Tax and superannuation measures
After much anticipation, Treasurer Scott Morrison today handed down his first Federal Budget. The Budget unveiled several significant tax changes that will impact businesses and individuals across Australia, including superannuation reforms, a diverted profits tax and a new tax and regulatory framework for collective investment vehicles. The following is a summary of the highlights of the principal business income tax and international tax measures and some of the significant personal income tax measures contained in the Federal Budget.
Business tax changes
Company tax cut
The Government intends to reduce the company tax rate to 25 per cent over 10 years. Businesses with an annual aggregated turnover of less than $10 million will be taxed at 27.5 per cent from the 2016-17 income year. All companies will be taxed at 27.5 per cent in the 2023-24 income year and the company tax rate will then be progressively lowered until it reaches 25 per cent in the 2026-27 income year.
Small business tax reforms
Small businesses will experience a range of benefits from this year's Budget.
- The small business entity turnover threshold will increase to $10 million from 1 July 2016 for the purposes of certain tax benefits, including: the lower small business corporate tax rate (27.5 per cent), accelerated depreciation and depreciation pooling provisions, simplified trading stock rules, simplified PAYG payment arrangements and other concessions.
- The threshold for access to the tax discount for unincorporated small businesses will be increased from $2 million to $5 million from 1 July 2016 and the tax discount will be increased over 10 years, in line with staggered cuts in the corporate tax rate (discussed above).
- Amendments will be made to Division 7A of the Income Tax Assessment Act 1936 from 1 July 2018. The amendments will clarify the rules and ease the compliance burden for taxpayers.
- There will be simplified BAS reporting requirements for small businesses.
Tax breaks for early-stage investors
The Budget confirms that measures previously announced for angel investors will be introduced. The Budget also confirms that the announced measures for venture capital limited partnerships will proceed.
The Government has accepted that the Taxation of Financial Arrangements (TOFA) regime has failed to deliver the simplification intended by that regime. The Government will redesign the TOFA framework with the aim of reducing compliance costs, simplifying the system and removing the majority of taxpayers from the TOFA rules.
The Budget announces three changes to the consolidation regime, intended to improve the integrity of the system:
- The treatment that applies to liabilities arising from securitisation arrangements within a financial institution will now also apply to non financial institutions. These liabilities will be disregarded if the relevant securitised asset is not recognised for tax purposes.
- Adjustment relating to deferred tax liabilities will be removed from the consolidation entry and exit tax cost setting rules.
- A consolidated group that acquires a subsidiary with deductible liabilities will no longer include those liabilities in the consolidation entry tax cost setting process, thus removing a double tax benefit.
Attracting foreign capital
New collective investment vehicles
The Budget introduces two new collective investment vehicles (CIVs), a corporate CIV and a limited partnership CIV, for which a new tax and regulatory framework will be required. These new investment structures can support the new Asia Region Funds Passport regime - an APEC initiative, the pilot program for which is scheduled to commence in 2017. These new CIV structures are more familiar to many non-resident investors than the unit trust structures that operate in Australia.
The Government has been reviewing the tax treatment of CIVs since May 2010, when the then Assistant Treasurer and the then Minister for Financial Services, Superannuation and Corporate Law announced that the Government would ask the Board of Taxation (Board) to review the tax treatment of CIVs, including whether a broader range of tax flow-through CIVs should be permitted.
The CIV changes in the Budget are based on the recommendations made by the Board of Taxation in the final report it released on 4 June 2015. It is anticipated that the new CIVs will be tax flow through vehicles that will operate in a similar way to managed investment trusts. They will be required to meet similar eligibility criteria, such as being widely held and engaging in primarily passive investment.
These proposed new CIVs strengthen the international competitiveness of Australia's funds industry, and accordingly build on a key theme arising out of the final report of the Financial System Inquiry.
Asset backed financing – Islamic investment
Certain asset backed financing arrangements (such as hire purchase arrangements and deferred purchase arrangements) will be taxed in an equivalent way to interest bearing loans or investments. This measure is intended to support Islamic financing and will apply from 1 July 2018.
International tax and integrity changes
Diverted profits tax
Australia will follow the UK and introduce its own diverted profits tax (DPT), from 1 July 2017. The type of arrangements to which the DPT will apply are arrangements between related parties:
- where the result of the arrangement is that tax paid overseas is less than 80 per cent of the tax that would have otherwise been paid in Australia;
- where it is reasonable to conclude that the arrangement is designed to secure a tax deduction; and
- that do not have economic substance.
Such arrangements will attract a 40 per cent tax on diverted profits. The tax is not intended to be deductible or creditable for income tax purposes (although franking credits may be allowed). The measure applies to large companies with global revenue of $1 billion or more, although companies with Australian revenue of less than $25 million will be exempt (unless the arrangements are artificial).
