2016 Australian Federal Budget Overview

2016 Federal Budget
Overview
Tax & Superannuation Changes
Andrew Lam & Garvin Jones| 31 May 2016
Twilight Seminar 2016

Federal Budget Overview 2016
Andrew Lam | Director Taxation | May 31 2016
Taxation Changes

Disclaimer
The material contained in this publication is general commentary only for distribution to
clients of Hill Rogers None of the material is, or should be regarded as advice.
Accordingly, no person should rely on any of the contents of this publication without
first obtaining specific advice from Hill Rogers. Hill Rogers, its Principals and agents
accept no responsibility to any person who acts or relies in any way on any of the
material without first obtaining such specific advice.
Twilight Seminar | Federal Budget Analysis | 31 May 2016 | 4

2016 Federal Budget Overview
Tax Changes
Personal tax • Personal tax rate changes
Business Tax • Corporate tax rate reductions
• Unincorporated small business tax offset
• Simplifying Division 7A
• Small business tax concessions
International Tax • GST on low value imported goods
• Diverted Profits Tax
• Hybrid mismatches
• New Tax Avoidance Taskforce

General Commentary
• Tax cuts for individuals and corporates are positive especially for small business
• Extending small business tax concessions for businesses < $10 million is positive and
should result in immediate cash benefit and compliance savings
• On the international tax front big business are a target and tax transparency will be a
focus. Given the continuing work of the OECD and the BEPS projects, we expect
international tax avoidance reforms will continue to be a focus of future budgets. Our
trading partners are heading down the same path.
• Superannuation also a target and a big concern
• Election year
• GST was not touched (foregone opportunity)
Pro – small business budget

Personal Tax Rate Changes
Taxable Income Tax on this income
0 – $18,200 Nil
$18,201 – $37,000 19% of excess over $18,200
$37,001 – $87,000 [from $80,000] $3,572 plus 32.5% of excess over $37,000
$87,001 – $180,000 $19,822 plus 37% of excess over $87,000
$180,001 and over $54,232 plus 47% of excess over $180,000
From 1 July 2016
• Above rates exclude Medicare levy
• 2% Temporary Budget Repair levy expires at end of 2017 year

Business Tax
Important changes for the middle market

Corporate Tax Rate Reductions
• The corporate tax rate will be
progressively reduced to 27.5%
• For 2016/17 the corporate tax rate is
27.5% for businesses with turnover
< $10 million
• From 2017/18 the threshold for
access to the 27.5% tax rate will
increase as follows, see table:
• Franking credits can be distributed in
line with rate of tax paid
• Unclear whether this refers to the
rate of tax paid in year of profit
derivation or year the dividend is
paid.
Income year
Annual aggregated
turnover threshold
Rate (%)
2015/16 (current year) < $2m 28.5
2016/17 < $10m 27.5
2017/18 < $25m 27.5
2018/19 < $50m 27.5
2019/20 < $100m 27.5
2020/21 < $250m 27.5
2021/22 < $500m 27.5
2022/23 < $1b 27.5
2023/24 None 27.5

Corporate Tax Rate Reductions
• From 2024/25 the company tax
rate will reduce to 27%, then 26%,
then 25%
Income year
Annual aggregated
turnover threshold
Rate (%)
2024/25 None 27.0
2025/26 None 26.0
2026/27 None 25.0

Unincorporated Small Business Tax Discount
• Available to individuals with business income that has aggregated turnover
< $5 million
• The unincorporated small business discount will increase in phases over 10 years
from 5% now to 16% in 2026/27.
• First increase is from 5% to 8% on 1 July 2016.
• Current cap of $1,000 p.a. will be retained

Simplifying Division 7A
• Amendments will be made to the operation and administration of the Division 7A rules
• Board of Taxation post implementation review of Division 7A
• Self-correction mechanism for inadvertent breaches of Division 7A without penalty
• Simplified loan arrangements – 10 years, maybe no written agreement required
• Safe harbour rules for calculating charge to shareholders for use of company assets
• A number of technical amendments to improve the overall operation of Division 7A
• Start date: 1 July 2018
• Government will consult stakeholders in developing the amendments

