Following the fallout from the Federal Budget, the government made some announcement yesterday with the promises of more news (and legislation) to come. On Thursday 18th June a little less than a month after the Federal Budget, more announcements are being made again changing the landscape following initial consultation. Given the short space of time between the “planned budget” announcements and these new changes, the approach appears, at best, to be tax reform in a haphazard manner and ill conceived and thought through at worst.
Whilst some of the changes are welcome, some still seem to leave uncertainty and the ability of a change in the government’s stance. So what are the latest changes announced?
Small Business Capital Gains Tax (“CGT”) Concessions
The new announcements increase the turnover threshold for businesses eligible for the small business CGT concessions from $2m to $10m. This is a most welcome change for small business given the $2m threshold has been in place for many years and did not align with other definitions of small business within the tax legislation. This threshold has been announced to increase with effect from 1 July 2027.
CGT 50% Discount for Innovation
“Innovative business” owners (including employees who own shares) and investors will retain the current 50 per cent CGT discount.
A consultation paper has been released, with submissions open until 10 July, giving further room for change. Based on the current announcement:
- Qualifying businesses must have less than $50m in turnover;
- The shares must be new equity issued by a company that is less than 10 years old or less than 15 years old for biotech, medtech and deep tech companies.
- The shares must be held for at least five years; and
- There is a lifetime cap of $10 million on the capital gain (before the discount).
Amendments to Legislation
The Federal Government has announced that it will make “targeted” changes to legislation currently before Parliament including:
- Providing a list of the payments that will exempt taxpayers from being subject to the 30% minimum CGT rate;
- Embedding the calculation method of the Working Australians Tax Offset (“WATO”) in legislation;
- Removing Ministerial powers no longer needed to give effect to the Government Policy intent; and
- Ensuring deductible gifts reduce capital gains that are subject to the minimum tax.
Potential Amendments to Legislation
In addition to the above, the Federal Government intends to removal Ministerial powers in relation to:
- The definition of new builds that are eligible to choose the 50% discount; and
- The definition of the types of housing investment exempt from the limits on negative gearing.
Importantly, and in a differing approach to the targeted changes announced, the above two changes are to be amended by additional legislation to be introduced later this year.
As such, if the additional legislation does not get passed, or is left on the shelf, then the current Ministerial powers will be retained. The question here is can the Government be Trusted to be true to its word on this?
Trust Taxation
The Federal Government has announced that it will exempt income from all types of discretionary testamentary trusts from the minimum tax provided that the trusts are for “genuine” testamentary purposes.
The announced change appears to be limited to income from assets of the deceased estate. For discretionary testamentary trusts that are established after 1 July 2028 the exclusion will apply to trusts that can only benefit individuals and income tax exempt charities.
This announcement whilst welcome, does not appear to fully solve the issues surrounding testamentary trusts. It is also limited to income and not capital gains as well as appearing to have a very narrow class of eligible beneficiaries.
Timelines
- Loss Carry Back and Instant Asset Write Off
The Federal Government has announced that it will next week introduce legislation to give effect to the loss carry back and the instant asset write off for small business.
- Trust Taxation Reform
The Federal Government has announced that in the “coming weeks” it will release a consultation paper on the implementation of the minimum tax on discretionary trusts which will provide further details on the proposed approach.
In the announcements recently made, there are no changes flagged to:
- the minimum 30% tax;
- the refundability of any tax credits arising from tax being withheld at the trust level;
- the loss of franking credits; or
- no credit being available for corporate beneficiaries.
We will provide further updates and commentary in relation to the continual changes flowing from the Federal Budget as and when additional information becomes available. If you have any questions in relation to how the Federal Budget or the new announcement impact you, please contact your ESV Engagement Partner.
