2016 Federal Budget Announcement
The 2016 Federal Budget has principally targeted superannuation, tax rates for individuals and companies and international tax avoidance. Tax Rates The Government has a long term strategy to reduce the company tax rate to 25% by 2026-27. Companies with turnovers less than $10 million in 2016-17 will have a reduced tax rate of 27.5%. The $10 million threshold will increase progressively to $1 billion in 2022-23. Similar discounts will apply to unincorporated entities with turnovers of less than $5 million. For individuals, the 32.5% tax rate will now apply to taxable incomes up to $87,000 instead of the current $80,000. Superannuation Undoubtedly, the most significant changes have occurred to the current superannuation concessions. The Government believes that many of the new measures affect less than one per cent of superannuation fund members. New measures will assist people with low superannuation balances and will encourage superannuation contributions for spouses with low incomes. The work test has been abolished for people under 75 years (but over 65 years). Diverted Profits Tax : Consolidations A new 40% diverted profits tax will apply to multinational corporations that artificially divert profits from Australia. ATO The ATO’s resources will be bolstered to focus on multinationals, large public and private groups and high wealth individuals. Tax whistle-blowers will receive extra protection.
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Companies
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Small Businesses
Progressive lowering of company tax rate over 10 years (regardless of size) Reducing company tax rate to 25% over the next 10 years
The Government’s ‘Ten Year Enterprise Tax Plan’ introduces a number of significant changes to small business turnover thresholds and tax rates, which will commence to apply from 1 July 2016 and be progressively phased in until the 2026-27 income year.
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Small business entity turnover threshold lifted to $10m
What is the proposal?
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The company tax rate will reduce to 25% over the next 10 years. Companies with an annual aggregated turnover of less than $10 million will have a tax rate of 27.5% in 2016-2017. That rate will then apply to companies with a turnover of $25 million in 2017-18. Each year thereafter, the turnover doubles until 2022-23 when the threshold reaches $1 billion. In 2024-25 the rate reduces to 27% and then reduces progressively by 1% per year until the rate reaches 25%. What does this mean for you? The lower tax rate for companies may induce people to use companies as trading structures possibly instead of trusts because of the potential for trust beneficiaries to be subject to the top marginal tax rate of 49% including the budget repair levy which is due to cease on 30 June 2017. Further, the lower rate over the phase in period does not apply to beneficiary companies of a business trust. The current 30% rate will still apply. The reduced company tax rates are intended to encourage investment, raise productivity, increase GDP and employment.
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Attempts to make the consolidation & TOFA rules simpler The Government made various announcements to improve the operation of the consolidation and taxation of financial arrangements (TOFA) regime: What is the measure?
Date of effect
No more double counting of joining entity’s deductible liabilities on entry into consolidation
From 1 July 2016 (defers start date from 14 May 2013)
Simplify the TOFA rules to reduce the scope, decrease compliance costs and increase certainty how the rules apply.
To income years on / after 1 January 2018
More businesses to benefit from a range of small business concessions and lowering of tax rate
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However, $2m turnover threshold remains for small business CGT concessions
What is the proposal? The Government intends to increase the small business entity annual turnover threshold from $2 million to $10 million per annum. The existing $2 million turnover threshold for businesses to access small business capital gains tax concessions will be retained. The related unincorporated small business tax discount (8% from 1 July 2016) will be limited to entities with turnover of less than $5 million. What does this mean for you? Businesses turning over less than $10 million per annum will be able to access a number of tax concessions, including several concessions announced as part of a package of small business measures in the 2015 Federal Budget. In particular, businesses turning over up to $10 million will be able to access:
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The lower small business corporate tax rate;
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The instant asset depreciation rules that currently allow an immediate deduction for assets costing less than $20,000 (acquired and installed ready for use before 1 July 2017) or $1,000 (on or after 1 July 2017);
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Simplified trading stock rules;
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Simplified rules for PAYG instalment calculations and cash basis accounting;
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Immediate deductibility of business start-up costs such as legal and professional fees (as opposed to being written off over 5 years);
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A 12-month prepayment rule;
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Certain fringe benefits tax exemptions and concessions.
Small business capital gains tax concessions that currently apply to the sale of active business assets will remain available only to businesses with an annual turnover below $2 million, or that satisfy the maximum net asset value test threshold of $6 million. Applies from 1 July 2016
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Unincorporated small business tax discount to increase to 16% An increase in the discount rate, but still capped at $1,000 per individual What is the proposal? Individuals deriving small business income either as a sole trader or through a partnership or trust are currently eligible for a tax offset of 5% of the tax payable on that business income, up to a maximum tax offset of $1000 per year. Starting from 1 July 2016, the discount percentage will incrementally increase to 16% over a 10-year period. What does this mean for you?
