for small businesses. The government was also keen to spell out its emphasis on fiscal prudence.   Federal treasurer Scott Morrison’s budget speech noted the government expects the budget to balance in coming years.

“I can confirm tonight that the budget is projected to return to balance in 2020-21 and remain in surplus over the medium term,” he said, adding, “the underlying cash balance will improve from a forecast deficit of $29.4 billion in 2017–18 to a projected surplus of $7.4 billion in 2020-21.”

Last night Morrison confirmed the federal government is extending the $20,000 tax incentive available to small businesses with revenues of less than $10 million. Under the rules small entities are able to instantly claim a tax deduction for goods and services that cost up to $20,000.

Known as the instant asset write-off provisions, the government has announced these rules will be extended to 30 June 2019.

Mid-sized businesses in focus too

But there are also many items in the budget of which Chief Financial Officers (CFOs) should take note. One of the major ones is amendments to the thin capitalisation rules. These rules govern how much debt versus equity a business must hold, in a bid to ensure companies don’t hold inordinate debt levels or try to flout tax rules.

In its 2018 budget report, The intersection of politics and prudence: Australian Federal Budget 2018-19, professional services firm Deloitte outlines how the rules are changing.

As it explains, after 1 July 2019, “all entities must rely on the asset values contained in their financial statements for thin capitalisation purposes.” As Deloitte international tax lead

Claudio Cimetta explained in the document, what this means is, “companies will no longer be able to revalue assets “off-balance sheet” for thin capitalisation purposes only.” This helps give users of financial statements a truer picture of a company’s financial position.  

Another change is the extension of the definition of a significant global entity. It is understood these rules have been broadened so that more businesses are considered to be significant global entities for tax purposes.

As the report notes, this, “will be expanded for income years commencing on or after 1 July 2018 to include members of large multinational groups headed by private companies, trusts, partnerships and investment entities.”

Cimetta provides further guidance about what this means for overseas businesses in the report. He writes, “the current definition applies only to an entity which is a member of a group headed by a public company or a private company required to provide consolidated financial statements. The definition will be broadened to include members of large multinational groups headed by private companies, trusts and partnerships. It will also include members of groups headed by investment entities.”

R&D rules amended

Another change announced at this year’s budget concerns the popular Research and Development Tax Incentive, which encourages local businesses to engage in R&D and pay less tax.

The way the rules are changing is complex. Deloitte’s report explains:

·         “For companies with annual turnover of $20 million or more, R&D tax incentive net benefits to be linked to the level of R&D intensity, with an increase in the annual expenditure cap (to $150 million). 

·         For companies with annual turnover below $20 million, R&D tax offset will be a premium of 13.5% above the applicable corporate tax rate. Annual refundable amounts limited to $4 million per annum.” 

As Deloitte’s global investment and innovation incentives lead Greg Pratt explains in the report, the rules were tightened in response to a government review of tax rules, which recommended a cap on refunds through the scheme.

But he noted, “surprisingly, the budget announcements did not include the introduction of a previously mooted 20 per cent collaboration premium aimed at increasing collaboration between companies and research bodies.” 

Tax system integrity in focus

A number of steps are being put in place to help ensure the Australian Taxation Office (ATO) is collecting the right amount of tax.

The ATO has a focus on the black economy at the moment and, as Deloitte’s report explains, this year’s federal budget announced measures to introduce a $10,000 limit for cash payments made to businesses from 1 July next year.

Additionally, the federal government has announced changes to the way the pay as you go (PAYG) tax regime operates. Under the regime businesses are required to withhold tax payable by their staff and make these payments to the ATO.

As Deloitte’s report noted, under new rules, businesses won’t be able to apply for a tax deduction for payments made to staff and contractors, for which they have not withheld PAYG tax.

Another new initiative is the extension of the Taxable Payments Reporting System (TPRS). The system is designed to ensure construction businesses and contractors pay the right amount of tax.

Deloitte’s report explains, “the TPRS will be expanded to three sectors which are seen as high risk in the context of the black economy. From 1 July 2019, security providers and investigation services, road freight transport, and computer system design and related services will all be subject to the TPRS.”

Finally, the federal government has reaffirmed its commitment to infrastructure, outlining $24.5 billion in spending. Of this, $12 billion will be spent on road projects and $8 billion has been allocated to capital city rail projects, which includes the important $5 billion Melbourne airport rail link project.

Overall, the budget seemed designed to keep spending in check and tighten the government’s ability to collect tax, which should provide a boost to the economy over time.

Key Takeaways

• Budget back in surplus by 2020/2021.
  
• Thin capitalisation rules tightened.
• R&D tax incentives amended.