Perhaps the Federal Budget 2015 – Joe Hockey’s second Budget – was as “dull and routine” as Tony Abbott said it would be, however from a tax perspective there were some big changes, particularly for small business. While it contains less of the hard hitting spending cuts from the 2014 Budget, it continues with the narrative of pledging a return to surplus despite dropping commodity prices.
We consider that in focussing on more popular measures such as tax breaks for small business, crackdowns on multinationals and increased childcare subsidies, the Budget remains a missed opportunity for more “big ticket” tax reform. Perhaps this was to avoid pre-empting any outcomes from the Government’s Tax Reform White Paper process which only recently commenced in March 2015. The Government is currently consulting on the Discussion Paper that has been released, will release a Green Paper in mid to late 2015 and the White Paper will be released in 2016 to take to the next election. This will address more of the underlying structural aspects of the tax system in Australia, and some of the larger elephants in the room such as the rate and base of the GST and broader superannuation reform, and bring them further onto the agenda.
As for this Budget, the Budget Papers predict a deficit of $35bn next year, down to a $6.9bn deficit in another 3 years’ time in 2018-19. This is less of a deficit than that forecast in the mid year Budget update delivered in December 2014, and in the context of a still falling iron ore price.
The centrepiece of the Budget was the $5.5bn Jobs & Small Business package, which contained small business tax cuts, accelerated depreciation for assets valued up to $20,000, and measures to reduce red tape. A major $3.5bn “Jobs for Families” child care package was also a central feature, seeking to deliver what the Treasurer said is a simpler, more affordable, more flexible, and more accessible child care system.
It is clear that several of the major new spending measures are linked to savings attached to legislation that is currently stalled in the Senate, and that getting Budget measures through the Senate will be no easier than last year, although the composition of the Senate has changed since then. In the 76-seat Senate, the Government will need 39 votes to have its legislation passed.
So who are the Winners and Losers?
Winners are small business, parents of young children, defence and national security. Losers are women so called ‘double dipping’ on paid maternity leave, stay at home parents, on line consumers of overseas content and large multinational companies.
SMALL BUSINESSES AND START UPS
Small businesses will be the major benefactors of many of the concessional tax measures proposed by the Budget. Much attention has already been given to the popular proposal to reduce the small business company tax rate by 1.5% and the equivalent 5% tax offset for unincorporated small businesses. We also recommend that equal, if not greater, attention is deserving of the proposed immediate write off for assets that cost up to $20,000.
These small business proposals will result in a gain to businesses, by way of tax savings, of approximately $1b over a full year.
Company Tax Rate Cut and Unincorporated Tax Offset
Effective from 1 July 2015, a company carrying on a business with aggregated turnover of less than $2m will have an income tax rate of 28.5%, down by 1.5% on the current company rate of 30%.
Effective from 1 July 2015, unincorporated small business, for example: sole traders and partnerships, will not receive a discounted tax rate. Instead unincorporated small businesses will receive a tax offset of 5% of the income tax payable on their business income capped at a total tax offset of $1,000 per individual.
Tax Planning Tip
Tax planning may be required to ensure a smooth transition to the 2 tier tax system once the details of the draft legislation become known.
Such planning may include the deferral of income derivation until 1 July 2015 or later.
For companies, planning may be necessary to ensure that the reduction in the company tax rate does not impact a company’s ability to attached franking credits to its existing and future profits.
For unincorporated small businesses, planning may be necessary when it becomes clear how the 5% tax offset will affect individuals that carrying on a small business through a trust structure and how the offset is affected by other non-business deductions or losses that an individual may have.
Small business accelerated depreciation – up to $20,000 per year
An immediate deduction will be available for small businesses for assets that cost up to $20,000 (each) and are acquired and installed ready for use from 7.30pm (AEST) 12 May 2015 to 30 June 2017.
Notably, this deduction will be available in respect of the acquisition of motor vehicles.
Further, an immediate deduction will also be allowed for the balance of an entity’s small business depreciation pool, but only if the pool balance does not exceed $20,000.
Tax Planning Tip
This Budget proposal provides encouragement for small businesses, by way of substantial immediate tax savings, to commence the undertaking of significant capital investment as early as today and to continue over the next 2 years.
Start up Costs
Effective from 1 June 2015, ‘start up’ businesses will be allowed to immediately deduct a range of professional expenses associated with starting a new business. Such costs may include professional, legal and accounting advice. This is a change from the current laws which require such costs to be deducted over a 5 year period.
