When we released our Federal Budget Review for 2015-16, we noted that among the changes in tax there was little in the way of ‘big ticket’ tax reform, and speculated that this was because the Government was leaving this for its much anticipated Tax Reform White Paper process. Now that this has fallen by the wayside, along with addressing 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, we were not expecting major tax reform in this Budget, and we were not proven wrong.
However, Scott Morrison’s first budget did deliver some welcome tax changes, especially for small business, and some not so welcome changes to superannuation.
The Treasurer opened by saying that this was “not just another Budget” and emphasised that it is an “economic plan” with three main focusses:
The Budget Papers predict a deficit of $37.1 billion in 2016-17, down from $39.9 billion in 2015-16 year. The deficit is then projected to fall to $6 billion over the next 4 years to 2019-20. Economic growth is expected to cool in 2016-17 before recovering in the following 3 years. This promise of a “stronger economy” appears to have been called into question however by the reduction in the cash rate to just 1.75%, with the Reserve Bank citing difficulties in the global economy and the slow down in China.
SO WHO ARE THE WINNERS AND LOSERS?
While the Treasurer says that Australians have moved on from the ‘Winners and Losers’ narrative, we have identified the members of each camp below:
Business with turnover up to $10 million and over the next 10 years businesses with turnover up to $100 million
All businesses by 2024 and 2017
Unincorporated small businesses
People earning more than $80,001
People earning more than $180,001
Online shoppers buying from overseas
People with super balances over $1.6 million
People earning over $250,000
Transition to Retirement pension account holders
HOW DOES THIS AFFECT YOU?
We recognise that most of our clients will fit into one of the categories listed above. To assist you with this process, we’ve set out the relevant changes below, together with some comments, considerations and tax planning tips. Further to that. we are again undertaking our YEAR END PLANNING for clients during May and June. This year sees an expansion in the topics which are to be considered in this process, including:
Stamp duty exemption in NSW on corporate restructures – will it stay or will it go and what are the opportunities?
GST cash basis accounting
Pension conversion from accumulation – and back if necessary!
Reduction in franking account balances when company tax rates reduce and efficient use of credits before the rate changes
Superannuation contributions where self employed and employed in the same year
Recommence superannuation contributions for those aged 65 to 75.
Fringe benefits Tax rule changes making alternatives to FBT worth considering
Small business accelerated depreciation (remember you must be carrying on a business – and rental is not a business)
SMALL BUSINESSES AND COMPANIES
Small Business Threshold to increase to $10m – increases tax concessions available
The ‘Ten year Enterprise Plan’ announced last night revolves around progressive company tax cuts and changes to the definition of “small business”.
From 1 July 2016 the small business entity threshold – for some purposes at least! – will increase from $2m to $10m.
As a result, a business with an aggregated annual turnover of less than $10m will be able to access a number of small business tax concessions from 1 July 2016 including:
the simplified depreciation rules- such as the immediate write-off for asset purchases costing less than $20,000 until 30 June 2017 (and then less than $1,000).
the simplified trading stock rules- such as those which give businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000.
immediate deductibility for various start-up costs- such as professional fees and government charges.
the increased FBT exemption for work-related portable electronic devices- such as mobile phones, laptops and tablets. Effective from 1 April 2017 to align with the FBT year.
a simplified method of paying PAYG instalments calculated by the ATO
a 12-month prepayment rule
the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO.
the new small business company tax rate of 27.5% (see below).
Tax Planning Tip
With the immediate write-off for asset purchases costing less than $20,000 becoming available on 1 July 2016 for businesses with an aggregated annual turnover of between $2m and $10m, timing of purchases is important. You might want to wait until after 1 July to make the purchase but make sure to do it before 30 June 2017.
The after-tax consequence of the proposed immediate deduction should also be considered. If this results in a tax loss, there is no immediate cash-flow advantage.
However, CGT concessions – small business threshold unchanged
The access to small business tax concessions for those with an aggregated turnover of less than $10m is not, unfortunately, endless. It is important to note that the threshold changes will not affect eligibility for the small business CGT concessions.
Small business CGT concessions will only remain available for businesses with annual turnover of less than $2m or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test).
Small business thresholds will, therefore, continue to be inconsistent – at last count there are at least 3 definitions of “small business” relating to different areas of the tax legislation. This leads to confusion and increased costs due to the complexity of the rules applying to the small business sector.
Company Tax Rate Cut – for all companies progressively
From 1 July 2016, the company tax rate for businesses with a turnover of less than $10 million will reduce to 27.5% (current rates are 28.5% for entities with a turnover of less than $2 million and 30% for those with a turnover above $2 million).
