2016 Federal Budget

A summary of the key items released in the 2016 Federal Budget

Scott Morrison’s 2016/17 Federal Budget promises a slightly reduced deficit of $37.1 billion in 2016/17 down from a revised $39.9 billion in 2015/16.

The key revenue measures comprise:

  • Minor changes to personal tax rates
  • Significant changes to the superannuation regime designed to reduce the current tax benefits for large member balances in pension phase and also to limit the amount of superannuation contributions into funds. Most of these changes will apply from 1 July 2017 but some apply now
  • Extension of the current small business income tax concessions to companies with higher turnovers
  • Phased reductions in the company tax rate with a long term goal of 25%
  • Continued crackdown on multi-national tax avoidance

There are no changes to:

  • Negative gearing
  • Capital gains tax discounts or concessions
  • Taxation of benefits paid to members from superannuation funds, other than in respect of transition to retirement pensions. 
  • Thin capitalisation ratios 
  • The 10% GST rate 

It is important to remember that what follows is a series of proposals that must be passed by Federal Parliament before they become law. The pending Federal election may make implementation of some Budget measures more difficult.

 

PERSONAL TAX MEASURES EXCLUDING SUPERANNUATION

Minor Decrease in Personal Tax Rates

The threshold at which the personal income tax rate increases from 32.5% to 37% will move from $80,000 to $87,000. This adjustment to prevent “bracket creep” will result in a modest annual tax cut of $315 for those earning more than $87,000.

There will be minor changes to the Pay As You Go Withholding rates due to this change and increases in the Medicare Levy thresholds from 1 July 2016.

The pause on indexation of the income thresholds for the Medicare Levy Surcharge and Private Health Insurance Rebate will continue for another three years from 1 July 2018.

The 2% Budget Repair Levy for those with taxable incomes over $180,000 will cease as at 30 June 2017 as was originally planned.

Negative Gearing

As expected, no changes were announced.

Capital Gains Tax 

As expected, no changes were announced.

Benefits paid to Members from Superannuation Funds

No changes were announced other than a change to Transition to Retirement payments which is covered below under Superannuation.

 

SUPERANNUATION CHANGES

Extensive superannuation changes were announced last night. 

The Government will enshrine in law that the objective for superannuation is to provide income in retirement to substitute or supplement the Age Pension. This reflects extensive consultations following the recommendation of the Financial System Inquiry.

The changes discussed below will make it considerably more difficult to build up large balances in a tax free pension environment.

$500,000 Lifetime Cap on Non-Concessional Contributions from Budget Night

The previous $180,000 annual and $540,000 three year bring forward non-concessional (i.e. not tax deductible) cap on superannuation contributions will be removed with effect from 7:30pm on 3 May 2016.

In its place, a lifetime non-concessional cap of $500,000 will apply from last night. The lifetime cap is calculated for non-concessional contributions that have been made at any time from 1 July 2007. Those with existing non-concessional contributions above that cap can retain them in their superannuation fund.

We are unsure whether this measure will apply to future contributions which are able to be made under the existing CGT Small Business Concessions.

Measures Starting from 1 July 2017

$25,000 Annual Concessional Contribution Cap

The concessional (i.e. tax deductible and/or employer) contribution caps are currently $30,000 for those under age 50 and $35,000 for older people.

From 1 July 2017 this will change to a single concessional contribution cap of $25,000.

Catch Up Contributions for Account Balances Under $500,000

The Government will allow individuals to make additional concessional contributions where they did not reach their concessional contributions cap in previous years. For example, if an individual has concessional contributions of $15,000 in the 2017/18 year, the $10,000 shortfall can be carried forward for up to five years and used to make additional concessional contributions providing the individual’s superannuation account balance is less than $500,000.

Division 293 Threshold Drops from $300,000 to $250,000

Division 293 currently imposes an extra 15% tax on concessional superannuation contributions made within the individual’s contribution cap (see above) to the extent that the individual’s income for superannuation surcharge purposes exceeds $300,000. This includes taxable income after adding back investment losses plus most reportable fringe benefits and concessional superannuation contributions made on their behalf. The effect is to increase the tax rate on affected contributions from 15% to 30%.

From 1 July 2017, this threshold will be reduced from $300,000 to $250,000.

$1.6 Million Superannuation Transfer Balance Cap

From 1 July 2017 there will be a starting “cap” of $1.6 million that can be used to fund a fully tax free retirement pension after age 60.

This will be achieved as follows:

Individuals Commencing a Pension on or after 1 July 2017

A maximum sum of $1.6 million will be able to be used to fund a member’s pension account upon which its earnings will remain tax free within the superannuation fund. The $1.6m is then able to be increased by those earnings.

If the member has more than $1.6 million in superannuation when they commence a pension, the excess over $1.6 million must remain in an accumulation account within the fund. The income from that accumulation account will continue to be taxed in the fund at 15% (or 10% for long term capital gains).

Individuals Already Receiving a Pension at 30 June 2017

Members already in the pension phase at 1 July 2017 with balances in excess of $1.6 million will be required to either:

  • Transfer the excess above $1.6 million back into an accumulation phase account with income thereon taxed in the fund at 15% (or 10% for long term capital gains); or
  • Withdraw the excess.

transition to retirement pensions

Members with a Transition to Retirement Pension account will no longer have the earnings on that account tax free within the superannuation fund.

Further, a recent strategy used by some to elect to treat their transition to retirement pension payments as a lump sum for tax purposes will be removed.

