Last night’s federal budget contained a surprising number of changes for small businesses, families and large multinationals. Perhaps the biggest surprise however was the lack of any changes to superannuation, an area where many commentators had expected some tinkering to occur.
There is very little in this budget that would qualify as structural reform, however the government’s tax green paper is on the horizon and due for publication later this year. This paper, which follows the government’s earlier tax discussion paper (available here), will set out options for structural reform to our tax system that the government will further refine before taking to the next election.
While the mainstream media will no doubt devote significant space to analysing the winners and losers of this year’s budget, we have cherry picked 10 points which we believe will be particularly relevant to our clients and colleagues. Please get in touch if you would like to discuss how any of the tax or superannuation measures announced last night apply to your circumstances.
In no particular order, our 10 points are:
1. CGT relief reforms for small business restructures
Small businesses may change the legal structure of their business without attracting a capital gains tax (CGT) liability from the 2016/17 income year. This measure will be available for small businesses with an aggregated annual turnover of less than $2m. It will enable small businesses to alter their legal structure as they find suitable without being impeded by potential CGT implications.
2. Small business tax rate cuts
The tax rate for companies with an aggregated annual turnover of less than $2m will be reduced by 1.5% (i.e. from 30% to 28.5%) from the 2015/16 income year. However, the maximum franking credit rate for a distribution will remain at 30%.
Further, a 5% tax discount will be introduced for individual taxpayers with business income from an unincorporated business, such as a sole trader, trust or partnership that has an aggregated annual turnover of less than $2m. This measure will also apply from the 2015/16 income year.
The discount, given in the form of a tax offset, will apply to the income tax payable on the business income received and will be capped at $1,000 per individual for each income year.
3. Small business accelerated depreciation changes
The threshold below which small businesses can claim an immediate deduction for the cost of an asset they start to use or install ready for use will be temporarily increased from the current $1,000 to $20,000.
The $20,000 threshold will apply for assets acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017. It is available for small businesses with an aggregate annual turnover of less than $2m.
Currently a small business can claim an immediate deduction for assets costing less than $1,000 to the extent the asset is used for tax deductible purposes. With the increase of the threshold for the immediate deduction, assets valued at $20,000 or more that cannot be immediately deducted will be included in the entity's small business pool and depreciated at 15% in the first income year and 30% each income year thereafter, in the same way the rules currently apply for assets costing $1,000 or more.
Similarly, over the period from 7.30pm (AEST) 12 May 2015 up to 30 June 2017, the balance in the small business pool can be immediately deducted if it is less than $20,000 (including an existing pool).
The current rules preventing a small business using the simplified depreciation regime for five years if it opts out of the regime will also be suspended until 30 June 2017.
From 1 July 2017, the $20,000 threshold for the immediate deduction of assets and the value of the pool will revert to $1,000.
While small businesses can access the simplified depreciation regime for a majority of capital assets, certain assets are not eligible (such as horticultural plants and in-house software) for which specific depreciation rules apply.
4. Immediate deduction for business establishment costs
An immediate deduction will be available for professional expenses that are associated with starting a new business, such as professional, legal and accounting advice or legal expenses to establish a company, trust or partnership.
The deduction will be available to start-up businesses from the 2015/16 income year. Currently, such expenses are deductible over five years under the black-hole expenditure provisions.
5. Measures encouraging business start-ups
In order to encourage business start-ups and entrepreneurship:
- business registration processes will be streamlined with a single online portal (business.gov.au) developed for business registration and company registration, making it quicker and simpler to set up a new business. A start up business will no longer need an Australian Company Number or business Tax File Number but can use its Australian Business Number to interact with the ATO and ASIC. The new portal (expected to be implemented by mid-2016) will provide all the relevant information and have integrated customer support, and
- a regulatory framework to facilitate the use of crowd-source equity funding will be implemented, including simplified reporting and disclosure requirements, to help small businesses access innovative funding sources.
6. Broader FBT exemption for portable electronic devices
The fringe benefits tax (FBT) exemption for work-related portable electronic devices used primarily for work purposes will be expanded from 1 April 2016. Small businesses with an aggregated annual turnover of less than $2m that provide their employees with more than one qualifying work-related portable electronic device will be able to access the FBT exemption even if the additional items have substantially similar functions as the first device.
The current FBT exemption is limited to more than one portable electronic device if the devices perform substantially different functions.
7. GST extended to offshore supplies of services and intangibles to Australian consumers
Offshore supplies of services and intangibles to Australian consumers will be subject to GST from 1 July 2017.
The government has released an exposure draft Bill extending the scope of the GST to offshore supplies of services and intangibles to Australian consumers from 1 July 2017. The Bill amends the GST Act to make all supplies of things other than goods or real property subject to GST where they are made to Australian consumers. This will result in supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services receiving similar GST treatment whether they are supplied by a local or foreign supplier.
Responsibility for GST liability arising under the amendments may be shifted from the supplier to the operator of an electronic distribution service in certain circumstances where the operator controls any of the key elements of the supply such as delivery, charging or terms and conditions. Shifting responsibility for GST liability to operators is aimed at minimising compliance costs as operators are generally better placed to comply and ensure that digital goods and services sourced in a similar manner are taxed in a similar way. These amendments are broadly modelled on similar rules currently in operation in the European Union and Norway.
The measure will result in Australia being an early adopter of guidelines for business-to-consumer supplies of digital products and services being developed by the Organisation for Economic Co-operation and Development (OECD) as part of the OECD/G20 base erosion and profit shifting project. The change will require the unanimous agreement of the States and Territories before enactment of legislation.
8. Modernising the methods used for calculating work-related car expense deductions
The methods of calculating work-related car expense deductions will be modernised from the 2015/16 income year.
The “12% of original value method” and the “one-third of actual expenses method”, which are used by less than 2% of those who claim work-related car expenses, will be removed. The “cents per kilometre method” will be modernised by replacing the three current rates based on engine size with one rate set at 66 cents per kilometre to apply for all motor vehicles, with the Commissioner responsible for updating the rate in following years. The “logbook method” of calculating expenses will be retained. These changes will not affect leasing and salary sacrifice arrangements. These changes will better align car expense deductions with the average costs of operating a motor vehicle.
9. Changes to tax residency rules for temporary working holiday makers
The tax residency rules will 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 will be taxed at 32.5% from their first dollar of income.
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 six 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 income above the tax free threshold up to $37,000. This measure will apply from 1 July 2016.
10. Release of superannuation for a terminal medical condition
Early access to superannuation will be provided to people with a terminal medical condition with effect from 1 July 2015. Currently, patients must have two medical practitioners (including a specialist) certify that they are likely to die within one year to gain unrestricted tax-free access to their superannuation balance. The government will change this period to two years. This will give terminally ill patients earlier access to their superannuation.
The above comments are reproduced with permission from the Taxation Institute of Australia and were sourced from the TaxVine Special 2015-16 Budget Edition.
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.