Budget Brief: Business

Penguin Red 3 Copy5
4
May

Budget Brief: Business

04.05.16

There have been a large number of changes and announcements in relation to the general business environment.  A large number of the changes are focused on driving jobs and growth through small business.  The other changes are generally focused on areas where the Government believe tax reform is required to address inconsistencies within the tax system or where multi nationals have been seen to be accessing loop-holes or complying with the letter but not the spirit of the law.

 

The main changes to have been noted below:

 

ALL BUSINESS

  • A reduction in the company tax rate to 25% rate.  This will be phased in over the next 11 income years starting with a fall to 27.5% with effect from 1 July 2016 for small businesses (determined by reference to turnover). The availability of the threshold increases over time by virtue of a turnover threshold increasing. Franking credits will continue to be calculated in the usual manner, ie by reference to the amount of tax paid by the company making the distribution.
  • Implementation of some of recommendations from the Board of Taxation’s Review into Division 7A (ie private company loans) will take effect from 1 July 2018 after a consultation process.  The changes will be designed to introduce safe harbour rules, simplified loan terms, self correction mechanisms and reduce compliance burdens.  Click here to read our previous article on the Board of Taxation's review.
  • The rules for the formation of a tax consolidated group are to be amended to address unintended integrity risks.  These changes are focused on the determination of the Allocable Cost Amount calculation amount and relate to the exclusion of deferred tax liabilities (applicable from the date legislation is introduced into Parliament) as well as the streamlining of the previously announced change in respect of deductible liabilities (applicable from 1 July 2016).
  • The highly complex area of the Taxation of Financial Arrangements (TOFA) rules are to be reformed with effect for income years commencing on or after 1 January 2018.  The reforms are designed to reduce the scope and increase certainty. Whilst initially designed to apply to only the largest of taxpayers, the TOFA rules as currently enacted apply to smaller taxpayers whilst carrying a high cost of compliance and complexity to these taxpayers.

 

SMALL BUSINESS

The turnover threshold for classification of a business as a small business is to be amended increasing it from $2m to $10m enabling the business to access a number of small business tax concessions (as well as the reduced corporate tax rate) from 1 July 2016.

 

The existing concessions include but are not limited to:

  • the simplified depreciation rules, including immediate tax deductibility for asset purchases under $20,000 (to 30 June 2017);
  • a simplified method of paying PAYG instalments and the ability to account for GST on a cash basis paying GST instalments as calculated by the ATO; and
  • immediate deductibility for various start-up costs and a 12-month prepayment rule.

 

Importantly, the turnover threshold changes will not affect eligibility for the small business CGT concessions, which will only remain available for businesses with annual turnover of less than $2m or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test).  This inconsistency continues to add complexity and confusion as to what is a small business.

 

Unincorporated business will receive an increased tax discount (or tax offset) over a 10-year period from 5% to 10%. The discount increases to 8% on 1 July 2016 and then increase to 10% in 2024-25 with further scheduled increased to reach a final discount of 16% in 2026-27. The maximum value of the discount will remain at $1,000.

 

INTERNATIONAL BUSINESS

The introduction of a diverted profits tax (DPT) at a rate of a 40% is a further attempt by the government to capture tax revenue from multi nationals that have been utilising perceived loop holes.  Whilst titled and styled as a DPT (similar to the UK DPT), it has significant differences from the UK's DPT.

 

The proposed new tax will target companies that relocate profits offshore that result in certain criteria being met including a de minimis threshold for Australian turnover of $25 million and the transactions / entities not having sufficient economic substance.

 

The actual application of the law will be subject to a consultation process but is scheduled to take effect for income years commencing on or after 1 July 2017.