We have pleasure in enclosing a summary of the significant announcements from the Federal Government’s 2016 Budget.
There are a great deal of changes in this budget. Like in recent years these proposed changes have presented numerous opportunities. We look forward to working with you to take advantage of any relevant opportunities to your specific circumstances. Please call our team to discuss how these changes apply to your individual circumstances.
2016/17 Federal Budget Highlights
The Federal Treasurer, Mr Scott Morrison, handed down his first Budget (the government’s third) at 7.30pm on 3 May 2016. The Budget sets out the government’s economic plan to ensure Australia continues to successfully transition from the mining investment boom to a stronger, more diversified new economy. It does this by:
- introducing a 10-year enterprise tax plan,
- fixing problems in the tax system, and
- ensuring that the government lives within its means.
Here are the tax, superannuation and social security highlights.
Increased turnover threshold for small business income tax concessions
The small business entity turnover threshold will be increased from $2m to $10m from 1 July 2016. The increased threshold means businesses with an annual turnover of less than $10m will be able to access existing small business income tax concessions including the:
- lower small business corporate tax rate (which will be reduced to 27.5% from the 2016/17 income year)
- simplified depreciation rules under Subdiv 328-D of the Income Tax Assessment Act 1997 (ITAA 1997), including the instant asset write off threshold of $20,000 available until 30 June 2017
- simplified trading stock rules under Subdiv 328-E of ITAA 1997
- option to account for GST on a cash basis and pay GST instalments as calculated by the ATO
- simplified method of paying PAYG instalments calculated by the ATO, and
- other tax concessions such as the extension of the FBT exemption for work-related portable electronic devices available from 1 April 2016 and the immediate deduction of professional expenses under s 40-880 of ITAA 1997.
The increased $10m threshold will not be applicable for accessing the small business capital gains tax concessions. These concessions will remain available only for small businesses with a turnover of less than $2m or that satisfy the maximum net asset value test. The unincorporated small business tax discount (which will be increased to 8% from 1 July 2016) will however be accessible to small businesses with a turnover of less than $5m.
Source: Budget Paper No 2, p 40; Assistant Treasurer’s media release, 3 May 2016.
Unincorporated small business tax discount increased
The unincorporated small business tax discount will be increased in phases over 10 years from the current 5% to 16%. First increasing to 8% on 1 July 2016, the discount will be available to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5m (also an increase from the current small business turnover threshold of less than $2m).
The tax discount will be increased in phases as follows:
The existing cap of $1,000 per individual for each income year will be retained.
The gradual increase is intended to coincide with the staggered cuts in the corporate tax rate to 25%.
Source: Budget Paper No 2, p 40.
GST reporting requirements simplified for small businesses
From 1 July 2017, all small businesses with less than $10m turnover will more easily be able to classify transactions, and prepare and lodge their business activity statements.
A trial of the new simpler reporting arrangements will commence on 1 July 2016.
Source: Assistant Treasurer’s media release “Easing the tax burden and making life easier for hard working small businesses”, 3 May 2016.
Staggered cuts to the company tax rate
The company tax rate will be progressively reduced to 25% over 10 years.
From the 2016/17 income year, the company tax rate for businesses with an annual aggregated turnover of less than $10m will be reduced to 27.5%. This threshold to access the 27.5% tax rate will be progressively increased to ultimately have all companies at that rate in the 2023/24 income year. The thresholds for the 27.5% rate will be as follows:
Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.
Source: Budget Paper No 2, p 41.
Targeted amendments to Div 7A
Targeted amendments will be made to improve the operation and administration of integrity rules for closely-held, private groups (in Div 7A of the Income Tax Assessment Act 1936) from 1 July 2018.
The amendments will include:
- a self-correction mechanism for inadvertent breaches of Div 7A
- appropriate safe-harbour rules to provide certainty
- simplified Div 7A loan arrangements, and
- a number of technical adjustments to improve the operation of Div 7A and provide greater certainty.
The amendments draw on a number of recommendations from the Board of Taxation’s post-implementation review of Div 7A.
Source: Budget Paper No 2, p 42.
Expanding tax incentives for early-stage investors
In the Mid-Year Economic and Fiscal Outlook 2015/16 the government announced tax incentives applying for the 2016/17 and later income years to promote investment in early stage innovative companies, including:
- a 20% non-refundable tax offset capped at $200,000 per investor per year, and
- a capital gains tax exemption, provided investments are held for at least three years and less than 10 years.
