Federal Budget Announcement and Impacts for SME Business Owners

Budget Impacts for Small to Medium Sized Enterprises (SMEs)

Quick overview

• The small business entity annual turnover threshold will be increased from $2 million to $10 million from 1 July 2016 for the purposes of accessing the proposed 27.5% company tax rate and certain existing income tax concessions including the $20,000 instant asset write-off. The increased threshold will not apply for the purposes of accessing existing small business capital gains tax concessions

• From the 2016-17 income year, the company tax rate for businesses with an annual aggregated turnover of less than $10 million will be reduced to 27.5%. The threshold to access the 27.5% tax rate will be progressively increased to ultimately have all companies at that rate in the 2023-24 income year 

• By 2026-27, it is proposed that the company tax rate will fall to 25% for all companies 

• 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. The current cap of $1,000 per individual for each income year will be retained

 Changes for superannuation 

• The threshold at which high income earners pay additional contributions tax will be lowered to $250,000 from 1 July 2017. The annual cap on concessional superannuation contributions will also be reduced to $25,000 

• The tax exemption on earnings of assets supporting Transition to Retirement Income Streams will be removed from 1 July 2017 

• A lifetime non-concessional contributions cap of $500,000 will be introduced 

• The current restrictions on people aged 65 to 74 making superannuation contributions for their retirement will be removed from 1 July 2017 

• 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 

• From 1 July 2017, all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions 

• A low income superannuation tax offset (LISTO) will be introduced to reduce tax on superannuation contributions for low income earners from 1 July 2017 

• The income threshold for the receiving spouse (whether married or de facto) of the low income spouse tax offset will be increased to $37,000 from 1 July 2017 

• A balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase will be introduced from 1 July 2017 

Other changes

• The threshold at which the 37% marginal tax rate for individuals commences will increase from a taxable income of $80,000 to $87,000 from 1 July 2016 

• The pause in the indexation of the income thresholds for the Medicare levy surcharge and the private health insurance rebate will continue for a further three years from 1 July 2018 

• The wine equalisation tax (WET) rebate cap will be reduced to $350,000 on 1 July 2017 and to $290,000 on 1 July 2018 

• Tax incentives for investing in early-stage innovative companies are to be expanded 

• Funding arrangements to attract more venture capital investment will be expanded 

• A new tax and regulatory framework will be introduced for two new types of collective investment vehicles 

2016 Budget in More Detail

SMEs

The small business entity turnover threshold will be increased from $2 million to $10 million from 1 July 2016. The increased threshold means businesses with an annual turnover of less than $10 million will be able to access existing small business income tax concessions including the:

• Lower small business corporate tax rate (which will be reduced to 27.5% from the 2016-17 income year) 

• Simplified depreciation rules under Subdiv 328-D of the Income Tax Assessment Act 1997 (ITAA 1997), including the instant asset write-off threshold of $20,000 available until 30 June 2017 

• Simplified trading stock rules under Subdiv 328-E of ITAA 1997 

• Option to account for GST on a cash basis and pay GST instalments as calculated by the ATO 

• Simplified method of paying PAYG instalments calculated by the ATO 

• Other tax concessions such as the extension of the FBT exemption for work-related portable electronic devices available from 1 April 2016 and the immediate deduction of professional expenses until s 40-880 of ITAA 1997 

The increased $10 million threshold will not be applicable for accessing the small business capital gains tax concessions. These concessions will remain available only for small businesses with a turnover of less than $2 million or that satisfy the maximum net asset value test. The unincorporated small business tax discount (which will be increased to 8% from 1 July 2016) will however be accessible to small businesses with a turnover of less than $5 million. 

Unincorporated Small Business Tax Discount Increased

The unincorporated small business tax discount will be increased in phases over 10 years from the current 5% for 16%. First increasing from 8% on 1 July 2016, the discount will be available to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million (also an increase from the current small business turnover threshold of less than $2 million). 

The existing cap of $1000 per individual for each income year will be retained.

Superannuation

Div 293 Tax Income Threshold Reduced

The Div 293 threshold (the point at which high income earners pay additional contributions tax) will be lowered from $300,000 to $250,000 from 1 July 2017. The annual cap on concessional superannuation contributions will also be reduced to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).　

Tax Exemption on Earnings Supporting Income Streams Removed

The tax exemption on earnings of assets supporting Transition to Retirement Income Streams (TRISs) will be removed from 1 July 2017 (that is, income streams of individuals over preservation age but not retired).

A rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.

Lifetime Cap For Non-Concessional Superannuation Contributions

A lifetime non-concessional contributions cap of $500,000 will be introduced. To ensure maximum effectiveness, the lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007, from which time the ATO has reliable contributions records, and will commence at 7:30pm (AEST) on 3 May 2016.

The lifetime non-concessional cap will replace the existing annual caps which allow annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65).

Contributions made before commencement cannot result in extra tax.

Harmonising Contribution Rules For People Aged 65 to 74

The current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement will be removed from 1 July 2017. People under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.

Catch-Up Concessional Superannuation Contributions

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. Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward. 

Restrictions on Personal Superannuation Contribution Deductions Eased

From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.

This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap. Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements.

Low Income Spouse Tax Offset Threshold Increased

The income threshold for the receiving spouse (whether married or de facto) of the low income spouse tax offset will be increased from $10,800 to $37,000 from 1 July 2017.

Superannuation Transfer Balance Cap Introduced

A balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase will be introduced from 1 July 2017. Subsequent earnings on these balances will not be restricted. This will limit the extent to which the tax-free benefits of the retirement phase accounts can be used by high wealth individuals.

Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in an accumulation phase account (where earnings will be taxed at the concessional rate of 15%). Members already in the retirement phase will balances above $1.6 million will be required to reduce their retirement balances to $1.6 million by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts.　

Other

Staggered Cuts To The Company Tax Rate

The company tax rate will be progressively reduced to 25% over 10 years.

From the 2016-17 income year, the company tax rate for businesses with an annual aggregated turnover of less than $10 million will be reduced to 27.5%. This threshold to access the 27.5% tax rate will be progressively increased to ultimately have all companies at that rate in the 2023-24 income year.

Personal Income Tax Relief

The threshold at which the 37% marginal tax rate for individuals commences will increase from taxable incomes of $80,000 to $87,000 from 1 July 2016.

Wine Equalisation Tax Rebate Cap Reduced

The government will address integrity concerns with the wine equalisation tax (WET) rebate by reducing the WET rebate cap and tightening eligibility criteria.

The WET rebate cap will be reduced from $500,000 for $350,000 on 1 July 2017 and to $290,000 on 1 July 2018 and tightened eligibility criteria will apply from 1 July 2019.

Under the tightened eligibility criteria for the rebate, a wine producer must own a winery or have a long-term lease over a winery and sell packaged, branded wine domestically. The final details on the tightened eligibility criteria, including the definition of a winery, will be resolved through further consultation.

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For more information on how the budget changes impact you, your family or your business, please contact Ian Walker on 07 3002 2699.