We believe last night's announcements delivered by Federal Treasurer Scott Morrison will please a sizeable proportion of Australian workers and small business operators. In terms of the broader economic impact however, we think corporate Australia will likely be disappointed by the bottom-up, painfully slow approach to company tax rate reductions.
The proposed changes to superannuation represent the biggest change since the overwhelmingly positive changes legislated in 2007. On this occasion, they are overwhelmingly negative for wealthier superannuation members and likely for those with SMSFs. Regardless of the merits of the policy intent, the retrospective application of the lifetime non-concessional contributions cap will have a significant impact on those with existing plans and investment strategies and this is well beyond what was expected.
We are cautiously optimistic about some changes; specifically the removal of the work test contribution rules for those between 65 and 75, the ability to carry forward unused concessional contribution limits and changes to the eligibility rules for personal superannuation contributions.
Business taxation
Company tax rate to reduce to 25% by 2026/2027
The Government intends to reduce the company tax rate to 25% over the next 11 income years.
The measure will be phased in from 1 July 2016, depending on company size (ie aggregated annual turnover). Small businesses will benefit sooner. The phase-in for all companies will be completed in the 2026–2027 income year.
Franking credits will continue to be calculated in the usual manner, by reference to the amount of tax paid by the company making the distribution.
Small Business Tax Concessions: Increase to Small Business Threshold
The aggregated annual turnover threshold for small business has increased to $10 million from a previous amount of $2 million, leading to more businesses having access to a number of small business concessions. These concessions will be applied from 1 July 2016.
Some of the existing small business tax concessions include:-
- - the simplified depreciation rules, which includes access to the immediate deduction of a business asset up to $20,000;
- - the simplified trading stock rules;
- - a simplified method of paying PAYG instalments calculated by the ATO;
- - the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
- - immediate deductibility for various start-up costs;
- - a 12-month prepayment rule; and
- - more generous FBT exemptions for work-related portable electronic devices.
We expect that the aggregated annual turnover threshold increase to $10 million will also apply to the small business restructure rollover measures announced in last year’s Budget and recently legislated.
However, the Small Business CGT concessions contained in Division 152 will remain only accessible to businesses with annual turnover of less than $2 million, retaining the initial threshold amount for this purpose.
Further, the turnover threshold for the purposes of the small business tax offset to apply to unincorporated small businesses (that is, those operated through trusts, partnerships or by sole traders) will increase from $2 million to $5 million. The amount of the tax offset will increase from 5% to 8%, with a plan to increase to 16% over the next 10 years. However, despite the rise in the headline number being increased, the benefit to the taxpayer still unfortunately caps-out at only $1,000 cap - as per the previously announced measures.
With these changes set to become effective 1 July 2016 and in order to access the reduced small business company tax rate of 27.5% in 2016/2017, it may be worth considering a restructure to your business.
Superannuation
Superannuation pension phase: $1.6 million transfer balance cap for retirement account
From 1 July 2017, the Government proposes to introduce a transfer balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into a tax-free “retirement account“ (also known as retirement phase or pension phase). Subsequent earnings on these pension transfer balances will not be restricted.
This transfer balance cap for amounts transferred into pension phase is intended to limit the extent to which the tax-free benefits of retirement phase accounts can be used for tax and estate planning.
Non-concessional contributions: $500,000 lifetime cap from Budget night
A lifetime non-concessional contributions cap of $500,000 is effective from 7.30 pm (AEST) on 3 May 2016. The lifetime non-concessional cap (indexed) will replace the existing cap of up to $180,000 per year (or $540,000 every three years under the bring-forward rule for individuals under 65).
The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007. Contributions made before 7.30 pm AEST on 3 May 2016 cannot result in an excess of the lifetime cap. However, excess non-concessional contributions made after commencement will need to be removed or be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings (AWOTE).
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, from 1 July 2017. The cap will be indexed in line with wages growth.The concessional contributions cap is currently set for the 2015–2016 and 2016–2017 income years at $30,000 for those under age 49 on 30 June of the previous income year (or $35,000 for those aged 49 or over on 30 June of the previous income year).
Members of defined benefit schemes will be permitted to make concessional contributions to accumulation schemes. However, the $25,000 cap will be reduced by the amount of their “notional contributions”.
Concessional contributions catch-up for account balances under $500,000
From 1 July 2017, individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions for “unused cap amounts” where they have not reached the concessional contributions cap in previous years. Unused cap amounts will be carried forward on a rolling basis for five consecutive years. Only unused amounts accrued from 1 July 2017 will be available to carry forward. The measure will also apply to members of defined benefit schemes.
Superannuation contributions tax (extra 15%) for incomes $250,001+
The income threshold above which the additional 15% Div 293 tax cuts in for superannuation concessional contributions will be reduced from $300,000 to $250,000 from 1 July 2017.
Currently, individuals above the high income threshold of $300,000 are subject to an additional 15% Div 293 tax on their “low tax contributions” (essentially concessional contributions), effectively doubling the contributions tax rate for concessional contributions.
The extra 15% Div 293 tax does not apply to concessional contributions which exceed an individual's concessional contributions cap (proposed to be set at $25,000 for all taxpayers from 1 July 2017). Such excess concessional contributions are effectively taxed at the individual’s marginal tax rate. The maximum amount of Div 293 tax payable each year will be limited to $3,750 (ie 15% of the $25,000 cap) from 1 July 2017.
Tax deductions for personal super contributions extended
From 1 July 2017, all individuals up to age 75 will be eligible to claim an income tax deduction for personal super contributions. This effectively allows all individuals, regardless of their employment circumstances, to make concessional super contributions up to the concessional cap.
To access the tax deduction, individuals must lodge a notice of intention to claim the deduction (generally before they lodge their income tax return) with their super fund or retirement savings provider. Individuals will be able to choose how much of their contributions to deduct.
Individuals that are members of certain prescribed funds would not be entitled to deduct contributions to those schemes. If you want to chat to a business tax consultant, get in touch today.
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