On Tuesday 12 May 2015, the Federal Treasurer Mr Joe Hockey handed down the 2015-2016 Federal Government Budget.
After the previous year’s budget was savaged by critics and many budget measures failed to gain support of the Senate, Mr Hockey had to change tack to try to win back public support. This year, the Government has provided more populist measures in the budget such as the $4.4 Billion Families Package and the $5.5 Billion Small Business Package.
While some of these measures were announced ahead of the Budget, there were still a few pleasant surprises for small business. However except for small business with less than $2 Million turnover, there was little to celebrate for other SMEs. The Government has advised that broader scale tax reform will form part of its ‘Tax White Paper’ from which it will form policies to take to the next election.
The official estimate is for a deficit of $35 Billion for the 2015/16 year, reducing to $6.9 Billion by 2018/19 (compared with last year’s estimate of a balanced budget by 2018/19).
This report summarises the key aspects of the Budget that we expect will affect Hanrick Curran’s client base primarily comprising small to medium enterprises and associated individual taxpayers. It has been prepared based on our understanding of the budget papers and associated press releases. Please note that the announced measures are not law and cannot be relied upon until enacted.
Should you have any queries in relation to how the Budget announcements will affect you or your business, please contact your usual Hanrick Curran advisor or the authors Jamie Towers and Chris Campbell on 07 3218 3900. Alternatively, further details can be found on the Government’s Budget website: www.budget.gov.au
- Small Business Package including 1.5% company tax cut; 5% unincorporated business tax cut and $20,000 asset write-off for ‘Small Businesses’ (<$2 Million turnover).
- Families Package including a simple, more affordable access to childcare to assist parents to go back to work.
- Broadening of GST to capture Offshore Intangible Supplies to Australian Consumers (‘Netflix Tax’).
What Didn’t Change
- No changes to Dividend Imputation.
- No Changes to Negative Gearing.
- No Changes to GST on imported goods < $1,000.
- No changes to Superannuation.
INDIVIUALS & FAMILIES
Income Tax Rate ‘Unchanged’ but…….
Aside from small business tax cuts, no new tax rate changes were announced during the Budget.
However, the final tax rate cuts announced and legislated by the previous Government are due to occur on 1 July 2015. This Government had announced this final round of tax cuts would be cancelled. However, the announcement has not yet proceeded. There is a Bill before Parliament (introduced in July 2014) that proposes to repeal the tax cuts, but has not yet passed. Currently as we stand, the individual tax rates are as follow:
Australian Resident Tax Rates
|2014/2015||2015/16 Legislated||2015/16 Announced but not enacted|
|Tax Thresholds||Threshold||Rate||Threshold||Rate||Threshold Rate|
|Low Income Tax Offset (LITO)||$445||#1.5% above $37,000||$300||#1% above $37,000||$445||#1.5% above $37,000|
|Effective tax free threshold||20,542||20,979||20,542|
|# Rate at which LITO reduced above threshold|
|* Includes 2% Budget Deficit Levy only above $180,000** All above rates are exclusive of the 2% Medicare Levy|
Australian Non-Resident Tax Rates
Tax Residency of Temporary Working holiday makers
The tax residency rules will change for individuals living in Australia on a temporary working holiday visa. Currently, if they are in Australia for more than 6 months, they are classed as a temporary resident and gain advantage of the resident tax free thresholds and marginal tax rates. From 1 July 2016, they will be classed as non-residents which means they will pay tax from the first dollar at 33%.
Medicare Levy Threshold Increase
The Medicare Levy low income threshold for individuals will increase from 1 July 2015 to $20,896. The ‘family’ threshold increases to $35,261 + $3828 per child. Once applying, the Medicare Levy remains at 2%.
Salary Packaging Impacted - Fringe Benefits Tax (FBT) Rate increases to 49% in line with Levies
As announced in last year’s Budget, the rate of FBT rose to 49% from 1 April 2015 in line with the top marginal tax rate plus levies. This will impact the benefit of salary packaged employees. If you have not already reviewed your salary package, you need to do so now as the rate increase should result in less take home pay.