Small Business Tax Concessions
• Small business entity turnover threshold increases from $2 million to $10 million
• Start date 1 July 2016
• Access to the following small business tax concessions
• 27.5% corporate tax rate
• Simplified depreciation rules
• $20,000 instant asset write off threshold (until 30 June 2017)
• Simplified trading stock rules
• Option to account for GST on a cash basis and pay GST instalments calculated by ATO
• Simplified method for paying PAYG instalments
• Other tax concessions e.g. FBT exemption for work related portable electronic devices from 1 April 2016 and car parking
exemption
• The $10 million threshold does not apply for access to small business CGT concessions

GST on Low Value Imported Goods
• GST extended to low value goods imported by consumers
• Start date 1 July 2017
• Overseas suppliers with Australian turnover > $75,000 must register
• International clients should assess these measures and be ready to update their
systems

Diverted Profits Tax
• Similar to the UK ‘google tax’
• Penalty tax of 40% on diverted profits
• Applies to groups with $1bn global turnover
• Exemption if Australian turnover < $25 million

Hybrid Mismatches
• Taking advantage of differential tax treatment of hybrid instruments
• A Board of Taxation discussion paper has been released
• Start date 1 January 2018

New Tax Avoidance Taskforce
• ATO to establish a tax avoidance task force
• Target multi-nationals, high wealth individuals and private groups
• Closer cooperation with other government agencies
• Expected to recover $3.7bn over 4 years
• Project Do It
• Wary of red tape

Federal Budget Overview 2016
Garvin Jones | Director - Superannuation| May 31 2016
Superannuation Changes

Top 5 Changes
1. Concessional Contribution caps $25,000
2. Non Concessional Contribution Cap $500,000 Lifetime Cap
(NCC from 1 July 2007, effective 3 May 2016)
3. $1.6 million Cap on Pension balances
4. Removal of the tax free income for assets supporting Transition to Retirement Income
Streams (TRIS)
5. Division 293 tax threshold, $250,000
• Changes apply to ALL Superfunds

Things that have not changed
• Tax Free Pensions and Lump Sums – 60 and over
• Minimum and Maximum Pension draw down factors
• Access to Super Benefits and Preservation Rules
• Reach preservation age and
• Meet a condition of release (retirement)
• Concessional Contributions for 2015/16 and 2016/17

$1.6m pension cap per person
• Assessed at
• 1 July 2017 for existing pensions
• Commencement day for new pensions
• Pension balances in excess of cap
• Must be rolled back to accumulation
- Usual preservation / tax rules apply to rolled back amount
- Investment income taxable again (15% on income, 10% on CG)
• Or removed from super
Otherwise, tax on both excess and associated earnings
Effective 1 July 2017

• Earnings on pension balance after assessment do
not count towards cap
• Indexation: CPI, in $100k increments
• Proportionate method would be used to
determine how much ‘cap space’ available

$1.6m pension cap: example
Existing pension
• $1.2m
• 75% of cap ‘used’
$1.6m cap indexed
to $1.7m
1 July 20211 July 2017
Proportionate method and indexation
1 July 2022
Pension balance now: $1.5m
Accumulation balance: $1m
How much accumulation $
could be converted to pension?
• 25% of ‘cap space’ available
• 25% x $1.7m = $425k

$1.6m pension cap: example
• Jane and Bob are 70
• $2m each in super
• Currently, all in pensions (one each)
• Fund earns around $200k pa
• No tax paid
• They draw around $300k pa in pensions and want to keep it around there (even
though the minimum is $200k)
Balances in excess of cap

Effect of $1.6m pension cap: excess
Jane $2m
Bob $2m
$1.6m
$0.4m
Pension
Accumulation
$1.6m
$0.4m Accumulation
Pension
Fund Income
now only 80%
tax free
20% ($40k)
taxable
Approx. $6k tax
If rolled back amounts remain in super...

