2016-17 Federal Budget: small tax cut to address bracket creep, major tax help for SMEs, phased company tax cut, major super tax changes, MNEs targeted, 10-year tax plan, tobacco tax up

On Tuesday, 3 May 2016, Treasurer Scott Morrison handed down the 2016-17 Federal Budget, his 1st Budget.

In the lead up to the Budget, the Government repeatedly emphasised the need for Australia to “live within its means” and that the Government had to carefully examine its expenditures. That theme was strongly confirmed by the Treasurer in his Budget Speech. Mr Morrison said the Budget was “not a typical Budget” in terms of sweeteners etc, but was about the Government’s economic plan for Australia. And of course, with an expected double dissolution election to be held just 2 months after the Budget, on 2 July 2016, the 2016 Budget assumes a greater importance and context than normal.

The Treasurer said the Budget is designed to essentially do 3 things:

• to grow the economy and to support growth in jobs;
• to ensure the tax system is better targeted so it can support investment that drives jobs and growth; and
• to ensure that “we continue on our strong path to Budget balance by keeping our expenditure under control, by living within our means”.

Mr Morrison said the Budget is a national economic plan for jobs and growth for a stronger economy. “It’s not a typical budget”, he said. “This is not a time to be throwing money around, you have to spend money wisely, you have to target it and the ultimate test is will it drive jobs and growth”.

The Treasurer said that the people making the economy work were SMEs and the Budget announced number of changes to support small business, some starting on 1 July 2016.

From a taxation and superannuation point of view, the Budget contained a number of significant announcements. These included modest reform of the tax brackets in an attempt to address tax bracket creep by increasing the $80,000 tax bracket threshold to $87,000, major superannuation changes (balance cap on retirement accounts, lifetime non-concessional contributions cap, transitional to retirement change) a further crackdown on multinational enterprise (MNE) tax avoidance, GST changes on the importation of low-value goods.

The Government also confirmed that the 2% temporary Budget deficit levy (on incomes over $180,000) would expire at the end of the 2016-17 financial year as currently legislated.

While the Budget itself was relatively quiet on GST changes, in a pre-budget interview on Sky News on 1 May 2016, the Prime Minister said there would be no change to the GST in the next Parliament. “We’ve looked very carefully at the proposal to raise the GST … but we’ve rejected it,” Mr Turnbull said. “I can give you this absolute undertaking: there will be no change to the GST in the next parliament,” he said. [Thomson Reuters note: One assumes this means there would be no change to the GST rate or base in the next term of a Coalition Government.]

With an eye on the election, the Treasurer noted that several special appropriation Bills were introduced into the House of Reps on 2 May 2016 which deal “with the unusual situation we have going to an election on the second of July, that will ensure a continuity of supply over the course of the election period”.

The economics

In his Budget Speech, the Treasurer said the deficit in underlying cash balance terms is expected to reduce from $39.9 billion in 2015-16 to $37.1 billion, or 2.2% as a share of the economy in 2016-17. Mr Morrison said the deficit is then projected to fall to $6.0 billion or just 0.3% of GDP over the next 4 years to 2019-20. “We are achieving this by policies that continue to control spending”, he said.

The Government says the economy is forecast to grow by 2.5% in both 2015-16 and 2016-17 and to pick up to 3% in 2017-18. It says the underlying cash balance is expected to improve in each and every year over the forward estimates period, from a deficit of 2.4% of GDP in 2015-16 to 0.3% of GDP in 2019-20. “The budget is projected to return to balance by 2020-21”, the Government said.

Budget documents state that total revenue for 2016-17 is expected to be $416.9 billion, an increase of 5.2% on estimated revenue in 2015-16. Total expenses for 2016-17 are expected to be $450.6 billion, an increase of 4.4% on estimated expenses in 2015-16.

The Government said it has committed a record $50 billion in infrastructure investment between 2013-14 and 2019-20 for roads, rail, airports and dams.

The Treasurer said payments as a share of the economy will fall from 25.8% in 2015-16 down to 25.2% in 2019-20. At the same time, there is no increase in the projected tax burden as a share of the economy, compared to the 2015-16 Budget, Mr Morrison said.

An outline of the major revenue-related announcements is given below.

Revenue measures announced

The major revenue measures announced in the Budget included:

• increasing the tax bracket at which the 37% tax rate starts from $80,001 to $87,001, to start from 1 July 2016;
• a phased reduction in the company tax rate over 10 years;
• major SME tax changes – small business threshold to be increased to $10 million, reduced tax rates for small business;
• significant new measures directed at MNE tax avoidance eg a diverted profits tax, hybrid mismatch measures, strengthened transfer pricing rules, significant increase in administrative penalties;
• superannuation eg:
  • $1.6m transfer balance cap for retirement accounts;
  • Non-concessional contributions: $500,000 lifetime cap from Budget night;
  • Concessional contributions cap cut to $25,000 from 1 July 2017;
  • Concessional contributions catch-up for account balances less than $500,000;
  • Superannuation contributions tax (extra 15%) for incomes $250,001+;
  • Transition to retirement income streams – integrity proposal.
• The Government is to impose GST on goods imported by consumers regardless of value. The new rules will commence on 1 July 2017.

Although speculated before the Budget, the Government did not announce any changes to Australia’s thin capitalisation rules. There had been media speculation that the Government would reduce the permitted “thin capitalisation” ratio from its current 1.5:1(60% / 40%) down to 1:1 (50% / 50%) thus reducing tax deductions for some highly geared corporate groups. This did not happen.

Australia has had a “thin cap” regime since 1987, although it was completely rewritten and “internationalised” in 2001.  The rules operate to deny “excess” interest expense deductions, with various limits:

• A “safe harbour” debt amount;
• An arm’s length debt amount; and
• A worldwide gearing level.

The “safe harbour” ratio was originally 3:1 (on a debt:equity basis), but was reduced to 1.5:1 for the 2014-15 income year.  (These ratios translate to 75% / 25% and 60% / 40% on a debt to total assets basis).

More information on the tax and related announcements is also contained in a number of Budget press releases on the Treasurer’s website and the Assistant Treasurer’s website.

Source: Thomson Reuters Weekly Tax Bulletin 18 – 3/5/16 – SPECIAL ISSUE – 2016 FEDERAL BUDGET