Federal Budget - Pitcher · 2015-05-12 · The 2015 Federal Budget delivered by the Treasurer forecasts a 2015/16 deficit of $35.1b, an improvement of $6b from this years estimated

Federal Budget

Tuesday 12 May 2015

2015-16

ContentsCommentary 1

Budget 2015-16 highlights 2

Personal tax 3

Superannuation 4

Administration 4

Small business 5

Corporate tax 8

International 9

GST 10

Employment 12

Within the context of the current political, economic and fiscal environment this budget is unremarkable and safe. The 2015 budget has placed the growth prospects for the economy onto the shoulders of small business. The sector is the beneficiary of tax cuts, concessions and stimulus for new activity.We welcome the opportunities for small business, however there is little to encourage or stimulate the balance of the business community. Without active budgetary policy, the balance of the economy will continue to rely on low interest rates, a lower exchange rate to support exporting and stable pricing. For many of our SME clients, the missing link will continue to be consumer confidence.

The government is also pursuing a raft of integrity measures to improve its treasury position.

These integrity measures are largely focused on businesses outside of the Australian tax system. They seek to adopt measures that many of our major trading partners have or will adopt. The implementation of these changes will require a delicate balance to not damage the level of inbound investment and Australia’s international competitiveness.

Given the lack of material business reform in the budget, the challenge still remains to address structural difficulties in the economy. The budget places even greater pressure on the Tax White Paper delivering the required impetus for economic growth over the medium to longer term.

Economic outlookThe 2015 Federal Budget delivered by the Treasurer forecasts a 2015/16 deficit of $35.1b, an improvement of $6b from this years estimated position. Importantly this represents 2.1% of GDP, a reduced burden of approximately 20% from the prior year. The projected budget position is the sum of a greater revenue take, principally through various taxation integrity measures, increasing revenue to $405.4b, representing 24.5% of GDP and expenditure of $434.5b, 26.2% of GDP.

Examining the major economic parameters upon which the Budget is built, there appears to be no immediate expectation for significantly improved financial performance in the coming 12 months. There is forecast to be a modest increase in growth as represented in GDP change, increasing from 2.5 percent in the current year to 2.75 percent over the next 12 months. Government expectations for unemployment is a rise to 6.5%, noting that in April 2015 the rate was 6.1%. These measures explain a modest CPI rate of 2.5%, and similar wages growth expectations.

Beyond the immediate 12 month period, governments’ ambition is to significantly reduce the budget deficit by 2018/19 to $6.9b. Examining the trend for revenue and expenditure, revenue as a percentage of GDP will increase 1.4% to 25.9%, while expenses will fall by 0.4% to 25.8% of GDP. In short, despite pledging no new taxes, government expect a greater contribution to their deficit ambition from revenue growth than expenditure control. This appears to be based on a stronger economy over the longer term, GDP growth projected to increase to 3.5%, leading to a decrease in the unemployment rate to 5.75% while maintaining a CPI of 2.5%.

Commentary

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Budget 2015-16 highlightsMild

10% GST applied to all digital downloads

retained for business & farm sales

$35.1b deficit 3.4% increase in government expenditure

5.5% increase in government revenue

economic growth to 2015/16

projected deficits over the next 4yrs$82b

unemployment rate for 2015/166.5%

2.75%

1.5% tax cut for incorporated businesses with annual turnover of <$2m

MAJOR INITIATIVES

5% tax discount for unincorporated businesses up to $1,000

NO CGT on restructure of

small business into any type of entity

100% tax deduction for professional costs establishing a new business

NILGST

high profile multinationals targeted for profit shifting

30

write offs for small businesses

$20,000

for depreciated water facilities, fodder storage & fencing

AGRI SUPPORT $70M $5,000FBT entertainment

cap for NFP employees

Revenue Individual income tax

FBT

Superannuation tax

Sales taxes

Fuels excise

Other excise

Customs duty

Other taxes

Non-tax revenue

48%

1.2%

15.2%

4.4%

1.7%6.2%

2.3%

17.6%

Company & resource rent taxes

1.1%2.3%

Expenditure

35.4%

19.8%

16%

6%

5.1%10.4%

Social security & welfare

Other purposes

Health

Education

Defence

General public services

All other functions

7.3%$405.4b $434.5b

Tax rates and work expensesThe Government has not made any announcement in this Budget to change the current personal income tax rates, nor to extend the two percent Budget Deficit Levy beyond 30 June 2017. Methods of claiming work-related car expenses are proposed to change from 1 July 2015.

