Summary – The Federal Budget

Scott Morrison has handed down the Budget which has some surprises, both good and bad for taxpayers and business. An overview of some of the key issues and our comments are set out below:

Superannuation

Those clients who make concessional contributions of more than $25,000 per annum, have income that exceeds $250,000 per annum, have a superannuation balance of more than $1.6M or plan to make non-concessional contributions in excess of $500,000 will need to pay attention when planning for the future. Changes to take place are:

• from 1 July 2017 the introduction of a $1.6M superannuation balance cap to cap tax-free retirement phase accounts
• from 1 July 2017 there will apply a 30% tax on concessional contributions (up from 15%) for combined incomes of greater than $250,000
• from 1 July 2017 there will be a lowering of the cap on concessional contributions to $25,000 across all eligible contribution ages
• from 7:30pm on 3 May 2016 there will be a $500,000 lifetime cap for non-concessional contributions
• from 1 July 2017, all individuals under the age of 75 will be able to claim tax deductions for personal contributions, regardless of the circumstances of their employment
• from 1 July 2017, the same contribution acceptance rules will apply for all individuals up to 75 and the minimum work requirements for Australians aged 65 to 74 will be removed, as well as restrictions on the bring-forward of non-concessional contributions and the inability of spouses over 70 from receiving contributions
• from 1 July 2017 there will be a removal of the tax exempt status of earnings of assets supporting transition to retirement income streams, and
  removal of anti-detriment provisions.

The superannuation changes are the most substantial for many years. For superannuation funds with existing retirement phase balances over the $1.6M cap, the excess must be removed from superannuation or moved back into accumulation phase and be subject to 15% tax by 1 July 2017. Planning will need to occur where there are substantial unrealised gains on these assets, with consideration given to realising gains prior to 30 June 2017, subject to duty and other considerations.

Income Tax

• from 1 July this year, the tax rate will reduce to 27.5% (30 June 2017 financial year) for businesses with a turnover of less than $10m
• the 27.5% rate will apply to companies with a turnover of less than $25m from 1 July 2017 (30 June 2018 year)
• the 27.5% rate will phase in over time and will apply to all corporate businesses regardless of turnover in 30 June 2024, after which the rate is the proposed to progressively drop further to 25% over 3 years
• an extension of the unincorporated small business tax discount from the 2016-17 year will be available to businesses with a turnover of less than $5m, up from the current threshold of $2m, and will be increased from 5% to 8% and will be expanded to 16% over the next decade (but to be capped at $1,000 for 2016-17), and
• from 1 July, the current $2m turnover threshold will be increased to $10m and will have access to:
  • simplified depreciation rules including immediate tax deductibility for depreciating asset purchases costing less than $20,000 until 30 June 2017
  • simplified trading stock rules, giving them the option to avoid end of year stocktake if the value of their stock has changed by less than $5,000
  • a simplified method of 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
  • other tax concessions currently available to small business, such as FBT exemptions, and
  • a trial of simpler BAS.

Noting that these threshold changes do not affect eligibility for the small business capital gains tax concessions which will remain at a $2m turnover test or a maximum net asset value of $6m.

The reduction in corporate tax rates is welcome, though it should be noted that when profits are paid to Australian resident owners the reduced tax rate will result in reduced franking credits. The changes do allow corporates to accumulate and reinvest profits at a lower rate and are welcome. It should be noted that the Opposition has indicated that they do not support the lowering of the corporate tax rate for business with a turnover of more than $2m.

Division 7A

The Budget has flagged that amendments will be made to Division 7A and private company loans. While specifics are not available at this point, it appears that the measures will be consistent with many of the recommendations of the Board of Taxation Review. However the amendments are not scheduled to apply until 1 July 2018 (that is the 30 June 2019 year).

The delayed start to the changes means that businesses operating in trusts that are seeking to access to the corporate tax rate for reinvested profits, must still manage division 7A issues for the next 2 to 3 years. Subject to management of State duty, consideration can be given to restructuring to corporatise such businesses, to deal with Division 7A issues ‘once and for all’.

Income tax – large companies and Multinationals

• as noted above the main change is the phased reduction of the corporate tax rate based on business turnover – though for higher turnover companies the reduced rate will not apply for several years
• expected changes to thin capitalisation rules, which limit the level of debt on which interest is deductible to foreign owned and Australian multinational companies were not announced. (There were suggestions that the maximum debt to equity ratio under safe harbour tests would reduce from 1.5:1 to 1:1)
• a ‘Diverted profits tax’ sometimes referred to as a ‘Google tax’ will be introduced from 1 July 2017 – but will only apply to multinational groups with turnover of more than $1b
• a Collective Investment Vehicle (CIV) regime for companies and ultimately limited partnerships is to be introduced. Currently Australia only has a CIV for trusts, and
• revised tax conditions for Foreign Investment Review Board (FIRB) approval have been released. Importantly the requirement of compliance with Australian tax laws to obtain FIRB approval will not require an ATO audit of taxpayers affairs prior to approval.

The budget issues for corporates are relatively limited in the short term, but it is clear that the Government and the Australian Taxation Office has a continuing focus on international taxation, transfer pricing and profit shifting, which will no doubt occur in parallel to other initiatives flowing out of the ‘Panama papers’ in respect of companies and high net worth individuals with offshore activities.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.