HELP (HECS) Repayment Threshold Lowered
From 1 July 2016, university leavers with a Higher Education Loan Program (HELP) debt who move overseas for more than 6 months will be required to register with the ATO and make repayments towards their HELP debts. The repayment requirement will apply from 1 July 2017 and will apply to those with worldwide income above the HELP repayment threshold (currently $53,345).
Car Expense Deductions
From 1 July 2015, the methods for claiming car expenses will be dramatically changed. The 1/3rd of expenses method and 12% of cost of car methods will be removed. Further, the cents per kilometre method will be reduced to a single rate of 66 cents per kilometre regardless of engine size.
Going forward, individuals will only be able to choose between the cents per kilometre method or logbook method to claim car expenses.
Zone Tax Offset Changes to exclude FIFO workers
The zone tax offset is designed to compensate people who live in remote areas for additional costs associated with living in that area. Fly in Fly Out (FIFO) Workers who work, but do not actually reside within a ‘zone’, will no longer be eligible for a ‘zone’ tax offset from 1 July 2015, therefore better targeting the offset to those who most require it.
Government employees working for more than 90 days while delivering Official Development Assistance overseas will have their tax exemption removed from 1 July 2016. These earnings will be treated as assessable income in Australia.
The exemption will remain available for Defence Force and Federal police personnel and individuals delivering Official Development Assistance via a charity or private contractor.
KEY WELFARE CHANGES
One of the key Budget measures is the Government’s Child Care Subsidy. The current systems will be abolished from 1 July 2017 and replaced by a single, means tested Child Care Subsidy, but will include an activity test.
For families on incomes of < $65,000, a subsidy of 85% per child of the lower of actual fee or benchmark price will apply.
The percentage of subsidy reduces as income rises, but remains uncapped unless family incomes exceed $185,000. At that point, the subsidy is capped at $10,000 per child (currently $7,500).
The activity test is designed to promote a return to work, so the more hours worked, the more hours of child care subsidy allowed.
|Family Income||Per Child Subsidy||Cap|
|Up to $65,000||85% of fee#||n/a|
|$65,000 - $170,000||Tapers from 85% - 50%||n/a|
|$170,000 - $185,000||50%||n/a|
|# % of lower of fee or benchmark price|
|Activity (hours worked per fortnight)||Subsidised hours (per fortnight)|
|8-16||up to 36|
|17-48||up to 72|
|49+||up to 100|
However, from 1 January 2016, families that choose not to vaccinate children will not receive Child Care payments or Family Tax Benefit Part A.
Family Tax Benefits (FTB)
The family Tax Benefits system was overhauled in the last Budget, but there is a further cut as the FTB Part A Large Family Supplement will be abolished from 1 July 2016. However, a per child rate will still be available.
The Government has confirmed their key election policy of 6 months paid maternity leave will not go ahead. However, they have also announced that the current legislated paid parental leave (18 weeks at minimum wage) will not be available where employers already provide paid maternity leave to employees. While the original intention was for both to apply, Mr Hockey wishes to stop the ‘double dip’.
In March 2015, the Government released a ‘tax discussion paper’. In my view this lacked substance, but was the Government’s way of saying, “The tax system isn’t adequate so we need to talk about tax.” The Government has advised an ‘Options Green Paper’ will be released late in 2015 for public consultation and from that a White Paper will be released in 2016. The White Paper should contain tax policies which the Government has said they will take to the next election.
One of the key ‘packages’ from this Budget is the $5.5 Billion Small Business package designed to get Small Business to ‘Have a Go’ and spend money.
The definition of ‘Small Business’ did not change. Broadly it is a business with aggregated turnover less than $2 Million. This definition has been around since at least 2007 and has not been changed for inflation.
The key change is a tax cut. Small business company tax will be reduced by 1.5% to 28.5% from 1 July 2015. We had been concerned that this would reduce the value of existing franking credits, but the Government has advised the rate of franking credit will remain at 30%. How the Government deals with this remains unseen. However, if companies pay out all their profits, then we believe some dividends will become unfranked.