Income Tax RatesWith no proposed changes, tax (excluding Medicare Levy) for the years ending 30 June 2015, 2016 and 2017 will be as follows:

2014-15 2015-16 and 2016-17

Taxable Income Tax Payable Taxable Income Tax Payable

$0 - $18,200 Nil $0 - $19,400 Nil

$18,201 - $37,000 19% of excess over $18,200 $19,401 - $37,000 $19% of excess over $19,400

$37,001 - $80,000 $3,572 + 32.5% of excess over $37,000

$37,001 - $80,000 $3,344 + 33% of excess over $37,000

$80,001 - $180,000 $17,547 + 37% of excess over $80,000

$80,001 - $180,000 $17,534 + 37% of excess over $80,000

$180,000+ $54,547 + 47% of excess over $180,000

$180,000+ $54,534 + 47% of excess over $180,000

If this Bill is passed, the tax free threshold for the years ending 30 June 2016 and 2017 will remain at $18,200 and the second marginal tax rate will remain at 32.5 percent.

Personal tax

Steady

Work-related car expensesThe Government has announced that it will abolish the “12 percent of original value method” and the “one-third of actual expenses method” for calculating an individual’s work-related car expense deductions. The “cents per kilometre method” will also be amended to replace the three current rates based on engine size with one flat rate set at 66 cents per kilometre.

The changes to the “cents per kilometre method” will result in reduced work-related car expense claims for vehicles with engine sizes above 1,600cc, whilst vehicles with engine sizes less than 1,600cc will enjoy a slightly increased claim.

These changes are to take effect from 1 July 2015, but are not proposed to affect leasing and salary sacrifice arrangements.

Notwithstanding the above, clients should be aware that there is a Bill currently before the House of Representatives which proposes to repeal the personal tax rate cuts that have already been legislated to commence from 1 July 2015.

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No significant superannuation changesThere were no significant superannuation changes announced, which was a relief but not surprising given superannuation taxation is currently being reviewed as part of the Government’s Tax White Paper process.The Tax White Paper review process is due to report towards the end of the 2015 calendar year. The Government has stated it then intends to consult on superannuation reform options before putting forward policy proposals to take to the next election.

While there is expected to be superannuation changes on the horizon, we are unlikely to see anything this side of the next Federal election.

Looking longer term, the more likely outcome following the election, irrespective of who is in Government, is superannuation taxes will probably increase. However we are confident that superannuation will still be taxed at lower rates than alternative tax structures.

Accordingly, from a tax perspective we see no need to change superannuation plans and if you are intending to invest, structuring those investments using a superannuation fund should continue to be an option considered.

Statutory remedial power for the Commissioner The Government has announced that it will provide the Commissioner with a statutory remedial power to administer the tax law to ensure that its intended purpose or object is achieved. This change will allow the Commissioner to modify the operation of the tax law to ensure that there are no unforeseen or unintended outcomes for taxpayers when applying the law, provided it has a beneficial outcome for affected taxpayers and no more than a negligible budget impact. This measure will have effect from the date of Royal Assent of the relevant legislation.

Superannuation Administration

Steady Sunny

We welcome this change, which will help to reduce uncertainty on small technical issues. It is expected that this measure will reduce the regulatory burden borne by taxpayers by providing greater certainty and better outcomes.

