At a high level, last night’s federal budget represents an attempt at rebalancing Australia's tax and superannuation systems in favour of small business and lower/middle income earners at the expense of multinationals and the very wealthy. The finer detail includes changes in a number of areas to allow for more flexibility, particularly around superannuation, some very generous concessions for businesses with turnover up to $10 million, and a tightening of existing anti-avoidance rules.
Whilst the GST rate, negative gearing and the Capital Gains Tax discount were ultimately left untouched, the budget nevertheless represents the biggest attempt at reforming the fairness of Australia’s taxation system in many years. Most Australians will be affected in some way by last night’s announcements and we welcome a large number of the proposed changes as both overdue and sensible, if modest, reform.
We have selected the top 10 announcements we believe will be of most interest to our clients and colleagues. Please get in touch if you would like to discuss any of the measures announced last night and how they might apply to you.
In order of announced start date, they are:
Date of effect: 7:30pm, 3 May 2016
1. Lifetime non-concessional superannuation contribution cap of $500,000.
Effective from budget night, the annual non-concessional superannuation contribution cap of $180,000 (or $540,000 under the 3 year bring forward rule) for individuals will be removed.
Instead a $500,000 lifetime cap on non-concessional contributions ('NCCs') will be introduced. This will capture all contributions made since 1 July 2007 (the earliest date from which the ATO has reliable data), however if an individual has already exceeded $500,000 in NCCs since that date, they will not be required to unwind these.
Contributions made in excess of the $500,000 lifetime NCC cap after 3 May 2016 will be subject to the current regime for excess NCCs i.e. subject to penalty tax at the top marginal rate of tax if not elected to be voluntarily withdrawn from super.
Date of effect: 1 July, 2016
2. The definition of a Small Business Entity will be adjusted to $10 million aggregated turnover (from the current $2 million) for a number of concessions
Under current tax law there is a sizeable list of concessions that can only be accessed by a small business entity (turnover < $2 million). Many of these concessions will be extended to a business turning over up to $10 million from 1 July 2016, including:
The simplified depreciation rules (which includes an immediate deduction for a depreciating asset costing less than $20,000 until 30 June 2017);
Simplified trading stock rules;
Option to account for GST on a cash basis and pay ATO calculated GST instalments;
FBT exemption for work-related portable electronic devices.
This change will not be extended to accessing the small business CGT concessions, which will remain at $2 million turnover or the $6m maximum net asset value test. There are a number of other concessions not specifically addressed as yet including the deductibility of prepaid expenditure up to 12 months in advance and the new small business rollover.
These changes will open up a range of valuable tax planning opportunities for businesses with aggregated turnover of between $2 million and $10 million.
3. The corporate tax rate for business companies turning over up to $10 million will be reduced to 27.5%
A reduction in the corporate tax rate to 28.5% from 1 July 2015 for businesses turning over up to $2 million had previously been announced. This rate will be reduced to 27.5% for companies with aggregated business turnover over up to $10 million from 1 July 2016.
Over 10 years this tax rate will be further reduced to 25%, whilst the aggregated turnover threshold at which the reduced rate applies will be increased to $100 million.
The rate at which a company is able to frank its dividends will also fall in line with the applicable tax rate.
4. The tax offset available for businesses carried on other than through a company will increase from 1 July 2016.
Recognising that not all small businesses are carried on through a company structure, a tax offset, known as the unincorporated small business tax discount, is available to individuals who receive small business income other than via a company.
The offset already applied from 1 July 2015 at a rate of 5%, however will increase to 8% from 1 July 2016 and is available where the business has a turnover of less than $5 million. The current maximum tax offset cap of $1,000 pa per individual will continue to apply.
Date of effect: 1 July, 2017
5. $1.6 million superannuation transfer balance cap to be introduced
From 1 July 2017, a balance cap of $1.6m will be imposed on superannuation members moving from accumulation to the tax-free income stream (pension) phase.
