Multinational corporate tax avoidance was high on the agenda as well as the tightening of superannuation concessions for high wealth individuals. On the other hand, changes aimed at small businesses are surprisingly generous and the Government confirmed that negative gearing will not be removed or tweaked in any way.

In an unprecedented move, the Reserve Bank of Australia announced on the same day its decision to reduce official interest rates by 0.25% to 1.75%, indicating its concern with the sluggish state of the economy which needs, according to various commentators, more stimulus than the Budget is likely to provide. With many saying that the Government’s economic performance projections are at odds with the Reserve Bank’s outlook, the likelihood of returning the Budget to surplus remains uncertain and several years away, at best.

In summary, if the Budget is passed as envisaged, small business will be the main immediate beneficiary of the changes, high wealth taxpayers will see their superannuation tax concessions wound back significantly and it will be business as usual for most. In fact, the cut in the interest rate is likely to have a bigger immediate impact for most Australian families than anything contained in the Budget.

Superannuation Measures

Effective Budget Night – 7.30pm (AEST) 3 May 2016

New lifetime cap for non-concessional superannuation contributions

The Government will introduce a $500,000 lifetime non-concessional contributions cap. It will replace the existing non-concessional contributions cap, which allows non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65).

This new lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007 (i.e., from the 2007/08 income year) and will be indexed in $50,000 increments in line with average weekly ordinary times earnings.

If an individual has exceeded the cap prior to commencement date (being 7.30 pm (AEST) on 3 May 2016 (i.e., Budget night), they will be taken to have used up their lifetime cap but will not be required to take the excess out of the superannuation system. This means that individuals who have made non-concessional contributions between 1 July 2007 and 3 May 2016 of $500,000 or more in total will not be able to make any further non-concessional superannuation contributions.

If after commencement, being the Budget Night, an individual makes non-concessional contributions that cause them to exceed the new lifetime cap of $500,000, they will be notified by the ATO and will have to withdraw the excess from their fund. Individuals who choose not to withdraw excess contributions will be subject to penalty tax.

WARNING! Extreme care should be taken in relation to this proposed measure. If you wish to make any non-concessional superannuation contributions after 3 May 2016, please contact your Ruddicks adviser first to discuss.

As the current and the proposed non-concessional contribution rules are conflicting, you may inadvertently trigger punitive excess contributions tax! While there is uncertainty as to whether this measure will be legislated, it is also designed to be retrospective so until such time as this change becomes law, taxpayers effectively have to comply with both sets of rules to avoid potentially significant penalties.

Changes effective from 1 July 2017 (i.e., effective from the 2017/18 income year)

Introduction of a $1.6 million cap on tax-free pensions

From 1 July 2017, the amount able to be held in a tax-free pension will be limited to $1.6 million. Any excess balances will need to either remain in accumulation phase or, for existing pensions, be transferred back to accumulation phase as the measures are proposed to be retrospective. Fund members will be able to maintain the excess amount above the new cap in an accumulation phase account where earnings will continue to be taxed at the concessional rate of 15%, with capital gains eligible for a one third discount.

Importantly, fund members already in pension phase with balances above $1.6 million will be required to reduce this balance to $1.6 million by 1 July 2017.

In contrast, under current law, if a fund member moves from accumulation phase into ‘pension phase’, earnings on assets supporting the pension (income tax and capital gains) are tax-free in the fund and there is no limit on the amount of accumulated superannuation that an individual can transfer into pension phase.

Taxing earnings on assets supporting a Transition to Retirement Income Stream

From 1 July 2017, the Government will remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams (‘TRIS’), being income streams or “pensions” of individuals over preservation age but not retired. Earnings from assets supporting a TRIS will be taxed at 15%. Importantly, this change is proposed to apply irrespective of when the TRIS commenced. This means that individuals with existing TRIS pensions will lose the tax-free status of earnings in relation to those pensions from 1 July 2017.

Reducing the concessional contributions cap

From 1 July 2017, the Government will lower the annual cap on concessional superannuation contributions to $25,000. Concessional contributions are those made from pre-tax money and include superannuation guarantee contributions, salary sacrifice contributions and contributions for which personal superannuation contribution deduction is claimed, such as those made by self-employed individuals.

Until 30 June 2017, the existing concessional contributions caps, being $30,000 for those aged under 50 years, and $35,000 for those aged 50 years and over, will continue to apply.

Allow catch-up concessional superannuation contributions

From 1 July 2017, the Government will allow individuals with a superannuation balance of less than $500,000 to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.