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Tax cuts for small businessThe Government announced it will cut the Small Business company tax rate to 28.5 percent from 30 percent, effective from the 2015/2016 income year and thereafter. Importantly, franking credits on distributions for small business will remain at 30 percent. It is estimated that this measure will benefit over 90 percent of incorporated businesses in Australia. Further, individuals with assessable income from an unincorporated businesses will receive a 5 percent tax discount in the form of a tax credit capped at $1,000.

We welcome the change for both small businesses and individuals benefiting under the proposed tax concessions. This measure is intended to improve cash flow and assist growth, competition and employment.

One watchout will occur for entities with a high dividend payout ratio that may exhaust available franking credits upon distributing franking credits at the 30 precent rate.

The 5 percent discount provided to individuals receiving business income from unincorporated associations is broadly in line with that provided to incorporated entities. However, the tax offset will be exhausted at $20,000 of tax payable (approximately taxable income of $89,500). Further, incorporated entities will obtain a greater benefit where their taxable income exceeds approximately $67,000. Essentially, this measure will amount to a $1,000 tax saving for sole trader type beneficiaries.

Improvements to the ATO to reduce red tape The Government announced that it will be providing $130m over a four year period to deliver an improved experience for clients dealing with the ATO.The Government is looking to reduce red tape by investing in three foundation initiatives: a “digital by default” service for providing information and making payments to the ATO, improvements to the data and analytics infrastructure and enhancing the current myTax system.

These initiatives form part of the Government’s digital transformation agenda and support the Government’s commitment to reduce red tape.

The Government also announced additional funding of $14.6m to the Inspector-General of Taxation. This funding is in addition to the 2014/15 Budget announcement which was looking to transfer the tax complaints function from the Office of the Ombudsman to the Inspector General of Taxation.

Small business

Sunny Sunny

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Upfront deductions and assistance for start upsThe Government will allow new start-up businesses to immediately deduct start-up costs such as professional, legal and accounting services from the 2015/2016 income year. Currently, some professional costs associated with a new start-up business are capitalised and deducted over a five year period (as “black-hole expenditure”). The term “start-up” is not defined, however the Budget release refers to expenses associated with starting a new business. There will be a question as to whether this will cover an existing group that establishes a new entity carrying on a new business.

The Government has not announced a cap on this measure. This change is welcomed and will assist in providing additional cash flow for new businesses.

In addition, the Government will look to streamline the business and company registration process to a single online portal. Currently there are two separate online portals for the ABN and TFN registration. This proposal will simplify the business and company registration process for new start-up businesses.

Upfront asset deductions for small business and farmersAs a further boost to small business the Government has announced a temporary expansion to the accelerated depreciation rules together with deduction benefits for farmers.Under announced measures, businesses with turnover below $2m will now be able to claim an immediate deduction for each asset with a cost of less than $20,000 which is acquired from today until 30 June 2017.

In addition, from 1 July 2016, all primary producers will be entitled to an immediate deduction for capital expenditure on fencing and water facilities, such as dams, tanks, pumps, and water towers. Further, fodder storage assets will be depreciated over three years. This will be a permanent change and represents a substantial acceleration from the current regime.

These measures will provide immediate cash benefits for small business, in particular new and expanding businesses, and primary producers. The measures are also aimed at enabling farmers to better manage periods of drought.

Small business

Sunny Sunny

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A new regulatory regime for Crowd Sourced Equity FundingThe Government has announced a commitment of $7.8m over four years from 2015-16, to implement and monitor a regulatory framework to facilitate the use of Crowd Sourced Equity Funding (CSEF). CSEF is an emerging form of funding that has the potential to provide finance for innovative business ideas that may struggle to attract funding under more traditional models. A total of $2.6m has been allocated to the 2015-16 financial year, indicating that the regulatory framework may be in place by the end of that year. This announcement follows the release of a Government Discussion Paper on CSEF in December 2014.

The measures form part of a suite of announcements designed to encourage start-ups and entrepreneurship, by making it easier for small businesses to access the capital they need to grow, whilst at the same time cutting red-tape through simplified reporting and disclosure requirements.

