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2016/2017 Federal Budget

Individual Tax

Review by Accountants & Tax Agents Pty Ltd Julius Mather – Managing Director

Income tax rates

We see in this Federal Budget a modest attempt to address the current bracket creep via the announced proposal to increase the threshold at which the second-highest marginal tax bracket of 37 per cent begins to apply, from $80,001 to $87,001. According to the Government’s modelling, this will prevent approximately 500,000 taxpayers from entering this tax bracket until the 2019-20 income year.

The proposed tax rates for the coming 2016-17 income year are contained within the tables below:

Taxable income threshold range ($)
Resident individual 2016-17 marginal income tax rate (%)
Non-resident individual 2016-17 marginal income tax rate (%)
0 – 18,200
0
32.5
18,201 – 37,000
19
32.5
37,001 – 87,000
32.5
32.5
87,001 – 180,000
37
37
180,001 +
45
45

The Government has not proposed any extension to the Temporary Budget Repair levy which will apply until 30 June 2017, after which it will be abolished. The levy applies at a rate of 2 per cent on that part of an individual’s taxable income exceeding $180,000.

The Government has also not proposed any changes to the rules for allowing tax deductions for work related expenses.

Medicare

The Medicare levy rate remains at 2 per cent of taxable income.

However, for the 2016-17 year, the Medicare levy low-income thresholds have been increased for singles, families, and single seniors and pensioners. The movements aim to offset growth in the Consumer Price Index (CPI) to ensure that low-income taxpayers are exempt from paying the Medicare levy. The increased thresholds are:

  • Individuals $21,335 (increased from $20,896)
  • Families $36,001 (increased from $35,261), with an additional $3,306 for each dependent child or student (increased from $3,238)
  • Single seniors and pensioners $33,738 (increased from $33,044), senior and pensioner couples $46,966 (increased from $46,000)

Private health insurance and Medicare levy surcharge

The private health insurance rebate percentage is indexed annually at 1 April. Note that the pause on indexation of the Medicare levy surcharge income thresholds is proposed to be extended until 30 June 2021.

Accordingly, the current rebate entitlements and surcharge applicable to those individuals who do not have the appropriate health insurance hospital cover, from 1 April 2016 to 31 March 2017 are as follows:

Full entitlement
Tier 1
Tier 2
Tier 3
Taxable Income
Singles
$90,000 or less
$90,001 – $105,000
$105,001 – $140,000
> $140,000
Families
$180,000 or less
$180,001 – $210,000
$210,001 – $280,000
> $280,000
Rebate
Aged under 65 years
26.791%
17.861%
8.930%
0%
Aged 65 – 69 years
31.256%
22.326%
13.395%
0%
Aged 70 or over
35.722%
26.791%
17.861%
0%
Medicare Levy surcharge
All ages
0.0%
1.0%
1.25%
1.5%

 

Note: For families with children, the thresholds are increased by $1,500 for each child after the first

Other-Negative Gearing

As expected, the Government did not announce any changes to remove or limit ‘negative
gearing’ for rental property investment.

Corporate tax rate reduction for small business entities

In a highly anticipated move, the Federal Government announced that it will reduce the company tax rate from 30 per cent to 27.5 per cent for all incorporated businesses with an annual aggregated turnover of less than $10 million with effect from 1 July 2016.

The corporate tax rate is currently 28.5 per cent for small business entities (broadly, those with annual aggregated turnover of less than $2 million) and 30 per cent for all other companies.

Increased concessions with an increased small business entity threshold

The Government has announced that the small business entity turnover threshold will be increased from $2 million to $10 million from 1 July 2016.

Importantly, all business entities (incorporated or otherwise) that meet the new $10 million aggregated turnover test will be able to access the simplified depreciation rules, including the existing instant asset write-off scheme. This will allow them to claim an immediate deduction for depreciable asset purchases costing less than $20,000 until 30 June 2017.

Increasing access to this scheme will provide significant incentives for many qualifying small businesses to increase their current capital expenditure spend. However, the aftertax consequences of the proposed immediate deduction for depreciating assets should be considered. If this results in a tax loss, there is no immediate cash-flow advantage.

Other concessions to which the increased $10 million threshold will apply from 1 July 2016
include:

  • Simplified trading stock rules, giving them the option to avoid end of year stocktake if the
    value of stock has changed by less than $5,000
  • A simplified method of paying PAYG instalments calculated by the Australian Taxation Office (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 Goods and Services Tax (GST) on a cash basis and pay GST instalments as calculated by the ATO
  • Other tax concessions currently available to small businesses, such as fringe benefits tax (FBT) exemptions (from 1 April 2017 to align with the FBT year)
  • A trial of simpler business activity statements (BAS) reducing GST compliance costs, with a full roll-out from 1 July 2017.

The current $2 million turnover threshold will be retained to access the small business capital gains tax (CGT) concessions, and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.

The introduction of an increased small business threshold is a welcome move as not all small businesses were able to take advantage of the existing concessions due to the low threshold. However, it is disappointing that the Government has not taken the opportunity to apply this $10 million eligibility threshold to all concessions targeted at small businesses.

Small business thresholds will continue to be inconsistent despite this change. This often leads to confusion and increased compliance costs due to the complexity of the rules applicable to the small business sector. For example, the small business CGT concessions require taxpayers to satisfy either the $6 million net asset value test or the $2 million.

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