At 7.30pm on Tuesday, 12 May 2015 Treasurer Hockey confronted his fellow parliamentarians in Canberra and presented the 2015 Budget.
This Update presents Centrepoint Alliance’s key observations specific to areas of interests by accountants and financial planners. The “devil is in the detail” and a closer examination of the relevant legislative changes will reveal more information.
Read Related Article: 2015 Budget Update
Read Related Article: 2015 Budget Infographic
In the meantime, enjoy this summary:
– commentary provided by Ken Mansell
Don’t you dare call it a dull and boring budget! Yes there may not have been a lots of big ticket changes in tax and super, but for a tax advisor this budget is full of changes that we need to be on top of and many changes we need to start to prepare to take advantage of.
This applies whether you are advising the largest multinational or a new start up business.
So what does the second budget of the Abbott government propose to change, specifically in relation to taxation and superannuation?
Let’s start with the best news – the changes to the tax system for small businesses:
1. SMALL BUSINESS TAX CHANGES
1.1 A massively expanded accelerated depreciation
The Government has announced it will significantly expand accelerated depreciation for small businesses. If you are a small business entity (aggregate annual turnover of less than $2 million) you can immediately deduct assets that cost less than $20,000.
We thought the old threshold of $6,500 was great…
The depreciable asset needs to be used or install ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017. From 1 July 2017 we go back to a $1,000 immediate asset threshold – how many assets will we be installing on the evening of 30 June 2017?
Assets valued at $20,000 or more can be placed in the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter. But when the balance is less than $20,000 you write the whole pool off.
This will make depreciation schedules for small businesses very, very simple – many small businesses may not have a depreciation schedule at all! But remember, it still might be worth keeping a list of depreciable assets for future business sales.
If you have left the simplified depreciation regime in the last five years you will be allowed to re-enter as the Government will remove the 5 year lock out rule.
The only thorn in the announcement is that in-house software will not come within these rules and will still be depreciable over 5 years (from 1 July 2015).
1.2 Tax cuts for small business
We all expected a reduction in the company tax rate for small businesses but there is even more on offer.
As expected, the Government will deliver a tax cut to all small businesses that operate through companies by a 1.5% cut in the company tax rate (to 28.5%). Remember, a small business has less than $2 million annual aggregated turnover.
How will franking work now? It looks like it won’t change. The current maximum franking credit rate for a distribution will remain unchanged at 30% for all companies. This means that even though the small business company is paying 28.5% tax, it can (if it has the franking credits) still frank up to 30%.
To be clear on this, if in the company’s first year it makes $100 taxable income, pays $28.50 in tax, it is able to pay a $71.50 franked dividend with $28.50 of attached franking credit (partial franked).
But if an existing company with no retained earnings but with a $50 franking balance makes $100 taxable income, pays $28.50 in tax, it is able to pay a $71.50 fully franked dividend ($30.64 of franking credits being $71.50 /70%x30%).
It is worth noting the problem the two company tax rates can cause. If your turnover is $1.9 million and your taxable income is $500,000 would pay $142,500 in income tax (using a 28.5% rate). Woops, you just found $100,001 in income you forgot to declare, making your turnover greater than $2 million, your taxable income $600,000 and your tax now $180,000 (at 30%). Find $100,000 and lose $37,500 or 37.5% in tax.
And now for the surprise.
Only a small number of businesses get their income in companies so how will this benefit these businesses? The government will also introduce a 5% tax discount on income from unincorporated small business (aggregated annual turnover again) activity. While this is capped at $1,000 per individual for each income year, delivered as a tax offset, it is at least $1,000 less. And it appears if the income flows through a trust to various individuals, each might get the $1,000.
Does this mean $416 minor unearned income might be substantially more? We have to wait and see when the legislation is released.
1.3 Capital gains tax roll-over relief for changes to entity structure
In what is a very strange announcement, the Government will allow small businesses (aggregated annual turnover of less than $2 million) to change legal structure without attracting a CGT liability.