Whilst the Government’s financial commitment is minor, with the specific makeup of the legislation still unknown, it is a positive sign that the Government has reaffirmed its commitment to providing funding alternatives to small business that will help Australia’s brightest and talented entrepreneurs create business opportunities in Australia.

CGT roll-over relief for small business restructuresFor “small businesses” (i.e. businesses with annual turnover of less than $2m), CGT roll-over relief will be available for restructures that occur from 1 July 2016.Presently, CGT roll-over relief is available for sole traders and trusts that move to a company structure. There is very little detail on the proposed measure at this stage. However, we are hopeful that the measure will extend relief to situations where a sole trader wishes to move to a trust or partnership structure, or where a company structure wishes to adopt a trust structure for its business.

This is a very welcomed change. However, to the extent that integrity measures limit the roll-over on moving from trusts to companies and vice versa, the potential benefits of the proposal may be reduced.

Small business

SunnySunny

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Research and development changesChanges limiting research and development (R&D) expenditure eligible for concessional tax offset rates to a cap of $100m were introduced as legislation in March 2015.

The Budget papers confirmed commitment to the $100m expenditure cap. However, the announcement contains some uncertainty as to the R&D rate.

Within the same announcement, the Budget papers note a reduction in the R&D tax offset rates by 1.5 percent for both the refundable and non-refundable R&D tax offsets to 43.5 percent and 38.5 percent respectively. These R&D tax offset reductions were previously announced in the last Federal Budget, but legislation to introduce the changes was blocked by the Senate.

It is therefore unclear whether the Budget papers contain an error in respect of the reduction in the R&D tax offset rate. We expect the rate and its application to small and large businesses to be clarified in the short term.

Managed investment trusts – start date for new regimeThe Government released exposure draft legislation in April containing the proposed new taxation regime for managed investment trusts. It was proposed in the exposure draft legislation that the new regime would commence from 1 July 2015. The new rules for managed investment trusts will now apply from 1 July 2016. However, managed investment trusts can elect to apply the new regime from 1 July 2015.Given that the new regime is only in exposure draft stage and is subject to change, we believe it will be difficult for managed investment trusts to determine whether they should opt in to the new regime from 1 July 2015. This is especially the case in respect of how fund payments will be taxed under the new regime. In our view, a mandatory start date from 1 July 2017 with the ability to choose to apply the new regime from 1 July 2016 would be more appropriate given that the legislation is still to be finalised and the amount of time that managed investment trusts will require to adopt new processes and systems under the new regime.

Corporate tax

Rain Change

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Proposed multinational anti-avoidance rules announcedAustralia’s general anti-avoidance income tax provisions will be enhanced to target foreign multinationals supplying goods or services to Australians “artificially” avoiding creating a permanent establishment (PE) in Australia so as to avoid paying their “fair share” of tax.The measure will apply from 1 January 2016 for multinational groups with global turnover exceeding $1b. Key elements will include the use of an Australian related entity providing services back to the multinational in connection with sales into Australia.

We expect middle market businesses will not be directly impacted. However, there may be more opportunities for such businesses to be independent service providers in Australia to these multinationals who may seek to restructure so as to not trigger these new rules.

The use of a 100 percent penalty, in conjunction with the above measure, is expected to encourage voluntary compliance from these multinationals. However, there is some uncertainty on how much tax will be collected.

Enhanced Transfer Pricing Documentation and Country-by-Country (“CbC”) ReportingAustralia’s transfer pricing documentation and disclosure rules will be more aligned with OECD standards for companies operating in Australia with global revenue of A$1b or more. These large companies will be required to provide the ATO with a CbC report detailing their global activities including where their profits are generated and where they pay tax. It will also require a master file overviewing their global business activities, structure and transfer pricing policies and a local file detailing their Australian entity’s related party transactions.

