2016 Federal Budget. Nothing much to see here
The 2016 Federal Budget was spectacularly dull and only had a few sweeteners, but not so much that will really excite anyone.
A year ago there was a lot of optimism that this budget might begin the process of genuine tax reform that Australia needs, but political expediency has reduced it to more tinkering at the edges. This is very much a budget from a Government whose first, second and third priorities are to get re-elected.
MORE TAX CUTS FOR NOT-SO SMALL BUSINESSES
Under a 10-year plan, the corporate tax rate will be reduced to 25% from 30%. From 1 July, the small business tax rate will be lowered by 1% to 27.5% and the turnover threshold for small businesses able to access it will be increased to $10 million from $2 million.
From 1 July 2016, the $20,000 temporary instant asset write-off is being extended to businesses with an aggregated annual turnover of less than $10 million. The asset must be first used or installed ready for use by 30 June 2017. The write-off can provide businesses with some cash benefit. For example, a business with an effective tax rate of 30% can receive up to $5,999 as a tax refund if an asset costing less than $20,000 is purchased.
In conjunction with the company tax rate decrease, the small business tax discount for sole traders and partnerships, currently at 8%, will be lifted to 16% for businesses with a turnover of less than $5 million. However, the discount is still limited to $1,000 per individual, which leaves it back in the bucket of being a relatively minor incentive.
The Government also announced changes to the BAS for small businesses, with a desire to make it simpler. The new BAS may be introduced from 1 July 2017.
From 1 July 2017, the GST will apply to low value goods imported by consumers. The intent of this measure is that low value goods imported by consumers will face the same GST regime as goods sourced in Australia.
RESTRICTING AUSTRALIAN’S ABILITY TO SAVE FOR THEIR RETIREMENT
Unfortunately the superannuation system has received a sweeping set of changes, some of which are good, some of which will hurt, and some of which are just a welcome bit of simplification and they will impact many Australians.
The Government’s proposal to slash concessional contribution (tax deductible contributions) caps has been labelled as a backward step that will reduce the ability of people to save adequately for retirement. The concessional contributions limits are to be reduced to a flat $25,000 per year from 1 July 2017 (currently ranging between $30,000 and $35,000 based on your age).
In addition, the extra tax rate of 30 percent that applies to contributions by those with incomes of over $300,000 will now apply to those with incomes of more than $250,000.
Currently individuals can make contributions of their own, after-tax money into superannuation of up to $180,000 per year, in addition to the normal ‘concessional’ or tax deductible contributions they might make. This system is being scrapped in favour of a single lifetime cap of $500,000, which will take into account all non-concessional contributions made since 1 July 2007. This retrospective change is unfair to people who were making contributions under the law at the time. This is a major restriction on older Australians who were planning to make significant contributions to their Superannuation funds, so they could be achieve their retirement aspirations
From 1 July 2017, the Government plans to remove the '10% rule' for personal deductible contributions. What this means is that anyone, no matter what their employment arrangements are, can make a tax-deductible contribution to super. this is a good outcome for the self-employed.
The Government is also simplifying the super rules substantially by removing the ‘work test’ for those aged over 65. From 1 July 2017, this will allow people aged from 65 to 74 to freely contribute money into superannuation subject to the same rules as everyone else.
Income on superannuation which is in a Transition to Retirement Income Stream (TRAP) is currently tax free. This tax-free status is being removed and so the income will subject to the normal superannuation tax rates (15%).
Low income earners who are below the tax free threshold find that contributions made into superannuation incur a tax rate of 15 percent. From 1 July 2017, up to $500 of this cost will be available as a tax offset for those with an adjusted taxable income of less than $37,000.
Fortunately, the Government has promised to retain the tax-free status of superannuation withdrawals in retirement. However, amounts invested in the ‘retirement phase’ (ie which is paid out as a pension) have been targeted. Currently, income on the amounts invested are tax free, but from 1 July 2017 the balance of these amounts will be capped at $1.6 million, reducing the generous concession on the income generated from investing these funds.
As a result of these many changes, Family Trusts may suddenly seem like a more appealing option for investors and the Property Market may become a far more attractive proposition.
A TOKEN MEASURE FOR INDIVIDUALS AND FAMILIES
The Government will increase the 32.5% personal income tax threshold from $80,000 to $87,000 from 1 July 2016. This measure benefits those on an income greater than $80,000. So for individuals earning $87,000 a year, the tax saving from this change results in a token benefit of $312 a year. That’s only $6 per week. Far from a real incentive and a galaxy away from the much anticipated tax reform. Unfortunately this change does not help double-income families where each spouse earns less than $80,000. For example, a family where each spouse earns $50,000 (on a combined income of $100,000), do not receive any benefit.
The Government confirmed that there is no plan to remove or limit negative gearing. This is a very positive outcome for all property investors.
Multinationals will be required to pay a new 40% tax on profits transferred offshore through related party transactions, without economic substance, that lower the tax paid on their Australian profits by 20% or more
SMOKERS…AN EASY TARGET
A further four annual 12.5 per cent increases in tobacco excise (another word for TAX) will be implemented, with the first increase to take effect on 1 September 2017. In four years, it is expected that a packet of cigarettes will cost more than $40
WATCH THIS SPACE
The budget also contains a $1.6 billion allocation for not announced budget initiatives. The cynical amongst us might suggest that the Government is holding back the exciting announcements for the election campaign.