In announcing its 2016 Federal Budget the government has continued down the path of redefining Australia’s superannuation system and also just what constitutes ‘small business’ in Australia. The further increase in tax audit activity will also win few friends in the business sector.

Our four key takeaways from this budget:

1. Increased tax audit activity

The government has announced the establishment of a new Tax Avoidance Taskforce. It will pursue tax avoidance in nominated ‘high risk’ sectors by multinationals, large public and private groups and high wealth individuals.

This initiative features a 55% increase in audit funding over four years, with targeted resulting gross revenue of $3.7 billion (which makes up 25% of net proposed revenue).

Proposed new sources of net revenue over the next four years:

2016 Federal Budget Net Revenue

Given the significant increases in audit activity we have already experienced in recent years we expect more businesses and family groups to be impacted by this announcement.

2. Redefining superannuation

The 2016 Federal Budget includes a number of proposed superannuation changes. Continuing its pre-budget discussion, superannuation is to be legislatively defined as a vehicle “to provide income in retirement to substitute or supplement the Age Pension”. We believe that this is a watered-down version of its previously understood purpose, which was to provide for the retirement and death of its members.

Given the ongoing volatility of governmental policies on superannuation as well as the further limitations that these announcements bring, we are increasingly considering alternative savings vehicles for our clients.

Limiting the tax-free pension balance to $1.6m per person

The government proposes to limit the amount of superannuation that is able to be transferred into the tax-free pension environment. From 1 July 2017, only income generated from a maximum $1.6m per person superannuation balance (at the time of starting the pension) will be tax-free in pension phase. Subsequent earnings to the balance cap of $1.6m will also retain the tax-free status. Transition rules will be implemented for those currently in pension phase and having a balance in excess of $1.6m.

With the introduction of the pension phase tax-free cap, it becomes even more important to ensure the family superannuation balances are split evenly to maximise this cap. It will also be important to consider which assets are allocated to the tax-free balance cap given the earnings on these assets will be tax-free.

Introduction of a lifetime $500,000 non-concessional contributions cap

The government proposes to introduce a lifetime non-concessional cap of $500,000 with effect from 7.30pm (AEST) on 3 May 2016. This will replace the existing annual non-concessional contributions cap of up to $180,000 per year (or $540,000 every 3-years under the bring-forward) being the restriction on non-deducted superannuation contributions.

The lifetime cap will be calculated based on non-concessional contributions made on or after 1 July 2007. There will be no impact for anybody who has already exceeded this cap based on non-concessional contributions made during the period 1 July 2007 to 3 May 2016.

Taxpayers will need to review their contributions from 1 July 2007 to determine whether they are eligible to make further non-concessional contributions and to what extent. This may be difficult given it goes back nine years.

Concessional contributions cap cut to $25,000

From 1 July 2017 the annual concessional contributions cap will be reduced to $25,000 for all individuals regardless of age. This proposed change alters the existing caps for deducted contributions for the 2016 and 2017 financial years of:

  • $30,000 for those under age 49; or
  • $35,000 for those aged 49 or over.

Concessional contributions catch-up for account balances less than $500,000

The government proposes to allow individuals with superannuation balances of less than $500,000 to make additional concessional contributions. The additional contributions allowed will be based on the unused cap amounts where the taxpayer did not reach the cap amounts in the previous five years. This change is to start from 1 July 2017, with no ability to make up shortfalls arising before this date.

Superannuation contributions tax (extra 15%) for incomes over $250,000

As broadly expected the government has lowered the individual income threshold at which additional superannuation contributions tax arises from $300,000 to $250,000. This means that the tax paid on superannuation contributions increases from 15% to 30% for affected individuals from 1 July 2017.

Tax deductions for personal super contributions extended

From 1 July 2017, the government will allow all individuals up to age 75 to claim an income tax deduction for personal super contributions, regardless of their employment circumstances. Previously, individuals who derived the majority of their income as an employee were not allowed a deduction for personal superannuation contributions.

This is a long overdue change that will make superannuation planning easier for many.

Superannuation funds paying Transition to Retirement Pensions (“TTRP”) to be taxed

At present all funds paying superannuation pensions are tax-free. The government proposes to remove this concession for funds that are paying a TTRP from 1 July 2017. This means that these funds will return to the 15% tax rate.

This change is intended to halt the perceived abuses of superannuation flowing from these pensions.

Work test to be removed for those aged 65 to 74

From 1 July 2017 all individuals less than 75 years of age will be able to make superannuation contributions regardless of their employment status.

3. Redefining small business

The government announced a number of tax cuts and other incentives that will help businesses. Initially these benefits will apply to small businesses but we can expect it to flow on to larger businesses over time.