Over the next 11 income years the Government intends to reduce the Company Tax rate to 25%. All companies will be transitioned to the new 27.5% rate by 2023-24 (on a schedule dependent on their turnover) and then the rate will fall progressively to 25% by 2026-7.
Franking credits will continue to be calculated by reference to the amount of tax paid by the company making the distribution.
Tax Planning Tip
This tax cut will devalue franking credits if it is implemented in the same way as previous reductions in the corporate tax rate have been. Consider whether there is a benefit in using franking credits now to receive their full value.
The increased differential between the corporate tax rate and the top marginal tax rate will have the effect of increasing the amount of ‘top-up tax’ payable when profits are distributed to shareholders – so consider timing issues.
Overall tax on company profits paid by the company and the shareholder themselves will not change however – the benefit here is to the company and its increased ability to return profits to the business to generate growth.
Unincorporated Businesses – threshold and discount up but maximum value unchanged
From 1 July 2016 the turnover threshold for access to the tax discount for unincorporated small businesses (e.g. sole traders and partners in a partnership) will increase from $2m to $5m.
Additionally, from 1 July 2016 the tax discount will increase to 8%. From 2024 it is planned that the tax discount will increase progressively from 8% to reach 16% in 2026-27.
However, the maximum value of the discount will remain at $1000.
Changes to Div 7A flagged
Div 7A is possibly one of the most problematic tax areas. It applies to payments, loans and debts forgiven by private companies to shareholders or associates.
The Government has flagged to improve the operation and administration of these rules by making targeted amendments to Division 7A such as:
a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty;
new safe harbour rules;
amended rules, with appropriate transitional arrangements, regarding complying Div 7A loans.
Any amendments will be introduced following consultation.
GOODS AND SERVICES TAX
GST and the importation of low value goods – from $0
An announcement was expected on this last year, but it came this year. From 1 July 2017 GST will be imposed on goods imported by consumers regardless of value. The previous rules did not impose GST on imported goods less than $1,000.
The liability for the GST will be imposed on overseas suppliers, using a vendor registration model. This means that those suppliers which have Australian turnover of $75,000 or more will be required to register for, collect and remit GST for all goods supplied to consumers in Australia.
As we noted last year, the devil in this announcement is in the implementation.
No other major GST changes
While the Budget itself was relatively quiet on GST changes, in a pre-budget interview on Sky News on 1 May 2016, the Prime Minister said there would be no change to the GST in the next Parliament. “We’ve looked very carefully at the proposal to raise the GST … but we’ve rejected it,” Mr Turnbull said. “I can give you this absolute undertaking: there will be no change to the GST in the next parliament,” he said. We assume that this means there would be no change to the GST rate or base in the next term of a Coalition Government.
MULTINATIONAL TAX MEASURES
One of the foundations for the Budget is innovation and ideas, and incentives including for startups and exporters.
Importers of innovation and ideas however have become targets in relation to their “diverted profits”.
A 40% diverted profits tax (DPT) – dubbed the “Google tax”- on the profits of multinational corporations that are artificially diverted from Australia will be introduced for income years commencing on or after 1 July 2017. The measures will apply to international businesses with global revenue over $1 billion.
The gain to revenue is budgeted at $200 million over 4 years which sounds very low to us.
TAX AVOIDANCE TASKFORCE
The ATO is receiving $700 million over 4 years to employ 1,000 experts as part of a new Tax Avoidance Taskforce to conduct operations to improve tax compliance by high wealth individuals, large private groups plus public companies and multinationals.
The tax budgeted to be received from this Taskforce is an amazing $3.7 billion over 4 years.
PERSONAL TAX MEASURES
We are sure you have heard the announcement that the 32.5% personal income tax threshold is to be increased from that $80,000 to $87,000, and that the benefit for anyone earning over this amount is about $6 per week. It is an acknowledgment of bracket creep – at least at this level – and the Government considers that this will prevent average full time wage earners from moving into the second top tax bracket until 2019-20.
The current top tax rate is 49% – 45% plus the Medicare Levy and the temporary Budget Repair Levy – and this will remain for the 2017 financial year and return to 47% when the levy is removed at the end of the 2016-17 financial year. This top marginal tax rate kicks in after $180,000.
The following table shows the current rates for the current year and the proposed rates to apply from 1 July 2016, and also shows the average rate of tax which will apply based on the new rates at the upper limit of each tax bracket.
Personal income tax rates and thresholds
Major changes to superannuation have been made in this Budget, with the stated aim of closing off generous superannuation tax concessions and reducing reliance on the aged pension. Indeed, this objective of superannuation “to provide income in retirement to substitute or supplement the Age Pension” will be enshrined in stand-alone legislation.
