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2016 Federal Budget Analysis

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The 2016 Federal Budget has been marketed as one driving “Jobs and Growth”.

Ignoring the obvious political connotations given we are heading into a federal election, let’s have a look at the key Budget Measures that will affect you and your business.

 

The Budget contained several key measures that will affect small businesses moving forward, namely:

1.     Tax Cuts for Small Business

2.     Superannuation changes for high income earners

3. Superannuation changes for retirees balances and tax free balances

4. Reduction to the company tax rate

5. Reduction of Superannuation Concessional Contributions Caps

6. Reduction of Superannuation Lifetime Non Concessional Contributions Cap

7.  Youth wage subsidies to reduce Youth Unemployment

 

1.     Tax Cuts for Small to Medium Business

Small Business is the Growth Engine of the economy. Small Businesses innovate, employ and grow. It is great to see the government offering incentives for small to medium businesses to continue to invest in their businesses and staff. If only the state government would get on board and significantly reduce things like Payroll Tax!

As of 1 July 2016, the Small Business Tax Concessions will apply to businesses with a Turnover less than $10 Million (up from $2 Million). What does this mean for businesses tuning over between $2 and $10m. These businesses will be able to access the following incentives:

1.     Reduction in the company tax rate from 30% to 27.5% for the 2016/17 financial year

2.   Access to accelerated depreciation rates and pooling of assets with depreciation at 30% for General Pool Assets

3.     Access to the instant asset write off of $20,000 for the 2016/17 financial year end

4.     These threshold changes will not affect eligibility for the small business capital gains tax concessions, which will remain available for businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test.

 

2.  Superannuation Changes

Unfortunately, the budget contains a few nasties in relation to the superannuation tax arrangements for both high net worth individuals and for high income earners. The budget has done this in a number of ways:

Introducing a $1.6 million superannuation “transfer balance cap” on the total amount of superannuation that an individual can transfer into retirement phase accounts. In other words, limiting the amount of superannuation that can support a tax free pension upon retirement. This is basically a step back in time to around 2000 when Superannuation Accounts had “Reasonable Benefits Limits” of around $1million. In practice, if you have over $1.6 million in your super fund, contact us for the full ramifications of this new policy.

The transfer balance cap will affect less than one per cent of superannuation fund members and will be applied to both current retirees and to individuals yet to enter their retirement phase.

For those high income earners with combined incomes and superannuation contributions greater than $250,000, they will now pay 30 per cent tax on their concessional contributions, up from 15 per cent. This is down from the current $300,000.

Lowering the superannuation concessional contributions cap to $25,000 per annum, down from $30,000. This is obviously a disincentive towards investing into super, however there is still incentive to build wealth through superannuation, especially if you can invest and grow this up to your $1.6m “transfer balance cap” over your working life.

The Government will also introduce catch-up concessional superannuation contributions by allowing unused concessional contribution caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 or less. This will allow those with lower contributions, interrupted work patterns or irregular capacity to make contributions to make ‘catch-up’ payments to boost their superannuation savings.

Introduction of a $500,000 lifetime cap for non-concessional contributions. The lifetime cap limits retirement tax minimisation and estate planning.

Low Income Superannuation Tax Offset (up to $500) for those earning less than $37,000. This effectively means if you earn less than $37,000 then you pay zero tax on your super contributions.

Improving concessional contributions - From 1 July 2017, the Government will lift current restrictions and allow individuals under the age of 75 to claim tax deductions for personal superannuation contributions to eligible superannuation funds.

This effectively allows all individuals, regardless of their employment circumstances, to make concessional super contributions up to the concessional cap. Individuals who are partially self-employed and partially wage and salary earners and individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements.

 

3.     Other Tax Changes

The Government is determined to improve disclosure of taxpayer information to the ATO, and will consult on new rules requiring tax and financial advisors to report potentially aggressive tax planning schemes.

These rules will give the ATO an extra tool to combat the use of aggressive tax schemes and limit the opportunity for such schemes to be marketed.

 

Preventing multinationals from profit shifting

The new Diverted Profits Tax will help ensure that large multinationals are paying the right amount of tax on profits made in Australia. The Diverted Profits Tax will commence on 1 July 2017 and apply to multinationals using artificial or contrived arrangements to reduce tax by diverting profits offshore.

The Diverted Profits Tax will broaden the ATO’s scope to identify large multinationals seeking to avoid tax by shifting profits out of Australia and will levy a tax rate of 40 per cent on transactions that are caught – a penalty compared to the standard company tax rate.

 

Addressing Bracket Creep

In this Budget, the Government is making a start on personal income tax relief.

The Government will prevent average full time wage earners from moving into the second top tax bracket until 2019-20 by increasing the 32.5 per cent tax threshold from $80,000 to $87,000. This will stop around 500,000 taxpayers facing the 37 per cent marginal tax rate.

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Guest Friday, 22 September 2017