CGT roll-over relief for change to entity structure
Effective 1 July 2016, a small business with an aggregated annual turnover of less than $2m will be able to change its legal structure without attracting a CGT liability. This measure is intended to provide small businesses with the flexibility to change its structure to better suit the growth phases that may otherwise obstruct it from becoming a larger established business.
Tax Planning Tip
Without the impending tax burden of a business restructuring, you may benefit from reassessing whether your current business structure is appropriate for you going forward.
Further Employee Share Schemes (“ESS”) Changes
In addition to the ESS changes that were introduced to the lower house on 26 March 2015, further changes were also announced in the Budget that will take effect from 1 July 2015.
Tax Planning Tip
The ESS regime has now become a tax efficient approach to the remuneration of employees. Please speak to Kaylene Hubbard, Tax Partner or Dean Crossingham, Tax Consultant to discuss whether an employee remuneration review may be beneficial to your business.
GOODS AND SERVICES TAX
The announcement of the ‘Netflix’ tax in the Budget is perhaps one of most important changes to GST since its introduction.
From 1 July 2017, GST will be imposed on offshore supplies of intangibles to Australian consumers. The definition of ‘intangibles’ to which the GST will apply includes digital content, games, software, aps and e-books but does extend to other services such as consultancy and professional services, which will receive similar GST treatment whether they are supplied by a local or foreign supplier.
The biggest issue here will be implementation, which probably explains why this measure is delayed until 1 July 2017.
There was no announcement concerning the treatment of low-value imported goods although this had been discussed.
On the compliance front, the Government announced that it will provide $265.5m to the Tax Office over 3 years from 2016-17 to “continue a range of activities to promote GST compliance and assist the Tax Office to identify:
PENSION AND SUPERANNUATION
As in previous years, concessional superannuation taxation has again been left unaffected by the Budget. We are sure this comes to the relief for many who are reliant on superannuation as an integral part of their wealth building strategy. However, as mentioned above, changes may yet be on the horizon.
The Age Pension
Effective from 1 January 2017, those who receive the Age Pension will be subject to an increased assets test thresholds. Including:
Single homeowners asset threshold increased to $250,000;
Homeowner couples asset threshold increased to $375,000; and
Non-homeowners asset threshold increased to $450,000 (single) and $575,000 (couple).
The Age Pension will also phase out by $3.00 of pension each fortnight, rather than the current $1, for each $1,000 of assets the recipient is over the relevant asset threshold. This means that the maximum value of assets that a homeowner couple can hold to qualify for a part pension will be reduced from $1.151m to approximately $823,000.
Proposed changes to pension income test free areas will not proceed and the previous indexation annually by the consumer price Index (cpi) will continue.
It is also noted that there will be new improved early access to superannuation for people with a terminal medical condition.
FRINGE BENEFITS TAX
Currently employees of public benevolent institutions and health promotion charities and employees of hospitals have a standard FBT exemption up to limits. The exemptions are now to be indexed and will become $31,177 and $17,667 respectively. Rebatable FBT employers who have partial FBT rebate are also affected by this change.
There is currently no limit to employees of these entities in relation to FBT free meal entertainment, holidays, hotels and weddings and also no reporting of these either. From 1 April 2016 there will be a limit per employee of $5,000 pa and there will be additional reporting obligations.
These proposals will result in a loss to not for profits, by way of increased tax liabilities, of approximately $100m over a full year.
Tax Planning Tip
We have an FBT review tax planning process for clients. Please speak to Kaylene our Tax Partner or Dean our Tax Consultant if you would like an FBT review.
TAX RESIDENCY RULES
From 1 July 2016, most working holiday visitors will be taxed as non residents at 32.5% from the first dollar earned. Typically they are currently taxed as a tax resident when in Australian for more than six months and usually receive a refund, which is spent whilst they are travelling in Australia.
These proposals will result in a loss to employees, by way of increased tax liabilities, of approximately $220m over a full year.
Watch this space
If you are an employer of backpackers on 417 visa’s this may have an adverse effect on your availability of staff. It will be interesting to see how this plays out at the business level and the effect on Members of Parliament voters.
