The Federal Government delivered its pre-election Budget in May, and the key winners were older Australians, suppliers to infrastructure projects and small business – just to name a few.
But when it comes to the manufacturing sector – or more specifically, those aftermarket businesses servicing the automotive industry – there was no significant investment or support announcements. Instead, benefits were incremental, rather than representing big-picture reforms.
Many mid-sized businesses in this sector have grown during what has been a volatile time for the Australian automotive industry. However, they still require new income streams to escalate growth, remain competitive, and meet the growing demand for high quality Australian-made parts, accessories, tools and equipment.
Pleasingly, there were some significant investments for other sectors which this industry could indirectly benefit from: including, $24.5 billion in new road, rail and public transport initiatives – part of a $75 billion investment over the next decade – that will help deliver exports to market more efficiently.
Moving on from the sector investment, there were some areas in this year’s Budget that have the potential to impact business owners and how you run your business. Therefore, here is our round-up on this year’s Budget highlights, as well as insights for business owners within the Australian Automotive Aftermarket Association network.
Research & Development
For many within the automotive aftermarket sector, research & development (R&D) is what gives you your competitive edge.
Disappointingly, the government has moved forward with a further revamp of the R&D tax incentive scheme. Even as the Treasurer spoke of the need for global competiveness, the proposed changes will make it harder for many businesses to rapidly innovate. It appears that the focus is now on reducing government expenditure in this area.
Small companies – those with a turnover of less than $20 million – seeking to accelerate their R&D activities will still be eligible for a refundable offset. However, the benefit rate has dropped from 16 per cent to 13.5 per cent, and there is now an annual cap of $4 million for the refundable component.
For companies with more than $20 million in turnover, from 1 July 2018, the government will introduce an R&D premium on top of the company’s tax rate, linked to their level of R&D intensity. The table below outlines this premium.
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Marginal R&D Premium
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R&D expenditure relative to Total Expenditure
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4 percentage points
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For R&D expenditure between 0 per cent and 2 per cent R&D intensity (inclusive)
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6.5 percentage points
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For R&D expenditure above 2 per cent to 5 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 2 per cent of the claimant’s total expenses for the year)
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9 percentage points
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For R&D expenditure above 5 per cent to 10 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 5 percent of the claimant’s total expenses for the year)
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12.5 percentage points
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For R&D expenditure above 10 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 10 per cent of the claimant’s total expenses for the year)
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This will negatively impact mid-sized businesses with a turnover above the threshold of $20 million. These larger companies will likely see a reduction in the overall benefit they may be entitled to, and an increase in complexity when making a claim.
There are some positives in the new measures. For example, AusIndustry will provide increased guidance in the form of ‘public findings’, similar to those provided by the Australian Taxation Office. From 1 July 2018, the government will also increase the $100 million R&D expenditure threshold to $150 million, allowing larger companies to continue being rewarded for additional R&D as they grow.
However, all claimants are likely to see an increase in administration and compliance activity from the regulators, with the added challenge of learning to comply with the new regulations. Furthermore, any handbrake on the speed of innovation will disadvantage a number of constantly evolving industry sectors, including advanced manufacturing. Such limitations on the R&D tax incentive seem counterintuitive if the aim is to enhance Australia’s global competitiveness.
Business taxation – Extended small business depreciation concessions
The Federal Government has extended its $20,000 instant asset write-off for small business entities – those with an aggregated annual turnover of less than $10 million – by 12 months, to 30 June 2019.
While the extension of these depreciation concessions is welcomed, it is disappointing that the Government did not increase the aggregated annual turnover threshold and extend the concessions to mid-sized businesses.
Superannuation
Superannuation was a key focus of the Budget, with some announcements made that players within the sector should be across.
- Work test exemption for contributions by recent retirees: The Government will introduce an exemption from the ‘work test’ for voluntary superannuation contributions (non-concessional) by individuals aged 65-74 with superannuation balances below $300,000 in the first year that they do not meet the work test requirements. Currently, the work test restricts the ability to make voluntary superannuation contributions for those aged 65-74 who self-report as working a minimum of 40 hours in any 30-day period in the financial year. Measures will take effect from 1 July 2019.
- Improved integrity over deductions for personal contributions: The Government seeks to improve the integrity of the ‘notice of intent’ (NOI) processes for claiming personal superannuation contribution tax deductions. It aims to modify the income tax return with a ‘tick box’. Some individuals receive deductions on their personal superannuation contributions but do not submit a NOI, despite being required to do so. This results in their superannuation funds not applying the appropriate 15% tax to their contribution. As the contribution has been deducted from the individual’s income, no tax is paid on it at all. Measures will take effect from 1 July 2018.
- Preventing inadvertent concessional cap breaches: The Government will allow individuals whose income exceeds $263,157 and have multiple employers to nominate that their wages from certain employers are not subject to the superannuation guarantee contributions. The measure will allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory super guarantee contributions. Measures will take effect from 1 July 2018.
Some final fast facts:
- Tighter thin capitalisation rules: The thin capitalisation rules will be tightened, requiring entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.
- Denial of deductions for holding vacant land: Deductions will not be allowed for expenses associated with holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. These invalid expenses may include interest costs, council rates and land tax. This measure will apply to land held for residential and commercial purposes, but will be subject to a ‘carrying on a business’ test. Accordingly, land held for a commercial development will not be subject to the new restriction.
- Anti-avoidance rules extended to circular trust distributions: Family trusts will be subject to a specific anti-avoidance rule that applies to other closely held trusts engaging in circular trust distributions. This measure will apply from 1 July 2019.
Other opportunities for growth
Outside of the Federal Budget, there are opportunities for funding growth if you know where to look for them: for instance, Federal and State Government grants, tax incentives and entitlements, debt restructuring and working capital optimisation.
The team at Grant Thornton helps clients to understand what the Budget’s announcements mean for them, and, importantly, we are helping companies to overcome barriers to growth and thrive in this current environment.
