Author: Jamie Towers
On Tuesday 3 May 2016, the Federal Treasurer Mr Scott Morrison handed down the 2016-2017 Federal Government Budget.
This was his first budget and the first under the leadership of Prime Minister Malcolm Turnbull.
The budget is much more far reaching than last year’s with major reductions to the company income tax rate, eventually down to 25% to try to make Australia more competitive on the International scene.
The budget aims to promote the Government’s economic plan to transition from a resources based economy to a more diversified internationally focussed economy. It also seeks to promote the Government’s economic leadership ahead of an early election.
The official estimate is for a deficit of $37.1 Billion for the 2016/7 year, reducing to a deficit of $6.0 Billion by 2019/20 and balanced by 2020-21. Last year’s estimate was a balanced budget by 2019.
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 and superannuation, please contact Jamie Towers, Clive Todd or your usual Hanrick Curran advisor on 07 3218 3900. Alternatively, further details can be found on the Government’s Budget website: www.budget.gov.au
- Small Business Package including a further 1% company tax cut for 2016/17, expanding to all companies and reducing to an eventual company tax rate of 25% by 2027. Small business concessions expanding to companies with $10 Million turnover (currently $2 million).
- Multinational Diverted Profits Tax (40%).
- Expansion of middle tax bracket from $80,000 to $87,000 to help avoid ‘bracket creep’.
- Significant Superannuation Changes aimed at sustainable retirement savings rather than wealth accumulation for estate planning for the wealthy.
What Did Not Change
While early speculation indicated some changes may occur, the Budget did not affect any of the following:
- Negative Gearing rules
- Capital Gains Tax
- Research & Development Tax Incentive
- Thin Capitalisation
INDIVIDUALS & FAMILIES
Bracket Creep Fixed – For Now
Every Federal Budget for the last number of years has ignored the issue of ‘bracket creep’. This refers to when people’s wages increase through inflation and their overall income increases into the next tax bracket (in this case, income above $80,000 would be taxed on the excess at 37%). The overall income and tax increases but the buying power decreases because of inflation.
This has been addressed by increasing the threshold for the 37% tax rate to $87,000 from 1 July 2016. While this is welcomed, it will have a negligible impact, providing a maximum tax break of $315.
However, the $87,000 threshold is not indexed, meaning the issue of ‘bracket creep’ will occur again. Bracket creep also affects people on lower wages and on high wages. The $180,000 threshold has not increased since it was introduced. We note that many foreign countries have a lower top level personal income tax rate, and operating from a much higher income level so while any reduction in individual taxes is welcome, Australia is far from competitive on an international level.
From 1 July 2016, the tax rates are expected to be as follows:
|1||18,201||$0 + 19% > $18,200||18,201||$0 + 19% > $18,200|
|2||37,001||$3,572 + 32.5% > $37,000||37,001||$3,572 + 32.5% > $37,000|
|3||80,001||$17,547 + 37% > $80,000||87,001||$19,822+ 37% > $87,000|
|#4||180,001||$54,547 + (45% + 2%) > $180,000||180,001||$54,232 + (45% + 2%) > $180,000|
Australian Non-Resident Tax Rates
|2||80,001||$26,000 + 37% >$80,000||87,001||$28,275 + 37% >$87,000|
|#3||180,001||$63,000 + (45% + 2%) >$180,000||180,001||$62,685 + (45% +2%) >$180,000|
#The Budget Repair Levy remains in place at 2% for the 2017 financial year for taxpayers with incomes above $180,000. Despite speculation, the levy has not extended for future years.
Medicare Levy Threshold Increase
The Medicare Levy low income threshold for individuals will increase from 1 July 2016 to $21,335. The ‘family’ threshold increases to $36,001 + $3,306 per child. Once applying, the Medicare Levy remains at 2%.
Other Budget Measures of Interest
While not directly related to income tax, some budget measures that may affect our clients include:
- Tobacco tax increasing 12.5% per year for 4 years. This will significantly increase the cost of cigarettes
- The Government is introducing a new jobs creation (Jobs PaTH) program including a ‘work ready’ training program
- For our health professional clients, the Government is introducing a $5 Billion dental plan and a $2.1 Billion savings fund to help with the cost of delivering the NDIS
Reduction in Company Tax Rate
The previous budget introduced a lower Corporate Tax Rate of 28.5% for Small Businesses (defined as a business with <$2 Million turnover). The Treasurer is seeking to further reduce this from 1 July 2016 and also apply this to all companies over time.
Companies with turnovers exceeding the above will retain the current tax rate of 30%. However,
from 2024/25, the tax rate will reduce to 27%
from 2025/26, the tax rate will reduce to 26%
from 2026/27, the tax rate will reduce to 25%
While the reduction in the company tax rate is a step in the right direction and long overdue, in our view, 10 years is a long time to wait. We note that countries such as the UK already have a tax rate of 20% and the UK Government has recently announced this will drop to 17% by 2020.
