Key tax changes in the 2016 Federal Budget
A Federal Budget so close before an election is a potential minefield. As a business owner it’s important to be across all the key tax changes.
The Turnbull and Morrison government has taken a modest approach in unveiling their ‘economic’ plan and implemented a range of moderate changes.
The main thrust of the federal budget is simple: enhance job growth by targeting small to medium business with tax cuts and incentives, then pay for it through refinements to the superannuation system.
Unlike most budgets of recent years, low income earners have been left largely alone with only a nominal change to the low income Medicare levy thresholds.
However, a range of changes continue to improve the case for small to medium businesses.
The superannuation system has also received a sweeping set of changes which will impact many Australians, so these are given a thorough review in this budget update.
Budget tax cuts
Tax cuts are a political hot potato which can easily be taken out of context, and indeed have already been by the media in the lead up to the budget. The key ones are summarised below.
Individual tax bracket change
The first is for the what the government terms ‘hard working Australians’ on the average wage of $80,000 per year.
For these, the 37 percent tax bracket, which currently kicks in at $80,000, will now start at $87,000.
In realistic terms, this is a modest increase that barely keeps up with the inflation based ‘bracket creep’ of the last couple of years, and nets a grand total of $315 to someone over the $87,000 limit.
Yes, $6 a week is barely worth a mention and doesn’t justify the media exposure that it has been subject to… a storm in a teacup!
This measure, while fair, is costly, given the large number of Australians who are in this income bracket.
That is the price to pay when our country is so heavily dependent upon the middle class for its income.
Company Tax Rate
A major pillar of the tax reform proposed in the budget is to reduce the company tax rate progressively.
The current rate is 30 percent, with a concessional rate of 28.5 percent applying to business with a turnover of less than $2 million.
The rate is being reduced to 27.5 percent for the 2016–17 year for those with a turnover of less than $10 million.
The turnover threshold will be progressively increased until the 2022–23 income year, after which the tax rate will decrease by 1 percent per year to finally sit at 25 percent in the 2026–27 income year for all companies.
These are big cuts, but over a long timeframe. They are also in principle objected to by the opposition so will be key measures to watch over the election to see whether they will come to fruition.
Small business tax discount
In conjunction with the company tax rate decrease, the tax discount on unincorporated business, currently at eight percent, will be lifted to 16 percent for business with a turnover of less than $5 million.
However, the discount is still limited to $1,000 per individual, which leaves it back in the bucket of being a relatively minor incentive.
Small and Medium Business
Small business has seen a raft of concessions targeted at them over the last couple of years, for example the generous immediate deduction for assets under $20,000 and the lower tax rates.
The reality is that many businesses on the ‘medium’ end of the scale have missed out over the years, because the definition of a small business sits at a fairly tight level of $2 million in turnover.
The government has proposed to increase this turnover threshold to $10 million, bringing many more businesses into this category.
This is a huge win for these businesses which will open up all the small business concessions they were previously denied, ranging from improved depreciation rules to capital gains tax concessions.
I lost count of how many politicians quoted this as an increase of the turnover threshold to one billion dollars (!), which is far from the case.
Unfortunately, the measure was vehemently opposed by the shadow treasurer shortly after the budget was delivered.
It will remain to be seen whether this announcement sees the light of day pending the results of an uncertain election.
The tax cuts do come with a bill, and the government is targeting what they call ‘generous superannuation tax concessions’ as one of the means of paying them.
It is not all bad news however as the government is trying to incentivise those on low income and with small balances in super to invest, while progressively penalising those who are at the other end of the scale.
There are a lot of changes, some of which are good, some of which will hurt, and some of which are just a welcome bit of simplification, so hang on as we go through them!
Simplifying contribution rules
From 1 July 2017, anyone will be able to make concessional superannuation contributions, regardless of employment circumstances.
This is a welcome change to the sometimes arbitrary and complex rules we are currently subject to, and ensures anyone, including the self-employed and those with employers who refuse to salary sacrifice, can gain the same benefits by contributing into super.
Concessional contributions caps
The concessional contributions limits are to be reduced to a flat $25,000 per year from 1 July 2017 (currently ranging between $30,000 and $35,000 based on your age).