This measure will apply to all superannuation members, including those currently in income stream phase. Those members who already have a balance of more than $1.6m in income stream phase will be required to reduce their balance to $1.6m by 1 July 2017. Excess balances may be reverted back to a normal accumulation phase account, the income on which will continue to be taxed at 15% (10% for discount capital gains).
These measures will limit the extent to which members can benefit from the tax-free concession afforded to their superannuation earnings. They will not change the tax-free nature of withdrawals from superannuation, either pension or lump sum, for members aged over 60.
A penalty tax will be applied for members who transfer more than $1.6m to income stream phase in a similar manner to the current excess non-concessional contribution penalty tax.
We expect these measures to result in a number of interesting outcomes such as potentially placing more scrutiny on the valuation of assets, such as real estate, which support pension accounts; and a likely preference for the drawing of additional superannuation amounts from a member’s accumulation account rather than pension account in some scenarios. It remains to be seen whether additional anti-avoidance rules will be introduced to combat potential abuse or avoidance of these new rules.
6. Additional superannuation contributions tax threshold for high income earners to be reduced
Under current rules, high income earners (those with an adjusted income of over $300,000) bear an additional tax on their concessional superannuation contributions, known as Division 293 tax, of up to 15%. This means that total superannuation contributions tax can be up to 30% for these individuals.
Form 1 July 2017, the threshold will be reduced to $250,000, bringing more taxpayers within the net of Division 293.
7. Concessional superannuation contribution cap to be reduced to $25,000pa
Under current rules, an individual aged under 50 can receive concessional contributions of up to $30,000 pa. For individuals aged 50 and over, the cap is $35,000.
From 1 July 2017 this cap is proposed to be reduced to $25,000 for all individuals.
This change, combined with the lifetime cap on non-concessional contributions of $500,000, will place the onus on individuals to plan further in advance for their retirement if they wish to take advantage of the tax advantages available through the superannuation system.
In conjunction with this change, a concession will be introduced which allows certain individuals to “catch up” on their concessional contributions where these have been underpaid in previous years. This concession is available only to individuals with an overall superannuation account balance of less than $500,000.
8. Deductibility of superannuation contributions
From 1 July 2017, all individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions. Such contributions will still be subject to the concessional contribution cap of $25,000. The work test which currently applies to individuals aged 65 – 74 will also be removed from this date.
As present individuals can only claim a personal tax deduction in limited circumstances and generally not when they are ordinary salary and wage earners.
This change will make it easier for individuals to reach their concessional superannuation contribution cap without needing to negotiate complex salary sacrifice arrangements with their employers. This is a very welcome change that essentially levels the playing field for all taxpayers, regardless of their circumstances.
9. Superannuation tax exemption for earnings on assets supporting Transition to Retirement Income Streams removed
From 1 July 2017, the tax exemption on earnings of assets used to support Transition to Retirement Income Streams will be removed. These earnings will revert to the usual superannuation tax rate of 15% (10% for discount capital gains).
Furthermore, a loophole which allows taxpayers to take tax-free lump sums under age 60 in place of their TRIS minimum withdrawal will be removed.
These two changes will remove the incentive for many higher income taxpayers to utilise a TRIS, and is intended to ensure TRIS are used for their original purpose of aiding lower income taxpayers in their transition to retirement.
10. GST to be extended to low-value imports by consumers
Under current law, imports into Australia by consumers with a value of less than $1,000 are generally exempt from GST.
From 1 July 2017, GST will be extended to overseas suppliers who have an Australian turnover of greater than $75,000. This will effectively bring into the Australian tax net many foreign vendors who supply goods into our market.
It is currently unclear how this rule will be enforced on overseas businesses and we shall await with interest further detail from the government.
Aaron is the tax partner at Baumgartners. He is a Chartered Tax Adviser with 18 years’ experience advising private and corporate clients on a wide range of tax and commercial matters. Aaron also represents clients in disputes with the Australian Tax Office and state revenue authorities. Aaron holds a Master of Taxation from UNSW and is an active member of the Taxation Institute of Australia.