The Federal Budget 2016/2017 - 3 May 2016
Overall: The Treasurer has an economic and political brief. We'll stick to the economics/taxes. Interestingly the budget will or should be passed before an election is called, so the timing will be very tight. A key measure you will hear a lot about is that he underlying cash balance is expected to reduce from $39.9 billion in 2015-16 to $37.1 billion, or 2.2% as a share of the economy in 2016-17. Mr Morrison said the deficit is then projected to fall to $6.0 billion or just 0.3% of GDP over the next 4 years to 2019-20. (Is this an attempt as a 'momentum' up sell?).
Budget documents state that total revenue for 2016-17 is expected to be $416.9 billion, an increase of 5.2% on estimated revenue in 2015-16. Total expenses for 2016-17 are expected to be $450.6 billion, an increase of 4.4% on estimated expenses in 2015-16. We note that nearly all growth projections have been over estimated in all years since the GFC. The deficits are projected to lower to $6.0 billion by 2019-20, with the aim of returning the book to balance by 2020-21.
Highlights:
Gives:
1. The big news is the change of definition of "SME" from $2m turnover to $10m from 1 July 2016 - 2017 Financial Year. Reduction in Company Tax Rates. No mention of provisions for those businesses that exceed $2m in 2016 but will be less than $10m in 2017 and later. A business with annual turnover of less than $10m will be able to access a number of small business tax concessions from 1 July 2016, 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 (how do you measure this - do a stock take?), 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 (eg professional fees and government charges); a 12-month prepayment rule; and the more generous FBT exemption for work-related portable electronic devices (eg 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. It is estimated about 100,000 businesses will fall under the $10m rule. (The threshold changes will not affect eligibility for the small business CGT concessions, which will only remain available for businesses with annual turnover of less than $2m or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test)).
Franking credits will continue to be calculated in the usual manner by reference to the amount of tax paid by the company making the distribution.
Unincorporated businesses (Sole Trader / Partnership): Like the company tax rate reductions, the tax discount (or tax offset) for unincorporated small businesses will increase over a 10-year period from 5% to 10%. The tax discount will increase to 8% on 1 July 2016 (2017), remain constant at 8% for 8 years, then increase to 10% in 2024-25 (2025), 13% in 2025-26 (2026) and reach a new permanent discount of 16% in 2026-27 (2027). The maximum value of the discount will remain at $1,000. Don't spend it all at once!
Also announced was that more taxpayers will be able to access the tax discount. From 1 July 2016 (2017), 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 $5m (the current threshold is $2m).
2. Closely following this is the 'indexation' of the $80,000 threshold to $87,000. This means $7,000 of salary is taxed at the rate UNDER the current $80,000. Sounds great and gets 'the tick' for giving, but it is not that much of a cut.
Taken Away:
3. Significant and many Superannuation changes including superannuation deductions reduced to $25,000 (check your salary plan in 2018 so you don't exceed the new limit), $1.6m transfer balance cap for retirement accounts; Non-concessional contributions: $500,000 lifetime cap from now, Concessional contributions cap cut to $25,000 from 2018, Concessional contributions catch-up for account balances less than $500,000, Superannuation contributions tax (extra 15%) for incomes over $250,001,
4. Multinationals appear to get more attention and High Net Worth Individuals ($30m in Assets). New ATO "Task force" to be assigned.
5. Give up Smoking. Increase of the excise by 12.5% every year for the next 4 years starting September 2017. Expensive smokes.
Other Measure - Details
6. Changes to Division 7A:. There will be consultation to make targeted amendments to improve the operation and administration of Div 7A. The 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 Div7A. Subject to the outcomes of the consultation process, Div 7A will be amended to include:
- a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty, new safe harbour rules, such as for use of assets, to provide certainty and simplify compliance for taxpayers, amended rules, with appropriate transitional arrangements, regarding complying Div 7A loans, including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions; and (unknown) technical amendments to improve the overall operation of Div 7A.
Date of effect These changes will apply from 1 July 2018 (2019). Given these are helpful and simplify what can be draconian rules is disappointing.
7. Collective investment vehicles – CIVs - proposed new types: A new tax and regulatory framework for 2 new types of collective investment vehicles (CIVs) to be introduced. CIVs allow investors to pool their funds and have them managed by a professional funds manager. A corporate CIV will be introduced from 2018 FY. CIVs will allow Australian funds managers to offer investments through a company structure which is well suited for offering retail investment products. A limited partnership CIV will be introduced for income years from 2019. This type of vehicle is commonly used overseas to facilitate wholesale investment by large investors, such as pension funds.
To implement ATO will be given $2m and $7.8m to ASIC, partially offset by $0.7m in registration fees. Reason? Enhance the international competitiveness of the Australian managed funds industry and maximise the effectiveness of related Government initiatives aimed at increasing access to overseas markets, including the Asia Region Funds Passport. 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 proposed new CIVs will generally be taxed as if they had invested directly.
It is not clear how or what standardised reporting to investors will be introduced (nothing stated).