One disappointing aspect of last year’s budget was somewhat addressed this year. From 1 July 2016, the definition of a Small Business will expand to businesses with a turnover of less than $10 Million (up from $2 Million) for the following ‘Small Business’ measures:
- Corporate Tax Rate (27.5%)
- Simplified Depreciation Rules (including instant asset write-off for assets costing < $20,000 – up to 1 July 2017)
- Simplified Trading Stock Rules
- Ability to account for GST on a Cash Basis
- Simplified PAYG instalments
- Other Concessions
The turnover threshold for these measures will not increase with the company tax rate reduction threshold above, but will remain constant at $10 Million.
However, the $10 Million threshold will not apply to the Small Business CGT Concessions and the turnover applying there remains at $2 Million.
There will be a further threshold of $5 Million introduced for the ‘Unincorporated Small Business discount’ (currently $2 Million). This provides a ’discount’ to the business income included in individual’s assessable income from unincorporated businesses. The discount will increase over time to 16% (in line with company tax rate increase), but remains capped at a maximum of $1,000 per individual.
Companies with over $1Billion Turnover
Diverted Profits Tax
A Diverted Profits Tax (DPT) of 40%, dubbed the Google Tax, will apply as a ‘catch all’ measure where the multinational anti-avoidance rules fail to operate. This tax will apply if the ATO is of the view that an Australian Company or Permanent establishment (with global (including related company) revenue of more than $1 Billion) has shifted profits offshore under an arrangement designed to reduce tax and there is no sufficient economic substance to the arrangement. The DPT will apply where the tax paid in the other jurisdiction is less than 80% of the tax that would otherwise be payable in Australia.
Penalties for late lodgement and other administrative errors will be increased by a value of 100, meaning potential penalties can increase from $4,500 to $450,000 for significant global entities ($1 Billion turnover).
The Government intends to again strengthen Australia’s related party transfer pricing laws from 1 July 2016 in line with OECD recommendations released in October 2015. The changes are designed to provide:
- Increased guidance on intellectual property and intangible assets; and
- Ensure the transfer pricing analysis reflects the substance of the transaction.
Tax Transparency Code
The Government has introduced a ‘tax transparency code’. While Global reporting of taxes paid in jurisdictions is limited to significant global entities, the Government is encouraging companies with turnover of more than $100 million to publish the differences between profit and taxable income to provide greater public scrutiny.
Changes to Division 7A (from 2018)
On a disappointing note, recommendations from the Board of Taxation’s review of Division 7A will not be implemented until 2018. However, when implemented, they will include:
- Self-Correction Mechanism for inadvertent breaches
- Safe Harbour rules
- More Simplified Division 7A loan arrangements
- Other technical updates
ATO – Tax Avoidance Taskforce
The ATO will be provided with $679 Million over four years to establish a tax avoidance taskforce to ensure multinational companies, private companies and high wealth individuals pay the correct amount of tax.
The taskforce is expected to raise more than $3.7 Billion in tax.
Early Stage Investors
The announced 20% non-refundable tax offset for investing into certain innovative start-up companies will be better targeted to include:
- Reduced holding period from 3 years to 1 year (to access CGT exemption)
- Limiting investments by non-sophisticated investors to $50,000
- Requiring the investor to not be an affiliate (ie control the company)
- Definition of ‘Eligible’ start-ups to include time limit for incorporation and criteria around innovation.
Changes to the tax consolidation regime announced 3 years ago will be modified to remove inequitable consequences for companies acquiring subsidiaries with deductible liabilities. Further adjustments to deferred tax liabilities will be removed from entry and exit calculations to more closely align commercial and tax outcomes.
TOFA Rules to be simplified
A welcome change is the announced simplification of the Tax of Financial Arrangements (TOFA) rules. The changes, to apply from 1 January 2018 will include:
- Close link to accounting rules
- Simplified accruals and realisation rules
- Simplified taxation of foreign currency gains and losses
Low Value Imports
Currently, there is an exemption from GST for imports valued at less than $1,000. The Government intends to extend the GST to such imports from 1 July 2017.
We note legislation for the ‘Netflix’ tax has not yet passed Parliament and expect any legislation requiring registration for low value imports to follow the rules currently proposed. Enforcement of GST registration and collection will remain an issue.
Simplified GST Reporting
A trial of simpler GST reporting will commence from 1 July 2016 and will apply to all small businesses (< $10 Million turnover) from 1 July 2017. This is designed to cut red tape and allow business owners to spend more time working on their business rather than filling in tax compliance forms.
Research & Development (R & D)
No news is good news. There were no announcements in relation to R & D.
Of note, the tax cuts of 1.5% to the R & D tax offset rates of 45% and 40% proposed in the 2014/15 budget have still not passed. It is likely these will not now apply to the 2015 or 2016 years if they ever get introduced again.
© Hanrick Curran 2016
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.