Individuals With a heavy focus on companies, small businesses, superannuation and multinationals, this year’s Federal Budget didn’t include much for individual taxpayers. Of note is the Government’s proposed change to marginal tax rate thresholds, designed to ensure that average full-time wage earners remain in the middle tax bracket, rather than moving in to the second highest bracket of 37%. This measure, along with changes to the Medicare levy and GST on consumer imports are discussed below.
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If you carry on a small business as a sole trader, a partner in a partnership or through a trust, the tax offset on your business income is currently 5% of the tax you would otherwise pay on that business income, up to a maximum tax offset of $1,000 per individual per annum.
Increasing the income threshold for the 32.5% tax rate Average full-time wage earners to stay in the middle tax bracket What is the proposal? From 1 July 2016, the Government intends to increase the taxable income threshold from $80,000 to $87,000 at which the 32.5% personal income tax rate applies.
Importantly, the discount is limited to business income derived by individuals from an unincorporated business that has an aggregated annual turnover of less than $5 million; this threshold will not be raised in line with the increase to the small business entity turnover threshold.
What does this mean for you? The Government’s intention in introducing this measure is to address bracket creep affecting average wage earners. Individuals employed full time and earning $80,000 per annum currently represent the average Australian, and the Government’s intention is that the second highest and highest marginal tax rates should not apply to average wage-earners.
On 1 July 2016, the tax offset will increase to 8% and remain at that rate until 30 June 2024. The tax offset rate will then increase to 10% from 1 July 2024, 13% from 1 July 2025 and reach a new discount rate of 16% from 1 July 2026. The tax offset amount will still be capped at $1,000 per individual per year.
In practice, the savings for workers intended to benefit from the measure (i.e. those earning between $80,000 and $87,000) will not be significant. The tax currently payable on a taxable income of $85,000 is $19,397. From 1 July 2016, the tax payable on $85,000 will be $19,172. The threshold change represents an annual tax saving of $225, or $4.32 per week.
This measure complements the company tax rate reductions, as each incremental increase in the tax discount percentage is equivalent to the relative reductions in the company tax rate proposed to occur over the next 10 years. Commences to apply from 1 July 2016 (then 8%) with
The same change will apply to non-resident taxpayers from 1 July 2016, so that the 32.5% rate will apply from $1 to $87,000, with income above $87,001 taxed at 37%.
ongoing changes through to 30 June 2027
Applies from 1 July 2016
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Medicare levy low-income thresholds increased Ensuring low-income thresholds are consistent with CPI movements What is the proposal? Starting from the current (2015-16) income year, the Government intends to increase the Medicare levy low-income thresholds for singles, families and seniors and pensioners What does this mean for you? Low-income earners will be subject to increased low-income thresholds from 1 July 2015, to ensure that the lowest income taxpayers are generally exempt from the Medicare Levy. Applies from 1 July 2015
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Applying GST to Low Value Goods Imported by Consumers Consumers to pay, but vendors to collect? What is the proposal? Starting from 1 July 2017, the Government proposes to remove the current $1,000 GST threshold exemption that applies to imported goods. The intent of the measure is to introduce equivalent GST on goods imported by consumers compared to those purchased from a domestic, GST-registered vendor. The measure will impose a liability to collect GST on sales by overseas vendors whose ‘Australian turnover’ is $75,000 or more – the same turnover threshold for GST registration that applies to Australian businesses.
Superannuation There are significant changes to superannuation in this year’s Budget. The Government has reduced superannuation tax concessions – principally by limiting the amount that can be transferred into a pension account to $1.6 million, and capping lifetime non-concessional contributions at $500,000. People aged over 65 will no longer need to be employed in order to make concessional contributions to superannuation, while employees will now also be able to make concessional contributions. Low income earners will be assisted with an offset against contributions tax that effectively aligns their superannuation tax rate with their personal tax rate.
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Catch-up concessional superannuation contributions What is the proposal? Individuals will be able to make additional pre-tax contributions if:
What does this mean for you?
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This measure will affect consumers who make online purchases from overseas suppliers, as those suppliers will now be obliged to collect GST on sales made to Australian customers.
They have not reached the contributions caps in prior years – for example, because they have been out of the workforce while caring for their children; and
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The decision to impose GST on suppliers rather than consumers appears aimed at reducing the cost of implementation; and as an alternative to imposing tax at the border on all imported goods. However, it remains to be seen whether or not the ATO can effectively enforce compliance with a vendor registration model, particularly in determining whether vendors have exceeded the $75,000 ‘Australian turnover’ threshold, and how those vendors calculated their net GST liability.