Only unused cap amounts accrued from 1 July 2017 can be carried forward, and can only be carried forward on a rolling basis for a period of five consecutive years. Allowing individuals to carry forward their unused concessional cap provides them with the opportunity to ‘catch-up’ if they have the capacity and choose to do so.

Changes to the contribution rules for those aged 65 to 74 – no more ‘work test’!

From 1 July 2017, the Government will remove the requirement that an individual aged 65 to 74 must meet the ‘work test’ to be eligible to make contributions to superannuation.

From 1 July 2017, individuals will also be able to make contributions for a spouse up to age 74. Currently, individuals can make contributions for a spouse up to age 69. From 1 July 2017, individuals will no longer have to satisfy a work test to receive contributions from their spouse.

Tax deductions for personal superannuation contributions – no more ‘10% test’!

From 1 July 2017, all individuals up to age 75 will be allowed to claim a tax deduction for personal superannuation contributions.

Under current law, a tax deduction for personal superannuation contributions is broadly limited to self-employed individuals, and substantially self-employed individuals (i.e., those that satisfy the ‘10% test’). This test will no longer apply.

Individuals who are, for example, partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from the proposed changes by being able to make tax deductible superannuation contributions. These will count towards the annual concessional contributions cap, together with any superannuation guarantee contributions and salary sacrificed amounts.

Additional contributions (Div 293) tax threshold reduced from $300,000 to $250,000

Currently, Division 293 imposes an additional tax of 15% on concessional contributions where an individual’s total ‘income’ (subject to certain adjustments) for an income year exceeds $300,000. This means that concessional contributions subject to tax under Division 293 are effectively taxed at 30%.

From 1 July 2017, the Government will lower the Division 293 threshold (i.e., the point at which high income earners pay additional contributions tax of 15%) from $300,000 to $250,000.

Consistent with current treatment, the additional 15% tax will be imposed on the whole amount of the contributions, up to the concessional cap, if ‘income’ for Division 293 purposes is above the threshold.

Otherwise, the additional tax is only imposed on the portion of the contribution that takes the individual over the threshold.

Introducing a Low Income Superannuation Tax Offset (LISTO)

From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (‘LISTO’) to reduce tax on superannuation contributions for low income earners.

The LISTO will provide a non-refundable tax offset of up to $500 to superannuation funds for the members with adjusted taxable income of up to $37,000 that have had a concessional contribution made on their behalf (such as superannuation guarantee contributions).

This will effectively avoid the situation in which low income earners would pay more tax on savings placed into superannuation than on income earned outside of superannuation.

The LISTO will replace the Low Income Superannuation Contribution when it ends on 30 June 2017.

Improve superannuation balances of low income spouses

From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse to $37,000 (from $10,800). The offset is gradually reduced for income above this level and completely phases out at income above $40,000.

The low income spouse tax offset provides up to $540 per annum for the contributing spouse and is designed to encourage superannuation contribution splitting with spouses on low incomes.

Business Measures

Changes effective 1 July 2016 (i.e., 2016/17 income year)

Reducing company tax rate to 25% over 10 years

The Government will reduce the company tax rate to 25% over 10 years (i.e., by 1 July 2026). This measure will commence from 1 July 2016, whereby the Government will cut the small business company tax rate to 27.5%, and make this tax rate available to small companies with an annual aggregated turnover of less than $10 million.

This turnover threshold will then be progressively increased to ultimately have all companies eligible for the 27.5% tax rate in 2023/24. In the 2024/25 income year, the company tax rate will be reduced to 27% and then be reduced progressively by 1 percentage point per year until it reaches 25% in the 2026/27 income year. Franking credits will be distributed in line with the rate of tax paid by the company.

The table below summarises the proposed changes to the company tax rate:

Unincorporated small business tax discount increase

The unincorporated small business tax discount will be increased in phases over 10 years from the current 5% to 16%. First increasing to 8% on 1 July 2016, the discount will be available to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5m (also an increase from the current small business turnover threshold of less than $2m).

The tax discount will be increased in phases as follows:

The current tax discount cap of $1,000 per individual for each income year will be retained.

Increasing the small business entity (‘SBE’) turnover threshold

The current tax discount cap of $1,000 per individual for each income year will be retained.

Increasing the small business entity (‘SBE’) turnover threshold

From 1 July 2016, the Government will increase the SBE turnover threshold from $2 million to $10 million.

