Key points on Taxation
- Personal income tax relief
- Increase in the Medicare Levy low income thresholds
- Pausing indexation of the Medicare Levy Surcharge and Private Health Insurance Rebate thresholds
- GST on low value goods imported by consumers
- Reducing the company tax rate to 25%
- Increased small business turnover threshold
- Increased unincorporated small business tax discount
- Diverted Profits Tax
- Preventing exploitation of cross-country tax differences
- Strengthening transfer pricing rules
- Measures to counter tax avoidance
- Collective Investment Vehicles
- Rumoured tax changes not announced
Personal income tax relief
Effective Date: 1 July 2016
The Government intends to increase the 32.5% income tax threshold from $80,000 to $87,000 from 1 July 2016.
This measure is aimed at addressing bracket creep and will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37% to 32.5%.
What does this mean for you?
If your income from all sources exceeds $80,000, you will pay less income tax than you otherwise would (i.e. the tax rate on your income between $80,000 and $87,000 will be reduced from 37% to 32.5%)
Increase in the Medicare Levy low income thresholds
Effective Date: 1 July 2015
The Government has announced increases to the Medicare Levy low income thresholds that apply for the current financial year (ending 30 June 2016).
The Medicare Levy low income thresholds will be increased as follows:
- $21,335 for individuals (previously $20,896)
- $36,001 for couples with no children (previously $35,261).
- $33,738 for pensioners eligible for the Seniors and Pensioners tax offset (previously $33,044)
- $46,966 for senior and pensioner couples with no children (previously $46,000)
For families and senior and pensioner couples with children, the additional amount of threshold for each dependent child or student will be increased to $3,306 (up from $3,238)
Pausing indexation of the Medicare Levy Surcharge and Private Health Insurance Rebate thresholds
Effective Date: paused until 30 June 2021
The Government intends to continue the pause in indexation of the income thresholds for the Medicare Levy Surcharge and Private Health Insurance Rebate for a further three years.
This means the thresholds will remain at the current levels until 30 June 2021.
Single parents and couples are subject to family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first.
GST on low value goods imported by consumers
Effective Date: 1 July 2017
Currently domestic suppliers of digital products and services in Australia are required to charge Goods and Services Tax (GST), however off-shore suppliers are not, creating an unfair playing field.
When the 2015 Federal Budget was handed down the Government issued draft legislation to extend the GST to overseas suppliers of digital products and services to Australian residents however this was not legislated.
In the 2016 Budget, the Government has indicated that the GST will be collected using a vendor registration model. From 1 July 2017, overseas suppliers with an Australian turnover of $75,000 or more will be required to register for, collect and remit GST for goods valued under $1,000 supplied to consumers in Australia.
These arrangements will be reviewed after two years to ensure they are operating as intended and take account of any international developments.
Unanimous agreement of the States and Territories will be required for this proposal to become law.
Reducing the company tax rate to 25%
Effective Date: phased over ten years commencing 1 July 2016
The company tax rate is proposes to be reduced to 25% over 10 years. These reductions will be phased in progressively, based initially on the level of annual aggregated turnover, before applying to all companies equally. Businesses with annual turnover exceeding the turnover threshold applying for a financial year will be subject to a 30% tax rate.
Franking credits will be able to be distributed according to the rate of tax paid by the company making the distribution.
What does this mean for you?
- If you are a small to medium business owner, tax savings may lead to increased capital to re-invest into your business, or in other areas, such as superannuation.
- From 1 July 2016 until 30 June 2024, your investments may have franking credits calculated at different tax rates, depending on whether the company making the distribution qualifies for the reduced company tax rate. This could make managing you tax affairs more complicated during this period.
Increased small business turnover threshold
Effective Date: 1 July 2016
The small business entity turnover threshold to qualify for certain small business tax concessions is proposed to increase from $2 million to $10 million from 1 July 2016.
Businesses with turnover of less than $10 million will be able to access the following concessions from 1 July 2016:
- simplified depreciation rules, including the ability to claim an immediate deduction for assets costing less than $20,000 that are purchased before 30 June 2017
- simplified trading stock rules, enabling businesses to avoid an end of year stocktake if the value of their stock has changed by less than $5,000
- the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO
- simplified PAYG instalments payment option
- other tax concessions available to small business, including fringe benefits tax (FBT) exemptions and immediate deductibility of professional expenses
Eligibility for the small business capital gains tax concessions, including the ability to contribute the proceeds from the sale of qualifying small business assets to superannuation, will continue to be limited to businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test.
Access to the unincorporated small business tax discount will be limited to businesses with annual turnover less than $5 million. Refer to the Increased unincorporated small business tax discount update below).
What does this mean for you?
If you are a small business owner, from 1 July 2016 you may be able to access small business tax incentives previously not available to you. This may lead to increased capital to re-invest into your business or in other areas, such as superannuation.
