A considered view
2016-17 Federal Budget
Audit | Tax | Advisory | Financial Advice
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A considered view
Key changes that could
impact you
Independent senator Nick Xenophon has
labelled the Turnbull government’s maiden
economic blueprint as a Budget the
government wants the Australian public
to forget. Speaking on ABC radio, he said
the 2016-17 Federal Budget amounted to
no more than “a treading water Budget”.
However, if the government is treading
water, it’s engaging in a lot of activity to do
so. The 2016-17 Federal Budget contains
many changes to the superannuation, tax
and transfer system. Rather than attempt
to examine all the changes in detail, we
have focused on a number of select
changes in both tax and superannuation
we think will be of most interest to you.
We have also made an effort to bring to
the surface issues that you may not have
heard about elsewhere.
We want to help you understand the
proposed changes that may have
unforeseen financial consequences for
you, and highlight the most strategic
methods of dealing with these changes.
For more information about any of the
changes introduced by the 2016-17
Federal Budget, contact your local Crowe
Horwath advisory team today.
Superannuation
considerations
On Budget night, the government
announced a comprehensive package
of targeted reforms which will impact
many common strategies employed by
pre-retirees and retirees in achieving their
retirement objectives. In summary they
include:
■■ a Lifetime Non-Concessional
Contribution cap of $500,000 indexed,
effective from 7.30pm on Budget night,
contributions to be counted towards
the cap from 1 July 2007;
■■ tax exemption on earnings from assets
supporting a Transition to Retirement
Income Stream (TRIS) to be removed
from 1 July 2017;
Audit | Tax | Advisory | Financial Advice
■■ the annual concessional contributions
cap reduced to $25,000 for all age
groups from 1 July 2017. This also
comes with an ability to carry forward
any unused cap amount for a rolling 5
year period where the individual has
less than $500,000 accumulated in
superannuation;
■■ 10 per cent rebate on unfunded
defined benefits pension schemes now
limited to $10,000 per annum; and
■■ extending the ability of individuals aged
from 65 to 74 to contribute to
superannuation without meeting a work
test;
How we see it
■■ an ability for all individuals, regardless
of employment circumstances, to claim
a tax deduction for personal
superannuation contributions up to the
concessional contributions cap;
■■ a balance cap of $1.6 million on the
total amount of accumulated
superannuation an individual can
transfer into the tax-free retirement
phase from 1 July 2017. Existing
members with balances greater than
the balance cap will be required to
move the excess back to the
accumulation phase;
■■ additional superannuation contributions
tax threshold lowered from $300,000 to
$250,000 from 1 July 2017;
■■ introduced a maximum $500 nonrefundable low income superannuation
tax offset for low income earners;
■■ removal of the anti-detriment tax
deduction for superannuation funds;
■■ 50 per cent of pension amounts on
funded defined benefits schemes over
$100,000 per annum now taxed at the
individuals marginal tax rate.
All things considered, superannuation
remains a highly attractive vehicle in which
to accumulate tax effective savings for
retirement. Where an individual’s marginal
tax rate sits above the superannuation
earnings tax rate of 15 per cent, then
tax efficiency continues to exist through
structuring accumulation of wealth for
retirement in that concessionally-taxed
environment.
Upon reaching retirement, an individual
can continue to enjoy tax-free earnings
on up to $1.6 million of assets (indexed).
Given that, presently, no rule exists
to force a compulsory cashing out of
accrued benefits above this cap, then
superannuation still looks good if your
marginal tax rate sits above 15 per cent.
The following table illustrates the
differences in the tax paid on
investment earnings on assets outside
of superannuation versus inside
superannuation above the retirement
balance cap.
■■ increased income threshold, for the
spouse tax offset on superannuation
contributions, to $37,000 per annum
for the low income spouse;
Individual income
tax bracket
FY 2016-17
($)
Individual (tax rate)^
per cent
Retirement
(over $1.6m)
per cent
Tax efficiency
opportunity
per cent
0 – 18,200
Nil
15
-15
18,201 – 37,000
19
15
4
37,001 – 87,000
32.5
15
17.5
87,001 – 180,000
37
15
22
180,001 +
45
15
30
^excludes Medicare levy and other levies
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A considered view
Another theme of these reforms in the
Budget is to scale down just how much
- and how quickly - an individual can
move their wealth into superannuation
and take advantage of those available
tax concessions. The result of this is that
we view the accumulation of retirement
savings for retirees as a more progressive
exercise.
As such, it is imperative that individuals
seek advice concerning their retirement
plans earlier in their life as opposed to
leaving it until later as opportunities may
not be as abundant.
