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.