The increased $10 million turnover threshold will allow an additional 90,000 to 100,000 business entities to gain access to certain small business concessions, such as the following:

• The lower (27.5%) small business corporate tax rate (noted above);
• The simplified depreciation rules including the ability to claim an immediate deduction for an asset purchased costing less than $20,000 until 30 June 2017;
• Simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the value of their stock has changed by less than $5,000;
• The option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
• Simplified method of paying PAYG instalments calculated by the ATO;
• Concessional tax treatment of prepayments.

The current $2 million turnover threshold will be retained for access to the small business capital gains tax (‘CGT’) concessions, while access to the unincorporated business tax discount (i.e., the increased 8% discount rate) will be limited to entities with turnover less than $5 million (as noted above).

Changes effective 1 July 2017 (i.e., 2017/18 income year)

Wine Equalisation Tax (WET) rebate cap reduced

To address integrity concerns, the WET rebate cap will be reduced from $500,000 to $350,000 on 1 July 2017 and to $290,000 on 1 July 2018 and tightened eligibility criteria will apply from 1 July 2019.

Under the tightened eligibility criteria for the rebate, a wine producer must own a winery or have a long-term lease over a winery and sell packaged, branded wine domestically. The final details on the tightened eligibility criteria, including the definition of a winery, will be resolved through further consultation.

Changes effective 1 July 2018 (i.e., 2018/19 income year)

Targeted amendments to Division 7A

From 1 July 2018, the Government will make targeted amendments to improve the operation and administration of Division 7A of the ITAA 1936, as a result of a number of recommendations from the Board of Taxation’s Post-implementation Review into Division 7A.

These changes will provide clearer rules for taxpayers and are expected to include:

• A self-correction mechanism for inadvertent breaches of Division 7A;
• Appropriate safe harbour rules to provide certainty;
• Simplified Division 7A loan arrangements;
• And a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.

Individuals and Families Measures

Changes effective for the 2015/16 income year

Medicare levy low income thresholds for 2015/16

For 2015/16, the Medicare Levy low income thresholds will be increased as follows:

Changes effective 1 July 2016 (i.e., 2016/17 income year)

Targeted personal income tax relief

From 1 July 2016, the Government will increase the 32.5% personal income tax threshold from $80,000 to $87,000. This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37% to 32.5%, preventing the tax bracket creep through inflation:

Note: the above rates do not include the Medicare Levy of 2% and the Temporary Budget Repair Levy of 2%.

Changes effective 1 July 2017 (i.e., 2017/18 income year)

Budget Repair Levy will end

On 30 June 2017, the three year Temporary Budget Repair Levy on high income individuals will cease. Up until then the temporary levy will continue to apply at a rate of two percent on individuals’ taxable income in excess of $180,000 per annum. This will mean that the top marginal tax rate (including the 2% Medicare Levy) will reduce from 49% to 47% from 1 July 2017.

Changes effective 1 July 2018 (i.e., 2018/19 income year)

Extending the existing freeze on the Medicare Levy Surcharge and Private Health Insurance Rebate thresholds

From 1 July 2018, the Medicare Levy Surcharge and Private Health Insurance Rebate will remain paused for three more years.

The rebate and surcharge levels applicable from 1 April 2016 to 31 March 2017 are:

Currently these thresholds are legislated to be paused from the 2014/15 income year through to the 2017/18 income year. As a result of this proposal, the thresholds would remain frozen until 30 June 2021. This means that clients earning near or above $90,000 for a single or $180,000 for a family, may expect to pay higher private health insurance premiums or a higher Medicare Levy Surcharge where no approved private health insurance is held.

Tax Integrity Package

Establishing the Tax Avoidance Taskforce

The Government will provide $678.9 million to the ATO over the forward estimates period to establish a new Tax Avoidance Taskforce. This will enable the ATO to undertake enhanced compliance activities targeting multinationals, large public and private groups and high wealth individuals.

The Tax Avoidance Taskforce will conduct operations to improve tax compliance in high tax risk sectors, resulting in better targeted audits and higher collections. The Government will also ensure the ATO has access to the information it needs by enhancing information sharing between the ATO and the Australian Securities and Investments Commission. This supports the operation of the Taskforce through improved risk analysis and detection.

DISCLAIMER: The contents of this publication are general in nature and we accept no responsibility for persons acting on information contained herein. The content of this newsletter does not constitute specific advice and readers are encouraged to consult their Ruddicks adviser on any matters of interest. © Ruddicks 2016