1. New Individual Tax Thresholds and New Deductions for Individual Super Contributions
High-income earners can look to benefit from a modest tax decrease under new measures in the Federal Budget 2016, while over 75s will have greater access to income tax deductions for personal super contributions.
The 32.5% tax threshold will be increased from $80,000 to $87,000 effective from 1 July 2016. This means if you earn more than $80,000 a year you can expect to enjoy a decrease in your income tax. Also, the 2% budget repair levy will expire at the end of the 2017 income year, which will effectively result in the top marginal rate of tax returning to 45%.
Income tax breaks have also been made more generous in regards to personal super contributions in the Federal Budget 2016. If you are 75 or under, from 1 July 2017 you can claim an income tax deduction for personal superannuation contributions. Currently, you can only claim such a deduction if you are essentially self-employed, since a personal superannuation contribution can only be made if your salary/wages are less than 10% of your total income. However, it is important to note that the extension of these benefits is limited by a concessional contribution cap of $25,000.
2. Adjustments to Corporate Tax Rates and Small Business Concessions
The government has included provisions in the Federal Budget 2016 aimed at lowering company tax rates in both the short term and the long term. It also aims to extend access to small business concessions, which will simplify the tax process for many companies.
If your company has an annual aggregated turnover of less than $10 million it will qualify for a corporate tax rate of 27.5% from 1 July 2016. Annual aggregated turnover includes turnover from a company as well as from its connected and associated entities. This specification of aggregated annual turnover is significant, since the 27.5% criteria applies not when company revenue is less than $10 million, but when both company income and income from the company’s connected and associated entities is less than $10 million.
The government also intends to implement a staged reduction of the company tax rate over the next 11 years. The aim is for all companies to have a tax rate of 25% by 2026-27. As yet the government has not provided specific details in regards to the franking of dividends where the tax rate has been reduced. It is expected that distributions will continue to be franked at 30%, which creates tax planning opportunities for businesses.
Also, from 1 July 2017 businesses that have an annual aggregated turnover of less than $10 million will have access to the small business concessions that are currently available only to businesses with an annual aggregated turnover of less than $2 million. These concessions make it simpler for you to determine taxable income. For example, they allow you to instantly write off assets purchased costing less than $20,000. But you will still be unable to access the capital gains tax concessions available to small businesses with an annual aggregated turnover of less than $2 million. When your turnover exceeds this amount, you will need to rely on your maximum value of net assets being less than $6 million at the time of the CGT event.
3. Changes to Rules Regarding How Money Can Be Drawn Out of Private Companies
The Federal Budget 2016 plans to simplify the Division 7A rules from 1 July 2018. These rules are used to deem dividends on shareholders and/or their associates for drawing or loaning money out of private companies to themselves.
This will clearly have an impact on how you can access funds in your business. This simplification will be effective from 1 July 2018 but will have implications on pre-existing loans. Even though little detail has been provided on the specifics of these changes, it is expected that the simplification will ease the compliance burden. Most likely, loan arrangements will be simplified by removing the need for formal written agreements, introducing 10 year unsecured loan terms, allowing fixed interest rates, and setting minimum repayment points at certain points during the loan term. It is also anticipated that a self correction mechanism for inadvertent breaches of the rules will be introduced.
4. Introduction of A Cap on Transfers of Accumulated Super
The Federal Budget 2016 also proposes changes to superannuation transfers and contributions.
From 1 July 2017, there will be a transfer balance cap of $1.6 million on the total amount of accumulated superannuation that can be transferred into the pension phase of your retirement. This phase currently attracts a 0% tax rate in the super fund. The excess of super balance over $1.6 million will continue in the accumulation phase, wherein profits/earnings made on this balance will be taxed at 15%. If you already exceed $1.6 million in the pension phase, it is likely that from 1 July 2017 the excess will need to be returned into the accumulation phase.
A lifetime limit of $500,000 per person will be imposed on non-concessional contributions. The measures propose that contributions made from 1 July 2007 will be counted against this $500,000 cap. This effectively replaces the current rules which allow a maximum $180,000 per year to be contributed (or $540,000 in advance of 3 years). Contributions made after 3 May 2016 that exceed the cap will need to be removed or will attract a penalty.
These are important and highly-specific changes. It is more important than ever for you to review non-concessional contributions made to your super from 1 July 2007. It is critical to make sure that you adjust to changes under this cap where necessary. If the cap has been exceeded prior to 3 May 2016, you won’t be penalised, but you also won’t be able to make further non-concessional contributions.
5. Changes to Tax Rates for Concessional Super Contributions and Pensions
The way your super contributions and pensions are taxed will be effected by proposals in the Federal Budget 2016.
The concessional super contribution cap will be reduced from $30,000 to $25,000 for those under 49 from 1 July 2017. The concessional super contribution cap will be reduced from $35,000 to $25,000 for those over 50 from 1 July 2017. Concessional contributions provide for a tax deduction for the payer of the contribution. For example, a company makes a contribution to avoid being taxed at a rate of 30%, instead having their contribution taxed at 15% in the fund. The cap limits the amount that can be taxed at this concessional rate of 15%, meaning that amounts exceeding the cap are subject to the usual rate of 30%.
If you earn above $250,000, from 1 July 2017 your concessional super contributions will be subject to tax in the fund at 30% (not the normal 15%). This threshold has been reduced from previous years when it was $300,000.
From 1 July 2017, under the Federal Budget 2016 the tax exempt status of profits/earnings in a transition to retirement pension account will be removed. A transition to retirement pension is given to you if you have not officially retired and are below 65 years old.
6. A New ATO Taskforce to Ensure Tax Compliance of Large Companies and High-Wealth Individuals
A new ATO taskforce will be established to ensure tax compliance of multinational companies, large private companies, and high-wealth individuals.
Under the Federal Budget 2016, a new Tax Avoidance Taskforce will crack down on multinational tax avoidance and secure revenue. With $679 million committed toward it, the taskforce will be made up of 1,300 people, including 390 new specialist officers. It will have significant powers with respect to obtaining third party data (e.g. from ASIC and AUSTRAC), and will be led directly by the ATO Commissioner of Taxation. The Taskforce is expected to raise more than $3.7 billion in tax liabilities between now and July 2020.
The end-goal of the taskforce will be to crack down on tax cheats and put money back into the system and the community, while also deterring people from entering into aggressive tax planning arrangements.
These changes outlined in the Federal Budget 2016 could effect you and your business. Contact a Business Advisor at Calibre Business Advisory to invest in financial peace of mind. We partner with you to grow and secure your company and your private wealth.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.