The concessions were announced to apply to investments in companies that were incorporated during the last three income years and that are undertaking an “eligible business”, the scope of which was to be determined by the government in consultation with industry. In addition, the company could not be listed on any stock exchange and must have expenditure of less than $1m and income of less than $200,000 in the previous income year.
The government has announced that following consultation with stakeholders, the measures will be amended so that they better target investment in innovative companies that face difficulty attracting the capital and business expertise needed to succeed.
The amendments include:
- reducing the holding period from three years to 12 months for investors to access the CGT exemption
- a time limit on incorporation and criteria for determining if a company is an innovation company under the definition of “eligible business”
- requiring that the investor and innovation company are non-affiliates, and
- limiting the investment amount for non-sophisticated investors to qualify for the tax offset to $50,000 or less per income year.
Source: Budget Paper No 2, p 21.
Funding arrangements for venture capital investment expanded
Funding arrangements to attract more venture capital investment will be expanded to improve access to capital and make the regimes more user-friendly.
The government has amended the Mid-Year Economic and Fiscal Outlook 2015/16 measure “National Innovation and Science Agenda — new arrangement for venture capital investment” to:
- add a transitional arrangement that allows conditionally registered funds that become unconditionally registered after 7 December 2015 to access the tax offset if the criteria are met
- relax the requirement for very small entities to provide an auditors’ statement of assets
- extend the increase in fund size from $100m to $200m for new early-stage venture capital limited partnerships (ESVCLPs) to also apply to existing ESVCLPs, and
- ensure that the venture capital tax concessions are available for FinTech, banking and insurance related activities.
Source: Budget Paper No 2, p 22.
New collective investment vehicles introduced
A new tax and regulatory framework will be introduced for two new types of collective investment vehicles (CIVs).
A corporate CIV will be introduced for income years starting on or after 1 July 2017 and a limited partnership CIV will be introduced for income years starting on or after 1 July 2018.
The new CIVs will be required to meet similar eligibility criteria as managed investment trusts, such as being widely held and engaging in primarily passive investment. Investors in these new CIVs will generally be taxed as if they had invested directly.
This measure is intended to allow fund managers to offer investment products using vehicles that are commonly in use overseas.
Source: Budget Paper No 2, p 39.
Changes to tax treatment for asset backed financing
The tax treatment of asset backed financing arrangements such as deferred payment arrangements and hire purchase arrangements will be clarified to ensure they are treated in the same way as financing arrangements based on interest bearing loans or investments.
This measure will apply from 1 July 2018.
Source: Budget Paper No 2, p 38.
INDIVIDUALS & FAMILIES
Personal income tax relief
The threshold at which the 37% marginal tax rate for individuals commences will increase from taxable incomes of $80,000 to $87,000 from 1 July 2016.
This measure reduces the marginal income tax rate on taxable incomes between $80,000 and $87,000 from 37% to 32.5% from the 2016/17 income year. It should prevent approximately 500,000 taxpayers facing the 37% marginal income tax rate in the 2016/17 income year. It should also ensure that the average full-time wage earner will not move into the 37% tax bracket in the next three years.
Source: Budget Paper No 2, p 42.
Medicare levy and surcharge — low-income thresholds to increase
The low-income thresholds for the Medicare levy and surcharge will increase from the 2015/16 income year. The changes are in the Tax and Superannuation Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2016.
The increases take into account movements in the consumer price index (CPI) so that low-income earners generally continue to be exempted from the Medicare levy.
The threshold for singles will increase to $21,335 (up from $20,896 for the 2014/15 year). For couples with no children, the threshold will increase to $36,001 (up from $35,261 for the 2014/15 year).
For single seniors and pensioners, the threshold will be increased to $33,738 (up from $33,044 for the 2014/15 year). For senior and pensioner couples with no children, the threshold will be increased to $46,966 (up from $46,000 for the 2014/15 year).
The child-student component of the income threshold for all families increases to $3,306 (up from $3,238 for the 2014/15 year).
Key aspects of the changes to the Medicare levy are summarised in the following table.
Medicare levy surcharge
The Bill also amends the A New Tax System (Medicare Levy Surcharge — Fringe Benefits) Act 1999 from the 2015/16 income year. It increases the Medicare levy surcharge low-income threshold in line with movements in the CPI for:
- the surcharge payable on taxable income for a person who is married (or both married and a beneficiary of a trust) to $21,335 (up from $20,896 for the 2014/15 year), and
- the surcharge on reportable fringe benefits to $21,335 (up from $20,896 in the 2014/15 year).
