Australian Federal Budget 2016-17

The government is seeking to elevate this year's Budget to a long term "economic plan" that will support Australia's transition into an advanced and diverse economy.  Treasury is projecting a stable macroeconomic picture - the economy growing at a healthy rate of 3% from 2017-18, unemployment at a rate of 5.5% and inflation within the reserve banks zone of comfort - however the government is still forecasting deficits up to 2019-20.

 

The 2016-17 Budget introduced a number of significant tax policies that include a phased reduction to the corporate tax rate, the introduction of a diverted profits tax, and a number of superannuation as well as personal tax changes.  Despite these, the package of measures fell well short of the comprehensive tax reform hoped for and as such broader structural taxation reform is still needed. 


Corporate tax

The government will reduce the corporate tax rate, ultimately to 25% on an 11 year phased basis, depending on turnover, commencing 1 July 2018.  The government has indicated that lowering the corporate tax rate is part of its plan to promote Australia’s economic growth and to encourage investment and it is expected that the reduction will increase GDP by 1% over the long term. 

 

The rate cut will commence with a reduction for small business companies (annual aggregated turnover of up to AUD$10m) to 27.5% from the 2016-17 income year.  The annual aggregated threshold will then be progressively increased to have all companies taxed at 27.5% in the 2023-24 income year.  From the 2024-25 income year the tax rate will be reduced for all companies to 27% and then reduced by 1% per year until it reached 25% in the 2026-27 income year.  These rate reductions will apply to all companies (resident and non-resident) and to other entities taxed like companies such as public trading trusts and limited partnerships. 


Diverted profits tax

The government will introduce a new diverted profits tax (DPT) with effect for income years beginning on or after 1 July 2017.  The DPT is modelled on the second limb of the UK’s DPT, the first limb of which was adopted in the 2015 Budget as the multinational anti-avoidance law (MAAL). This provision is aimed at arrangements involving transactions with overseas related parties which are subject to a tax rate which is less than 80 percent of the tax rate applied in Australia, where the arrangement lacks economic substance.

Essentially, the objective of the DPT is to change the balance of negotiation with large business on transfer pricing and structuring issues.  The DPT will impose a penalty tax rate of 40 percent, and any purported underpayment of tax determined by the ATO is payable upfront. In addition, the DPT assessment will include an interest charge for the period from when any amount would have been payable on the relevant income tax assessment, to the issue of the ATO’s DPT assessment.

Superannuation
This year’s budget has focussed strongly on superannuation with a number of changes being announced.  Some of these will impact the ability of some Australians to save for their retirement, while others provide incentives and opportunities for lower income earners. 

Some of the measures which will apply from 1 July 2017 include:

  • The age at which Australians will have to satisfy a work test to be able to make superannuation  contributions will be increased from 65 to 74 years of age;
  • Australians up to the age of 75 will have the ability to claim a deduction for personal superannuation contributions regardless of their work circumstances;
  • The ‘Income threshold’ at which high income earners pay an additional 15% tax on concessional contributions made will be reduced from AUD$300,000 to AUD$250,000.  ‘Income threshold is Taxable Income + reportable fringe benefits + investment losses + taxed contributions
  • Refund of all contributions tax in accumulation on death ceases 1 July 2017;
  • Concessional contribution caps (for contributions which come from pre-tax income) are to be reduced to AUD$25,000 per annum for all ages.  Only for those with balance less than $500,000, unused concessional cap accruing from 1 July 2017 is carried forward on a rolling basis of 5 consecutive years (i.e. max of $125,000);
  • A lifetime cap of AUD$500,000 will be applied to non-concessional contributions, retrospective to 1 July 2007, indexed annually $50,000 with AWOTE index.  The cap takes effect immediately and applies to all non-concessional contributions made after 1 July 2017.  Excess of the cap before commencement will not be regarded as excess and allowed to be retained in system.  If exceed the cap post commencement, must withdraw excess or otherwise penalty applies. Insurance proceeds (e.g. TPD) should not impact the cap - another reason to have more insurance in superannuation. 
    Doesn’t affect other traditional contribution caps - Small business CGT contributions & Personal injury contributions;
  • The amount of a person’s superannuation balance that can be transferred into a pension phase will be restricted to AUD$1.6 million, where future earnings are tax free and unrestricted thereafter.  Those already in pension phase will be expected to reduce their retirement balance to AUD$1.6 million by 1 July 2017 with the options of returning the excess amounts back to accumulation (earnings taxed at 15%) or withdrawal from superannuation.  $1.6M cap annually indexed in $100k increments in line with CPI. 
    Unused ‘cap space’ on subsequent transfer is done on a proportional basis (e.g., previously utilised 75% of cap, will have 25% left of current (indexed) cap;
  • Transition to retirement income streams continues, but fund earnings taxed 15%, no grandfathering, readjustment to cap $1.6M needs to be done by 1 July 2017;
  • Raising income threshold to $37,000 (from $10,800), Low Income Spouse superannuation Tax Offset of $540 (based on $3,000 contribution) for contributing spouse, cut out at $40,000
  • Low income earners will receive a tax offset up to max of $500 (based on $3,330), for up to ATI of $37,000 to their super fund to compensate for tax paid on their super contributions. 

Personal Tax

The budget seeks to address bracket creep by increasing the income threshold at which the 37% rate commences from AUD$80,000 to AUD$87,000 from 1 July 2016.   This will provide a small tax cut to middle income earners, but falls short of providing the cuts to taxpayers across the board that full indexation of tax brackets would have achieved.  Despite this measure, across OECD countries, Australia will still have one of the highest income tax rates for a single person earning the average national wage, at 22.7%.  By comparison, rates in New Zealand, the US and the UK are much lower, at 17.6%, 16.5% and 12.8% respectively. 

In addition to the above and consistent with announcements leading into the Budget, there have been no changes made to negative gearing or the taxation of discount capital gains.


 
- AustCham Finance, Legal and Tax Committee


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