Unincorporated Small Business Tax Discount
Many small businesses are not incorporated, so those held in trusts, partnerships or individual names will not benefit from the company tax rate cut. Instead, the Government has promised a 5% discount of the tax payable on business income received from an unincorporated small business entity. The discount is capped at $1,000 per individual and will be delivered as a tax offset.
For example, a family trust earns $80,000 of business income and distributes it all to Jack. Ignoring levies, Jack’s tax would be $17,534, but he would receive a tax offset of 5% of $17,534, or $876, meaning net tax payable of $16,658.
Re-Introduction of Small Business Write-off
Small Businesses have always had a ‘write-off’ for assets below a certain threshold. The previous Labor Government increased the threshold from $1,000 to $6,500. This was repealed with effect from 1 January 2014. However, it has now been increased again, but up to $20,000. This means that small business can purchase assets worth up to $20,000 and claim an up front tax deduction rather than depreciate them. Assets exceeding $20,000 can be depreciated at 15% in the first year and 30% thereafter. These rules will apply from Budget night until 30 June 2017.
Professional expenses associated with starting a new business such as costs of incorporating a company and legal and accounting advice are generally deemed capital costs. The current treatment is to write these costs off over five years. This treatment will change from 1 July 2015 to allow an immediate write-off for such expenses.
CGT Relief for Change to Entity Structure
Small Businesses that wish to change their structure will be able to do so from 1 July 2016 without incurring a Capital Gains Tax (CGT) liability. Currently, the only restructure relief is from an individual, partnership or trust to a company. Going forward, changes should be able to be made to other structures (e.g. individual to trust).
While the restructure relief is welcomed, of concern is the Budget documents are silent on roll-over relief of ‘revenue assets’ such as depreciating assets and trading stock. Existing roll-overs may be able to be utilised in certain circumstances. Further, Transfer (Stamp) Duty still applies in most States to the transfer of a business, so there will still be impediments to changes in structures.
Measures ‘encouraging’ start-ups
The process of registering a business will be streamlined into a single online portal (business.gov.au) with businesses able to then interact with the ATO and ASIC using just their ABN. The current business registration process is still a mess, despite attempts to fix it over recent years, so a change in this area is welcome.
Further, the Corporations Act will be amended to allow Small Business to more easily and legally use crowd-source equity funding without the additional red tape currently associated with public companies.
FBT Exemption for Portable Electronic Devices
From 1 April 2016, small business will be able to provide more than one portable electronic device to be used primarily for work without incurring a fringe benefits tax liability. Currently, if two devices have similar functions (eg laptop and a tablet), only the first is exempt from FBT.
Employee Share Schemes
There is currently a Bill before Parliament to change the Employee Share Scheme tax rules from 1 July 2015. These rules were changed in 2009, but the changes resulted in adverse tax outcomes with employees being taxed when they had no ability to sell shares to pay a tax bill. The new rules should in most cases simplify and allow a deferral of tax on employee shares until such time as shares can be sold to raise cash for any tax bill.
Further, for employees of start-ups, the taxation of the ‘discount’ on shares is to be treated as a capital gain rather than ordinary income, meaning possible access to the 50% CGT discount. This will be extended to options converted to shares and the shares sold within 12 months of exercise.
Currently, Not for Profit Entities and Charities have either a $17,667 or a $31,177 FBT free cap on benefits provided to employees. In addition to these caps, they are able to provide meal entertainment to employees with no FBT payable and it is not a reportable benefit.
From 1 April 2016, the Government plans to place a $5,000 cap on the amount of meal entertainment that can be salary sacrificed by employees of not for profits. Benefits in excess of this cap will count towards the other FBT free caps and any excess will be taxable.
Of large concern, the Budget paper indicates that all use of meal entertainment benefits will become reportable. The Government has pledged to reduce red tape and compliance for businesses, but this one measure will dramatically increase the amount of compliance for reporting on PAYG Summaries.
From 1 July 2016, Primary Producers will be allowed to immediately write-off new capital expenditure on fencing and water facilities and claim depreciation over three years for fodder storage facilities.