Effect of $1.6m pension cap: excess
$1.6m
$0.4m
Pension
Accumulation
One approach:
What about their income ($300k, $150k each)?
Draw as little as possible
5% x $1.6m = $80k
No tax to pay – over 60
The rest - $70k (17.5% of the balance)
Lump sum not a pension
No tax to pay – over 60

Effect of $1.6m pension cap
• Investment reserves
• Hold back investment returns and allocate to pension balances
• Death: CGT on accumulation balances
• Increased focus on extracting $ before death
• Reversionary pensions
• Could this prevent ‘re-counting’ of the same pension for the $ for the survivor?
What else is there to think about longer term?

• Consider segregating assets to support $1.6m pension balance
• May take time to organise
• Evening up balances
• Contribution splitting (concessional)
• Recontribution for spouse
Action plan: lead up to 1 July 2017

• Realise large CG in 2016/17 before tax exemption lost
• Refresh cost base
• Also relevant for TRIS up to 1 July 2017 (when tax exemption no longer available)
• Multiple pensions
• How to keep tax free / taxable separate?
- Consider another fund
• Which to roll back?
• Is it worth withdrawing excess and investing in own name?
Action plan: lead up to 1 July 2017

TRIS: removal of tax concessions
Fund entitled to tax exemption on
investment income generated from assets
underpinning TRIS balance
No tax exemption on investment
income generated from assets
underpinning TRIS balance
Now
Earlier of:
• Retirement
• Age 65
1 July 2017
• NO CHANGE to the eligibility rules to commence to TRIS
But not until 1 July 2017... 13 months away

TRIS: Action for now and in 2016/17
Have member circumstances changed?
• Ceased a paid job after 60?
• Decided to never again work 10 or more hours per week?
• TRIS converts to ABP
• Earnings on ABP tax free
For existing TRIS

Non-concessional Contributions
Age Old New
Up to 65 $180,000 / $540,000 $500,000 lifetime cap
65 – 74 *$180,000 $500,000 lifetime cap
* Work test from age 65

Non-concessional contributions
1 July 2007
Lifetime cap of $500k from 3 May 2016
2010/11: $450k2007/08: $450k 2013/14: $450k Post 3 May 2016: $any
3 May 2016
Indexed to
$550k
Age 75

1 July 2007
2010/11: $450k2007/08: $450k 2013/14: $450k Post 3 May 2016: $any
3 May 2016
Indexed to
$550k
Age 75
“Used up” $500k lifetime cap – but no excess Excess

1 July 2007
2010/11: $450k2007/08: $450k 2013/14: $450k Post 3 May 2016: $any
3 May 2016
Indexed to
$550k
Age 75
2015/16: $180k Cap left: $320k

1 July 2007
2010/11: $450k2007/08: $450k 2013/14: $450k Post 3 May 2016: $any
3 May 2016
Indexed to
$550k
Age 75
2015/16: $180k Cap left: $320k
2015/16: $500k Cap left: $nil
Cap left:
$50k?
Fully “used up” cap

• Excess: treated in usual manner
• Release excess NCC + 85% associated earnings; OR
• Pay excess tax (currently 49%)
• Indexation: AWOTE, in $50k increments
• No changes to exclusions from NCC cap
• Small Business CGT caps
• Personal injury
These would remain in place and are in addition to NCC cap
Lifetime cap of $500k

Non-concessional contributions: items
• Bring forwards planned for late 2015/2016
• In-specie contributions already in train
• Contracted property: settlement sum funded by NCC
• UK pension transfers already in train
• Future recontributions
• LRBAs: dependent on large NCC for repayment or asset improvement
Review

Non-concessional contributions: items
• Remember: disallowed deductible contributions
count!
• Reimburse SMSF expenses paid personally
• Beware improvements to fund assets for $0
• Obtain advice before making contributions
Prevent inadvertent use of NCC cap

Contribution rules relaxed (from 1 July 2017)
Who is allowed to contribute?
Old Aged under 65 OR
65-74 and working
Anyone aged up to 75
Old
New Work test removed

