eDelivering his first Budget, Scott Morrison could be accused of implementing a Nip and Tuck leading up to the election, with tax breaks for small businesses and middle income earners to be fully funded by a crackdown on multi-national tax avoidance and the tax concessions for wealthy superannuants.
The middle income tax bracket for individuals will increase from $80,000 to $87,000. This means that for those people who were earning $87,000, they will receive a $315 tax saving per annum, as their tax rate on the additional $7,000 is reduced from 37% to 32.5%.
Whilst this is estimated to cost $3.95B over four years, the Government is addressing bracket creep, to prevent 500,000 taxpayers from moving into the second highest marginal tax rate.
Small Business Tax Concessions
Let’s start with the concessions, aimed at promoting growth and innovation of small businesses in Australia, the backbone of the Australian economy, which are expected to cost $2.7B over the next four years.
Incorporated Businesses (businesses operated through a company)
- The tax rate for small businesses will be reduced to 27.5% from 1 July 2016 (this was to reduce to 28.5% from 1 July 2016);
- Significantly, the turnover threshold to be classified as a small business will increase from $2M to $10M from 1 July 2016. This will bring a much larger group of businesses into the small business taxpayer framework.
By increasing this threshold, many businesses will likely be able to access the following tax concessions:
- immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017 and then less than $1,000;
- avoiding an end of year stocktake if the value of the stock has changed by less than $5,000;
- a simplified method for PAYG instalments to reduce the risk of potential penalties that may apply from under or over estimating instalments;
- accounting for GST on a cash basis, and paying GST instalments as calculated by the ATO;
- immediate deductibility for various start-up costs (eg professional fees and government charges);
- a 12-month prepayment rule; and
- the more generous FBT exemption for work-related portable electronic devices (eg mobile phones, laptops and tablets)
Please note, this does not extend to the eligibility for the small business capital gains tax concessions, for which the turnover threshold will remain at $2M.
From 2024/2025, it is proposed that the tax rate to apply to small business operating through a company will reduce to 27%, with a further reductions by 1% each year until the company tax rate is 25% in the 2026/2027 income year.
For those small businesses that satisfy the above thresholds that ARE NOT operated through a company (ie, they operate as a sole trader, or via a trust or a partnership), they will receive a tax offset increase over 10 years from 5% (current) through to 16%. This will operate as follows:
- Currently (2015/2016): 5%;
- From 2016/2017 through to 2024/2025: 8%;
- 2024/2025: 10%;
- 2025/2026: 13%;
- 2026/2027: 16%.
The maximum value of the discount will remain at $1,000.
Further, 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 $5m (the current threshold is $2m).
The above concessions will certainly impact the operations of a business, and also consideration of the most appropriate entity for a business to operate.
Company Tax Rate
In addition to the above cuts to the company tax rate for small businesses, it has also been proposed to reduce the overall company tax rate for all Australian companies as follows from 2017/2018; by progressively increasing the turnover threshold of companies eligible for the 27.5% rate, before reducing the company tax rate from 2024/2025, down to a final rate of 25% from 2026/2027, in order for Australian companies to be seen as more competitive in line with the corporate tax rates in other foreign jurisdictions.
Franking credits will continue to be calculated in accordance with the current treatment – with reference to the tax paid by the company declaring the dividend.
Corporate tax reform measures
The Government has announced various changes to some existing tax regimes, to address industry concerns and unintended consequences.
- Modifications to previously announced but unenacted changes from the 2013/2014 Budget to the tax consolidation regime in respect of the exclusion of liabilities from the tax cost setting process on entry. The Government is concerned these such liabilities are giving companies a double tax benefit in the form of future deductions for the liability, as well as potentially an uplift in the tax cost of assets which is claimed by depreciation.
- The Government has recognised that the taxation of financial arrangements (TOFA) regime has inadvertently applied to a significant group of smaller taxpayers than had been originally intended, and was not delivering the compliance cost savings and simplification benefits. The TOFA measures will be amended with effect to income years commencing after 1 January 2018 to more closely deliver the simplification as intended, and to remove the majority of taxpayers from the regime. We are pleased that the Government has recognised that changes are required and we support this announcement.
- Further to the Board of Taxations Post Implementation Review of Division 7A, the Government has reiterated their intention to make amendments to these provisions, to assist in easing the compliance burden whilst maintaining the integrity of the measures. This will include providing safe harbour rules, self-correction mechanisms for inadvertent breaches and simplified loan arrangements. As a result of various changes in the ATO’s interpretation and application of these provisions over the past few years, compared to the measures as initially introduced with effect in 1997, many businesses have faced impediments to their operations, as such we support the Government in undertaking a thorough review of the measures to ensure such impediments are reduced.
Online shoppers beware – GST extended to low value imports of Goods worth <$1,000
Following the recent introduction of the “Netflix” tax imposing GST on imports of intangible services such as digital downloads and streaming, and after years of speculation, low value goods of less than $1,000 that are imported into Australia will also be subject to GST from 1 July 2017.
A report by the Productivity Commission in December 2011 indicated that to lower the low value importation threshold to $100, the Government could collect $500m of GST revenue, however this would come at a cost of $1.2b in administration and compliance costs, given the current manner in which international parcels are processed. As a result, a taskforce was established to consider how to improve efficiencies in the processing of low value parcels.
Under the current budget however, to address concerns about the otherwise significant costs of collection of GST that have previously hindered the imposition of GST on such goods in the past, which are typically brought into the country by way of online shopping and delivered by Australia Post or couriers, the Government will require overseas vendors to register for GST in Australia and undertake the collection of GST at the time of the transaction, rather than addressing when the goods arrive into Australia to be collected by customs. Much like the imposition of registration requirements on foreign vendors of digital supplies, it remains to be seen how this regime will be implemented by the Australian Government on suppliers in foreign jurisdictions.
Focus on tax integrity of multinationals
With much focus on the level of taxes paid by multinationals, a new diverted profits tax will be introduced from 1 July 2017. The tax is aimed at multinational companies with global revenue of more than $1B that shift profits offshore through arrangements with related parties, where such arrangements deliver significant savings in tax that otherwise may have been paid in Australia, and do not have sufficient economic substance. A tax of 40% will apply to such diverted profits.
In addition, multinational companies may be liable for increased administrative penalties for failing to adhere to tax disclosure obligations, as part of the Government’s tax integrity package, with potential penalties for non-disclosure and non-lodgement increasing from $4,500 to $450,000.