The measures are said to leave 96% of Australians unaffected, but will raise $2.8 billion over 4 years. Here are the key changes:
$1.6 million limit on retirement accounts
The Government has called it – $1.6 million is the upper limit on what we need to retire comfortably. This has been calculated as the amount which will generate earnings equivalent to 4 times the aged pension per year.
From 1 July 2017 a cap of $1.6 million will apply on the total amount of superannuation that an individual can transfer into a tax-free “retirement account”- also known as retirement phase or pension phase. The cap will be indexed in line $100,000 increments in line with the CPI. There is no limit on the amount of earnings on these transferred balances.
This is a dramatic change, but the sting is that it is, in effect retrospective.
Members who are already in pension phase with balances over $1.6 million at 1 July 2017 must either:
Transfer the excess back into an accumulation account – where earnings will be taxed at 15% – to reduce their pension account balance to $1.6 million by 1 July 2017; or
Withdraw the excess from superannuation completely.
A tax on amounts that are transferred in excess of $1.6 million (including on their earnings) will be applied, similar to the tax on excess non-concessional contributions.
Tax Planning tip:
Consider the following as part of tax planning over the coming year:
If your pension account balance is over $1.6 million will you be better off moving it back to your accumulation account or out of super altogether? Earnings on funds in accumulation phase will be taxed at 15%, those outside super will be taxed at your marginal tax rate. Of relevance here is the point at which an individual’s average rate of tax is 15% – this is at about $45,000.
Transition to retirement pensions (TTRs)
The tax exemption on earnings used to support TTRs is to be removed. These earnings will be taxed at 15% instead of the current 0% from 1 July 2017, regardless of when the TTR commenced.
The Government has also said that individuals can no longer elect to treat certain TTR amounts as lump sums for tax purposes, which currently makes them tax free up to the low rate cap of $196,000.
Tax Planning tip:
Consider whether any assets supporting your TTR which have latent capital gains can be sold prior to 1 July 2017 to crystallise the capital gains in a tax free pension environment.
$500,000 lifetime cap on non-concessional contributions
The Government has introduced a lifetime non-concessional contributions cap of $500,000 effective from Budget night – 7.30pm 3 May 2016. This will replace the existing annual cap of $180,000 per year, or $540,000 every 3 years under the bring-forward rule for those under age 65).
This is another tricky change which has retrospective effect. The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007. Any contributions made before 7.30pm on 3 May 2016 will not give rise to an excess of the cap, but excess contributions made after that time will need to be removed or be subject to excess contributions tax.
Concessional contributions cap cut to $25,000 from 1 July 2017
The annual concessional contributions cap will be reduced to $25,000 for all individuals, regardless of age, from 1 July 2017. It is currently set at $30,000 for those under age 49 on 30 June for the previous income year, or $35,000 for those aged 49 or over for that year. These contributions include all employer contributions and personal contributions for which a deduction has been claimed.
We consider this to be a short-sighted change by the Government. Indeed, if it has drawn the line in the sand by effectively saying that $1.6 million is a reasonable balance to have in superannuation on retirement, contributions of $25,000 over a working life of 40 years would only raise a balance (before earnings of course) of $1 million. This is also of course assuming that individuals have the capacity to contribute $25,000 per year.
Tax Planning tip:
Consider whether you have excess cash available for the 2016 and 2017 income years to contribute to superannuation to take advantage of the higher caps pre 1 July 2017.
Also note the ‘catch up’ available to those with superannuation balances under $500,000. These individuals will be able to make additional concessional contributions for ‘unused cap amounts’ where they have not reached their concessional contributions cap in previous years. Unused cap amounts will be carried forward on a rolling basis for a period of 5 consecutive years, however only unused amounts from 1 July 2017 will be able to be carried forward.
According to the Government, allowing individuals with account balances of $500,000 or less to make catch-up concessional contributions will make it easier for people with varying capacity to save and for those with interrupted work patterns to save for retirement.
Jane is a 48-year-old earning $100,000 per year. She has a superannuation balance of $400,000. In 2017-18, she has total concessional contributions of $10,000. In 2018-19, Jane has the ability to contribute $40,000 into superannuation of which $25,000 is the amount allowed under the annual concessional cap and $15,000 is her unused amount from 2017-18 which has been carried forward.
The full $40,000 will be taxed at 15% in the superannuation fund. Prior to the changes, her amounts in excess of the annual cap would have been subject to tax at her marginal rate, resulting in a $3,600 tax liability.
Additional superannuation contributions tax of 15% for income over $250,000
Currently the additional 15% tax on concessional contributions cuts in for those with income over $300,000. From 1 July 2017 it will apply to those with income over $250,000. The tax effectively doubles the contributions tax rate from 15% to 30% for concessional contributions. Note that Labor has also proposed that, if elected, it would reduce the high income threshold to $250,000.
