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Federal Budget 2016 - What you need to know

The 2016 Federal Budget was handed down on Tuesday 3 May. Following are some of the headline announcements that the Government intends to implement in the event that it is re-elected in the coming months.

In mixed news for business, the Government says the economy is forecast to grow by 2.5% 2015/2016 and to remain at this rate in 2016/2017. Growth will then however accelerate to 3% in 2017/2018. To provide some historical context, average annual economic growth in Australia has been 3.47% from 1960 to 2014.

Pleasingly for borrowers, inflation is expected to remain subdued at 2% in 2016/2017 meaning that interest rates will likely remain at record lows.

The outlook for the other key economic indicator, employment, is strong. The current 5.8% unemployment rate is expected to fall to 5.5% in 2016/2017, and remain at this rate through to 2019/2020.                                                     

INDIVIDUALS and FAMILIES

Income Tax Cuts

Individual income taxes will be reduced over the next two years as follows:

• From 1 July 2016, the threshold at which the 37% marginal tax rate commences will increase from taxable income of $80 000 to $87 000. This will benefit approximately one-quarter of taxpayers, and will result in a tax cut of up to $6 per week.
• From 1 July 2017, the 2% Debt Levy will be abolished. This is currently payable by individuals with taxable incomes of more than $180 000. Once abolished, the top marginal tax rate will fall to 45% (not including Medicare Levy).

Medicare Levy Surcharge and Private Health Insurance Rebate

The pause in the indexation of the income thresholds for the Medicare levy surcharge (MLS) and the private health insurance rebate will continue for a further three years from 1 July 2018. For higher income earners who don’t have private health coverage, this may result in an increased MLS liability in coming years. For those who do have private coverage, the pause in the rebate thresholds may result in a possible reduction in the amount of the rebate you receive going forward.

Tobacco Excise Increased

In bad news for smokers, tobacco excise and excise-equivalent customs duties will be subject to four annual increases of 12.5% from 1 September 2017. As a result, a packet of cigarettes could cost as much as $40 by 2020.

Tax Relief for ADF Personnel

Income tax exemptions will be provided to Australian Defence Force personnel deployed in Afghanistan, the Middle East and in international waters.

BUSINESS

Increased Turnover Threshold for SBEs

The Small Business Entity (SBE) turnover threshold will be increased from $2 million to $10 million from 1 July 2016. This will allow thousands more businesses to access the lower company tax rate, and a range of existing income tax concessions including the $20 000 instant asset write-off. The increased threshold will not however apply for the purposes of accessing the lucrative small business CGT concessions.

Company Tax Cut

From 2016/2017, the company tax rate for businesses with an annual turnover of less than  $10 million will be reduced to 27.5%. The company tax rate will be progressively reduced to 25% over 10 years for all companies. As per the following table, the rate will remain at 30% until annual turnover qualifies your company for a reduction:

Non-incorporated Business Tax Cut

The unincorporated small business tax discount will be increased in phases over 10 years from the current 5% to 16%, first increasing to 8% on 1 July 2016. However, the current cap of $1,000 per individual for each income year will be retained. The current $2 million turnover eligibility threshold for this discount will be increased to $5 million from 1 July 2016, allowing thousands more sole traders and individuals in partnerships to access this discount

GST Reporting Requirements Simplified

In welcome compliance news, GST reporting requirements will be simplified as follows:

• Extending the option to account on a cash basis to businesses with an annual turnover of less than $10 million from 1 July 2016
• Allowing businesses with an annual turnover of less than $10 million to pay ‘GST instalments’ as determined by the ATO from 1 July 2016
• Allowing businesses with an annual turnover of less than $10 million to use simplified BAS reporting from 1 July 2017 (following a trial in 2016/2017).

Division 7A Simplification

From 1 July 2018, the Division 7A compliance burden will be eased. These changes will provide clearer rules for taxpayers while maintaining the overall integrity and policy intent of Division 7A. The amendments will include:

• A self-correction mechanism for inadvertent breaches of Division 7A
• Appropriate safe-harbour rules to provide certainty
• Simplified Division 7A loan arrangements, and
• A number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.

SUPERANNUATION

Additional Contributions Tax

The income qualification threshold at which high income earners pay an additional 15% concessional contributions tax will be lowered from $300 000 to $250 000 from 1 July 2017. For those who earn below this amount, the contributions tax remains at 15%. To be clear, this tax is payable by your superannuation fund (not you personally) in the year that concessional contributions are made.

Contribution Caps Slashed

In changes that will limit the amount of money taxpayers can inject into the concessionally taxed superannuation environment, the contribution caps have been significantly pared back as follows:

• Effective 3 May 2016, the non-concessional (after-tax) contributions cap will now be a lifetime cap of $500 000 rather than the current annual cap of $180 000. This new cap will be retrospective by taking into account all non-concessional contributions made on or after 1 July 2007. Contributions made before the commencement date of 3 May 2016 cannot result in an excess of the lifetime cap. However, excess non-concessional contributions made after 3 May 2016 will need to be removed or subject to penalty tax. Going forward, the lifetime cap will be indexed to average weekly ordinary time earnings.
• From 1 July 2017, the annual cap on concessional contributions will be reduced to $25 000 for all taxpayers (down from $30 000 for taxpayers under 50, and $35 000 for older taxpayers). This change will limit the capacity to make deductible contributions to superannuation, as well as salary sacrificed contributions. Softening the blow however, individuals with a superannuation balance less than $500 000 will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years, with effect from 1 July 2017. Unused cap amounts will be carried forward on a rolling basis for a period of 5 consecutive years. Only unused amounts accrued from 1 July 2017 will be available to be carried forward.

Deductions for All

From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions. Currently, only those who receive little or no employer superannuation contributions can claim a deduction. This change is good news for the many employees who wish to make contributions to superannuation but whose employers do not offer salary sacrifice.

Cap on Retirement Accounts

A balance cap of $1.6m on the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase will be introduced from 1 July 2017. Currently there is no cap, and therefore taxpayers can enjoy unlimited tax-free pensions. Amounts above this cap will still be able to be maintained in superannuation however they will need to be in an accumulation phase account (where earnings are taxed at 15% rather than tax-free).

Transition to Retirement Crackdown

The tax exemption on earnings from assets supporting Transition to Retirement Income Streams (TRIS) will be removed from 1 July 2017. Currently earnings on assets supporting TRIS are tax exempt. Once this exemption is removed, earnings will be taxed at the usual concessional rate of 15%. This change will apply regardless of when the TRIS commenced.

Low Income Earner Relief

From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce the tax on super contributions for low income earners. The LISTO is a non-refundable tax offset to super funds, based on the tax paid on concessional contributions made on behalf of low income earners up to a cap of $500. The LISTO will apply to taxpayers with adjusted taxable income up to $37 000 that have had a concessional contribution made on their behalf. The proposed LISTO will replace the current Low Income Superannuation Contributions (LISC).

Work Test Abolished

The current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement will be removed from 1 July 2017. This is good news for older taxpayers who do not meet the current ‘work-test’ but who wish to inject money into the concessionally taxed superannuation environment.