Overview
The foundation of this year’s Budget is “jobs and growth” with the Government positioning the message that it has a solid economic plan to transition the economy from the resource boom to a more diversified economy.
The Federal Budget is based on the following key areas which have implications for the economic and investment outlook:
- Putting in place “jobs and growth” measures aimed at boosting new investment, creating jobs and supporting small companies
- Cutting the company tax rate for small to medium companies to 27.5% from 1 July 2016. It is expected that economic and job growth will be greater from tax cuts to small and medium businesses than to larger companies. The company tax rate will be progressively lowered to 25% for all companies over the next 10 years
- Limiting superannuation tax concessions to the rich and redirecting these to lower income earners and those with lower tax balances
- Controlling spending growth. Government payments as a share of GDP are forecast to decline from 25.8% of GDP in 2016-17 to 25.2% of GDP in 2019-20.
The measures announced aim to create jobs as the mining boom ends and new sources of growth emerge. According to the Budget papers, almost 300,000 jobs were created in the economy last year, which is the largest number of jobs created in a single year since 2007.
The Government’s view is that a key to higher economic growth is through supporting innovation with a $1.1 billion National Innovation and Science Agenda and other new measures to boost investor confidence.
The key issues of the budget and how they may affect you are detailed below.
Important Note: Before any of these announcements can be implemented, they will require passage of legislation.
Small Business
Reducing the company tax rate over 10 years to 25%
The government will reduce the company tax rate to 25% over 10 years (i.e., by 1 July 2026).
This measure will commence from 1 July 2016, whereby the government will cut the small business company tax rate to 27.5%, and make this tax rate available to small companies with an annual aggregated turnover of less than $10 million. This turnover threshold will then be progressively increased to ultimately have all companies eligible for the 27.5% tax rate in 2023/24.
The progressive increase in the annual aggregated turnover thresholds for companies eligible for the 27.5% tax rate will be as follows:
- $25.0 million in the 2017/18 income year;
- $50.0 million in the 2018/19 income year;
- $100.0 million in the 2019/20 income year;
- $250.0 million in the 2020/21 income year;
- $500.0 million in the 2021/22 income year; and
- $1 billion in the 2022/23 income year.
In the 2024/25 income year, the company tax rate will be reduced to 27% and then be reduced progressively by 1 percentage point per year until it reaches 25% in the 2026/27 income year.
Franking credits will be distributed in line with the rate of tax paid by the company.
Increasing the Small Business Income Tax Offset (‘SBITO’)
The tax discount for unincorporated small businesses will increase incrementally over 10 years from 5 per cent to 16 per cent.
The tax discount will increase to 8 per cent on 1 July 2016, remain constant at 8 per cent for eight years, then increase to 10 per cent in 2024-25, 13 per cent in 2025-26 and reach a new permanent discount of 16 per cent in 2026-27.
The discount is currently available to an individual in receipt of income from an unincorporated small business entity (‘SBE’) (i.e., basically, an entity with an aggregated turnover of less than $2 million), and applies to the income tax payable on the business income received from such an entity.
The current tax discount (or SBITO) cap of $1,000 per individual for each income year will be retained.
Furthermore, 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.
Small business entity turnover threshold
From 1 July 2016, the small business entity turnover threshold will be increased from $2 million to $10 million. However, the current $2.0 million turnover threshold will be retained for access to the small business capital gains tax concessions, and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5.0 million.
Superannuation
The Government is attempting to reduce the cost of tax concessions to super by limiting the amount that can be contributed as well as the tax exemptions in retirement.
Clients with lower balances and/or lower levels of income will gain greater flexibility. Clients with higher balances and/or incomes may choose to seek alternative non-superannuation investment options that also provide tax advantages.
A summary of the changes are as follows:
$1.6 million superannuation transfer to pension phase balance cap
From 1 July 2017 the Government will introduce a cap of $1.6 million on the amount of benefits that can be transferred from an accumulation account into a tax free (pension) retirement account. The cap will work as follows:
- The cap will increase in $100,000 increments in accordance with the consumer price index.
- Earnings derived in the pension account after transfer will not need to be transferred from the fund in the event that retirement account grows to exceed $1.6 million.
- A proportionate method which measures the percentage of the cap previously utilised will determine how much cap space an individual has available at any single point in time. If the individual has previously used up 75 % of their cap they will have access to 25% of the current indexed cap.
- Subsequent movements in retirement accounts due to earnings growth will not be measured against cap space.
