Personal tax rates: small tax cut from 1 July 2016
From 1 July 2016, the 32.5% personal income tax threshold will increase from $80,000 to $87,000 in an attempt to address tax bracket creep. The Government expects this will stop around 500,000 taxpayers facing the 37% marginal tax rate and prevent average full-time wage earners from moving into the second-top tax bracket until 2019–2020.
Budget deficit levy not extended
In the lead-up to the Budget, the Treasurer indicated that the 2% Budget deficit levy (tax) on incomes over $180,000 would not be extended beyond its initial three years. The levy applies for three years from 1 July 2014, and is due to cease at the end of the 2016–2017 financial year.
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 threshold to increase to $10 million
The small business entity threshold will increase from $2 million to $10 million from 1 July 2016.
As a result, a business with an aggregated annual turnover of less than $10 million will be able to access a number of small business tax concessions, including:
- the simplified depreciation rules;
- 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
- the more generous FBT exemption for work-related portable electronic devices.
The threshold changes will not affect eligibility for the small business CGT concessions, which will only remain available for businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test).
Reduced tax rates for small business
The company tax rate for small business entities will reduce to 27.5% (from 28.5%) from the 2016–2017 income year. The rate is set to reduce further to 27% in 2024–2025 and then by one percentage point per year until it reaches 25% in 2026–2027.
To complement the company tax rate reductions, the tax discount (or tax offset) for unincorporated small businesses (eg sole traders and partners in a partnership) will increase over a 10-year period from 5% to 10%.
The tax discount will increase to 8% on 1 July 2016, remain constant at 8% for eight years, then increase to 10% in 2024–2025 and13% in 2025–2026, reaching a new permanent discount of 16% in 2026–2027. The maximum value of the discount will remain at $1,000.
From 1 July 2016, access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million (the current threshold is $2 million).
GST and importation of low-value goods
From 1 July 2017, GST will be imposed on goods imported by consumers, regardless of the goods’ value. The GST liability will be imposed on overseas suppliers, using a vendor registration model. This means suppliers with Australian turnover of $75,000 or more will be required to register for, collect and remit GST for all goods supplied to consumers in Australia.
These arrangements will be reviewed after two years to “ensure they are operating as intended and take account of any international developments”.
GST small business taxpayers: election to use cash basis
From 1 July 2016, the Government proposes to extend the option for taxpayers to use the cash basis of accounting for GST to small businesses with an annual turnover of less than $10 million. Such entities would be able to account for GST on a cash basis and pay GST instalments as calculated by the ATO.
Superannuation pension phase: $1.6 million transfer balance cap for retirement accounts
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.
In Other News…
There are many ways in which entities can defer income, maximise deductions and take advantage of other tax planning initiatives to manage their taxable income. Taxpayers should be aware that they need to start the year-end tax planning process early in order to maximise these opportunities. Of course, those undertaking tax planning should be aware of the potential application of anti-avoidance provisions. However, if done correctly, tax planning can provide a number of tax savings.
Deferring assessable income
- Income received in advance of services being provided is generally not assessable until the services are provided.
- Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June in order to defer the income.
- A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If disposal of an asset will result in assessable income, the taxpayer may consider postponing the disposal to the following income year.
- Rollover relief may be available for balancing adjustments arising from an involuntary disposal of assets where replacement assets are acquired.
- Taxpayers should review all outstanding debts before year-end to identify any debtors who may be unable to pay their bills. Once a taxpayer has done everything in their power to seek repayment of the debt, they may consider writing off the balance as bad debt.
- The entitlement of corporate tax entities to deductions in respect of prior year losses is subject to certain restrictions. An entity needs to satisfy the “continuity of ownership” test before deducting prior year losses. If the continuity of ownership test is failed, the entity may still deduct the loss if it satisfies the same business test.
- A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.
- Small business entities are entitled to an outright deduction for the taxable purpose proportion of the adjustable value of a depreciating asset, subject to conditions.