The attractiveness of
superannuation
Whilst some aspects of the proposed
changes to superannuation have received
significant media coverage, there are a
number of positives which appear to have
almost seemingly gone unnoticed by
comparison.
From 1 July 2017, individuals will have
the ability to make contributions to
superannuation up until they turn 75
years of age. The existing work test will
not have to be met in order to make the
contribution. A reduced concessional
contribution cap of $25,000 will apply
and, as such, those clients who still had
forms of passive income in their retirement
(such as from rental properties) could
benefit from maximising their tax efficiency
without having to be gainfully employed.
Additionally, Transition to Retirement
(TTR) still exists! However, the changes
ultimately reduce the tax efficiency of
the strategy. The government’s original
intention of providing the rules which allow
for these types of income streams was
to permit people to progressively wind
back their working hours and ease into
their retirement rather than an abrupt end
to full-time employment. The changes to
the rules will still cater for these scenarios,
whilst reducing the tax arbitrage
opportunities prior to age 60.
Estate planning implications
Not that long ago concerns were reported
from some members of the government
that superannuation was being used as
a vehicle for ‘intergenerational wealth
transfer’ rather than for its intended
purpose.
Audit | Tax | Advisory | Financial Advice
Certainly, several strategies have
previously been used to improve the tax
efficiency of outcomes for a member’s
nominated beneficiaries.
Furthermore, the Budget revealed that
anti-detriment provisions are to be
removed from 1 July 2017. Surprisingly,
this received little press coverage for what
it represents - perhaps reflective of how
underappreciated it was, even amongst
experts. Anti-detriment provisions
amounted to a refund of the contributions
tax paid over the lifetime of accumulation
of a member’s benefit. It was only ever
accessible where the death benefit was
paid as a lump sum to a dependent
and it was paid on top of the deceased
member’s account balance. Given that
there was no legal requirement to actually
make such a payment, not all funds
offered this to their members. In particular,
Self-Managed Superannuation Funds
(SMSFs) often struggled to be able to
make this payment as they usually did not
have reserves. However, its removal will
mean that the benefit is now forgone, but
when choosing an appropriate fund it is
one less thing to have to consider.
The Lifetime Non-Concessional
Contributions cap brings about planning
constraints for those looking to aid
in improving the tax efficiency of any
residual benefits paid as a lump sum to
their beneficiaries upon their eventual
passing. Many retirees’ superannuation
monies will eventually end up being paid
to non-dependent beneficiaries, such as
their adult children, who would otherwise
pay 16.5 per cent on the taxable parts
of the deceased’s residual benefits. The
new lifetime cap will effectively reduce the
amount of money which could previously
have been cycled through to increase the
amount of the member’s benefit which
would be able to be received tax-free.
Combined with the changes to
superannuation tax rates, high net worth
individuals may look to long-forgotten
non-superannuation strategies and
structures in order to provide tax effective
wealth transfer vehicles. Could this see
the return of insurance and investment
bonds? Only time will tell.
Opening up Retirement Income
Stream options
The government will extend the existing
tax exemption on earnings to products
such as deferred lifetime annuities and
group self-annuitisation products. This
should allow product providers to offer a
wider range of retirement income products
which may offer more flexibility and choice
for retirees. Specifically, this measure
concludes the government’s final report into
the Retirement Income Streams Review
it commenced in 2014. Central to the
report was a concern that individuals were
likely to outlive their consumption needs in
retirement (longevity risk) due to increasing
life expectancies.
Aged Care: the easy to miss
aspects and flow-on effects
The elephant, sitting patiently in the corner,
is Aged Care. With the baby boomer
population - those aged between 52 and
70 in 2016 - now firmly entering their
retirement years, consideration towards pre
-planning for later retirement years may be
necessary, even if it is a little early.
More specifically, two measures announced
on Budget night will have an indirect
impact on Aged Care. Firstly, a change
to the subsidy system, which is the split
of the cost of care between the Aged
Care provider and the government, will be
altered to deliver a $1.2 billion reduction
over the next four years. Secondly, there
will be more unannounced compliance
visits to Aged Care providers to improve
the quality of care for residents and identify
key issues.
Whilst a compliance step towards improved
quality of care is a great thing, this aspect
could ultimately lead to increased cost for
consumers of Aged Care accommodation
through higher fees and supplements oncharged to residents. Likewise, a reduction
in government funding will put pressure on
suppliers of Aged Care accommodation.