PERSONAL SUPERANNUATION CONTRIBUTION DEDUCTION RULES EASED

From 1 July 2017, the rules around personal superannuation contributions will be eased, so that all individuals, regardless of employment status, will be able to claim a personal tax deduction for any contributions they make up to their maximum concessional contributions cap of $25,000 (being the maximum of both their employer plus personal contributions).

Work Test to be Removed for Contributions Between Ages 65 and 74

It is proposed to remove the work test from 1 July 2017. This will allow anyone between the age of 65 and 74 to make superannuation contributions, both concessional and non-concessional, in the same way as those aged under 65.

Low Income Super Tax Offset (LISTO)

This measure will effectively eliminate the contributions tax in relation to individuals with taxable incomes up to $37,000.

The superannuation fund receiving the individual’s concessional contributions will receive a 15% tax offset to a maximum of $500 (equivalent to concessional contributions of $3,333).

Increased Income Threshold for Low Income Spouse Tax Offset

The Government will increase access to the low income spouse superannuation tax offset by increasing the low income spouse’s income threshold from $10,800 to $37,000. The maximum offset remains at $540.

Anti-Detriment Deduction to be Removed

Anti detriment payments arise where a superannuation fund pays a lump sum death benefit. A fund can, in certain circumstances, increase the lump sum death benefit and then claim a tax deduction for that increase.

From 1 July 2017, the anti-detriment tax deduction will be removed.

Extended Tax Exemptions for Other Retirement Income Products

The Government will remove tax barriers to the development of new retirement products, for example by extending the tax exemption on earnings in the retirement phase to products such as annuity products.

 

SMALL BUSINESS CHANGES

The following measures will apply from 1 July 2016.

Increase in Small Business Turnover Threshold from $2 Million to $10 Million

The Small Business Entity threshold test will increase from $2 million to $10 million. This will apply for accessing the following small business tax concessions:

  • Simplified depreciation rules
  • Immediate write off of assets up to $20,000 (until 30 June 2017 and $1,000 thereafter)
  • Simplified trading stock rules
  • Simplified method of paying PAYG instalments
  • Option to account for GST on a cash basis
  • Immediate deductibility of certain start up costs 

Small business FBT exemptions will apply from 1 April 2017.

For the CGT Small Business Concessions, the annual turnover threshold for the entity will remain at $2 million and the alternative $6 million net asset value test remains as well.  

Reduced Tax Rates for Small Business

The small business company tax rate will fall to 27.5% (from its current 28.5%). See below for more general changes to the company tax rate.

The current “Tax Discount” for individuals with unincorporated small businesses (i.e. sole traders and partners in a partnership) will increase from 5% to 8%. It will then increase further until it reaches 16% by 1 July 2026. It’s limited to where the annual turnover of the unincorporated small business is under $5 million (currently $2 million) and the maximum discount remains capped at $1,000 per individual per year.

 

BUSINESS TAXATION GENERALLY

Ten Year Enterprise Tax Rate – 25% Company Tax Rate

The Government’s goal is to achieve a flat 25% company tax rate by 2026/27. This will be phased in progressively depending on the company’s aggregated turnover:

Budget

If the company tax rate does drop it will be important to manage shareholder expectations with regards to franking dividends. The Budget papers note merely that franking credits will continue to be calculated in the usual manner by reference to the amount of company tax paid.

Longer Term Changes to Division 7A Private Company Loan Rules

The Government proposes to amend Division 7A with effect from 1 July 2018 to:

  • Provide a self correction mechanism for inadvertent breaches
  • New safe harbour rule for use of company assets
  • Ten year standardised loan period with more commercial interest calculations
  • Technical amendments to improve the overall operation of Division 7A

Other Corporate Tax Measures

The following have been flagged:

  • Closing “loopholes” for tax consolidated groups in relation to securitisation arrangements, deferred tax liabilities and deductible liabilities
  • Introducing a Corporate Collective Investment Vehicle (CIV) regime from 1 July 2017
  • Introducing a Limited Partnership CIV regime from 1 July 2018
  • Simplify the Taxation of Financial Arrangements (TOFA) regime from 1 January 2018 to more closely resemble existing financial accounting standards and simplify various TOFA calculations

 

MULTI-NATIONAL CORPORATE TAX MEASURES

The Government has announced a number of further “anti-avoidance” type measures intended to defeat attempts by multinational corporate groups to structure their affairs in order to minimise their income tax paid in Australia.

Diverted Profits Tax (DPT)

The DPT will apply from 1 July 2017 where an Australian company is a member of an international corporate group and:

  • The group has global revenue of more than $1 billion, and either
  • The Australian company has revenue of more than $25 million, or
  • The group is artificially booking Australian revenue offshore

If these criteria are satisfied, the DPT will apply if:

  • The tax on profits shifted offshore is less than 80% of the tax that would have been paid in Australia; and
  • It is reasonable to conclude the arrangement was designed to secure a tax reduction; and
  • The arrangement lacks sufficient economic substance

The DPT will then apply at 40% of the diverted profits. DPT will not be tax deductible but will generate franking credits at the applicable company tax rate.

Implementing the OECD Hybrid Mismatch Arrangement Rules

This measure, which is to apply from 1 January 2018, is aimed at multinational corporations that exploit differences in either the tax treatment of an entity overseas or in the tax laws of two different countries in respect of a particular transaction. For example, an arrangement might be treated as debt in Australia, but as equity overseas, resulting in a taxation advantage.

$678.9 Million for Australian Taxation Office Taskforce on Multinationals

Additional funding will be provided to the ATO over a four year period to undertake enhanced compliance activities specifically targeting multinationals, large public and private groups and high net wealth individuals.

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