Special 2016 Budget Edition
Posted on 4th May 2016 by Christabelle Harris
Bringing the Budget into tax focus
Although personal tax is largely untouched in the 2016/17 Budget, there are major changes to the tax arrangements for superannuation and business with delivery of a 10-year plan for business tax.
Small business the big winner
Small and medium enterprises (SMEs) are the major beneficiaries from this year’s Budget, with the announcement that the small business tax rate will drop 1 per cent to 27.5 per cent in 2016/17. This rate will apply until 2024/25, when it will decrease to 27 per cent, before dropping to 26 per cent in 2025/26 and finally to a flat 25 per cent from 2026/27 onwards.
More SMEs will also qualify for the tax cut, with the change applying to businesses with an annual turnover of less than $10 million, five times the current $2 million threshold.
The centrepiece of last year’s Budget, the instant asset write-off, has also been expanded so SMEs with an annual turnover of up to $10 million can use the tax benefit.
Benefits for small business
Small businesses such as sole traders, partnerships and trusts will also benefit from an increase in their tax discount.
Unincorporated entities with an annual turnover of less than $5 million (up from $2 million) will qualify for an 8 per cent tax discount (up from 5 per cent) for the period 2016/17 to 2023/24.
In line with changes to company tax, this discount will increase in stages over the next 10 years, reaching 16 per cent from 2026/27 onwards.
Company tax rate flattens to 25 per cent
While SMEs will enjoy a tax cut now, large companies will have to wait a little longer. The Budget includes a planned phasing in of company tax cuts so by 2023-24 all companies will be taxed at 27.5 per cent.
By 2026-27, the rate for all businesses will drop to 25 per cent to make local firms more competitive internationally.
Multinationals hit by new tax
Following the UK’s lead, the Government announced a new 40 per cent diverted profits tax for any profits multi-nationals attempt to shift offshore.
This move will apply to global companies with a turnover of $1 billion or more and is designed to target artificial tax arrangements.
Tax cuts we aren’t having
This year’s Budget saw only minor changes to personal taxation and changes to the tax benefits surrounding negative gearing were firmly ruled out.
To address concerns about more taxpayers moving onto higher tax rates (so-called ‘bracket creep’), the Government announced from 1 July 2016, the bottom threshold for the second top tax bracket will rise from $80,000 to $87,000. This will ensure taxpayers on ‘average wages’ remain on the middle tax bracket of 32.5 cents per dollar. While the change will benefit the top 25 per cent of working Australians, other taxpayers were left empty-handed.
Smokers will feel real pain, however, with the Government announcing four more annual 12.5 per cent increases in tobacco excise from 1 September 2017.
Super gets a makeover
The Treasurer also made some bold – and unexpected – changes to the superannuation system, many of which will limit the benefits of this savings vehicle for those on higher incomes.
Pension Accounts capped at $1.6 million
One of the biggest changes and challenges will be the introduction of a $1.6 million cap on the total amount of superannuation that can be used to commence a pension. This is to be introduced from 1 July 2017. For those entering retirement after 1 July 2017, any superannuation in excess of the cap can remain in accumulation where earnings are taxed at 15%. Those with existing pensions as at 1 July 2017 in excess of the cap will need to roll back amounts into accumulation taxed at 15% or withdraw funds.
Lifetime cap for non-concessional super contributions
Superannuation savers also face a new lifetime cap of $500,000 (indexed) on their non-concessional (or after-tax) contributions. The cap will apply to all non-concessional contributions with immediate effect from 7.30pm (AEST) 3 May 2016. The cap will apply to individuals aged up to 75 and will be indexed in $50,000 increments.
The cap takes into consideration all non-concessional contributions made since 1 July 2007. If you have exceeded your cap prior to commencement of the new rules, you will be taken to have used your lifetime cap but you will not be required to take the excess out. However where the excess occurs after 3 May 2016, you will be notified by the Australian Taxation Office to withdraw the excess from your super account or be subject to the penalty arrangements.
The lifetime non-concessional cap will replace the existing non-concessional contributions cap which allows you to contribute up to $180,000 per year or $540,000 under the bring-forward provisions for those age under 65 years.
Transition to Retirement Income Streams
From 1 July 2017 the tax exempt status of income from assets supporting transition to retirement (TTR) pensions will be removed making TTR strategies less attractive.
Reduction in concessional contributions cap
From 1 July 2017, the annual cap for concessional (or pre-tax) contributions into superannuation will fall to $25,000 for everyone up to age 74 years. Currently the concessional contributions cap is $30,000 if under age 50 and $35,000 if aged 50 and over.
More tax on contributions for more high earners
From 1 July 2017 the ‘division 293’ threshold will reduce from $300,000 to $250,000 per year meaning individuals earning over this amount will have to pay an additional 15% tax on concessional contributions.
Super benefits for average taxpayers
While wealthier Australians may be unhappy, there are some superannuation benefits for older workers and those on lower incomes.
The contributions work test will be abolished from 1 July 2017, allowing everyone under age 75 to make personal contributions to superannuation, or to have a spouse contribute on their behalf without needing to pass a ‘work test’.
Everyone will also be able to claim a deduction for any personal contributions made to superannuation, regardless of their employment status. Currently, this tax deduction is limited to the self-employed or those ‘substantially self-employed’.
Playing super catch-up
The Budget also introduced changes for low-income earners and those with low super balances. The Low Income Superannuation Tax Offset (LISTO) of up to $500 will help reduce the effective tax rates on concessional contributions for taxpayers earning under $37,000.
Catch-up contributions for those with balances under $500,000 will be encouraged. People who do not fully utilise their annual concessional contributions cap will be able to carry forward their unused cap on a rolling five-year basis.
More taxpayers may also be able to access the18% tax offset up to $540 if they make a contribution on behalf of their low-income spouse following a lift in the current $10,800 spouse income threshold to $37,000.