Tax & Super Newsletter Budget Edition May 2015 - June 2015

In this issue:

The 2015-16 Federal Budget

Budget measures affecting Individuals and Families

The ‘Small Business’ package of Budget measures

Budget measures affecting Large Businesses

The 2015-16 Federal Budget

The 2015-16 Federal Budget was handed down on 12 May 2015.

The intention of this Budget is to support small businesses and grow jobs, support families and ensure fairness of tax and benefits. At the same time, national security is being ensured as well as steadily repairing the budget in a measured way. The Treasurer, the Hon. Joe Hockey MP, stated that the Government is taking steps to continue to repair the budget “with sensible savings and a prudent approach to spending”.

The Budget mainly focuses on small businesses with aggregated turnover of less than $2 million and large businesses with global revenue of at least $1 billion.

The main measures likely to affect you are outlined below. To ensure you know precisely how you may be affected by one or more of these measures, you should consult your tax adviser.

Budget measures affecting Individuals and Families

Medicare levy low-income thresholds for singles, families and single seniors and pensioners increased

With effect from the 2014-15 year, the Medicare levy low-income thresholds for singles, families and single seniors and pensioners will be increased per the table below:

Couples (no children)$35,261$34,367
Single seniors and pensioners$33,044$32,279

The additional amount of threshold for each dependent child or student will be increased to $3,238 (up from $3,156 for 2013-14).

The increase in these thresholds takes into account movements in the Consumer Price Index (CPI). This is to ensure that generally low-income taxpayers continue to be exempted from paying the Medicare levy.

Modernising the methods used for calculating work-related car expense deductions

The methods of calculating work-related car expense deductions will be modernised from the 2015-16 income year.

This involves removing:

the ‘12% of original value method’; and

the ‘one-third of actual expenses method’

as these methods are used by less than 2% of those who claim work-related car expenses.

Remaining methods

The ‘cents per kilometre method’ will be modernised by replacing the three current rates based on engine size with one rate set at 66 cents per kilometre to apply for all motor vehicles, with the Commissioner of Taxation responsible for updating the rate in following years.

The ‘logbook method’ of calculating expenses will be retained.

These changes will not affect leasing and salary sacrifice arrangements and will better align car expense deductions with the average costs of operating a motor vehicle.

Changes to tax residency rules for temporary working holiday makers

 From 1 July 2016, the tax residency rules will be changed to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here. This means they will be taxed at 32.5% from their first dollar of income.

Currently, a working holiday maker can be treated as a resident for tax purposes if they satisfy the tax residency rules, typically that they are in Australia for more than six months. This means they are able to access resident tax treatment, including the tax-free threshold, the low income tax offset and the lower tax rate of 19% for income above the tax-free threshold up to $37,000.

The ‘Small Business’ package of Budget measures

 Small business tax rate cuts

 There are cuts to the tax rate for small businesses which will apply from the 2015-16 income year.

Incorporated Entities

The tax rate for companies with an aggregated annual turnover of less than $2 million will be reduced by 1.5% (ie from 30% to 28.5%) from the 2015-16 income year. However, the maximum franking credit rate for a distribution will remain at 30%.

Unincorporated entities

For sole traders and individuals who earn business income from a partnership or trust with an aggregated annual turnover of less than $2 million, a 5% tax discount (provided as a tax offset) will be introduced and capped at $1,000 per individual.

Small business accelerated depreciation changes

From Budget Night (starting 7.30pm (AEST) 12 May 2015), the threshold below which small businesses can claim an immediate deduction for the cost of an asset they start to use or install ready for use will be temporarily increased from $1,000 to $20,000. This will apply to assets acquired and installed ready for use from Budget Night through to 30 June 2017.

Only small businesses with an aggregated annual turnover of less than $2 million are eligible.

Assets valued at $20,000 or more that cannot be immediately deducted can be included in the entity’s small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter, in the same way the rules currently apply for assets costing $1,000 or more.

Also, the balance in the small business simplified depreciation pool will be able to be immediately deducted if it is less than $20,000 (including an existing pool).

The rules currently preventing a small business using the simplified depreciation regime for five years if it opts out of the regime will also be suspended until 30 June 2017.

While small businesses can access the simplified depreciation regime for a majority of capital assets, certain assets are not eligible (such as horticultural plants and in-house software) for which specific depreciation rules apply.

Note that from 1 July 2017, the $20,000 threshold for the immediate deduction of assets and the value of the pool will revert back down to $1,000.

Immediate deduction for business establishment costs

From the 2015-16 income year, an immediate deduction will be available for professional expenses that are associated with starting a new business, such as professional, legal and accounting advice or legal expenses to establish a company, trust or partnership.

Under the current laws, these expenses can only be deducted over a five year period.
CGT relief reforms for small business restructures

From the 2016-17 income year, small businesses with an aggregated turnover of $2 million or less may change the legal structure of their business without attracting a capital gains tax (CGT) liability.

This measure recognises that new small businesses may initially choose a legal structure that no longer suits them once their business is more established. They will be able to change their legal structure without being hampered by potential CGT implications.

Currently, CGT roll-over relief is only available to individuals, trustees or partners in a partnership who incorporate. This new measure provides CGT relief to many more entities.

Budget measures affecting Large Businesses

 A raft of measures affecting large businesses were also announced in the Budget. These are summarised below:

For companies with global revenue of $1 billion or more

A targeted multinational anti-avoidance law will be introduced into the general anti-avoidance provisions.

The maximum administrative penalties that apply to companies that enter into tax avoidance and profit shifting will be doubled.

The OECD’s new transfer pricing documentation standards will be implemented from 1 January 2016.

Other measures combatting multinational tax avoidance

A voluntary corporate disclosure code will be developed to facilitate greater compliance with the tax system.

The Government will also tackle treaty abuse in its treaty practices, consult on the development of anti-hybrid rules, exchange information with other countries on harmful tax practices, and further fund the ATO’s profit-shifting investigations.

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