These suppliers may then seek a higher
proportion of funding for Aged Care
accommodation from new residents
through setting a higher Refundable
Accommodation Deposit (RAD) required for
entry, as long as new residents are left with
the minimum legislated amount. Allowing
for these potential increases to Aged Care
fees and charges should be considered
in the planning process earlier to ensure
sufficient capital exists when required.
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A considered view
Small business
considerations
Ten-year enterprise tax plan
A new definition of small
business
One of the major small business initiatives
is the announcement that the definition of
a Small Business Entity will be changed
from businesses with a turnover of less
than $2 million to those with a turnover of
less than $10 million. The Budget Papers
state that from 1 July 2016, businesses
with a turnover of less than $10 million
will be able to access all the concessions
available for current small businesses,
apart from the small business Capital
Gains Tax (CGT) concessions.
This includes the following:
■■ the simplified depreciation rules;
■■ immediate write-off for asset
acquisitions costing less than $20,000
(until 30 June 2017);
■■ immediate write-off for asset
acquisitions costing less than $1,000
(after 30 June 2017);
■■ the simplified trading stock rules which
give businesses the option to opt out of
an end-of-year stocktake if the value of
the stock has changed by less than
$5,000;
■■ a simplified method of paying Pay As
You Go (PAYG) instalments calculated
by the ATO, which removes the risk of
under or over estimating PAYG
instalments and the resulting penalties
that may be applied;
■■ the option to account for GST on a
cash basis and pay GST instalments as
calculated by the ATO;
■■ immediate deductibility for various
start-up costs (e.g. professional fees
and government charges);
■■ a 12-month prepayment rule; and
■■ the more generous Fringe Benefits Tax
(FBT) exemption for work-related
portable electronic devices (e.g. mobile
phones, laptops and tablets).
How we see it
With the exception of the immediate writeoff for asset acquisitions costing less than
$20,000, most of the above, on their own,
will probably not have a massive impact
Audit | Tax | Advisory | Financial Advice
on the tax payable.
However, one of the big issues to consider
is whether the legislation will be drafted in
such a way as to allow businesses with a
turnover of less than $10 million to access
the new Small Business Restructure Rollover in the CGT provisions.
The Budget Papers do not mention this
specifically, noting only that “the current
$2 million turnover threshold will be
retained for access to the small business
CGT concessions” (query what “small
business CGT concessions” means in
this context). The Papers also state that
eligible businesses will gain “access to
concessions such as the lower corporate
tax rate, accelerated depreciation and
depreciation pooling”, without mentioning
the rollover.
At a Briefing on 5 May, the Treasurer was
asked why $10 million businesses would
not be eligible for the small business
CGT concessions and the small business
restructure roll-over. While he ruled out
the access to the small business CGT
concessions, he did not appear to pick up
on the distinction in the second part of the
question. Accordingly, while some experts
and professional organisations have
released their speculative view, at this
point there is nothing authoritative in the
public domain to suggest that the small
business restructure roll-over is available
for $10 million businesses.
Small business clients with turnover
between $2 million and $10 million that
are looking to expand or acquire takeover
targets should consider whether delay is
the most appropriate course of action.
While we are of the view that it is more
likely than not that the small business
restructure roll-over will be available, it is
prudent to wait until the legislation is in
place before acting on the basis that this
concession will be available.
Structuring arrangements
In tax circles, the 2016-17 Federal Budget
was one of the most anticipated Budgets in
a long time. This is because the government
indicated that much of the tax reform that
was originally slated for the White Paper
process would emerge on Budget night.
While it is difficult to say that there has been
“root and branch” tax reform, the Budget
does represent a significant effort to change
existing arrangements.
It has been speculated that the decision
to deliberately omit the small business
CGT concessions from the new definition
of small business could be indicative
of a longer term desire on behalf of
the government to wind back the CGT
concessions. With this in mind, clients
may consider structuring arrangements
with a view to lock in potential benefits
that are available now.
Division 7A of 1936 Tax Act is the
provision of the Tax Act that operates
to deem the extraction of anything of
value (including loans, payments and
debt forgiven) from a company to be a
(generally unfranked) dividend in the hands
of the shareholder or associate taxable at
marginal rates.
The government has indicated that a
new-and-improved Division 7A will operate
from 1 July 2018. However, little detail
is publically available on changes in this
area. The only available information lies
in several discussion papers that were
released by the Board of Taxation, and in
the Budget Papers where it states there
will be a self-correction mechanism for
inadvertent breaches and a new safe
harbour.
Changes in this area will necessitate wide
ranging review at both a transactional and
entity level.