In addition, various programs including $250 Million in concessional drought specific loan schemes will be provided.
Managed Investment Trusts – Yet Another Deferral
The proposed changes to the taxation of Managed Investment Trusts have been deferred yet again until 1 July 2016, although MITs can opt in early from 1 July 2015. Exposure draft legislation was released in April 2015 for discussion. Time will tell whether this actually proceeds to legislation, or is once more put in the ‘too hard’ basket. The rules were originally announced in 2010 and have been deferred multiple times.
A measure requiring unanimous support of the States to enact legislation is the ‘broadening’ of the GST base to include cross border supplies of digital products and services imported by Australian consumers. Publically known as the ‘Netflix tax’, it is designed to apply GST to supplies of digital content e.g. games, software, books and streaming of movies and television shows to Australian consumers.
Wisely, these measures will not apply until 1 July 2017. The Government has a lot of work ahead in determining how to charge the GST and how to enforce this. An exposure draft bill has suggested a number of ways to collect the tax, with each one having its own problems. It is proposed that the supplier or an Electronic Distribution Service would need to remit the GST. However, these may be entities not in Australia with no current requirement to register for GST. Accordingly, while the idea is commendable, the legislation is a long way from being passed.
Reverse Charge not Proceeding
The Going Concern exemption and Farm land exemption in the GST Act had been mooted to be replaced by a ‘Reverse Charge’. This will no longer proceed following consultation that there would be too many adverse consequences for taxpayers.
No GST change to Taxable Importations of < $1,000
Of good news for consumers, the exemption that applies to purchases of imported goods valued at <$1,000 remains intact. The Government does not have an adequate collection mechanism where the costs of collection would outweigh the tax collected, so until that is changed, the exemption will most likely remain.
A $100 Million cap has been placed on the amount of R & D expenditure on which a tax offset can be claimed. This will apply from 1 July 2014.
Last year’s Budget had included tax cuts of 1.5% to the R & D tax offset rates of 45% and 40%, but these cuts did not pass the Senate, so the current rates remain. This year’s Budget paper does still refer to the reduced rates of 43.5% and 38.5% suggesting the Government may reintroduce legislation to reduce these.
ATO Power to ‘Fix’ Law not operating as intended
The law will be amended to allow the Commissioner of Taxation to issue a Legislative Instrument that has the effect of removing unintended outcomes of legislation.
Commonwealth Penalty Units
Commonwealth Penalty Units, the measure by which penalties are applied for breaking Federal Laws will be increased from $170 to $180 from 31 July 2015. Therefore, for taxpayers, late lodgement penalties will increase.
While not applicable to Hanrick Curran clients, part of the Government’s initiative to claw back taxation revenue is the announcement of a strengthening of the anti-avoidance tax laws (Part IVA of the Tax Act). These changes have the aim of catching global business with turnover exceeding $1 Billion who supply goods or services in Australia, but shift profits offshore to low or no tax jurisdictions. It is anticipated these rules will only apply to around 30 companies making supplies in Australia without a taxable presence.
The rules should cancel any tax benefits achieved under a scheme and bring taxable profits into Australia.
Transfer Pricing Documentation requirements will also be increased for such companies.
Further, penalties for such companies will be doubled.
Hanrick Curran has many clients in regional and Northern Queensland, so we provide a snapshot of some of the positive capital expenditure these clients can expect over the coming years.
$100 Million has been set aside over four years to improve cattle supply chains in the North of Australia in the ‘Northern Australia Beef Roads Fund’. This will target upgrading key roads critical to the cattle industry.
Further, a Northern Australia Infrastructure Audit will roll out over four years to identify key infrastructure needs going forward.
The upgrade of the Bruce Highway will continue.
Mr Hockey further announced a $5 Billion ‘Northern Australia Infrastructure Facility’ to provide loans to aid the construction of ports, pipelines, electricity and water infrastructure to help “open the ‘Northern frontier for business”. Further details will be outlined in the ‘Developing Northern Australia’ white paper set to be released later this year.
Author Jamie Towers
© Hanrick Curran 2015