The 2016-17 Federal Budget is an election year budget so stay tuned as there will be more announcements to come as the Budget allows for a $1.6 billion “decisions taken but not yet announced” election war chest. Furthermore, with a pending election timing is everything and some measures may not even make it past the post.
At “the Stable” we mainly focus on small to medium businesses and note that the budget contained a number of items of interest. However, the area of superannuation has created the most noise as taxpayers’ face some sweeping changes.
Business
- Company tax rate reduced to 25% over 10 years
- Increase in tax discount for unincorporated small business to 16% over 10 years
- Small business entity threshold increase to $10m from 1 July 2016
- $1k GST exemption on imported goods abolished from 1 July 2017
- UK style diverted profits tax to reign in multinationals
Superannuation
- $500,000 lifetime non-concessional contributions cap
- Reduction in concessional contribution cap from 1 July 2017
- Tax exemption on earnings supporting transition to retirement income streams (TRIS) removed from 1 July 2017
- 30% tax on super contributions of high income earners threshold reduced to $250k
- Tax free super balances capped at $1.6m from 1 July 2017
We hope you enjoy our Budget summary focussing on items of particular interest. As always please be in contact with any queries or to discuss any planning opportunities that may be present. Finally, please check out our new website featuring the support you need under the one roof at “the Stable”.
Business Tax
The Budget introduces a series of tax cuts progressively applied to business. Significantly, the threshold for accessing some of the small business entity concessions will increase dramatically from the current $2 million threshold to $10 million.
Reducing the company tax rate to 25%
Date of effect: progressively from 2016-17
The company tax rate will be reduced to 25% over 10 years. The reduction will initially target companies with a turnover less than $10 million, and then gradually increase access:
| Year | Company annual aggregated turnover | Tax rate |
|---|---|---|
| 2016-17 | Less than $10 million | 27.50% |
| $10 million or more | 30% | |
| 2017-18 | Less than $25 million | 27.50% |
| $25 million or more | 30% | |
| 2018-19 | Less than $50 million | 27.50% |
| $50 million or more | 30% | |
| 2019-20 | Less than $100 million | 27.50% |
| $100 million or more | 30% | |
| 2020-21 | Less than $250 million | 27.50% |
| $250 million or more | 30% | |
| 2021-22 | Less than $500 million | 27.50% |
| $500 million or more | 30% | |
| 2022-23 | Less than $1 billion | 27.50% |
| $1 billion or more | 30% | |
| 2023-24 | All | 27.50% |
| 2024-25 | All | 27% |
| 2025-26 | All | 26% |
| 2026-27 | All | 25% |
Franking credits will still be calculated with reference to the amount of tax paid by the company paying the dividends.
Small business entity threshold jumps to $10m
Date of effect: 1 July 2016
In a significant win for business, the small business entity turnover threshold will increase from $2 million to $10 million from 1 July 2016. The reform will give a greater number of businesses access to a range of tax concessions such:
- The lower small business corporate tax rate (27.5%);
- Simplified depreciation rules including an immediate write-off for assets costing less than $20,000 that are acquired by 30 June 2017 and depreciation pooling provisions;
- Simplified trading stock rules;
- A different method of calculating PAYG instalments;
- The option of accounting for GST on a cash basis;
- FBT exemptions (this would start from 1 April 2017); and
- A trial system of using a simpler business activity statement.
The current $2 million turnover threshold will be retained for access to the small business CGT concessions and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.
Simplifying Division 7A
Date of effect: 1 July 2018
Division 7A will be amended to ease the compliance burden associated with the rules and to give effect to some of the recommendations made by the Board of Taxation in its Post‑implementation Review into Division 7A.
The reforms include a self‑correction mechanism for inadvertent breaches of Division 7A, appropriate safe‑harbour rules to provide certainty, simplified Division 7A loan arrangements and a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.
This is a welcome development, particularly for small and medium business taxpayers using companies for business or investment activities who struggle to understand and comply with the existing rules.
Superannuation
The Government has introduced a series of dramatic changes to the concessional tax status of superannuation. The reforms will change many of the strategies advisers currently utilise to maximise benefits for clients.
Lifetime cap on non-concessional contributions
Date of effect: 7.30 pm (AEST) on 3 May 2016 (Applies to all non-concessional contributions made on or after 1 July 2007)
A lifetime $500,000 non-concessional contributions cap will be introduced from Budget night.
The current system of annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65), will be replaced with this new lifetime cap.
The lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007 and will commence at 7.30 pm (AEST) on 3 May 2016. Contributions made before commencement will not result in an excess. However, excess contributions made after commencement will need to be removed or will be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings.
The lifetime cap is available up to age 74.
Concessional contributions cap reduced
Date of effect: 1 July 2017
The current concessional contributions cap will reduce to $25,000 from 1 July 2017.
| Current concessional cap | From 1 July 2017 | |
|---|---|---|
| Under age 50 | $30,000 | $25,000 |
| 50 and over | $35,000 | $25,000 |
Even at the 30% contributions tax rate, concessional contributions remain beneficial but the benefits are reasonably marginal, say 17% on up to $25k, or approximately up to $4,250 per annum.
Individuals with superannuation balances of less than $500k will be permitted to use some of their unused concessional contributions limits from previous years.
Tax Exemption on Transition to Retirement Income Stream Earnings removed
Date of effect: 1 July 2017
The tax exemption on the earnings of assets supporting Transition to Retirement Income Streams will be removed from 1 July 2017. The rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.
30% tax on super for high income earners
Date of effect: 1 July 2017
At present, individuals with combined income and superannuation contributions of more than $300,000 pay an additional contributions tax of 15% on concessional contributions. From 1 July 2017, this income threshold will reduce to $250,000.
Tax free super balances capped at $1.6m
Date of effect: 1 July 2017
A new $1.6 million cap will apply to how much can be transferred into a retirement phase account. Earnings on amounts within the account will continue to be tax-free. Transfers in excess of this $1.6 million cap (including earnings on these excess transferred amounts) will be taxed in a similar way to the tax treatment that applies to excess non-concessional contributions.
Where an individual accumulates amounts in excess of $1.6 million, 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 $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts.
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.
Other
$678.9 million for new ATO anti-avoidance taskforce
A new anti-avoidance taskforce will undertake “enhanced compliance activities” targeting multinationals, large public and private groups and high wealth individuals.
This measure provides the ATO with a 55% increase in funding for compliance programs targeting multinationals and high wealth individuals, with a 43% increase in resources devoted to tackling multinationals (including ramping up to an additional 390 average staffing level per year).
Information sharing between the ATO and ASIC will also be improved.