8. Diverted profits tax ("Google tax") with a penalty rate of 40% to be introduced Applies companies with global revenue of $1 billion or more but not to companies with local revenue of less than $25 million, unless they are booking revenue offshore. There are significant penalties for not co-operating with the ATO in excess of $450,000.
9. Tax Avoidance Taskforce to be established within the ATO The Taskforce is intended to have over 1,000 experts and will pursue tax avoidance by multinationals and high wealth individuals. The Tax Avoidance Taskforce will act to improve tax compliance in high tax risk sectors and will also directly target compliance cases against those exposed by the Panama Papers.
This initiative enhances and extends current compliance activities targeting large multinationals, private groups and high-wealth individuals to 30 June 2020, and will feature the collective efforts of over 1,000 experts, including 390 new specialised officers.
10. Passport fees to rise - again : From 1 January 2017, the cost of each new passport will increase by $20 for adults and $10 for children and seniors, and the fee for priority processing of passport applications will increase by $54.
11.. Further Other Measures - Summary (no details here, you'll be deluged in detail from every direction tomorrow).
- "Ten Year Enterprise Tax Plan" (for governments with 3 year terms, sure)
- Company tax rate to reduce to 25% by 2026-27
- Personal tax rates: small tax cut from 1 July 2016; Budget deficit levy not to be extended
- Medicare Levy Surcharge and Private Health Insurance Rebate - indexation pause to continue,
the pause on indexation of the income thresholds for the Medicare Levy Surcharge and
Private Health Insurance Rebate for another 3 years from 1 July 2018.
- Higher education options: HELP debts, etc. The Government is considering a number of higher education reforms to commence in 2018
- Temporary Budget Repair to expire at end 2017 FY
- GST to be imposed on goods imported by consumers regardless of value. The new rules will commence in 2018 FY.
12. Superannuation Measures -Summary
- Superannuation pension phase - $1.6m transfer balance cap for retirement accounts
- Transition to retirement pensions - tax concessions to be reduced
- Non-concessional contributions: $500,000 lifetime cap from Budget night
- Concessional contributions cap cut to $25,000 from 2018 year
- Concessional contributions catch-up for account balances less than $500,000
- Superannuation contributions tax (extra 15%) for incomes $250,001+
- Tax deductions for personal super contributions extended
- Superannuation contribution rules - work test to be removed for age 65 to 74
- Low income super tax offset (LISTO) to be introduced
- Low income spouse super tax offset to be extended
- Retirement income products - tax exemption extended
- Anti-detriment deduction to be removed for super death benefits
- Objective of superannuation to be enshrined in stand-alone legislation
If you want more detail on the Superannuation tax changes please contact us as they are quite long.
If you have any comments or questions please let me know.
Brett Lamond & Co
3 May 2016
[20160503]
Last Edit 10 May 2016
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Budget documents state that total revenue for 2016-17 is expected to be $416.9 billion, an increase of 5.2% on estimated revenue in 2015-16. Total expenses for 2016-17 are expected to be $450.6 billion, an increase of 4.4% on estimated expenses in 2015-16. We note that nearly all growth projections have been over estimated in all years since the GFC. The deficits are projected to lower to $6.0 billion by 2019-20, with the aim of returning the book to balance by 2020-21.
Highlights:
Gives:
1. The big news is the change of definition of "SME" from $2m turnover to $10m from 1 July 2016 - 2017 Financial Year. Reduction in Company Tax Rates. No mention of provisions for those businesses that exceed $2m in 2016 but will be less than $10m in 2017 and later. A business with annual turnover of less than $10m will be able to access a number of small business tax concessions from 1 July 2016, 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 (how do you measure this - do a stock take?), 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 (eg professional fees and government charges); a 12-month prepayment rule; and the more generous FBT exemption for work-related portable electronic devices (eg 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. It is estimated about 100,000 businesses will fall under the $10m rule. (The threshold changes will not affect eligibility for the small business CGT concessions, which will only remain available for businesses with annual turnover of less than $2m or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test)).
Franking credits will continue to be calculated in the usual manner by reference to the amount of tax paid by the company making the distribution.
Unincorporated businesses (Sole Trader / Partnership): Like the company tax rate reductions, the tax discount (or tax offset) for unincorporated small businesses will increase over a 10-year period from 5% to 10%. The tax discount will increase to 8% on 1 July 2016 (2017), remain constant at 8% for 8 years, then increase to 10% in 2024-25 (2025), 13% in 2025-26 (2026) and reach a new permanent discount of 16% in 2026-27 (2027). The maximum value of the discount will remain at $1,000. Don't spend it all at once!
Also announced was that more taxpayers will be able to access the tax discount. From 1 July 2016 (2017), 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 $5m (the current threshold is $2m).
2. Closely following this is the 'indexation' of the $80,000 threshold to $87,000. This means $7,000 of salary is taxed at the rate UNDER the current $80,000. Sounds great and gets 'the tick' for giving, but it is not that much of a cut.