Source: Budget Paper No 2, p 23; Tax and Superannuation Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2016.
Pausing of Medicare levy surcharge and private health insurance rebate thresholds
The pause in the indexation of the income thresholds for the Medicare levy surcharge and the private health insurance rebate will continue for a further three years. This will achieve efficiencies of $744.2m over three years from 1 July 2018.
Source: Budget Paper No 2, p 113.
Income tax exemptions for ADF personnel deployed overseas
The government will provide a full income tax exemption for Australian Defence Force (ADF) personnel deployed on Operation PALATE II in Afghanistan. This income tax exemption has effect from 1 January 2016, and will remain in effect until 31 December 2016.
The government will also update the coordinates for Operation MANITOU in international waters, with effect from 14 May 2015, and Operation OKRA in the Middle East, with effect from 9 September 2015, to reflect the actual areas covered by the operations.
Source: Budget Paper No 2, p 20.
List of deductible gift recipients updated
Since the Mid-Year Economic and Fiscal Outlook 2015/16, the following organisations have been approved as specifically-listed deductible gift recipients (DGRs) from the following dates:
- Australian Science Innovations Incorporated from 1 January 2016
- The Ethics Centre Incorporated from 24 February 2016, and
- Cambridge Australia Scholarships Limited from 1 July 2016 to 30 June 2021.
In addition, from Royal Assent the following organisations have been approved as specifically-listed DGRs provided the gifts are made for education or research in medical knowledge or science:
- The Australasian College of Dermatologists
- College of Intensive Care Medicine of Australia and New Zealand, and
- The Royal Australian and New Zealand College of Ophthalmologists.
Taxpayers may claim an income tax deduction for gifts to these organisations of $2 or more.
Source: Budget Paper No 2, p 23–24.
Div 293 tax income threshold reduced
The Div 293 threshold (the point at which high income earners pay addition contributions tax) will be lowered from $300,000 to $250,000 from 1 July 2017. The annual cap on concessional superannuation contributions will also be reduced to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).
Reducing the Div 293 tax income threshold will limit the effective tax concessions provided to high income individuals. Capping concessional contributions at $25,000 per year will still allow individuals to accumulate significant amounts of tax advantaged concessional superannuation.
The lower Div 293 income threshold will also apply to members of defined benefits schemes and constitutionally protected funds currently covered by the tax. Existing exemptions (such as state higher level office holders and commonwealth judges) for Div 293 tax will be maintained.
From 1 July 2017, the government will include notional (estimated) and actual employer contributions in the concessional contributions cap for members of unfunded defined benefits schemes and constitutionally protected funds. Members of these funds will have opportunities to salary sacrifice commensurate with members of accumulation funds. For individuals who were members of a funded defined benefits scheme as at 12 May 2009, the existing grandfathering arrangements will continue.
Source: Budget Paper No 2, p 28–29.
Tax exemption on earnings supporting income streams removed
The tax exemption on earnings of assets supporting Transition to Retirement Income Streams (TRISs) will be removed from 1 July 2017 (ie income streams of individuals over preservation age but not retired).
A rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.
These changes will ensure that TRISs remain fit for purpose, are not accessed primarily for their tax advantage, and still meet the objective of supporting people who want to remain in the workforce.
Source: Budget Paper No 2, p 30.
Lifetime cap for non-concessional superannuation contributions
A lifetime non-concessional contributions cap of $500,000 will be introduced. To ensure maximum effectiveness, the lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007, from which time the ATO has reliable contributions records, and will commence at 7.30 pm (AEST) on 3 May 2016.
The lifetime non-concessional cap will replace the existing annual caps which allow annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65).
Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or be subject to penalty tax.
After-tax contributions made into defined benefits accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional cap. If a member of a defined benefits fund exceeds their lifetime cap, ongoing contributions to the defined benefits account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold. The amount that could be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007. Contributions made to a defined benefits account will not be required to be removed. The government will consult to ensure broadly commensurate and equitable treatment of individuals for whom no amount of post 1 July 2007 non-concessional contributions are available to be removed.
The measure which will be available to all Australians up to age 74 will provide support for the majority of Australians who make non-concessional contributions well below $500,000 and flexibility around when they choose to contribute to their superannuation.
Source: Budget Paper No 2, p 27.
Harmonising contribution rules for people aged 65 to 74
The current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement will be removed from 1 July 2017. 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.
