If this was the first budget in a three-year term, it would look decidedly different. We need to be realistic about the expectations of what the budget can achieve given the background scenario facing the new Federal Treasurer Scott Morrison’s first budget. The Treasurer has a difficult job to produce a plan to stop the deficits, while providing some goodies to reinvigorate the government’s stalling fortunes.
It would be unrealistic in an election year to expect any significant reduction in the size of the overall federal deficit. The best we can hope for are signs of a credible plan towards the road to budget surplus. When the leadership of the Liberal Party changed in September last year, everything was back on the table in relation to tax reform. Unfortunately, the tax reform process which was started in March 2015 with the discussion paper titled Rethink Tax has been put on hold. The government’s initial intention was to take tax reform to the next election, but this is a risky strategy in an election year.
The Turnbull government has decided early into his reign to take reforms of the GST off the political agenda. He will not be seeking a mandate from the public in the upcoming election on possible changes to the rate or base of the GST. Given that there is no bipartisan support for changes to the GST, it is understandable that this pledge was dropped early in the piece as it carried too much political risk leading into a tight election cycle.
Given this scenario, what is the best we could hope for, you ask? Well, some small steps in the right direction would be good given the tight fiscal tightrope facing the Federal Treasurer.
The government indicated in the lead-up to the budget that it would channel tax savings towards reducing PAYG taxes on workers and small business tax cuts rather than reducing the size of the deficit in the short term. The government is hoping to obtain a growth dividend from such a strategy to shore up its re-election prospects and provide an impetus to the economy in the short term. The long-term structural deficits live to fight another day as a result of the political realities heading into another election period. Tough decisions will loom ahead in order to address government expenditures rising much faster than revenue. Without meaningful tax reform and expenditure restraint, the budget will remain in structural deficit for the foreseeable future.
What did we get on budget night?
In a nutshell, the two big announcements were in relation to small business tax concessions and as anticipated superannuation changes. Savings in the taxation treatment of superannuation have been channelled to fund tax cuts for SMEs. Last year’s budget bestowed tax concessions on the micro small business sector with turnover of less than $2 million. This year’s budget has moved some of these concessions up the food chain into SME territory. The government hopes mid-size businesses are more likely to invest, employ and survive than microbusinesses. There are rosy assumptions built into the budget projections. Some of these assumptions are already under pressure, such as the inflation rate and iron ore price. Lower inflation reduces bracket creep that could create further headwind. If the robust assumptions do not hold true we could see a blowout of the Federal deficit, which is not expected to be in surplus until 2020-21 at the earliest based on current budget projections.
Small business
The big announcement on the night was increasing the definition of incorporated small businesses from $2 million to $10 million turnover. This gives such businesses access to the full suite of small business tax concessions.
From as earlier as 1 July 2016, all incorporated businesses with annual turnover of less than $10 million will have access to the following small business tax concessions:
- A lower small business company tax rate of 27.5 per cent;
- simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017 and then less than $1,000;
- Immediate deduction for prepaid expenses, where the prepayment covers a period of 12 months or less, that ends in the next income year.
- simplified trading stock rules, giving businesses the option to avoid an end of year stock take if the value of the stock has changed by less than $5,000;
- a simplified method of paying 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;
- other tax concessions available to small business currently, such as the Fringe Benefits Tax concessions (from 1 April 2017, the beginning of the next fringe benefits tax year) and immediate deductibility of professional expenses;
- Immediate deductibility of professional expenses such as legal and accounting when setting up a new business; and
- Access to small business restructure rollover if there is a change in legal structure.
The increase in the small business entity turnover threshold provides greater access to the tax concessions previously enjoyed only by entities with turnover of less than $2 million.
For unincorporated small businesses (sole traders, partnerships, trusts), the government will increase the unincorporated tax discount from five per cent to eight per cent for entities with turnover less than $5 million. Unfortunately, the cap for the discount remains at $1,000.
The government has indicated that the $2 million threshold will be retained for the purposes of the small business capital gains tax concessions. If all these changes go through we will have $2 million, $5 million and $10 million thresholds adding further complexity to the system.
Superannuation
As expected there was a raft of superannuation changes. The government proposes to introduce from 1 July 2017 a maximum pension account balance of $1.6 million which will receive concessional tax treatment of zero tax.
The annual concessional contribution cap will be cut to $25,000 for all individuals as from 1 July 2017. Also applying from 1 July 2017, the threshold at which Division 293 tax applies will be reduced to $250,000 from $300,000. Contributions caught by Division 293 are effectively taxed at 30 per cent rather than 15 per cent.
In a welcome move, taxpayers will no longer have to show that less than 10 per cent of their income came from employment in order to claim a deduction for super contributions. This has been a longstanding anomaly which discriminated taxpayers based on their sources of income. It is also abolishing the work test for taxpayers aged 65 to 74 allowing them to make concessional contributions to super regardless of their age. Both these measures will make it easier for taxpayers to contribute to superannuation up to the maximum concessional contribution cap.
From budget night 2016, individuals will be limited to a lifetime non-concessional contribution cap of $500,000, which will replace the existing annual non-concessional contribution cap of $180,000 per year (or $540,000 if the two-year rule bring forward rule was applied). If you have already exceeded this amount since 1 July 2007 to budget night 2016, then you will not be penalised or required to remove the excess component from their superannuation savings.
To round off a raft of changes to superannuation the government also made changes to transition to retirement income streams (TRIS) and anti-detriment tax. In relation to TRIS, the government will take away the tax-free treatment of income earned by assets supporting a TRIS as from 1 July 2017.
With respect to anti-detriment payments, which essentially refund the contributions paid by the deceased fund member over their lifetime will come to an end.
Some of the proposed changes (lifetime cap for non-concessional contributions and maximum pension cap of $1.6m) in our view represent retrospective changes to superannuation which the government undertook would not be done prior to the budget.
Australia has had 25 years of uninterrupted growth but has accumulated a sizeable debt, which needs to be reined in to protect our AAA credit rating and to lessen the burden on our future generation. Our tax mix is essentially unchanged since the 1950s and is not fit for purpose for today’s economy. We have an ageing population, anaemic growth, declining productivity adding to the mix of challenges ahead requiring difficult decisions to be made regardless of who wins the next election. The budget has cast an economic plan back to surplus, but its fortunes are riding on the back of small businesses as the economy transitions away from mining.
A final word of caution: the budget has created a plethora of tax planning opportunities. One caveat, however, is that budget changes are not yet law. The government needs to win the next election and the changes need to make it through Parliament to see the light of day. The Labour Party has already indicated that some of the proposed changes, such as the change to the definition of a small business, will not be supported, so we live in uncertain times, which seems to be the only constant in life.
Tony Greco, general manager, IPA