Many clients enter into complying loan
arrangements in order to escape the
operation of Division 7A. Currently, it is
possible to enter into seven, 10 (where
a trust holds an entitlement on behalf
of a company) and 25 year complying
loan arrangements. The Board of Tax
recommended simplifying this so only
one type of complying loan arrangement
applied – the 10 year loan. It is likely that
those with existing 25 year complying loan
arrangements will be grandfathered.
10 year loans obviously place a bigger cash
flow squeeze on businesses over the near
term than 25 year loans, and the Board
of Tax propose compulsory repayments
of capital as well as interest. Accordingly,
many clients will find themselves in a worse
position if they are forced into new 10
year complying loan arrangements and
will be well served locking down 25 year
complying loan arrangements before the
government announces the detail of its
changes in this area.
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A considered view
At the entity level, a complex matrix of
issues affecting structuring decisions
will be at play. The staged reduction of
the corporate rate will generally increase
the attractiveness of companies in
comparison to trusts, while at the same
time the possibility of a new “tick the
box” regime remains firmly on the table
as a possible reform to Division 7A. This
will enable corporate groups to opt out
of Division 7A by ticking a box in the tax
return which will also disqualify trusts in
the group from accessing the 50 per cent
CGT Discount.
These factors may well require small
businesses to rethink the common
preference for a trust over a company
as preferred business and investment
vehicle. We may well see a preference for
an operating company owned by a trust
or something similar. Feeding into this will
be the aforementioned Small Business
Restructure Roll-over which may well allow
many family groups to restructure in exotic
ways not available in previous years.
A related and equally important issue is
the proposed reform to the taxation of
trusts. It is most disappointing that the
Budget contained no indication of any
movement in this area. It appears that this
has been moved to the ‘too hard’ basket
on a permanent basis, and unfortunately
there will be no resolution to the long
standing issues that have plagued the
taxation of trusts.
Reducing the company tax rate
to 25 per cent
One of the Henry Tax Review
recommendations was to reduce
the corporate tax rate to 25 per cent
(recommendation 27), something which
had little commentary until now. The
Budget announcement to reduce the
corporate tax rate represents the current
government picking up one of the Henry
review recommendations – which we
believe is a good thing. However, the
Henry review made it plain that the timing
should be “subject to economic and fiscal
circumstances.” It is debatable whether
the fiscal circumstances are optimal for
a corporate tax cut, and no doubt the
opposition will suggest they are not.
Audit | Tax | Advisory | Financial Advice
If the Federal Budget is passed, starting
in the 2016-17 income year, the tax rate
for businesses with an annual aggregated
turnover of less than $10 million will be
27.5 per cent. For all other businesses,
the corporate tax rate will remain at the
current rate of 30 per cent.
income but not unusual receipts such as
capital gains or, in most cases, insurance
receipts. Turnover is calculated either in
the immediately-prior income year, in the
current year or on a projected basis for
the current year - providing certain criteria
is met.
Currently, from 1 July 2015, the small
business company tax rate is 28.5 per
cent for businesses with an annual
aggregated turnover of less than $2
million. The Budget changes this by
providing that the $10 million threshold be
progressively increased until ultimately all
companies pay tax at the 27.5 per cent
rate in the 2023-24 income year.
Question two involves the consideration
of new tax planning opportunities that
are available to taxpayers as tax rates
are lowered. It is critical to understand
that there will now be a two-tier taxation
system for corporate taxpayers, with the
threshold for qualification for the lower
rate changing from year to year. For
many medium businesses, qualification
for the lower rate will present a one-off
opportunity in the year prior to qualification
to engage in legitimate tax planning to
optimise outcomes.
The annual aggregated turnover
thresholds for companies obtaining a tax
rate of 27.5 per cent will be:
■■ $25 million in the 2017-18 income year;
■■ $50 million in the 2018-19 income year;
■■ $100 million in the 2019-20 income
year;
■■ $250 million in the 2020-21 income
year;
■■ $500 million in the 2021-22 income
year; and
■■ $1 billion in the 2022-23 income year.
In the 2024-25 income year, the company
tax rate will be reduced to 27 per cent
and then be reduced progressively by 1
percentage point per year until it reaches
25 per cent in the 2026-27 income year.
How we see it
In the initial years, the biggest issues will
be:
1. In the current income year will I, or am
I likely to, be under the aggregated
turnover threshold to qualify for the
lower tax rate?
2. If, in the current income year, the
answer to question one is yes, what
strategies should be put in place to
ensure that I can optimise my tax
position?
In most cases the answer to question
one should be relatively straight forward.
