All of the lead-up indicators about the Federal Budget promised it would be a game changer, but from a tax perspective it is more a case of back to the future.
Above all else, the introduction of the Temporary Levy effectively takes us back in time to when top marginal tax rates were 49%, and income streaming and use of corporate beneficiaries were the prevalent tax structuring tools. Given that the largest spending cuts are due in 2017-18, it would not be surprising if the new 49% rate became permanent.
In our insight into the Federal Budget, the Gadens tax team highlight below the key and more immediate implications of the Budget measures for you and your business.
The use of trust and corporate beneficiary structures remains a valid and effective means of reducing income tax costs.
The differential between the top personal marginal rate and the corporate tax rate will exceed 20% for the first time in decades.
This differential effectively mandates a re-assessment of structure for all private business income which is outside the confines of a clear employer / employee relationship. While Division 7A rules and complexities have led to a reduced incidence of these structures in recent years, the difference between a 28.5% corporate tax rate and a 49% personal income tax rate start making those complexities look more manageable.
Selling businesses and using franking credits
Until now many vendors of private businesses have been ambivalent between deriving a capital gain discount and receiving a pre-sale franked dividend.
The changes in the budget result in “top up” tax on franked dividends (effectively 28.7% from 1 July 2015) becoming significantly higher than discount capital gains (effectively 24.5%).
Unless there is a clear ability to shelter franked dividends in a corporate structure post exit, prospective vendors should be looking to reduce pre-sale dividends either as a transaction mechanism or in the lead up to exit.
Businesses which are vulnerable to shifts in consumer demand, particularly discretionary expenditure, will need to make further adjustments to their cost structure to mitigate the negative demand impact flowing from tax increases, the withdrawal of tax benefits and concessions and reductions in expenditure.
In some cases this will require structural adjustment including renegotiation of major supply contracts and workforce restructure.
Given limited lead time before these deflationary impacts commence, businesses which respond quickest will best preserve their competitiveness.
The increase in the FBT rate to mirror the effective top marginal rate of 49% heightens the need to ensure that employees earning under $180,000 are not being disadvantaged where they receive non-cash benefits. Unfortunately, there is continued delay in addressing the acknowledged deficiencies in the taxation of employee share schemes. Combined with the higher tax rate announced in the budget, this heightens the need for bespoke approaches to incentivising key employees.
For most businesses the generous paid parental scheme significantly enhances their ability to retain female talent and is a clear incentive to develop this talent where it is not an existing focus.
Businesses generally should use this opportunity to update their HR policies and consider return to work incentives in conjunction with the scheme to distinguish themselves as employers of choice.
Owners and principals should consider how family planning aligns with potential eligibility for the scheme. within private and family businesses.