They have a superannuation balance of less than $500,000.
What does this mean for you? This is an equity measure, especially targeted at women – people who have been out of the workforce can access the same superannuation benefits as those that were in the workforce. However, note that a catch-up contribution cannot be made any later than 5 years after the year of the under-contribution. Applies from 1 July 2017
Applies from 1 July 2017, with arrangements to be reviewed after two years
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Harmonising contribution rules for those aged 65 to 74 What is the proposal? The work test will be abolished for people over 65 years and under 75 years. What does this mean for you? Individuals under 75 will be able to receive contributions from their spouse even if they have not worked during the income year. Applies from 1 July 2017
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Improve superannuation balances for low income spouses What is the proposal? The Government will increase the capacity for spouses to make contributions to each other’s superannuation funds by lifting the income threshold for the receiving spouse from $10,800 to $37,000. What does this mean for you? If an individual is a high income earner with a stay-at-home or low income spouse, they can make tax concessional contributions to their spouse’s superannuation fund. Applies from 1 July 2017
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$1.6 million superannuation transfer balance cap
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Low Income Superannuation Tax Offset Reduced tax on superannuation contribution for low
Limiting tax concessions for pension accounts
income earners What is the proposal? What is the proposal?
Self-funded retirees will be only be able to transfer $1.6 million into their pension accounts (usually from their accumulation accounts). Earnings on amounts in the limited pension accounts will not be restricted.
The superannuation funds of individuals with an adjusted taxable income – which essentially includes the total of your income and any superannuation contributions – of $37,000 or less will receive a nonrefundable tax offset of up to $500 against tax paid on concessional superannuation contributions.
If a self-funded retiree already has more than $1.6 million in their pension account, the account balance must be reduced - the excess amounts may be transferred to accumulation accounts where they will be taxed at the concessional rate of 15%.
What does this mean for you? The proposal means that low income earners will not pay more tax on their superannuation contributions than had they earned that amount of income outside of superannuation.
What does this mean for you? The Government believe that a balance of $1.6 million in a pension account could support an income stream of approximately four times the single age pension – this presumes an earning rate of 5% on $1.6 million. The main benefit of retaining amounts above $1.6 million in a superannuation fund is to enjoy the concessional rate of tax of 15% on earnings and possibly refunds of franking credits. This new capping regime may cause many retirees to spend the amount over the cap because they can no longer convert that amount into a pension.
Applies from 1 July 2017
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Lower concessional contributions
Applies from 1 July 2017
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What is the proposal? There are two elements to this proposal:
Lifetime cap for non-concessional superannuation contributions A significant limitation on estate planning What is the proposal?
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Concessional (pre-tax) superannuation contributions will be capped at $25,000 per year for everyone; and
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The current 30% contributions tax payable by people with incomes of greater than $300,000 will apply to incomes of $250,000. This rate exceeds the normal contributions tax rate of 15%.
What does this mean for you?
Individuals up to the age of 74 years will be limited to a $500,000 lifetime cap for non-concessional contributions. Such contributions will be measured as far back as 1 July 2007.
Tax concessional contributions to superannuation will be limited to $25,000, down from $30,000 for individuals under 50 years of age, and from $35,000 for individuals 50 and over.
What does this mean for you?
The income threshold for determining whether an individual is liable to additional contributions tax has been lowered from $300,000 to $250,000. This may cause a reduction in contributions.
The current non-concessional contributions limits of $180,000 per year or $540,000 over three years have been discarded. So if an individual was thinking about making significant contributions to superannuation over the coming years, their plans will be significantly curtailed. That said, apparently only 1% of superannuation fund members have made non-concessional contributions of greater than $500,000 since 2007. Applies from 7.30pm on 3 May 2016
Reforming the taxation of concessional superannuation contributions
Applies from 1 July 2017
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Removal of the anti-detriment provision in respect of death benefits from superannuation A quirk in the law no more What is the proposal? The ‘anti-detriment provision’ will be removed. This provision can result in a superannuation fund member’s lifetime superannuation contributions tax payments being refunded to their estate, where the beneficiary of the estate is the dependant of the member. What does this mean for you? For some deceased estates this will result in a lost refund of contributions tax. This unusual concession was rarely used and, from a tax policy perspective, was difficult to justify. Applies from 1 July 2017
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International
Strengthen integrity of income streams No more concessionally taxed transition to retirement income streams What is the proposal? Income derived from assets supporting transition to retirement income streams will no longer be tax exempt for people of any age. What does this mean for you? If an individual reaches their preservation age, the income derived from assets supporting their pension will not be tax free unless they retire.
