2016 Federal Budget

Summary

The Federal Treasurer, Scott Morrison handed down his first budget last night.

Unlike many pre-election budgets it did not contain significant tax cuts or spending programs. Like many budgets over the last decade many of the key changes had been flagged prior to Budget night.

That being said, the Budget contained a number of significant announcements in respect of small businesses, personal taxation and superannuation:

  • Minor reform of the tax bracket creep by increasing the $80,000 tax bracket threshold to $87,000. This equates to a full year saving of $315, so we can have another coffee per week.

  • A phased reduction in the company tax rate over 10 years.

  • Major SME tax changes - small business threshold to be increased to $10 million, reduced tax rates for small business.

  • Major superannuation changes (balance cap on retirement accounts, lifetime non-concessional contributions cap, transitional to retirement change). It would be nice for parties on both sides of politics to leave superannuation alone, so we can plan our retirement in a more stable environment. The proposed changes continue to make negative gearing strategies attractive, subject to the upcoming election.

  • A further crackdown on multinational enterprise (MNE) tax avoidance, GST changes on the importation of low-value goods.

  • The Government also confirmed that the 2% temporary Budget deficit levy (on incomes over $180,000) would expire at the end of the 30 June 2017 financial year as currently legislated. This will also have a favorable flow on impact on FBT and other employment taxes.

 

Personal tax

1. Changes to personal tax rates

The Government will increase the 32.5 per cent personal income tax threshold from $80,000 to $87,000 from 1 July 2016.

The currently legislated rates for 2015-16 and proposed new personal tax rates and thresholds for 2016-17 (including the 2% temporary budget deficit levy, but excluding the 2% Medicare levy) are as follows:

2015-16

2016-17

Threshold

Rate

Threshold

Rate

$0 - $18,200

0%

$0 - $18,200

0%

$18,201 - $37,000

19.0%

$18,201 - $37,000

19.0%

$37,001 - $80,000

32.5%

$37,001 - $87,000

32.5%

$80,001 - $180,000

37.0%

$87,001 - $180,000

37.0%

$180,001

47.0%

$180,001

47.0%

 

With Medicare levy included, the top marginal rate is 49% from 1 July 2014 to 30 June 2017.

2. Removal of temporary budget deficit levy

In the lead-up to the Budget, the Treasurer indicated that the 2% Budget deficit levy (tax) on incomes over $180,000 would not be extended beyond its initial 3 years. The levy was announced in last year's Budget, has been legislated and applies for 3 years from 1 July 2014. It is due to cease at the end of the 2016-17 financial year.

3. Low income tax offset

The currently legislated low income tax offset (LITO) rates have not changed and are:

  • LITO amount - $445.

  • Lower withdrawal limit - $37,000.

  • Upper withdrawal limit - $66,667.

  • Withdrawal rate - 1.5%.

4. Increasing the Medicare levy lowincome thresholds

The Government will increase the Medicare levy lowincome thresholds for singles, families and seniors and pensioners:

  • The threshold for singles will be increased to $21,335.

  • For couples with no children, the threshold will be increased to $36,001 and the additional amount of threshold for each dependent child or student will be increased to $3,306.

  • For single seniors and pensioners, the threshold will be increased to $33,738.

  • For senior and pensioner couples with no children, the threshold will be increased to $46,966 and the additional amount of threshold for each dependent child or student will be increased to $3,306.

5. Medicare Levy Surcharge and Private Health Insurance Rebate

The Government will continue the pause on indexation of the income thresholds for the Medicare Levy Surcharge and Private Health Insurance Rebate for a further 3 years from 1 July 2018.

6. Backpacker tax

The Government has come under significant pressure to remove the so called ‘backpacker tax’ announced in last year’s budget. The change has not yet been legislated, although it is proposed to apply from 1 July 2016.

Under the proposed changes:

  • The tax residency rules would be changed to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here.

  • This means they would be taxed at 32.5% from their first dollar of income up to $80,000 (from 1 July 2017 $87,000).

  • Currently, a working holiday maker can be treated as a resident for tax purposes if they satisfy the tax residency rules, typically, that they are in Australia for more than 6 months.