Importantly, the extra 15% tax does not apply to concessional contributions which exceed an individual’s concessional contributions cap (which is proposed to be set at $25,000 for all taxpayers from 1 July 2017). Such excess concessional contributions are effectively taxed at the individual’s marginal tax rate in any event. As such, the maximum amount of Division 293 tax payable each year will be limited to $3,750 (ie 15% of the $25,000 cap) from 1 July 2017.
Jill’s income for surcharge purposes (other than reportable superannuation contributions) is $230,000 for the 2017-18 income year and her low tax contributions are $25,000 for the corresponding financial year. Jill’s combined income and low tax contributions are $255,000 (ie $230,000 + $25,000).
The amount of low tax contributions ($25,000) is greater than the excess of the amount of combined income and low tax contributions over the proposed $250,000 threshold. The excess equals $5,000 ($255,000 less $250,000). Hence, Jill’s taxable contributions are $5,000 and the extra tax payable is $750 (ie 15% of $15,000) for the 2017-18 income year.
Tax Planning tip
While the high income threshold will be reduced to $250,000, the extra 15% tax will potentially apply to taxpayers with incomes above $225,000 (ie $250,000 less the proposed $25,000 concessional cap from 1 July 2017). This is because the income threshold includes any concessional contributions (up to the concessional cap) and adds back any net investment losses (eg from negative gearing). Therefore, taxpayers who are within $25,000 of the high income threshold should also review their superannuation contributions and salary sacrificing arrangements from the 2017-18 income year.
Despite the extra 15%, concessional contributions up to the cap of $25,000 will still receive an effective tax concession up to 19% (ie the top marginal rate, plus the 2% Medicare levy and 2% temporary budget deficit levy, less 30%). Nevertheless, affected taxpayers may wish to consider scaling back their superannuation contributions to only the mandatory 9.5% superannuation guarantee contributions (which are still subject to the additional tax).
Likewise, taxpayers may need to reconsider making additional superannuation contributions for a financial year if they are also anticipating a large one-off amount of taxable income during the income year. For example, an employment termination payment or a large net capital gain (eg from the sale of an investment property) will flow through into the taxpayer’s taxable income and may push them above the $250,000 income threshold and trigger the additional tax on their concessional contributions for that income year.
Tax deductions for personal superannuation contributions
From 1 July 2017, all individuals up to age 75 can claim an income tax deduction for personal super contributions. This effectively allows all individuals, regardless of their employment circumstances, to make deductible super contributions up to the concessional cap. Individuals who are partially self-employed and partially wage and salary earners (eg contractors), and individuals whose employers do not offer salary sacrifice arrangements will benefit from these proposed changes.
Chris is 31 and decides to start his own online cricket merchandise business. While he gets his business up and running he continues working part-time in an accounting firm where he earns $10,000. In his first year his business earns him $80,000. Of his $90,000 income he would like to contribute $15,000 to his super account.
Under current arrangements, Chris would not be eligible to claim a tax deduction for any personal contributions. While his employer allows him to salary sacrifice into super, he is limited to the $10,000 he earns in salary and wages.
Under the proposed new arrangement, Chris will qualify for a tax deduction for any personal contributions that he makes (up to his concessional cap). Chris makes a $15,000 personal contribution and notifies his super fund that he intends to claim a deduction. He includes the tax deduction as part of his tax return.
Work test to be removed for age 65 to 74
From 1 July 2017, the work test for making superannuation contributions for people aged 65 to 74 will be removed. People under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.
Low income super offset and spouse offset
From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on super contributions for low income earners. The LISTO will provide a non-refundable tax offset to super funds, based on the tax paid on concessional contributions made on behalf of low income earners, up to a cap of $500 and will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
The ATO will determine a person’s eligibility for the LISTO and will advise their super fund annually. The fund will contribute the LISTO to the member’s account.
From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse to $37,000 from $10,800. The offset will gradually reduce for income above $37,000 and will phase out at income above $40,000.
The low income spouse tax offset provides up to $540pa for the contributing spouse.
If you have any queries please contact the CABEL Partners office on (02) 8071 0300
CABEL Partners is a boutique Chartered Accounting firm offering accounting and audit services to small to medium enterprises, individuals and not for profit organisations. We specialise in specialist tax advice and start up business mentoring. CABEL Partners knows what you want! CABEL Partners will provide certainty and complete your work with clear and regular communication, transparency, and a pro-active attitude.
Email - firstname.lastname@example.org Office: (02) 807 10 300 A: Level 5, 1 James Place, North Sydney 2060