Does this means that we can start a small business in any structure at all and when we see what the business grows into (as long as the turnover is less than $2 million) we can just change the structure through this rollover? It appears so.
Now the devil will definitely be in the detail of this rollover. But I cannot wait to see if we can take a sole trader and roll the business into a discretionary trust that has the potential beneficiaries being the family of the sole trader.
This might make the initial conversation you have with the new start up client go something like “come see me if you don’t go bust in the first six months and then we will structure you in a tax effective way.”
1.4 FBT exemptions for work-related electronic devices
The Government will extend the FBT exemption for small businesses that relates to work-related electronic devices. Currently an employer can only provide multiple devices to an employee and be exempt from FBT if each device has a different function. Under the new rules, from 1 April 2016 an employer can provide more than one devise to an employee without FBT applying, even if they have substantially similar functions.
But remember, this still has to be “work-related” so we are not going back to packaged laptops for the children.
1.5 Allow immediate deductibility for professional expenses
The Government has stated it will allow businesses to immediately deduct a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice. This will apply from 1 July 2015.
Remembering that tax advice is already immediately deductible it is somewhat unclear what the government is taking about. But my guess is they will amend section 40-880 of the ITAA97 to make the 5-year write off where no business eventuates and immediate deduction.
2. PERSONAL INCOME TAX AND SALARY PACKAGING CHANGES
I’m sorry to say the rest of the changes are not quite as memorable. But there will be some changes practitioners need to be aware of.
2.1 Changing the methods used for calculating work-related car expense deductions
From 1 July 2015, the “12% of original value method” and the “one-third of actual expenses method”, will be gone (they were only used by 2% of those claiming car deductions).
Also, the “cents per kilometre method” will change with the three current rates with one rate set at 66 cents per kilometre for all motor vehicles, updated each year. This new method and the “logbook method” will be all that is available.
2.2 A cap for salary sacrificed meal entertainment and entertainment facility leasing expenses
If you work for a public benevolent institution, a health promotion charity, a public and not-for-profit hospital, or public ambulance service you know you can salary sacrifice expenses up to a certain cap. But you also know that certain expenses are outside that cap and you can salary sacrifice as much of these as you like.
These include meal entertainment and have even led to weddings being salary sacrificed and the use of meal cards.
The Government will introduce a separate single grossed-up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses. Above the $5,000 and it will be included in the employee’s cap.
Interestingly, the Budget documents state the “all use of meal entertainment benefits will become reportable.” If this is true for all employers and not just these few employers, this could be a substantial change.
All this will apply from 1 April 2016.
2.3 Changes to tax residency rules for temporary working
The Government will change the tax residency rules from 1 July 2016 to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here. This means they will be taxed at 32.5% from their first dollar of income.
Interesting this was what three test cases the Commissioner recently ran concluded but this will put the matter beyond doubt.
3. GOODS AND SERVICE TAX CHANGES
3.1 Applying GST to digital products and services imported by consumers
As the Government has been indicating for some time, it is going to introduce what has become known as the “Netflix tax”.
The GST taxable supply rules will be extended to include cross border supplies of digital products and services imported by consumers. This will apply from 1 July 2017.
Of course, this change will require the unanimous agreement of the States and Territories but I am sure they are already planning on how to spend the extra revenue.
3.2 More money to promote GST compliance
The Government has announced it will provide $265.5 million to the Australian Taxation Office over 3 years from 2016-17 to continue a range of activities to promote GST compliance.
And somehow this will raise around $2.1 billion in additional GST. Now that is a return on investment.
3.3 Not proceeding with a reverse charge for going concerns and farmland
Finally for GST, in the Budget, the Government announced it will not proceed with replacing the current GST-free treatment for supplies of going concerns and farmland with a reverse charge mechanism.