Turnover is generally defined as “total
ordinary income that the entity derives
in an income year in the ordinary course
of carrying on a business”. As such,
it will include trading and investment
Taking this into account, it is essential for
these taxpayers to monitor their position
relative to the moving thresholds. Talk to
your Crowe Horwath representative after
the Federal Election to ensure that you
are prepared for the changes as they take
effect.
Qualification for the reduced corporate
rate in the next income year will often
be as a result of current year turnover.
Accordingly, it is essential to be aware
of exactly where you stand in relation
to current year turnover (“measurement
year”) as it is being derived, rather than
after the end of the financial year. It will
often be in the measurement year that
clients may give consideration to:
■■ reviewing contracts to determine
whether income is ‘derived’ in the
current year or may be delayed;
■■ assessing whether it may be possible
to delay billing work in progress;
■■ determining the most appropriate
valuation method for (closing) trading
stock for tax purposes;
■■ scrapping or discarding unwanted
stock before year-end;
■■ deferring sales until the next financial
year;
■■ deferring contract dates for the sale of
CGT assets;
■■ reviewing the basis on which interest or
other income is derived and whether
there is scope to defer;
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A considered view
■■ delaying the disposal of capital assets
that have balancing adjustments; and
■■ assessing the timing of insurance
recovery claims and negotiations with
insurer/final payment.
Large business
considerations
Tax consolidated groups
Deductible liabilities measure
It came as a welcome statement that
tax consolidation measures which were
previously released as exposure draft
legislation in April 2015 and previously first
announced in the May 2013 Budget have
been announced to change following the
consultation process.
The measures were originally proposed
to have retrospective effect from the date
that the changes were first announced,
at 7:30pm on 14 May 2013, and
therefore would have caught a number of
transactions which have occurred in the
past three years.
The measures were aimed at denying the
double benefit of taxpayers, including an
amount of deductible liabilities (such as
annual leave provisions, bonus provisions,
accruals and other future deductible
liabilities) in the Allocable Cost Amount
(ACA) calculations at step two of the
calculation. Additionally, the measures
were aimed at obtaining the future
deduction for these amounts when the
amounts were incurred or paid.
The mechanism to deny the double
benefit was proposed to include an equal
amount to the deductible liability in income
of the acquiring group over a one year or
four year period (depending if the liability
was current or non-current). This may
have resulted in adverse timing differences
in situations where the ACA amount went
to assets such as goodwill, CGT assets
or depreciable assets with large effective
lives.
Thankfully, the measures will instead apply
to deny the double benefit by disallowing
the ability to include the amount in the
ACA calculation at step two.
The impact of this is that, instead of
requiring an immediate inclusion in
assessable income over one year or
four years, the measure will instead
reduce the cost base of assets acquired,
such as depreciables, CGT assets
and, importantly, goodwill. In many
transactions, the remainder of ACA will be
allocated to goodwill in accordance with
its market value, and no tax deduction
is available for goodwill. Instead, the
cost base will only ever be realised if the
business is sold.
In further good news, the changes will be
prospective from 1 July 2016. This means
they will not apply to transactions prior to
this date and will protect taxpayers who
have made decisions based on the current
law.
Overall, this means there will be no
need to make any change to the ACAs
performed on recent transactions prior to
1 July 2016 and therefore there will not be
any adjustments needed to prior year tax
returns lodged. This seems to be a much
fairer outcome than originally envisaged.
Contact us
Deferred tax liabilities
There were also announcements related to
calculating Deferred Tax Liabilities (DTLs)
as part of the ACA process.
DTLs have previously given rise
to complex adjustments in the tax
consolidation ACA process and there is
seen to be a commercial/tax mismatch on
entry and exit ACAs. This should simplify
the ACA process further, but details will
become known upon release of the draft
legislation.
The change is proposed to apply from the
date the relevant legislation is introduced
in Parliament.
Parliament dissolved and
implications for you
On May 9 2016, the Australian
Parliament was dissolved. Once the
official proclamation is read, Parliament
is dissolved and caretaker mode begins.
Under Parliamentary conventions,
caretaker mode simply means that
the acting government will not take
any actions that will bind an incoming
government and no significant policy
decisions are made during this period.
On 21 March 2016, the Prime Minister
wrote to the Governor-General asking to
prorogue Parliament. Essentially, when
Parliament is prorogued, all business
pending before both Houses of Parliament
is terminated. This has led to some
confusion over the status of certain bills
that have been introduced into either
house but had not yet received assent as
at prorogation.
For information on any pending legislation
or in relation to the likely consequences
announced on Budget night, contact your
Crowe Horwath representative today.
Tel 1300 856 065
www.crowehorwath.com.au
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