MULTI NATIONAL ANTI AVOIDANCE LAWS
It is interesting that changes which are to be introduced from 1 January 2016 to tax those multinationals with world wide income over $1 billion and who seek to attribute income in a low tax country, is stated to have an unquantifiable gain in the budget papers. In other words the treasury isn’t able to estimate the revenue gain from this change. In addition to this change the penalties for multi nationals avoiding tax has been doubled. Transfer pricing rules will be bought into line with OECD standards. Where these taxpayers have a reasonably arguable tax position the existing system applies.
Tax Planning Tip
The need for a proactive reasonably arguable position (RAP) also applies to small business and individual taxpayers. This concept has been around now for many years and is well entrenched. We see tax cases where taxpayers receive significant penalties for not getting advice and seeking a RAP, where one is available and when the cost of getting advice and a RAP would have been small in comparison to the tax and penalties. We recommend all the time a careful cost benefit assessment so an informed decision can be made about getting advice and seeking a RAP or even a Private Binding ruling (which are now common and Provide Certainty).
LAST BUT NOT LEAST
Work Related Car Expense Deductions
Effective from 1 July 2015, the ’12 per cent of original value method’ and the ‘one-third of actual expenses method’ for individuals to claim work related car expenses will be removed. Further, the ‘cents per kilometre method’ will be revised by the replacing of the three current rates based on engine size with one rate set at 66 cents per kilometre.
These proposals will result in a loss to businesses, by way of increased tax liabilities, of approximately $300m over a full year.
Personal Income Tax Rates
There are no changes to personal income tax rates. This will mean that ‘bracket creep’ will continue to occur as an individual’s income is exposed to higher tax rates.
The following comparison of the total income tax paid by individuals within each marginal bracket, relative to the over all income taxes paid by individuals in Australia is interesting:
Taxable Income $ Tax payers % Tax Paid % Marginal Tax Rate % *1
0 - 18,200 20 0 0
18,201 - 37,000 24 3 19
37,001 - 80,000 37 30 32
80,001 - 180,000 16 39 37.5
180,001 + 3 28 45
*1 Excluding the Medicare Levy at 2%
Child Care Subsidy and Parental Leave Pay
A simplified Child Care Subsidy will be introduced from 1 July 2017 replacing numerous existing policies. This should improve the position of those using child care on family incomes up to $170,000pa. The new arrangement will cover parents who are working, looking for work, training, studying or volunteering.
Currently an individual can receive taxpayer funded Parental Leave Pay (PLP) in addition to employer provided parental leave entitlements. From 1 July 2016 this double dipping will be removed.
Watch this space
If this proceeds through the Senate one wonders if the effect will be the removal of employer entitlements whereas one assumes the desired effect is the removal of the PLP?
It is intended that Higher Education Loan Program debts will from 2016 include overseas income as well as Australian income.
Thank you for your attention to these matters.
If you have any queries, please contact the CABEL Partners office on 02 8071 0300.
CABEL Tax Consulting is a unique service offering preparation and planning for your tax situation. CABEL has been operating this service for over 10 years as a stand-alone division. With assignments relating to tax planning, small business and other capital gains tax concessions and private ruling applications, our services are only limited by your needs.
Kaylene Hubbard | TAX PARTNER
email@example.com T. 0414 407 295
Kaylene is a highly experienced Law Graduate and Solicitor with a special interest in taxation law. Kaylene worked previously as a Partner at Deloitte and now provides high level taxation advice for CABEL clients. In her role as Tax Partner, Kaylene leads CABEL Tax in challenging the status quo to achieve financial benefits for clients.
Kaylene has a Bachelor of Arts/Bachelor of Laws from Macquarie University and a Postgraduate Diploma in Commerce from the University of NSW. Kaylene is a Fellow of the Taxation Institute of Australia, A Solicitor of the Supreme Court of NSW and an Affiliate Member of the Institute of Chartered Accountants, Australia.
Dean Crossingham | TAX CONSULTANT
firstname.lastname@example.org T. 02 8071 0319
Dean has over a decade of experience providing tax advisory and compliance solutions. He advises on all areas of tax concerning private enterprise and family groups. Dean’s expert yet pragmatic approach provides clarity to his clients and confidence to the CABEL Tax team.
Dean is a member of the Institute of Chartered Accountants of Australia and New Zealand, he is a Chartered Tax Advisor of the Taxation Institute of Australia and he also holds a Master of Applied Taxation from the University of New South Wales.