All three reports will need to be lodged for income years commencing on or after 1 January 2016 within 12 months of the end of the period. There are some exemptions and potential overlap with Australia’s recently introduced transfer pricing record keeping requirements. As such, consideration will be given as to whether the local file will replace (or at least be leveraged from) current transfer pricing documentation requirements for such entities.

However, it remains to be seen whether or not this information will be misused by developing countries seeking to apply global formulatory apportionment to make transfer pricing adjustments – a potential risk which has already been flagged by US Treasury officials and others.

By way of example, using global formulatory apportionment, countries like China could seek to assert taxing rights over some portion of the profits of Australian resource companies supplying goods or services to Chinese customers. Such competing tax claims could be catastrophic for Australian resource companies already hard hit by falling commodity prices.

We welcome the consolidated global revenue threshold of A$1b as a sensible way of relieving SMEs from the additional compliance burden associated with CbC reporting.

International

Stormy Stormy

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Netflix Tax to commence from 1 July 2017The so-called ‘Netflix Tax’ has been formally announced in the Budget but will not commence until 1 July 2017. It is being promoted by the Government as an integrity measure and follows the explosive growth in cross-border supplies of digital products since GST came into effect almost 15 years ago.While the focus has been on imported digital products such as movies, music and e-books, it will also apply to services that are provided from offshore to Australian resident customers. The draft legislation released by the Government with the Budget limits the new regime to business-to-consumer (B2C) transactions. Business-to-business (B2B) transactions where the recipient is GST registered will be excluded on the basis that a GST credit would otherwise be available and therefore no additional net GST revenue would be derived by the government.

Given that the changes are intended to apply to B2C transactions, one of the biggest challenges facing offshore suppliers will be their ability to identify Australian consumers and to confirm whether those consumers are resident in Australia and are not registered for GST purposes. The draft legislation places an obligation on the suppliers to take reasonable steps to confirm the residency and registration status of their customers.

Consumers of digital products and services caught by the new regime are likely to face increased prices from 1 July 2017 in circumstances where the offshore supplier recognises that they have a GST liability and has the ability to increase the prices they charge to their Australian customers.

The draft legislation recognises that there will be a significant number of small suppliers that will be covered by these changes. Where the suppliers provide their product or service through an electronic distribution service, the provider of that service will, subject to certain requirements, become liable for the GST rather than the individual suppliers.

One such measure is the proposed introduction of a new limited registration regime which will give overseas suppliers an option to be part of a simplified GST reporting process, but at the same time to forgo any entitlement to GST credits on their costs. Given that most overseas suppliers would be expected to have minimal GST credit entitlements, this may be attractive as a means of simplifying their administration obligations.

The Organisation for Economic Co-operation and Development (OECD) is currently preparing guidelines for B2C supplies of digital products and services as part of the OECD/G20 base erosion and profit shifting project. These guidelines are expected to be finalised later this year and they will play an important role in shaping the rules to be adopted by Australia in relation to the administration of this new regime.

In the lead up to 1 July 2017 it will be extremely important to ensure that the compliance requirements for the new regime are simple and manageable for the overseas suppliers. To this end, special registration and lodgement rules will be developed by the ATO in consultation with the community.

GST

Stormy

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ATO gets a further $265m for its GST compliance programThe Government will provide an additional $265.5m to the ATO over 3 years from 2016-17 for its GST compliance activities. The additional funds will form part of an extension to the ATO’s existing GST compliance program.The extended compliance activities are forecast to generate additional GST revenue of $1.8b for the States and Territories over the forward estimates period.

SME’s are already subject to regular reviews by the ATO in relation to their GST obligations, including Business Activity Statement (BAS) verification checks, business system reviews and GST audits.

This significant increase in compliance funding will mean that the volume of these reviews will continue to increase over the next 3 to 5 years.

Where the ATO finds errors in an entity’s GST compliance, it is generally able to recover any unpaid GST liabilities going back up to 4 years. This can prove costly both in terms of the additional GST payable as well as penalty and interest charges.

