OneLedger is once again here to bring you some of the highlights from the 2016 Budget. Against the backdrop of a new Liberal Leadership and a double dissolution election in July, this was always going to be a cautious budget. With various polarising policies such as negative gearing and GST supposedly on the table, the Liberals retreated to lower economic fruit wins.

OneLedger is once again here to bring you some of the highlights from the 2016 Budget. Against the backdrop of a new Liberal Leadership and a double dissolution election in July, this was always going to be a cautious budget. With various polarising policies such as negative gearing and GST supposedly on the table, the Liberals retreated to lower economic fruit wins.

The 2016 Budget benefits both small and large businesses with generous company tax cuts over time. Large multinationals minimising tax through profit shifting mechanisms, those avoiding tax and the higher income earners taking advantage of traditionally generous superannuation rules appear to be the biggest targets.

If your concept requires a bricks and mortar presence and you are looking at leasing, you are likely to sign a lease with a term for over a year and potentially up to ten years. Coupled with this, there is the security deposit of at least three month’s rent to pay plus a personal guarantee engagement which means your business structure may not shield you if you not be able to pay your rent.

It is important to remember that these announcements are yet to receive royal assent and whilst Labor has supported some measures (based on the limited interviews last night) – proposals are subject to change through the passage of Parliament.

We have provided some guidance below on the measures most applicable to businesses:

Small Business Tax Cuts

The definition of a small businesses is to include those with turnover up to $10m (a substantial increase from the previous $2m threshold). The company tax rates for these businesses will be cut to 27.5% from 28.5% commencing 1 July 2016.

This measure will allow for many more businesses to be included in the definition of small business, deliver a lower company tax rate and provide immediate cash benefits through reduced Pay As You Go Tax Installments from 1 July 2016.

More businesses will now be able to make use of the $20k immediate asset write off.

Sole traders, partnerships and trusts will receive an 8% discount on their taxable income from business (to gradually reach 16%). This appears to be delivered via a tax offset in an individual’s return and still capped at $1,000.

OL Comment – Reducing the tax burden for small business allows them to re-invest this additional money into their business and people. Last year we commented that further support be delivered to those going over the $2m threshold hence why the increase in the definition of small business to $10m is welcomed.

Tax Cuts for Big Business

Company tax rates for all businesses will be reduced to 25% by 2027. This will bring Australia’s corporate tax rate in line with our key international counterparts.

OL Comment – Having a competitive corporate tax rate with similar countries will promote foreign investment in Australia and also give enterprises room for re-investment and growth.

Concessional Contributions

The concessional contribution cap (contributions that are deductible) will be reduced to $25,000 from $30,000. However individuals can now directly claim a deduction for contributions made rather than arrange for salary sacrifice.

With an account balance of less than $500,000, individuals can make ‘catch up’ concessional contributions where they may not have exceeded their annual contribution cap in a prior year.

OL Comment – Making it easier for all  individuals to contribute and claim concessional super contributions is welcomed and we look forward to advising our clients on these changes.

Superannuation for Low Income Earners

Low income earners (below $37,000) to receive a Low Income Superannuation Tax Offset up to $500 to encourage personal contributions to super.

OL Comment – This broadly replaces the existing Low Income Superannuation Contribution which is good policy to promote saving for retirement amongst Low Income Earners.

Reducing Superannuation benefits of high earners

Those earning over $250,000 to be taxed on concessional contributions over this threshold by an additional 15% (bringing the total to 30%). The previous threshold was $300,000.

A transfer balance of $1.6m for individuals to transfer to retirement phase accounts will also be brought in – limiting the amount that can be taken out of superannuation tax free.

There will now also be a lifetime cap of $500,000 for non-concessional contributions.

OL Comment – The superannuation system has been fundamentally flawed from its original intention to provide a savings vehicle for retirement. Rather, it has become a tax and estate planning haven. These rules will curb the exploitation of superannuation laws and allow them to exist as originally intended.

However, the application of these rules to existing funds is quite onerous in our opinion. Taxpayers should be able to apply the rules at the time with some degree of certainty that they will not be repealed.

Personal Income Relief

The middle income bracket where the marginal rate of 32.5% applies will be increased from $80,001 to $87,001 preventing bracket creep to the next tax rate of 37%.

OL Comment – Keeping more Australian’s in the middle tax bracket will reduce the tax burden that has increased through years of bracket creep. We hope that further cuts to personal income tax rates will follow in future years.

Targeting Tax Avoidance

Transfer Pricing rules for multi-nationals will be tightened in line with OECD guidelines. This will allow for the correct profits to be taxed in Australia.

A Diverted Profits Tax will be introduced for entities using various schemes to shift profits from Australia. To deter such arrangements, profits being shifted will be subject to a 40% rate as opposed to the company tax rate of 30%.

The government will also beef up the ATO’s firepower with greater penalties and the establishment of the Tax Avoidance Taskforce.

OL Comment – In light of the high profile companies paying relatively low tax in Australia, these measures were essential to bringing Australia’s tax system up-to-date with the digital business world. The estimates to raise $3.9b sound optimistic and it is hard to believe there is $3.9b in taxes sitting on the sidelines.

In summary, the Budget was centered around Jobs and Growth but delivered no real tax reform. Instead it delivered some desperately needed changes to current tax loopholes. The biggest challenges facing the execution of this Budget are the assumptions of growth in China and Australia that it is based on.

I think we will find the record low interest rate enviroment (now 1.75%) may be what delivers the Jobs and Growth, not this budget.

Andrew Hubbard
Director – OneLedger

andrew.hubbard@oneledger.com.au