In its simplest form, a hybrid mismatch is a financial instrument which is treated as debt for purposes of the tax rules in one jurisdiction but equity in another, with the result that the payments under the instrument are tax deductible for the payer but tax exempt for the payee.
As part of its "Base Erosion and Profit Shifting Project" (commonly known as "BEPS"), the OECD has developed a set of recommended hybrid mismatch rules for domestic implementation, to combat use of these arrangements. The Board of Taxation has recently consulted on the OECD's hybrid mismatch rules, and the Government has asked the Board to undertake further work in this area. The Government will implement the OECD's rules to eliminate hybrid mismatches, taking into consideration the Board's recommended changes to those rules, from the later of 1 January 2018 or 6 months following the date of Royal Assent of the legislation. The OECD's rules in this area are extremely complicated. Although there is currently not much detail on how Australia will implement the OECD's reforms, it is likely that any changes will be significant.
Following the ATO's loss in Commissioner of Taxation v SNF (Australia) Pty Ltd  FCAFC 74, the Government hard wired the OECD's 2010 Transfer Pricing Guidelines into Australian legislation. The OECD has recently updated its Guidelines. Under this Budget, the OECD's most recent Guidelines will apply to Australia's transfer pricing rules from 1 July 2016.
Changes to the administration of the tax system
The Government will introduce five new measures to improve the administration of the tax system:
- whistleblowers who disclose information to the ATO will be better protected;
- a tax avoidance taskforce will be established to undertake enhanced compliance activities targeting multinationals, large public groups and high wealth individuals;
- penalties will be imposed on significant global entities who fail to adhere to tax disclosure obligations, including a failure to lodge tax returns on time;
- a Tax Transparency Code will be introduced and multinational businesses with an annual turnover of $100 million or more will be encouraged to adopt the Code to allow greater public scrutiny; and
- the Federal Government will consult on new rules requiring tax and financial advisors to report potentially aggressive tax planning schemes.
Significant personal tax measures
Personal tax rates
The Government will increase the Medicare levy low income threshold for certain taxpayers. The Government will also provide targeted personal income tax relief by increasing the 32.5 per cent personal income tax threshold from $80,000 to $87,000 from 1 July 2016.
Prior to releasing the Budget, the Government had foreshadowed significant changes to superannuation and confirmed that wealthy Australians will pay more tax on their superannuation. The Budget releases some of the detail around those announcements, and also contains many other measures that, when taken together, result in major changes to the superannuation system. The changes are:
- The Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase. This capped amount plus earnings will continue to be tax free in retirement. However, earnings on amounts above this cap will be subject to tax within the super fund. The change will be applied to both current and future retirees.
- The Government will lower the Division 293 threshold from $300,000 to $250,000. A 30 per cent tax applies to concessional contributions made by individuals with a combined income and superannuation contributions above this threshold.
- From 1 July 2017, the annual cap on concessional superannuation contributions will be reduced to $25,000.
- There will be a lifetime non concessional contributions cap of $500,000. This applies to all non concessional contributions made on or after 1 July 2007. Excess contributions will need to be removed or subject to penalty tax.
- Broadly commensurate treatment will apply to defined benefit arrangements.
- Individuals with a superannuation balance of less than $500,000 will be able to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.
- Low income earners will get a low income superannuation tax offset to reduce tax on superannuation contributions, up to a cap of $500.
- From 1 July 2017, all individuals aged up to 75 may claim an income tax deduction for personal superannuation contributions, regardless of their circumstances.
- The income threshold for a low income spouse will be raised from $10,800 to $37,000, increasing access to the low income spouse superannuation tax offset. A contributing spouse will be eligible for an 18 per cent offset worth up to $540 for contributions made to an eligible spouse's superannuation account.
- It will be easier for people aged 65 to 74 to make superannuation contributions. They will also be able to receive contributions from their spouses and no longer have to satisfy a work test.
- The tax exemption on earnings of assets supporting transition to retirement income streams will be removed.
- The anti detriment provision will be removed. From 1 July 2017 the Government will no longer allow funds to claim this as a deduction. This will ensure consistent treatment of lump sum death benefits across all superannuation which aligns with the treatment of bequests outside of superannuation.
- From 1 July 2017, the tax exemption on earnings in the retirement phase will be extended to products such as deferred lifetime annuities and group self-annuitisation products. The Government will also consult on how these products will be treated under the Age Pension means test.
The GST will be extended to low value goods imported by consumers from 1 July 2017. This will result in low value goods imported by consumers facing the same tax regime as goods that are sourced domestically.