- Those individuals already in retirement as at 1 July 2017 with balances of $1.6 Million will need to either:
- Transfer the excess amount above $1.6 million back into an accumulation super account where income will be taxed at 15%, or
- Withdraw the excess amount from their superannuation fund
- Individuals who breach the $1.6 million cap will be subject to a tax on both the amount in excess of the cap and the earnings on the excess amount similar to the tax treatment that applies to excess non-concessional contributions.
Taxation of concessional superannuation contributions
Currently those who earn over $300,000 (taxable income plus superannuation contribution) are required to pay an additional 15% contribution tax on their concessional super contributions (i.e. total of 30% contribution tax).
From 1 July 2017, this threshold will reduce to $250,000.
Reduction in the Concessional Contribution Cap to $25,000
From 1 July 2017 the Government will also reduce the annual cap on concessional superannuation contributions to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).
Lifetime cap of $500,000 for non-concessional superannuation contributions
From 7:30 pm (AEST) on 3 May 2016, a $500,000 lifetime non-concessional contributions cap (indexed to ordinary times earnings) will apply.
Excess contributions will need to be removed from the fund or will be subject to penalty tax. The amount that could be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007.
All non-concessional contributions made from 1 July 2007 will be counted towards the lifetime cap. However, contributions made before this measure cannot, by themselves, result in an excess amount.
The lifetime cap will replace the annual caps (and ‘bring forward’ arrangements), which currently apply.
The new cap will allow Australians up to age 74 to make non-concessional contributions.
Transition to Retirement income streams (TRIS)
From 1 July 2017, the tax exemption for earnings on assets supporting ‘transition to retirement’ income streams will be removed.
Low Income Superannuation Tax Offset (LISTO)
From 1 July 2017, a Low Income Superannuation Tax Offset (LISTO) will apply to reduce tax on superannuation contributions for low-income earners.
The LISTO is a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners.
The offset is capped at $500 and will apply to members with adjusted taxable income up to $37,000.
Catch-up concessional superannuation contributions
From 1 July 2017, individuals who have not reached their concessional contributions cap in previous years will be allowed to make additional concessional contributions.
The measure is limited to those whose superannuation balance is less than $500,000.
Unused amounts are carried forward on a rolling basis for five consecutive years.
Only amounts accrued from 1 July 2017 can be carried forward.
Contribution rules for those aged 65 to 74
From 1 July 2017, individuals under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.
Superannuation balances of low-income spouses
From 1 July 2017, the Government will increase access to the low-income spouse tax offset – which provides up to $540 per annum for the contributing spouse – will apply where the low-income spouse’s income is up to $37,000 (increased from the current $10,800).
Anti-detriment payments
These will be abolished from 1 July 2017.
Tax deductions for personal superannuation contributions
From 1 July 2017, all individuals up to age 75 (without the need to satisfy the work test after age 65) will be able to claim an income tax deduction for personal superannuation contributions.
This will apply regardless of employment status (i.e., wholly employed, self-employed or a partially employed/self-employed).
Personal Income Tax
Income tax relief
From 1 July 2016, the government will increase the 32.5% personal income tax threshold from $80,000 to $87,000.
This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37% to 32.5%, preventing around 500,000 taxpayers facing the 37% marginal tax rate.
Medicare levy low income thresholds
For 2015/16 will be as follows:
- Individuals $21,335 (previously $20,896)
- Families $36,001 (previously $35,261)
- The family income threshold (i.e., $36,001) will be increased by $3,306 (previously $3,238) for each dependent child or student.
- For single seniors and pensioners with no dependants who are eligible for the seniors and pensioners tax offset, the threshold will be increased to $33,738 (previously $33,044).
Negative Gearing
The Government has announced officially that they will not remove or limit negative gearing because it would increase the tax burden on Australians trying to invest for their future.
Social Security & Family Payments
Work for the Dole
From 1 October 2016, the most job ready job seekers will enter the Work for the Dole phase after 12 months participating in job active, rather than the current six months.
Jobs for Families Package
Child Care Subsidy, Additional Child Care Subsidy and Community Child Care Fund will now apply from 1 July 2018 (rather than the previously announced 1 July 2017).
Child care fee assistance will continue to be provided under the Child Care Benefit, Child Care Rebate, Jobs, Education and Training Child Care Fee Assistance, Community Support Program and Budget Based Funded Program until 30 June 2018.
Removal of Clean Energy Supplement
From 1 July 2017 new applicants of social security and veterans affairs payments will not receive this additional payment.