Contribution rules relaxed (from 1 July 2017)
Who is allowed to contribute? Who can claim a tax deduction?
Old Aged under 65 OR
65-74 and working
Less than 10% income + benefits
from “employment
Anyone aged up to 75 Anyone
Old
New

Concessional Contributions
Old New
Age 2016 + 2017 2018
49 – 74 *$35,000 $25,000
< 49 $30,000 $25,000
* Work test from age 65

Concessional contributions
From 1 July 2017 $25k & ‘Catch up’
But only for those with < $500k in super.
(When? All years? Just Year 4?)
Maximum of 5 years.
$10k $5k
$25k
$15k
Year 1 Year 2 Year 3 Year 4

Concessional contributions
From 1 July 2017 $25k & ‘Catch up’
But only for those with < $500k in super.
(When? All years? Just Year 4?)
Maximum of 5 years.
$10k $5k
$25k
$15k
$20k top up (Year 3)
Year 1 Year 2 Year 3 Year 4

‘Catch up’ unused concessional contributions
• Broken work patterns
• Lumpy income or variable contribution levels
• Greater disposable income later in life
• Non-working 65-74 year olds who expect to
receive assessable income in the future (e.g. a
large capital gain)
Useful for those with:

Some new opportunities for 65-75s?
Watch new $500k lifetime limit on any non-concessional contributions
High taxable income
(investments) – tax
deductible super
contribution
Sold assets in
retirement – ability to
contribute cash
Recontribute pension
payments

Other proposed contributions changes
Division 293 Tax
• Additional 15% paid on Concessional
Contributions
• Income threshold to reduce from $300,000 to
$250,000

Other proposed contributions changes
Introduction of ‘Low income super tax offset’
• LISC reintroduced
• 15% tax offset (not refund) on Concessional Contributions (maximum offset $500 per
person)
Extending spouse tax offset
• Income threshold for 18% tax offset (max $540) to increase from $10,800 to $37,000
(phase out at $40,000)

About the speakers
Andrew is both a chartered tax adviser and a solicitor having worked with leading taxation
advisory teams in chartered accounting firms (both big 4 and mid-tier) and a top tier law firm.
Andrew’s expertise lies in
• providingtax advice
• leading tax due diligence assignments
• general tax planning and
• providingtax compliance services
His clients include family groups, private and public companies (including listed entities) and not
for profit groups.
Andrew Lam - Director, BCom, LLM, CTA
Services: Taxation, Large
Corporate, Corporate
Advisory, Not-For-Profit
t: +61 2 9232 5111
d: +61 2 9220 0381
e: andrew.lam@hillrogers.com.au
w: www.hillrogers.com.au

About the speakers
Garvin’s extensive expertise and technical experience in income tax and superannuation makes
him a valuable advisor to his clients, including SMSFs, High Net Worth Individuals and SMES.
Garvin’s advises clients in
• Tax planning and compliance
• Wealth creation plans
• Retirement planning
• Regulatory compliance
Garvin is passionate about helping people to plan for the transition between work and
retirement in a way that sees their financial goals achieved.
Garvin Jones - Director, BBus, CA
Services: Superannuation
High Net Worth Individuals
and Professionals
t: +61 2 9232 5111
d: +61 2 9220 0346
e: garvin.jones@hillrogers.com.au
w: www.hillrogers.com.au

t +61 2 9232 5111 f +61 2 92337950
www.hillrogers.com.au | info@hillrogers.com.au
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Member of Morsion KSi, an association of global independent accounting
firms. Liability limited by a scheme approved under Professional Standards
Legislation.
Disclaimer: The material contained in this publication is general
commentary only for distribution to clients of Hill Rogers None
of the material is, or should be regarded as advice. Accordingly,
no person should rely on any of the contents of this publication
without first obtaining specific advice from Hill Rogers. Hill
Rogers, its Principals and agents accept no responsibility to any
person who acts or relies in any way on any of the material
without first obtaining such specific advice.

2016 Australian Federal Budget Overview

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2016 Australian Federal Budget Overview