CUTS TO COMPANY TAX RATES
The company tax rate will be progressively reduced to 25% over 10 years.
From 1 July 2016 (the 2016/17 income year), the company tax rate will be reduced from 28.5% to 27.5% for businesses with an aggregate annual turnover below $10m.
The threshold to access the 27.5% tax rate will be progressively increased over the next 7 years, and the rate will decline thereafter until it reaches 25%.
The table below summarises the path to 25%:
Income year Annual aggregated turnover threshold Tax Rate
2016/17 < $10m 27.5%
2017/18 <$25m 27.5%
2018/19 <$50m 27.5%
2019/20 <$100m 27.5%
2020/21 <$250m 27.5%
2021/22 <$500m 27.5%
2022/23 <$1b 27.5%
2023/24 none 27%
2024/25 none 26%
2025/26 none 25%
Note: Until 1 July 2023, any company whose annual aggregate turnover is equal to or exceeds the above turnover thresholds will be taxed at the current rate of 30%.
Franking credits will only be able to be distributed in line with the rate of tax paid by the company making the distribution.
INCREASED TURNOVER THRESHOLD FOR SMALL BUSINESS INCOME TAX CONCESSIONS
The small business entity turnover threshold will be increased from $2m to $10m from 1 July 2016.
The increased threshold means businesses with an annual turnover of less than $10m will be able to access existing small business income tax concessions including the:
• lower small business corporate tax rate (which will be reduced to 27.5% from the 2016/17 income year);
• simplified depreciation rules, including accelerated depreciation through the small business pooling provisions;
• immediate deduction of assets costing less than $20,000 available until 30 June 2017 (refer below);
• option to account for GST on a cash basis (refer below);
• simplified method of paying PAYG instalments; and
• other tax concessions such as the extension of the FBT exemption for work-related portable electronic devices available from 1 April 2016 and the immediate deduction of professional expenses under s 40-880 of ITAA 1997.
Note: the increased $10m threshold will not be applicable for accessing the small business capital gains tax concessions. These concessions will remain available only for small businesses with a turnover of less than $2m or that satisfy the maximum net asset value test.
CONTINUATION OF INSTANT ASSET WRITE-OFF FOR SMALL BUSINESS
The instant asset write-off scheme, which was previously available to businesses turning over up to $2m annually, will be extended to businesses turning over up to $10m from 1 July 2016.
The $20,000 instant asset write-off scheme allows businesses to immediately deduct the business use portion of depreciable assets purchased up to the value of $20,000 instead of claiming the deductions over a number of years.
The $20,000 limit applies on a per asset basis, so several assets each costing less than $20,000 would qualify.
The Government has not extended the timeframe for the scheme, which is due to expire on 30 June 2017.
GST CONCESSIONS FOR SMALL BUSINESSES
From 1 July 2016, small businesses with a turnover of less than $10m will be able to account for GST on a cash basis. This was previously only available to businesses with a turnover of less than $2m.
This will assist a number of businesses with managing cash flow.
EXPANDING TAX INCENTIVES FOR EARLY-STAGE INNOVATION INVESTORS
The following tax incentives are proposed to apply from 1 July 2016 and later income years to promote investment in early stage innovative companies, including:
• a 20% non-refundable tax offset capped at $200,000 per investor per year; and
• a capital gains tax exemption, provided investments are held for at least 12 months and less than 10 years. For assets held longer than 10 years, the cost base will be re-set in 10 years.
The concessions were announced to apply to investments in companies that:
• were incorporated during the last three income years;
• are undertaking an “eligible business” (to be determined following consultation with stakeholders).
WHO IS ELIGIBLE?
The tax incentives are available to all types of investors, regardless of their preferred method of investment (whether an investment is made directly as a corporation or individual or indirectly through a trust or partnership) other than ‘widely held companies’ and 100 per cent subsidiaries of these companies. A trust or partnership will not directly be entitled to the tax offset, however, rules will apply to ensure the value of these tax incentives flow through to beneficiaries and partners, where such an investment method is chosen.
The amendments include:
• reducing the holding period from three years to 12 months for investors to access the CGT exemption;
• a time limit on incorporation and criteria for determining if a company is an innovation company under the definition of “eligible business”;
• requiring that the investor and innovation company are non-affiliates; and
• a total annual investment limit of $50,000 to apply to retail (non-sophisticated) investors. No limit applies to sophisticated investors.
HOW WILL THE 20% OFFSET WORK?