The government has redefined the tax concept of a ‘small business’. A small business now has a turnover less than $10m (previously it was a turnover of less than  $2m ). This definition is linked to most of the small business tax concessions that already exist. Notably, the new $10m threshold will not apply for the (sometimes very generous) small business Capital Gains Tax concessions.

It is important to realise that the turnover taken into account is an aggregated turnover which will link many associated enterprises. Caution will be required in assessing eligibility.

The most noteworthy incentives in our view are the:

  • $20,000 instant asset write off
  • Cash accounting for GST
  • Reduced company tax rate

$20,000 instant asset write off

The $20,000 instant asset write off introduced last year for “Hockey’s tradies” still has another full year to run. For the 2016-2017 year, businesses with turnover up to $10m will be able to claim an immediate deduction for depreciating assets worth less than $20,000.

The number of companies with revenue between $2m and $10m is much smaller than those with turnover under $2m. However, businesses in the newly expanded threshold have a much greater capacity to invest in new assets and take advantage of the immediate deduction. This measure is likely to have a real stimulus impact.

Cash accounting for GST

One change that might be overlooked is the option for these larger ’small businesses’ to report GST on a cash basis. While it may not sound very exciting, this could provide a real cash flow boost to many businesses in this category. It will be particularly helpful for those in service industries with high receivables. Under the current system, these businesses would often pay GST to the tax office before collecting it from their customers.

Tax rate changes

One of the headlines from this budget are the changes to the company tax rate. The plan is for the ’glide path’ of tax cuts to be set out in legislation. They will then come into effect each year over the next 10 years.

From 1 July 2016, the newly expanded category of small businesses will see a company tax rate cut to 27.5%. This is in contrast to the current 28.5% for those small business companies with a turnover under $2m, and 30% for all other companies.

From the 2018 tax year, the 27.5% rate will be gradually phased in for business companies with turnover up to $1 billion. The government will then expand the rate cuts to all companies, and eventually the tax rate is scheduled to hit 25%.

Who gets the cuts?

Critically, we note that until 2023-2024, this is a business company tax cut, not a company tax cut. The turnover thresholds refer to business turnover, so companies earning only passive investment income are excluded.

Confusingly, under the current legislation, companies earning both business and passive income receive the lower tax rate for all of their income. We will be interested to see if this anomaly remains when the new tax rates are introduced.

Again, noting that it is a business company tax cut, there is not much benefit for unincorporated small businesses. The discount on individual income tax from small business introduced last year has been increased, but it is still capped at $1,000.

Franking credits

One flow-on effect from changing the company tax rate that has received little mention is the rate of a fully franked divided. While the budget papers are not particularly clear, it seems the rate will be the particular company’s tax rate in a given year. The problem here is that companies that have built up a substantial franking account balance might end up with credits that they cannot use.

4. Other measures of note

GST on all imports
From 1 July 2017 all imports of goods by consumers will attract GST. This will be collected by requiring offshore vendors with an Australian turnover in excess of $75,000 to register for GST in Australia. This aligns with the proposed treatment for imports of services such as digital downloads intended to apply from the same date.

Temporary Budget Repair Levy remains temporary
No current intention to extend the Temporary Budget Repair Levy beyond its legislated three year term. The levy is an additional 2% charge on personal incomes in excess of $180,000 from 1 July 2014. It legislated to expire on 30 June 2017. The treasurer has confirmed that the levy will not be extended, despite speculation to the contrary. This means that the present highest personal tax rate of 49% (including the Medicare levy) should fall back to 47% from July 2017.

Changes to tax rules for loans from private companies
The government has announced that it will seek to implement changes to the convoluted “Division 7A” rules regarding loans from private companies. These rules are designed to ensure that monies drawn from companies are taxed at personal rates rather than the lower corporate tax rates. The changes are amongst those recommended in June 2015 by the Board of Taxation. They will significantly alter the minimum repayment and documentation terms and also the ability to self-correct inadvertent breaches of these provisions. The changes are to apply from 1 July 2018.

HELP Proposals
Following from the 2015 budget’s proposal to commence recovery of HELP debts from non-residents from July 2017, the government intends to explore further ways of increasing collection of HELP debts. This includes consideration of a household income test for HELP repayments and the recovery of HELP debts from deceased estates.

Our final thoughts

This is a pre-election budget. Given the difficulties the present government has had in passing any laws, the true test will be whether they will have enough support from the electorate to legislate their announcements.

For the first time in a number of years the government has announced some changes with real impact. Planning will be required to ensure you maximise the opportunities that these changes present.

If you think you should take action based on our thoughts above, please contact Murray Howlett from our tax team on (07) 3023 1300.