Increased unincorporated small business tax discount
Effective Date: phased over ten years commencing 1 July 2016
A tax discount of 5% currently applies to income tax payable on business income received from an unincorporated small business. This discount is proposed to increase to 16% incrementally over 10 years from 1 July 2016, as shown in the table below. The increases to the tax discount coincide with the incremental decreases in the company tax rate over the same period (refer to the Reducing the company tax rate to 25% update on page 18).
The maximum discount available for an income year will remain at $1,000 per individual.
Access to the tax discount will be extended to individuals with business income from an unincorporated small business with an aggregated annual turnover of less than $5 million (up from $2 million).
What does this mean for you?
If you are an owner of an unincorporated small business with a turnover of less than $5 million, you may be able to access an increased tax discount (up to $1,000) from 1 July 2016.
Diverted Profits Tax
Effective Date: 1 July 2017
A new Australian Diverted Profits Tax (DPT) is proposed to impose a 40% penalty rate of tax on certain multinational corporations that attempt to shift their Australian profits offshore to avoid paying tax.
The 40% tax will apply to profits diverted offshore through arrangements involving related parties:
- that result in less than 80% tax being paid overseas than would otherwise have been paid in Australia;
- where it is reasonable to conclude that the arrangement is designed to secure a tax reduction; and
- that do not have sufficient economic substance.
The DPT will apply to companies with global revenue of $1 billion or more. The tax will not apply to companies with Australian revenue under $25 million unless the company is artificially booking their revenue offshore.
The Government is currently consulting with interested parties on the key design features of the DPT.
Preventing exploitation of cross-country tax differences
Effective Date: 1 January 2018*
This measure is intended to amend Australian tax law to reflect the Organisation for Economic Co-operation and Development’s (OECD) rules to eliminate hybrid mismatch arrangements. This will close loopholes that allow multinational corporations to exploit the differences between the tax treatment of entities and instruments across different countries.
For example, a loan from a parent company to its subsidiary could be treated as equity in one country and debt in another. This means the subsidiary may be able to claim a deduction for interest payments made to its parent and the parent company may not be required to pay tax on those payments.
* The changes will apply from the later of 1 January 2018 or six months from the date of Royal Assent of the amending legislation.
Strengthening transfer pricing rules
Effective Date: 1 July 2016
Transfer pricing rules regulate the way companies set prices for the trade of goods and services amongst their different businesses in different countries.
The Government intends to amend Australia’s transfer pricing laws to reflect updated Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines. The updated guidance clarifies how intellectual property and other intangibles can be priced and confirms that it is the substance rather than the contractual form of a transaction that matters.
The changes will close loopholes that allow multinational companies to use excessive related-party payments to divert profits overseas reducing the tax they pay in Australia.
Measures to counter tax avoidance
Effective Date: 1 July 2016 – 1 July 2018
The Government announced a range of measures to enforce Australia’s tax laws:
Tax Avoidance Taskforce – the ATO will establish a new taskforce which will pursue tax avoidance by multinationals, large public and private businesses and high wealth individuals.
Tax Transparency Code – from the 2016 financial year onwards, businesses with an annual turnover of $100 million or more will be encouraged to publish information to support greater and better informed public scrutiny.
Protections for whistleblowers – from 1 July 2018, individuals who report tax avoidance or misconduct to the ATO will have their identity protected and will be protected from victimisation and civil and criminal action.
Disclosure of potential tax avoidance – the Government will consult on new laws to require tax and financial advisers, known as mandatory disclosure rules, to report to the ATO potentially aggressive tax planning schemes.
Increased penalties for breaching tax reporting obligations – from 1 July 2017, companies with global incomes of $1 billion or more will be subject to a maximum penalty of $450,000 (up from $4,500) for failing to lodge tax returns and similar tax documents on time. The penalties for making false and misleading statements to the ATO will also be doubled (currently penalties can be up to $9,000).
Collective Investment Vehicles
Effective Date: 1 July 2017
The Government has announced that it will create new forms of Australian Collective Investment Vehicles (CIV) for investors to pool their funds with Australian fund managers.
CIVs allow investors to pool their funds and have them managed by a professional funds manager.
A corporate CIV will be introduced from 1 July 2017. From 1 July 2018, a limited partnership CIV will also be introduced.
The new CIVs will be required to meet similar eligibility criteria as managed investment trusts, such as being widely held and engaging in primarily passive investment. Investors in these new CIVs will generally be taxed as if they had invested directly.
Creating these new structures is aimed at encouraging foreign investment, and is seen as necessary to maximise the effectiveness of the Asia Region Funds Passport.
Amendments will be required to existing Australian corporations and tax law, both to legislate for the form and characteristics of the vehicle, and to ensure tax neutrality. Further consultation is expected in relation to this.
Rumoured tax changes not announced
The Government confirmed that they do not intend to remove or limit negative gearing.
The Temporary Budget Repair Levy (a 2% levy on taxable income exceeding $180,000) will not be extended and will cease to apply on 30 June 2017.
Content courtesy of BT’s ‘Federal Budget – May 2016′.