Currently, there are minimum work requirements for Australians aged 65 to 74 who want to make voluntary superannuation contributions. Restrictions also apply to the bring-forward of non-concessional contributions. In addition, spouses aged over 70 cannot receive contributions.
The government will remove these restrictions and instead apply the same contribution acceptance rules for all individuals aged up to 75 from 1 July 2017. The measure will allow people aged 65 to 74 to increase their retirement savings, especially from sources that may not have been available to them before retirement, including from downsizing their home.
Source: Budget Paper No 2, p 24–25.
Catch-up concessional superannuation contributions
Individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years, with effect from 1 July 2017. Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward.
The measure will allow people with lower contributions, interrupted work patterns or irregular capacity to make contributions, eg women or carers, to make “catch-up” payments to boost their superannuation savings. It will also apply to members of defined benefit schemes, with consultation undertaken to minimise additional compliance impact for these schemes.
Source: Budget Paper No 2, p 24.
Restrictions on personal superannuation contribution deductions eased
From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.
This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap. Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements.
Individuals that are members of certain prescribed funds would not be entitled to deduct contributions to those schemes.
Prescribed funds will include all untaxed funds, all commonwealth defined benefits schemes, and any state, territory or corporate defined benefits schemes that choose to be prescribed.
Source: Budget Paper No 2, p 30.
Low income superannuation tax offset introduced
A low income superannuation tax offset (LISTO) will be introduced to reduce tax on superannuation contributions for low income earners from 1 July 2017.
The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners, up to a cap of $500. The LISTO will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
The measure will effectively avoid the situation in which low income earners would pay more tax on savings placed into superannuation than on income earned outside of superannuation.
Source: Budget Paper No 2, p 28.
Low income spouse tax offset threshold increased
The income threshold for the receiving spouse (whether married or de facto) of the low income spouse tax offset will be increased from $10,800 to $37,000 from 1 July 2017.
The measure will improve the superannuation balances of low income spouses by extending the current spouse tax offset to assist more families to support each other in accumulating superannuation. The low income spouse tax offset provides up to $540 per annum for the contributing spouse and builds on the government’s co-contribution and superannuation splitting policies to boost retirement savings, particularly for women.
Source: Budget Paper No 2, p 25.
Superannuation transfer balance cap introduced
A balance cap of $1.6m on the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase will be introduced from 1 July 2017. Subsequent earnings on these balances will not be restricted. This will limit the extent to which the tax-free benefits of retirement phase accounts can be used by high wealth individuals.
Where an individual accumulates amounts in excess of $1.6m, they will be able to maintain this excess amount in an accumulation phase account (where earnings will be taxed at the concessional rate of 15%). Members already in the retirement phase with balances above $1.6m will be required to reduce their retirement balance to $1.6m by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts.
A tax on amounts that are transferred in excess of the $1.6m cap (including earnings on these excess transferred amounts) will be applied, similar to the tax treatment that applies to excess non-concessional contributions.
The amount of cap space remaining for a member seeking to make more than one transfer into a retirement phase account will be determined by apportionment. Commensurate treatment for members of defined benefits schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000 from 1 July 2017. Consultation will be undertaken on the implementation of this measure for members of both accumulation and defined benefits schemes.
Source: Budget Paper No 2, p 25–26.
Anti-detriment death benefit provision removed
The anti-detriment provision in respect of death benefits from superannuation will be removed from 1 July 2017.
The anti-detriment provision can effectively result in a refund of a member’s lifetime superannuation contributions tax payments into an estate, where the beneficiary is the dependant of the member (spouse, former spouse or child). Currently, this provision is inconsistently applied by superannuation funds.
Removing the anti-detriment provision will better align the treatment of lump sum death benefits across all superannuation funds and the treatment of bequests outside of superannuation. Lump sum death benefits to dependants will remain tax free.
Source: Budget Paper No 2, p 29.
GST AND OTHER INDIRECT TAXES
GST extended to low value goods imported by consumers
GST will be extended to low value goods imported by consumers from 1 July 2017.
The intent of this measure is that low value goods imported by consumers will face the same tax regime as goods that are sourced domestically.
Overseas suppliers that have an Australian turnover of $75,000 or more will be required to register for, collect and remit GST for low value goods supplied to consumers in Australia, using a vendor registration model.
These arrangements will be reviewed after two years to ensure they are operating as intended and take account of any international developments.