  • This means they are able to access resident tax treatment, including the tax-free threshold, the low income tax offset and the lower tax rate of 19% (for taxable income above the $18,200 tax-free threshold up to $37,000).

 

Business

1. Company tax rates

The Government will reduce the company tax rate to 25 per cent over 10 years. The timetable is summarised in the table below.

Income year

Threshold (< $)

Rate (%)

2015-16 (current year)

2m

28.5

2016-17

10m

27.5

2017-18

25m

27.5

2018-19

50m

27.5

2019-20

100m

27.5

2020-21

250m

27.5

2021-22

500m

27.5

2022-23

1bn

27.5

2023-24

all companies

27.5

2024-25

all companies

27

2025-26

all companies

26

2026-27

all companies

25

 

Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.

2. Proposed changes to Division 7A

The Government will make targeted amendments to improve the operation and administration of Division 7A.

These changes are intended to provide clearer rules for taxpayers and assist in easing their compliance burden while maintaining the overall integrity and policy intent of Division 7A. It includes a selfcorrection mechanism for inadvertent breaches of Division 7A, appropriate safeharbour 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.

These changes draw on a number of recommendations from the Board of Taxation's Postimplementation Review into Division 7A and will apply from 1 July 2018.

 

3. Increase in small business entity turnover threshold

The Government will increase the small business entity turnover threshold from $2.0 million to $10.0 million from 1 July 2016.

This change will have a number of desirable tax outcomes including;

  • the simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017 and then less than $1,000;

  • the simplified trading stock rules, which give businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000;

  • a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied;

  • the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;

  • immediate deductibility for various start-up costs (e.g. professional fees and government charges);

  • a 12-month prepayment rule; and

  • the more generous FBT exemption for work-related portable electronic devices (e.g. mobile phones, laptops and tablets) – the FBT car parking exemption for small business already applies to entities with "annual gross income" of less than $10m.

4. Increase in the unincorporated small business tax discount

The Government will increase the tax discount for unincorporated small businesses incrementally over 10 years from 5 per cent to 16 per cent.

The tax discount applies to the income tax payable on the business income received from an unincorporated small business entity. Access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5.0 million.

The tax discount will increase to 8 per cent on 1 July 2016, remain constant at 8 per cent for eight years, then increase to 10 per cent in 202425, 13 per cent in 202526 and reach a new permanent discount of 16 per cent in 202627. This will coincide with staggered cuts in the corporate tax rate to 25 per cent.

The current cap of $1,000 per individual for each income year will be retained.

5. CGT concessions unchanged

Unfortunately, the current $2.0 million turnover threshold will be retained for access to the small business capital gains tax concessions, and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5.0 million will remain in place

Superannuation – good news

Let’s get to the good news first.

1. Allow catchup concessional superannuation contributions

From 1 July 2017, the Government will allow individuals to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.

Access to these unused cap amounts will be limited to those individuals with a superannuation balance less than $500,000. 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.

2. Works test removed

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. None of these restrictions apply to individuals aged under 65.

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.

3. Superannuation balances of low income spouses

From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse to $37,000 from $10,800. The low income spouse tax offset provides up to $540 per annum for the contributing spouse.

4. New Low Income Superannuation Tax Offset (LISTO)

From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on superannuation contributions for low income earners.

The LISTO will provide a nonrefundable 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.

This 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.

5. Tax deductions for personal superannuation contributions

From 1 July 2017, the Government will improve flexibility and choice in superannuation by allowing all individuals up to age 75 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 selfemployed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements.

Superannuation – bad news

Now for the bad news and there is lots of it.

1. Introduction of new $1.6 million superannuation transfer balance cap

Under current law, if a fund member moves from accumulation phase into ‘pension phase’, earnings on assets supporting the pension (income tax and capital gains) are tax free in the fund. Additionally, there is no limit on the amount of accumulated superannuation that an individual can transfer into pension phase.

From 1 July 2017, the Government will introduce a $1.6 million cap on the total amount of superannuation that can be transferred into a tax-free retirement account (the pension phase)

The cap will index in $100,000 increments in line with the consumer price index, just as the Age Pension assets threshold does.

