2016/17 Federal Budget

The Budget Paper No. 2 of the 2016/17 Federal Budget released on 3 May 2016 proposes some key changes to Federal taxation laws.

A brief summary of the Federal Government’s announcements is outlined below:

Targeting multinational profit shifting and transfer pricing

  • A 40% diverted profits tax will be imposed on the profits of multinational corporations that are artificially diverted from Australia, effective from 1 July 2017.
  • New rules will be introduced to incorporate recommendations under Action Items 2, 8, 9 and 10 of the OECD’s Action Plan on Base Erosion and Profit Shifting.

Company tax rate

  • The company tax rate will be progressively reduced to 25% over 10 years by first reducing the small business tax rate to 27.5%, progressively increasing the income threshold to which this applies and, finally, progressively reducing the tax rate to 25%.

Small businesses

  • The small business entity turnover threshold will increase from $2 million to $10 million for the purpose of all small business tax concessions other than the capital gains tax concessions, effective from 1 July 2016.
  • The unincorporated small business tax discount will increase from 5% to 16% over the next 10 years, with the first increase to 8% effective from 1 July 2016.

Superannuation

  • The personal income threshold at which individuals are subject to a tax rate of 30% rather than 15% tax on their superannuation contributions will be lowered from $300,000 to $250,000, effective from 1 July 2017.
  • The annual concessional contributions cap will be reduced to $25,000, effective from 1 July 2017.
  • A lifetime non-concessional contributions cap of $500,000 will be introduced, applying immediately to all non-concessional contributions made on or after 1 July 2007. This will replace the existing caps which allow non-concessional contributions of up to $180,000 per year or $540,000 over three years.
  • Individuals with superannuation balances of less than $500,000 will be entitled to make additional, ‘catch-up’ concessional contributions where they did not reach their concessional contributions cap in previous years, with roll-overs beginning to accrue from 1 July 2017.
  • A low income superannuation tax offset will be introduced to reduce the tax rate imposed on contributions made by low income earners, effective from 1 July 2017.
  • A retrospective cap of $1.6 million will be applied to the amount of accumulated superannuation an individual can transfer into the tax-free retirement phase, from 1 July 2017. Individuals that already have balances above $1.6 million will be required to reduce this balance beneath the threshold by 1 July 2017.

Individuals

  • In order to eliminate bracket creep, the threshold at which the 37% marginal tax rate applies to individuals will be increased from $80,000 to $87,000, effective from 1 July 2016.

Indirect taxes

  • GST will be extended to low value goods imported by Australian consumers from overseas suppliers, effective from 1 July 2017.
  • Tobacco excise will be increased by 12.5% each year for four years, beginning on 1 September 2017.
  • The wine equalisation tax rebate cap will be reduced from $500,000 to $350,000 on 1 July 2017 and then to $290,000 on 1 July 2018.

It is important to be aware that, given the upcoming Federal election to be held on 2 July 2016, the budget announcements merely form part of a ‘tax plan’ proposed by the Government. It is worth noting in particular that in the Opposition’s Budget Reply speech, Bill Shorten stated that, among other things:

  • Labor would not support the proposed 10 year plan to reduce company tax to 25%, but would support a tax cut for small businesses.
  • Labor would not support the retrospective $500,000 non-concessional lifetime cap and $1.6 million transfer balance cap.

If you would like to discuss any of the proposals, please contact a member of our Tax team.

ATO updates

Taxpayer alert: Tax exempt ‘foundations’ used to artificially avoid or evade tax

On 29 April 2016, the ATO released Taxpayer Alert TA 2016/5 which targets arrangements involving the establishment of an unincorporated ‘private foundation’ which is claimed to be exempt from income tax, through which the taxpayers stream their business or personal income. The concern arises where only a small portion of that income is used for social or humanitarian purposes, with the balance primarily used for personal consumption and investment. The ATO is concerned that these arrangements are artificial and contrived, and designed exclusively to avoid or evade tax. Moreover, these arrangements have the potential to undermine public confidence in the good work done by legitimate charities and not-for-profit entities.

On this basis, the ATO considers that:

  • the proper amount of tax is not being paid;
  • these arrangements may constitute shams;
  • amounts received by foundations may nonetheless be considered assessable income of individuals or companies;
  • the general anti-avoidance provisions may apply to cancel any tax benefits; and
  • participants may be subject to other taxation or criminal liability.

Taxpayer alert: Diversion of personal services income to SMSFs in order to minimise tax

On 29 April 2016, the ATO released Taxpayer Alert TA 2016/6 which targets individuals that divert their personal services income (PSI) to a self-managed superannuation fund (SMSF) as a tax minimisation strategy. The benefit for the taxpayer is that the income of the SMSF is either taxed at the concessional rate of 15% or is exempt from income tax if the fund is in the pension phase.

The ATO considers that a typical arrangement involves a client providing remuneration to an entity other than the individual who provided the personal services, such as a company or trust, and that company or trust then distributes the income to a SMSF of which the individual is a member.

Under TA 2016/6, the ATO considers that this arrangement may be ineffective for tax minimisation purposes for the following reasons:

  • it may be ineffective at alienating income;
  • the income may nonetheless be included in the individual’s assessable income as PSI;
  • the income received by the SMSF may be considered non-arm’s length income and thereby not qualify for concessional tax treatment (i.e. taxable at 47%); or
  • the general anti-avoidance rules may apply.

Legislation and government policy

The Board of Taxation launches a platform for ideas to improve the tax system

On 29 April 2016, the Chair of the Board of Taxation, Michael Andrew, launched Sounding Board: Ideas for better tax regulation, which is an online, collaborative platform designed to generate and consider ideas for tax system improvement. The platform allows users to submit, discuss and vote on ideas for improving the tax system, and thereby promotes collaboration from the community. The Board of Taxation has encouraged stakeholders to submit ideas and provide feedback on options. Following this, the government will work with the Board of Taxation, Treasury and the ATO to implement those ideas which are considered to be of most benefit. This initiative is expected to increase the transparency and efficiency of Australia’s taxation system and strengthen the overall Australian economy.