Taken Away:
3. Significant and many Superannuation changes including superannuation deductions reduced to $25,000 (check your salary plan in 2018 so you don't exceed the new limit), $1.6m transfer balance cap for retirement accounts; Non-concessional contributions: $500,000 lifetime cap from now, Concessional contributions cap cut to $25,000 from 2018, Concessional contributions catch-up for account balances less than $500,000, Superannuation contributions tax (extra 15%) for incomes over $250,001,
4. Multinationals appear to get more attention and High Net Worth Individuals ($30m in Assets). New ATO "Task force" to be assigned.
5. Give up Smoking. Increase of the excise by 12.5% every year for the next 4 years starting September 2017. Expensive smokes.
Other Measure - Details
6. Changes to Division 7A:. There will be consultation to make targeted amendments to improve the operation and administration of Div 7A. The 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 Div7A. Subject to the outcomes of the consultation process, Div 7A will be amended to include:
- a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Div 7A with the opportunity to voluntarily correct their arrangements without penalty, new safe harbour rules, such as for use of assets, to provide certainty and simplify compliance for taxpayers, amended rules, with appropriate transitional arrangements, regarding complying Div 7A loans, including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions; and (unknown) technical amendments to improve the overall operation of Div 7A.
Date of effect These changes will apply from 1 July 2018 (2019). Given these are helpful and simplify what can be draconian rules is disappointing.
7. Collective investment vehicles – CIVs - proposed new types: A new tax and regulatory framework for 2 new types of collective investment vehicles (CIVs) to be introduced. CIVs allow investors to pool their funds and have them managed by a professional funds manager. A corporate CIV will be introduced from 2018 FY. CIVs will allow Australian funds managers to offer investments through a company structure which is well suited for offering retail investment products. A limited partnership CIV will be introduced for income years from 2019. This type of vehicle is commonly used overseas to facilitate wholesale investment by large investors, such as pension funds.
To implement ATO will be given $2m and $7.8m to ASIC, partially offset by $0.7m in registration fees. Reason? Enhance the international competitiveness of the Australian managed funds industry and maximise the effectiveness of related Government initiatives aimed at increasing access to overseas markets, including the Asia Region Funds Passport. 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 proposed new CIVs will generally be taxed as if they had invested directly.
It is not clear how or what standardised reporting to investors will be introduced (nothing stated).
8. Diverted profits tax ("Google tax") with a penalty rate of 40% to be introduced Applies companies with global revenue of $1 billion or more but not to companies with local revenue of less than $25 million, unless they are booking revenue offshore. There are significant penalties for not co-operating with the ATO in excess of $450,000.
9. Tax Avoidance Taskforce to be established within the ATO The Taskforce is intended to have over 1,000 experts and will pursue tax avoidance by multinationals and high wealth individuals. The Tax Avoidance Taskforce will act to improve tax compliance in high tax risk sectors and will also directly target compliance cases against those exposed by the Panama Papers.
This initiative enhances and extends current compliance activities targeting large multinationals, private groups and high-wealth individuals to 30 June 2020, and will feature the collective efforts of over 1,000 experts, including 390 new specialised officers.
10. Passport fees to rise - again : From 1 January 2017, the cost of each new passport will increase by $20 for adults and $10 for children and seniors, and the fee for priority processing of passport applications will increase by $54.
11.. Further Other Measures - Summary (no details here, you'll be deluged in detail from every direction tomorrow).
- "Ten Year Enterprise Tax Plan" (for governments with 3 year terms, sure)
- Company tax rate to reduce to 25% by 2026-27
- Personal tax rates: small tax cut from 1 July 2016; Budget deficit levy not to be extended
- Medicare Levy Surcharge and Private Health Insurance Rebate - indexation pause to continue,
the pause on indexation of the income thresholds for the Medicare Levy Surcharge and
Private Health Insurance Rebate for another 3 years from 1 July 2018.
- Higher education options: HELP debts, etc. The Government is considering a number of higher education reforms to commence in 2018
- Temporary Budget Repair to expire at end 2017 FY
- GST to be imposed on goods imported by consumers regardless of value. The new rules will commence in 2018 FY.
12. Superannuation Measures -Summary
- Superannuation pension phase - $1.6m transfer balance cap for retirement accounts
- Transition to retirement pensions - tax concessions to be reduced
- Non-concessional contributions: $500,000 lifetime cap from Budget night
- Concessional contributions cap cut to $25,000 from 2018 year
- Concessional contributions catch-up for account balances less than $500,000
- Superannuation contributions tax (extra 15%) for incomes $250,001+
- Tax deductions for personal super contributions extended
- Superannuation contribution rules - work test to be removed for age 65 to 74
- Low income super tax offset (LISTO) to be introduced
- Low income spouse super tax offset to be extended
- Retirement income products - tax exemption extended
- Anti-detriment deduction to be removed for super death benefits
- Objective of superannuation to be enshrined in stand-alone legislation
If you want more detail on the Superannuation tax changes please contact us as they are quite long.
If you have any comments or questions please let me know.
Brett Lamond & Co
3 May 2016
[20160503]
Last Edit 10 May 2016
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