Superannuation savings accumulated in excess of the cap can remain in an accumulation superannuation account, where the earnings will be taxed at 15 per cent.

A proportionate method which measures the percentage of the cap previously utilised will determine how much cap space an individual has available at any single point in time. For example, if an individual has previously used up 75 per cent of their cap they will have access to 25 per cent of the current (indexed) cap •

Subsequent fluctuations in retirement accounts due to earnings growth or pension payments are not considered when calculating cap space.

Those individuals already in retirement as at 1 July 2017 with balances in excess of $1.6 million will need to either:

  • transfer the excess back into an accumulation superannuation account; or

  • withdraw the excess amount from their superannuation.

Individuals who breach the cap will be subject to a tax on both the amount in excess of the cap and the earnings on the excess amount.

Example

Agnes, 62, retires on 1 November 2017. Her accumulated superannuation balance is $2 million. Agnes can transfer $1.6 million into a retirement income account. The remaining $400,000 can remain in an accumulation account where earnings will be taxed at 15 per cent.

Alternatively, Agnes may choose to remove this excess amount from superannuation. While Agnes will not have the ability to make additional contributions into her retirement account, her balance will be allowed to fluctuate due to earnings growth or drawdown of pension payments.

2. New $500,000 lifetime non concessional cap

The Government will introduce a new $500,000 lifetime nonconcessional contributions cap.

The lifetime cap will take into account all nonconcessional contributions made on or after 1 July 2007, from which time the Australian Taxation Office has reliable contributions records, and will commence at 7.30 pm (AEST) on 3 May 2016.

Non-concessional contributions include contributions which are not included in the assessable income of the receiving superannuation fund, e.g. non-deductible personal contributions made from the member's after-tax income (formerly known as undeducted contributions).

Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or subject to penalty tax.

The lifetime nonconcessional cap will replace the existing annual caps which allow annual nonconcessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65).

The introduction of the $500,000 lifetime cap will effectively limit the ability of some individuals to implement recontribution strategies for wealth and estate planning purposes.

Example

Anne, aged 61, is planning for her retirement. Five years ago Anne received an inheritance of $200,000 which she put into her superannuation. Anne now intends to sell her home and buy a smaller property. She is hoping to put the proceeds into her superannuation.

Anne can contribute up to $300,000 more into her superannuation before she reaches her non-concessional cap. Anne’s non-concessional contributions are in addition to the compulsory superannuation payments her employer makes and the additional salary sacrificed contributions she elects to make from her salary

3. Reducing the Division 293 threshold

From 1 July 2017, the Government will lower the Division 293 threshold (the point at which high income earners pay addition contributions tax) from $300,000 to $250,000.

The Division 293 tax effectively doubles the contributions tax rate from 15% to 30% for concessional contributions.

4. Reducing concessional contribution caps

The annual concessional contributions cap will be reduced to $25,000 for all individuals regardless of age from 1 July 2017.

The concessional cap is currently set at $30,000 for those under age 49 on 30 June for the previous income year (or $35,000 for those aged 49 or over on 30 June for the previous income year) for the 2015-16 and 2016-17 income years.

Existing processes for the administration of the concessional contributions caps and the imposition of the additional 15% on contributions, including the ability to withdraw the excess from super to pay the additional liability, will be maintained.

Currently, concessional contributions exceeding an individual’s annual concessional cap are automatically included in an individual’s assessable income and taxed at the individual’s marginal tax rate (plus an interest charge).

  • An individual is also entitled to a 15% tax offset for the contributions tax paid by the fund.

  • Individuals can elect to release up to 85% of their excess concessional contributions from their superannuation fund to the Commissioner as a "credit" to cover the additional personal tax liability.

5. Transition to Retirement Pensions

The Government said it will remove the tax exemption on earnings for pension assets supporting transition to retirement pensions (TTRs) from 1 July 2017 irrespective of when the TRIS commenced.. Under the changes, earnings from assets supporting TRISs will be taxed at 15% (instead of the current 0%).

The changes to the Transition to Retirement pension rules will effectively limit the ability of some individuals to implement recontribution strategies for wealth and estate planning purposes.

 

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