4.1 Part IVA targeted to multinational tax avoidance
Part IVA is the general anti avoidance rule in the tax legislation. It allows the Commissioner to undo, and penalise, a scheme undertaken for the dominant purpose of gaining a tax benefit.
In the Budget, the Government is going to extend this rule (as it did with imputation streaming many years ago) to specifically target multinationals that artificially avoid having a taxable presence in Australia.
From 1 January 2016, approximately 30 foreign companies with global revenue of $1 billion or more will be subject to a new anti-avoidance rule that will apply where certain arrangements are entered into for a principal purpose of avoiding tax in Australia.
This includes where:
- The activities of an Australian company or other entity are integral to an Australian customer’s decision to enter into a contract;
- The contract is formally entered into with a foreign related party to that entity; and
- The profit from the Australian sales is booked overseas and subject to no or low global tax.
This new rule is summarised in the diagram at appendix A.
This is going to be the subject of much consultation between now and 1 January 2016.
4.2 New transfer pricing documentation standards
The Government will also implement the Organisation for Economic Co-operation and Development’s new transfer pricing documentation standards from 1 January 2016 for companies with global revenue of $1 billion or more.
4.3 Stronger penalties for multinational tax avoidance
Finally, in relation to multinational tax avoidance, the Government will double the maximum administrative penalties. But like all of these changes, this measure will apply to companies with global revenue of $1 billion or more.
5. BITS AND PEACES
Finally, there are a series of other minor announcements that include:
- Allowing all primary producers to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills from 1 July 2016.
- Allowing primary producers to depreciate over three years all capital expenditure on fodder storage assets such as silos and tanks used to store grain and other animal feed from 1 July 2016.
- Targeting the Zone Tax Offset to exclude ‘fly-in fly-out’ and ‘drive-in drive-out’ workers.
- Some minor technical changes to the new employee share scheme rules that start on 1 July 2015, including:
- Excluding eligible venture capital investments from the aggregated turnover test and grouping rules;
- Providing the capital gains tax discount where options are converted into shares and the resulting shares are sold within 12 months of exercise; and
- Allowing the Commissioner of Taxation to exercise discretion in relation to the minimum three-year holding period where there are circumstances outside the employee’s control that make it impossible for them to meet this criterion.
- Providing income tax relief for Australian Defence Force personnel deployed on Operations AUGURY and HAWICK.
- Allowing DGR public museums and public art galleries to acquire cars free of luxury car tax in respect of cars acquired for the purpose of public display, consigned to the collection and not used for private purposes.
- As they do every budget, the Government will increase the Medicare levy low-income thresholds. For example, the threshold for singles will be increased to $20,896.
- Specifically listing the Global Infrastructure Hub as an income tax exempt entity.
- Providing $32.4 million over 5 years for the Australian Taxation Office, Australian Securities and Investments Commission and the Department of Industry and Science, to develop a single online portal for business and company registration; publish new computer code to enable developers to build new registration software; and reduce the number of business identifiers.
- Providing $14.6 million over five years to the Inspector-General of Taxation to support its operations.
- Providing $130.9 million over four years to deliver an improved experience for clients in their dealings with the Australian Taxation Office.
- The start date for the new tax regime for managed investment trusts has been put back a further 12 months to 1 July 2016 but MITs will have the option of applying the new rules from 1 July 2015.
- Adding entities to the list of DGRs like the International Jewish Relief Limited and the National Apology Foundation.
There are a few other announcements in the Budget that we have had earlier. These include:
- Modernising the Offshore Banking Unit regime.
- Relaxing criteria for the release of superannuation for terminal medical conditions so that two medical practitioners must certify that they are likely to die within two years.
- Introducing a $100 million expenditure cap for the research and development tax incentive.
- Providing $127.6 million over four years to a Serious Financial Crime taskforce for investigations and prosecutions that will address superannuation and investment fraud, identity crime and tax evasion.