A taxpayer, who is a sophisticated investor, acquires $50,000 worth of shares in a qualifying early stage innovation company (ESIC) on 1 October 2016. Assuming they have a sufficient tax liability at the end of the 2016-17 income year and meet the other requirements in relation to the tax offset, they would receive a tax offset of $10,000. Should they acquire an additional $500,000 worth of shares in the same qualifying ESIC on 1 December 2016 (and assuming they have a sufficient tax liability and still meet the other requirements of the tax offset) they would receive a tax offset of $110,000 in the income year ending 30 June 2017.
PERSONAL INCOME TAX RELIEF
• The threshold at which the 37% marginal tax rate for individuals commences will increase from taxable incomes of $80,000 to $87,000 from 1 July 2016.
• For those earning more than $180,000 per annum, the 2% temporary budget repair levy introduced in the 2014 budget has not been extended and will expire on 30 June 2017.
The proposed personal income tax thresholds for residents from 1 July 2016 are below:
Income thresholds Rate Proposed tax payable
$0-$18,200 0% Nil
$18,201 – $37,000 19% Nil + 19% of excess over $18,200
$37,0001 – $87,000 32.5% $3,572 + 32.5% of excess over $37,000
$87,001 – $180,000 37% $19,822 + 37% excess over $87,000
$180,000+ 45% $54,232 + 45% of excess over $180,000
Concessional contributions – $25,000 cap
• From 1 July 2017, the concessional contributions cap will be lowered to $25,000 irrespective of age (down from $30,000 if aged under 50 and down from $35,000 if aged 50 or over). Individuals with a superannuation balance of less than $500,000 will be able to carry forward the unused portion of the cap in 2017/18 and subsequent years on a rolling 5-year basis.
CONCESSIONAL CONTRIBUTIONS – TAX RATE
• Currently, the superannuation fund pays 15% tax on concessional contributions. Higher income individuals earning over $300,000 pay an additional 15% tax on the contributions under Division 293. That threshold will be reduced to $250,000. The combined tax will still be lower than their marginal rate.
CONCESSIONAL CONTRIBUTIONS – WORK TEST
• The current restrictions on people aged 65 to 74 making superannuation contributions for their retirement will be removed from 1 July 2017.
• From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.
NON-CONCESSIONAL CONTRIBUTIONS – $500,000 CAP
• A $500,000 lifetime non-concessional contributions cap will be introduced. All non-concessional contributions since 1 July 2017 will count towards the cap. Excesses will need to be withdrawn, or a penalty tax will apply.
• However, excess non-concessional contributions made before 7:30pm on 3 May 2016 are not subject to these rules.
• We understand this cap will not impact individuals who have used the $500,000 capital gains tax retirement exemption. Further guidance on this is expected.
RETIREMENT PHASE – $1.6M CAP
• From 1 July 2017, individuals will only be allowed to transfer $1.6m of accumulated superannuation into retirement phase, plus the earnings thereon. These changes limit the amount of superannuation savings that high wealth individuals can apply the earning tax exemption to.
• Existing balances will need to be reduced back to $1.6m by 1 July 2017. That is, any excess must be transferred back to accumulation phase where 15% tax applies to earnings.
RETIREMENT PHASE – TRANSITION TO RETIREMENT PENSIONS
• From 1 July 2017, the tax exemption on earnings of assets supporting Transition to Retirement Income Streams will be removed.
• Transition to retirement pensions will be considered an accumulation phase product which is subject to 15% earnings tax in the fund.
• This change may increase incentives for some individuals to retire before age 65, and draw a retirement pension instead.
• The income threshold for the low income spouse offset (whether married or de facto) will be increased from $10,800 to $37,000 from 1 July 2017.
TARGETED AMENDMENTS TO DIVISION 7A
Targeted amendments will be made to the rules for closely-held, private groups (in Div 7A of the Income Tax Assessment Act 1936) from 1 July 2018.
The amendments will include:
• a self-correction mechanism for inadvertent breaches of Div 7A without attracting a penalty;
• appropriate safe-harbour rules to provide certainty in certain circumstances where an asset is provided for use by a company to a shareholder or associate;
• simplified Div 7A loan arrangements; and
• a number of technical adjustments to improve the operation of Div 7A and provide greater certainty.
Note: The Government has not provided any details as to precisely what the simplification of Division 7A arrangements entails. Alarmingly, the Government might be intending on adopting the proposals set out in the Board of Taxation’s Division 7A Review, which provided that all Division 7A loans should be repayable within ten years of the introduction of the new rules regardless of the date in which these loans were made. This would mean that pre December 1997 loans and pre December 2009 unpaid present entitlements could now be subject to Division 7A and must be repaid within ten years of the legislation coming into effect.