The government released a package of measures to ensure multinational enterprises (MNEs) pay their fair share of tax on profits they make in Australia. To assist with this policing of MNEs, a new Tax Avoidance Taskforce will be created in the ATO and information sharing between the ATO and the Australian Securities and Investments Commission (ASIC) will be enhanced. The various measures are briefly discussed below:
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Large entities with a global revenue of $1 billion or more will be subject to a diverted profits tax of 40% if they artificially divert profits from Australia (i.e. broadly arrangements between related parties whereby profits are shifted offshore – resulting in less than 80% of tax being paid overseas than would have otherwise been payable in Australia).
Applies from 1 July 2017
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New diverted profits tax What is the proposal?
Tax deductions for personal superannuation contributions
What does this mean for you? Generally, this diverted profits tax measure will apply to large companies with global revenue of $1 billion or more – however, this measure will not apply to such companies with Australian revenue
No more 10% rule What is the proposal?
of less than $25 million that are not artificially booking their revenue offshore.
All individuals up to age 75, regardless of their employment circumstances, will be able to claim a tax deduction for personal superannuation contributions up to a $25,000 cap.
Applies from 1 July 2017
What does this mean for you? The effect of the current law is that only self-employed (or substantially self-employed) people can make tax deductible superannuation contributions. This means that employees generally make additional contributions by way of salary sacrifice arrangements. The new law will enable employees to make tax deductible contributions, nullifying the need for salary sacrifice arrangements. Applies from 1 July 2017
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Eliminating hybrid mismatch arrangements What is the proposal? The Government will implement the Organisation for Economic Co-operation and Development’s (OECD) rules to eliminate hybrid mismatch arrangements – specifically targeting instances where tax is either deferred or not paid at all. Hybrid mismatch arrangements occur where arbitrage opportunities arise because of the difference in tax treatment of either:
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Financial instruments (e.g. taxed as debt in one country but as equity in another); or
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Entities (e.g. taxed as a trust in one country but as a company in another).
What does this mean for you? If you currently have any such hybrid mismatch arrangements in place, we would advise you speak to a tax adviser as soon as possible. Applies from the later of 1 January 2018 or six months after Royal Assent
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Increasing administrative penalties for significant global entities
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Excise refund for distillers
What is the proposal? Support for distillers
The Government will increase administrative penalties imposed on companies with global revenue of $1 billion or more if they do not adequately disclose their taxation obligations. The aim of these increased penalties is to ensure that multinationals do not opt out of their reporting obligations.
What is the proposal?
What does this mean for you?
The brewery refund scheme – which refunds 60% of the excise paid by small brewers – will be extended to distilleries and producers of lowstrength fermented beverages such as non-traditional cider.
Penalties relating to:
What does this mean for you?
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Distillers will receive a significant cut in their excise bills.
lodgement will be increased by a factor of 100 – thereby raising the maximum penalty from $4,500 to $450,000;
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Applies from 1 July 2017
making reckless or careless statements to the ATO in relation to their tax affairs will be doubled. Applies from 1 July 2017
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Helping infrastructure investments by enhancing access to asset backed financing What is the proposal?
Other
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Wine equalisation tax rebate integrity and wine tourism funding Deterring artificial business structuring and multiple
The Government will clarify the tax treatment of asset backed financing arrangements to ensure they are treated in the same way as financing arrangements based on interest bearing loans or investments. What does this mean for you? This measure will make asset backed financing arrangements more suited to infrastructure investment (e.g. large and long term projects).
rebate claims What is the proposal?
Applies from 1 July 2018
From 1 July 2017, the wine equalisation tax rebate cap will be reduced from $500,000 to $350,000 and to $290,000 from 1 July 2018. The eligibility criteria will also be tightened from 1 July 2019 – a wine producer will only be eligible if they own a winery or have a long term lease over a winery and sell packaged, branded wine domestically. The Australian Grape and Wine Authority will also receive $50 million over four years from 1 July 2016 to promote Australian wine overseas and Australian wine tourism.
Final Thoughts We note that this double dissolution election budget contains a number of sweeteners for a broad spectrum
What does this mean for you?
of Australian taxpayers (who are incidentally also
The wine equalisation tax rebate cap will be harder to obtain, and rebates will be less.
voters).
Applies from 1 July 2017
Regardless of the political outcome, we hope that this economic budget plan will stimulate growth and job creation in Australia for years to come.
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