- Providing the Commissioner of Taxation with a power to make a legislative instrument to modify the operation of the tax law to ensure that the law’s purpose or object is achieved.
6. A SUMMARY OF SORTS
If you are a small business, you will pay less tax, worry less about structures and not worry about depreciation for some time.
If you salary package meal entertainment, you need to reconsider its use.
If you claim work related car expenses, your methods have been reduced.
If you import digital products you will need to reconsider if GST applies.
And if you are a multinational with global revenue of $1 billion or more, you probably won’t be reading this but will be speaking to your tax advisor – and you should, as these new rules could be painful.
SUPERANNUATION, SOCIAL SERVICES AND OTHER MEASURES
– commentary provided by Peter Kelly
Unlike Ken’s tax summary, where all the exciting news resides, the rest of the budget contains a real mix of measures, mostly small and relatively boring, but with some significant issues for financial planners to consider when dealing with their clients.
1. CROSS-PORTFOLIO PENALTY UNITS
The current cost assigned to a penalty unit is $170. This will increase to $180 from 31 July 2015.
Furthermore, the cost of a penalty unit will be indexed to the Consumer Price Index (CPI) each three years from 1 July 2018.
Penalty units apply to a range of financial penalties imposed by Government agencies for legislative breaches.
Most notably of recent times, if the introduction of an administrative penalty regime for SMSF trustees that breach certain prescribed sections of the Superannuation Industry (Supervision) Act (SISA).
The increase in the cost of penalty units will result in breaches SISA ranging from $900 (currently $850) to $10,800 (currently $10,200).
2. SUPERANNUATION – TERMINAL ILLNESS BENEFITS
Under present legislation, a preserved superannuation benefit can be accessed on diagnosis of a terminal medical condition. A terminal medical condition arises when two medical practitioners certify that a superannuation fund member is suffering from a medical condition and they are unlikely to survive for more than 12 months.
The Government proposes to extend the survival period from 1 year to 2 years.
This change is to take effect from 1 July 2015.
HUMAN SERVICES MEASURES
3. PAYMENTS OF CERTAIN BENEFITS
Effective from 1 July 2016, the Department of Human Services will only be paying a range of benefits by Electronic Fund Transfer.
Benefits covered by this change include Medicare and Pharmaceutical Benefit Scheme payments, and Centrelink payments.
4. FRAUD PREVENTION AND DEBT RECOVERY
Additional funding has been allocated to the Department of Human Services to improve fraud prevention, debt recovery capability and improved assessment processes.
This measure should result in savings across a range of services but particularly in relation to Centrelink payments.
The additional funding is intended to be available from 1 July 2015.
SOCIAL SERVICES MEASURES
5. AGED CARE
Aged Care means testing for residents who pay their accommodation costs by periodic payment (Daily Accommodation Payment) will have their payments aligned with the arrangements that apply to residents who pay their accommodation costs by way of a lump sum (Refundable Accommodation Deposit).
For those residents who pay their accommodation costs by way of a periodic payment, the current exemption from means testing of rental income of the former residence, will be removed.
This measure will apply to new residents from 1 January 2016.
6. HOME CARE PROGRAMME
Additional funding is to be provided to provide increased consumer choice and flexibility for older Australians in receipt of a Commonwealth funded Home Care Package.
Packages will be allocated directly to consumers by the My Aged Care Gateway, rather than to service providers.
This will take effect from 1 February 2017.
7. AUSTRALIAN WORKING LIFE RESIDENCE (AWLR) – REDUCED PORTABILITY
Effective from 1 January 2017, some Age Pension, Wife Pension, Widow B Pension and Disability Support Pension recipients will have their full basic means tested rate reduced if they are absent from Australia for more than 6 weeks. Currently they can be absent for up to 26 weeks.
After 6 weeks absence from Australia, recipients who have lived in Australia for less than 35 years will be paid a reduced rate of benefit proportionate to their Australian residency.