In addition, the extra tax rate of 30 percent that applies to contributions by those with incomes of over $300,000 will now apply to those with incomes of more than $250,000.
Currently individuals can make contributions of their own, after-tax money into superannuation of up to $180,000 per year, in addition to the normal ‘concessional’ or tax deductible contributions they might make.
This system is being scrapped in favour of a single lifetime cap of $500,000, which will take into account all non-concessional contributions made since 1 July 2007.
The effect of this is immediate, as non-concessional contributions made after 3 May 2016 (budget day) which are in excess of this cap will be subject to a penalty tax rate.
Low income superannuation tax offset
Low income earners who are below the tax free threshold find that contributions made into superannuation incur a tax rate of 15 percent, so it actually costs them to put money into superannuation.
From 1 July 2017, up to $500 of this cost will be available as a tax offset for those with an adjusted taxable income of less than $37,000.
The work test
The government is simplifying the super rules substantially by removing the ‘work test’ for those aged over 65.
From 1 July 2017, this will allow people aged from aged 65 to 74 to freely contribute money into superannuation subject to the same rules as everyone else!
Taxation of TRAPs
Income on superannuation which is in a Transition to Retirement Income Stream (TRAP) is currently tax free.
This tax-free status is being removed and so the income will subject to the normal superannuation tax rates.
Those with superannuation balances of less than $500,000 will be allowed to make ‘catch up contributions’ where they have not fully utilised the available concessional caps from previous years.
It will only apply to unused amounts accrued from 1 July 2017, and will apply on a 5 year rolling basis.
This essentially allows individuals to plan their contributions and make them in ‘lumps’ in arrears, rather than utilising the maximum cap every year.
Fortunately, the government has promised to retain the tax-free status of superannuation withdrawals in retirement. However, amounts invested in the ‘retirement phase’ (ie which is paid out as a pension) have been targeted.
Currently, income on the amounts invested are tax free (in addition to the pension payments themselves), but from 1 July 2017 the balance of these amounts will be capped at $1.6 million, reducing the generous concession on the income generated from investing these funds.
Jobs for vulnerable young people
The government has a large focus on ‘jobs growth’, as repeatedly quoted during the budget delivery. Part of delivering on this is through the reduction of company tax rates.
In addition, in an attempt to refine previous systems such as ‘work for the dole’, a new scheme is proposed which is designed to provide vulnerable young people with subsidised work experience.
This will allow employers to design an internship placement of 4 to 12 weeks during which a job seeker will get unpaid work experience for 15 to 25 hours per week.
Business will be incentivised with a $1,000 upfront payment while job seekers will receive an additional $200 per fortnight on top of their regular income support payments.
Finally, a wage subsidy of up to $10,000 will be available where a job seeker is subsequently employed for at least six months.
Other items of interest
There are a number of smaller measures that don’t hit the headlines on budget night, or do so for the wrong reasons!
A couple of interesting measures include:
GST on imports
The government will now require overseas suppliers who sell more than $75,000 worth of goods in Australia to register for GST.
While increase tax revenue, this will also potentially increase the price of low-value goods bought through international ebay stores and the like.
From 1 July 2018, the government proposes to clarify the tax treatment of deferred payment and hire purchase arrangements.
Currently these can be quite complex from a taxation point of view, where most just resort to a simply interest bearing loans.
This could open up a new breed of financing arrangements in coming years that move away from the conventional chattels mortgage loans we are used to.
There are some incentives in the Budget for startup and innovation enterprises, but the reality is that these are obscure and hard to get, and will mean little for the average punter.
The reality is that there are few people hurt by this budget, given the focus on recovering the cost of its initiatives from big business and wealthy superannuation accounts.
There is some welcome simplification and some modest tax cuts to expect in the coming year.
Most importantly, the changes to superannuation and to the small business definitions will require positive action on your part, both to take advantage of the opportunities presented, and to avoid any pitfalls with your current strategies.
Make sure you get in touch with your advisor to avoid any pitfalls in your current strategies, and even more importantly, take advantage of some of the opportunities presented.
The information provided here is of a general nature for Australia and should not be your only source of information. Please consult an experienced tax agent as each small business’ circumstance will vary for end of financial year.