- Non-business taxpayers are entitled to an immediate deduction for assets that are used predominantly to produce assessable income and that cost $300 or less, subject to conditions.
- Self-employed and other eligible people are entitled to a deduction for personal superannuation contributions, subject to meeting conditions such as the “10% rule”.
- Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent to avoid breaching the “benchmark rule”.
- Loans, payments and debts forgiven by private companies to their shareholders and associates may give rise to unfranked dividends that are assessable to the shareholders and their associates. Shareholders and entities should consider repaying loans and making payments on time, or have appropriate loan agreements in place.
- Companies should consider whether they have undertaken eligible research and development (R&D) activities that may be eligible for the R&D tax incentive.
- Companies may consider consolidating before year-end to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes.
- Taxpayers should review trust deeds to determine how trust income is defined. This may have an impact on the trustee’s tax planning.
- Trustees should consider whether a family trust election (an FTE) is required to ensure that any losses or bad debts incurred by the trust will be deductible and that franking credits will be available to beneficiaries.
- Taxpayers should avoid retaining income in a trust because it may be taxed in the hands of the trustee at the top marginal tax rate.
Small business entities
- From 2015–2016, the tax rate applicable to small business entities that are companies is 28.5% (rather than the standard 30% rate) and other types of small business entities are entitled to a tax discount in the form of a tax offset.
- Small business entities are entitled to an immediate deduction for certain pre-business expenditure incurred after 30 June 2015.
- Eligible small business entities can access a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.
- An optional rollover has been introduced for the transfer of business assets from one entity to another for small business owners who change the legal structure of their business.
- A CGT “look-through” treatment for eligible earn out arrangements has been introduced.
- From the 2016–2017 FBT year, small business entities will be able to provide more than one work-related portable electronic device to an employee and claim the FBT exemption for each device, even if the devices have substantially identical functions and are not replacement items.
Capital gains tax
Taxpayers may consider crystallising any unrealised capital gains and losses to improve their overall tax position for an income year.
- Individuals who wish to take advantage of the concessionally taxed superannuation environment should keep track of their contributions.
- Individuals with salary sacrifice superannuation arrangements may want to have early discussions with their employers to help ensure contributions are allocated to the correct financial year.
- Individuals earning above $300,000 are subject to an additional 15% tax on concessional contributions. However, despite the extra 15% tax, there is still an effective tax concession of 15% (ie the top marginal rate less 30%) on their contributions up to the relevant cap.
- Self managed super funds (SMSFs) have been reminded that if they have investments in collectables or personal-use assets that were acquired before 1 July 2011, time is running out to ensure they meet the requirements of the superannuation law for these assets.
Fringe benefits tax
- The rules for individuals claiming car expense deductions have changed. As a result, if employers reimburse expenses relating to an employee’s use of their own car, only two methods are available for calculating the taxable value of this fringe benefit (when employers apply the "otherwise deductible rule").
- A separate gross-up cap of $5,000 has been introduced for salary sacrificed meal entertainment and entertainment facility leasing expenses for certain employees of not-for-profit organisations. Affected individuals may want to discuss it with their employers.
For the 2015–2016 income year, the general tax-free threshold available to Australian resident taxpayers is $18,200.Australians who have student debts and are travelling or living overseas will soon have the same repayment obligations as people who are still living in Australia.
The State Revenue Office advised they have more than $100 million of unclaimed monies waiting to be collected by Victorians.
Victoria's State Revenue Office holds the records of money that has not been claimed for 12 months, which can include share dividends, salaries and wages, proceeds from a sale, or rents and bonds.
We encourage you to visit the State Revenue Office online database to search for any amount recorded under your name or company name.
Please click on the link below to search for your unclaimed money…
Important: Clients should not act solely on the basis of the material contained in Cents & Sensibility. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Cents & Sensibility is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
Please contact us if you wish to discuss how the points raised in this edition specifically affect you.
The knp Team