We recommend that all of our clients conduct periodic reviews of their GST systems and reporting processes to pick up any mistakes that may be repeating themselves each period. Regular GST health checks are the best way to protect your business from the next ATO review.

GST-free exemptions are here to stayIn December 2013 the Government announced its intention to remove the GST-free exemptions for supplies of a going concern and supplies of farm land, and to turn them into taxable supplies subject to an optional GST reverse charge mechanism.The Government has now confirmed that this measure will not proceed. We understand that the Government was unable to obtain unanimous agreement from the States and Territories regarding a consistent approach to stamp duty position under a GST reverse charge mechanism.

The GST-free exemptions for supplies of a going concern and supplies of farm land will therefore remain in place.

Pitcher Partners advocated against the proposed removal of these exemptions due to the potential increased GST funding cost and increased stamp duty cost for our clients if they could no longer access these exemptions in respect of their business and property acquisitions. We are pleased that the Government has finally agreed to retain the exemptions and accordingly provide certainty to our clients in relation to the GST treatment of their future acquisitions.

GST

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Small business work related devices From 1 April 2016, the FBT exemption relating to work-related portable electronic devices will be extended to allow small business employers with an aggregated turnover of less than $2m to provide more than one substantially similar work-related portable electronic device annually to each employee (e.g. a tablet and a phablet). Currently, the exemption only allows for another substantially similar work-related portable electronic device to be exempt where it is a replacement for an existing device that was lost, destroyed or obsolete.

Anecdotal evidence suggests that while small business employers may provide these devices to employees, substantially similar devices are generally not provided to employees within the same year.

Not-For-Profit entertainmentFrom 1 April 2016, not for profit organisations offering salary packaging options to employees for meal entertainment and entertainment facility leasing expenses (“EFLE” – e.g. all-inclusive holiday packages and weddings) will be subject to additional capping measures and reporting measures. The additional cap of $5,000 of grossed up taxable value applies to these expenses where the expenses have been provided under salary packaging arrangements, with the total amount now reportable on employee payment summaries for various means tests.

Employees are able to utilise their existing caps to reduce FBT on any excess over the meal entertainment and EFLE expenses cap.

Importantly, the changes will not affect any meal entertainment or EFLE expenses typically provided by employers in the ordinary course of business (i.e. not under salary packaging arrangements – e.g. meals with clients, year-end functions etc).

Not for profit organisations currently utilising salary packaging of meal entertainment and EFLE will be affected in their ability to remunerate and attract key staff. It is also likely to increase the complexity of not for profit provisions.

Employment

SteadySunny

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Employee Share Scheme amendmentsThe Government has announced further changes to enhance the new Employee Share Scheme legislation that will commence from 1 July 2015.Three further technical changes will make employee share schemes more accessible for Australian businesses and their employees.

For companies accessing the start-up concession eligible venture capital investments will be excluded from the $50m aggregated turnover test.

Also, employees will be eligible to utilise the 50 percent CGT discount for their employee share interests where options are converted to shares and the resulting shares are sold within 12 months of exercise.

Finally, the Commissioner will be provided with the ability to exercise his discretion where circumstances outside the employee’s control prevent them from meeting the new minimum three-year holding period for accessing the concessions for options and shares.

Temporary working holiday makersEffective 1 July 2016, temporary working holiday makers will be taxable at the non-resident income tax rate of 32.5 percent, regardless of whether they meet other residency tests. These individuals will no longer have access to the tax free threshold, the low income offset, and the lower tax rate of 19 percent income for income above the tax free threshold up to $37,000.

This may impact ability for small agricultural businesses to attract temporary labour over their harvesting season.

However, we note that employees in Australia on a company sponsored temporary work visa (such as a Temporary Work (Skilled) visa (subclass 457)) will not be impacted by these measures.

We anticipate that these amendments will take effect from 1 July 2015 when the new legislation commences and will further assist the competitiveness of innovative start-up companies in Australia.

Employment

SteadySunny

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