AWLR covers the period a person has lived in Australia from age 16 to age pension age.
Pensioners with more than 35 years AWLR will not be affected.
8. FAMILY TAX BENEFIT – PART A – FTB-A
The Large Family Supplement will cease from 1 July 2016.
Furthermore, FTB-A will only be paid for 6 weeks in any 12 month period for families outside Australia.
Currently families receive FTB-A at the usual rate for 6 weeks and the base rate for a further 50 weeks.
This measure will apply from 1 January 2016.
9. WORKING AGE PAYMENTS – WAITING PERIOD
Applicants for Newstart and Sickness Allowance, Parenting Payment and Youth Allowance (Other) are required to serve a 1 week waiting period. This measure is to apply from 1 July 2015.
Applicants for Widows Allowance are to be excluded from having to serve the waiting period.
10. CHILD CARE SUBSIDY
A subsidy of 85% of child care fees (up to an hourly fee cap) will be payable to families with an income of less than $60,000 (2013/14 dollars). The subsidy will taper down to 50% for eligible families with an income of $165,000.
For eligible families with an income of more than $180,000, the subsidy will be capped at a maximum of $10,000 per child, per year.
11. NEWSTART AND SICKNESS ALLOWANCE – ELIGIBILITY AGE
In the 2014 Budget, it was proposed that the eligibility age for Newstart and Sickness Allowance be increased from 22 to 24.
This measure has now been deferred until 1 July 2016 with the eligibility age to be increased to 25.
12. LOW INCOME SUPPLEMENT
The Low Income Supplement is a payment of $300 made to eligible low income households. The Supplement will cease from 1 July 2017 however eligible recipients will still receive the Energy Supplement.
13. NO JAB – NO PAY
As recently announced in the media, the budget contains a measure that will see families with children who have not been immunised no longer being eligible for subsidised childcare or the FTB-A end of year supplement.
Exemptions will apply for medical reasons and the measure is due to apply from 1 January 2016.
14. INDEXATION OF THRESHOLDS
The 2014 Budget included a proposal to pause the indexation of thresholds for the income test free areas and deeming for a 3 year period. This measure was not legislated and has now been abandoned.
The income test free thresholds and deeming thresholds will continue to be indexed the CPI.
The 2014 Budget also contained a proposal to reset the deeming thresholds to $30,000 and $50,000. This measure has also been abandoned.
15. ASSETS TEST REBALANCE
Apart from some of the tax measures already covered by Ken, this is probably the “big ticket” item in the budget and confirms recent announcements made by the Minister for Social Services.
The assets test thresholds are to be increased and the taper rate increased from $1.50 per thousand of assets over the asset free threshold, to $3.00 per thousand.
This change will not apply until 1 January 2017.
As a result of the proposed changes, more pensioners will qualify for the maximum rate of pension however the amount of assets that may be held before the pension is no longer payable, will be reduced.
Those people who will no longer qualify for a pension will be automatically provided with a Commonwealth Senior’s Health Card, or a Health Care Card if under age pension age.
16. INDEXATION OF AGE PENSION
The 2014 Budget proposal to restrict indexation of the Age Pension to movements in CPI has been withdrawn.
Pensions and pension equivalent payments will continue to be indexed in line with the greater of CPI or Pensioner and Beneficiary Living Cost Index and benchmarked against Male Total Average Weekly Earnings.
17. PAID PARENTAL LEAVE
Currently some people receive parental leave payments made by their employer in addition to the payments made by the government.
Measures are to be introduced from 1 July 2016 that will eliminate this “double dipping”.
18. INCOME TEST – DEFINED BENEFITS PENSION
The deductible amount applying to defined benefit superannuation pensions is to be capped at a maximum of 10%. This will apply from 1 January 2016.
This measure will only affect public sector and corporate defined benefit schemes.
Recipients of Department of Veterans Affairs pensions and/or pensions paid from military superannuation funds will be excluded.
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