This change will require the unanimous agreement of the states and territories prior to the enactment of legislation. This follows the in-principle agreement made on 21 August 2015 by the Council on Federal Financial Relations Tax Reform Workshop.
Source: Budget Paper No 2, p 19.
Discussion paper on GST treatment of digital currencies released
The government has released a discussion paper seeking public submissions on options to address the “double taxation” of digital currencies under the GST regime. According to the Treasurer, the paper moves the government a step closer to delivering an important change that will ensure that consumers are no longer “double taxed” when using digital currencies such as Bitcoin to buy goods and services already subject to GST.
Source: Treasurer’s media release “Embracing our FinTech future”, 3 May 2016.
Tobacco excise to increase
Tobacco excise and excise-equivalent customs duties will be subject to four annual increases of 12.5% from 2017 until 2020. The increases will take place on 1 September each year and will be in addition to existing indexation to average weekly ordinary time earnings. These four annual increases will take Australia’s excise on a cigarette to almost 69% of the average price of a cigarette (assuming there are no other changes to cigarette prices over this period). This is close to the World Health Organisation recommendation of 70% of the price of a cigarette.
In addition, the duty-free tobacco allowance will be limited to 25 cigarettes (or equivalent) from 1 July 2017. This is down from the current allowance of 50 cigarettes.
Amendments will also be made to the Customs Act 1901 and the Excise Act 1901 to provide enforcement officers with access to tiered offences and appropriate penalties. This will increase the range of enforcement options available for illicit tobacco offences.
Source: Budget Paper No 2, p 16.
Tax Avoidance Taskforce
The government will provide the ATO with $679m over four years to establish a Tax Avoidance Taskforce, which is intended to enhance the ATO’s current compliance activities targeting large multinationals, private groups and high-wealth individuals, and extend them to 30 June 2020. The Taskforce will be led directly by the Commissioner of Taxation, Chris Jordan.
The Taskforce will work closely with partner agencies including the Australian Crime Commission, the Australian Federal Police and AUSTRAC. New legislation will be introduced that will allow the ATO to improve information sharing and analysis with the Australian Securities and Investments Commission. Part of the work of the Taskforce will be testing the law through litigation where there is deliberate tax avoidance.
It is intended that the Commissioner will provide regular progress reports to the government on the work of the Taskforce, with the first report to be provided before the end of 2016.
External experts will be appointed to play a role in support of the Taskforce, including a panel of eminent former judges which will review proposed settlements with the ATO to ensure they are fair and appropriate.
The Taskforce is expected to recover $3.7b in tax liabilities over four years, and it is intended that the work of the Taskforce will also deter taxpayers from attempting to avoid their tax obligations.
Source: Budget Paper No 2, p 33.
Protection for tax whistleblowers
Under the new arrangements, individuals will receive improved protection if they disclose information to the ATO relating to tax avoidance behaviour and other tax issues. The types of individuals that will be protected include:
- employees of taxpayers
- former employees of taxpayers, and
- advisers to taxpayers.
Whistleblowers will have their identities protected and will be protected from victimisation, criminal prosecution and civil action for disclosing information to the ATO.
The measure forms part of the government’s Tax Integrity Package, and will apply from 1 July 2018.
Source: Budget Paper No 2, p 32.
Companies encouraged to adopt Tax Transparency Code
In the 2015/16 Federal Budget, the government announced a voluntary Tax Transparency Code. The Board of Taxation released a discussion paper on the Code in December 2015, and recommended that businesses with aggregated TTC Australian turnover of at least A$100m but less than A$500m should adopt Part A of the Code, which covers:
- a reconciliation of accounting profit to tax expense and to income tax paid or income tax payable
- identification of material temporary and non-temporary differences, and
- accounting effective company tax rates for Australian and global operations (pursuant to the Australian Accounting Standards Board (AASB) guidance).
It was recommended that large businesses (ie businesses with aggregated TTC Australian turnover of A$500m or more) adopt Parts A and B of the TTC. Part B of the TTC covers:
- the business’ approach to tax strategy and governance
- a tax contribution summary for corporate taxes paid, and
- information about international related party dealings, financing and tax concessions.
In this Budget (2016/17) the Government announced that it is committed to encouraging greater tax transparency within the corporate sector, especially by multinational corporations, and encourages all companies to adopt the TTC from the 2016 financial year onwards.
Source: Budget 2016-17 Glossy: Making our tax system more sustainable.
Federal Budget Highlights 2016 – 2017
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