The Federal Treasurer, Mr. Joe Hockey handed down his second Federal Budget speech on 12 May 2015. The Budget Papers predict a deficit of $35bn next year, down to a $6.9bn deficit in another 3 years’ time in 2018-19.

Arguably, the cornerstone of this budget is to provide tax relief to Small to Medium size Enterprise business (SME). A strong focus in this Budget is to lift productivity and drive growth by encouraging workforce participation and supporting small business.  There is also a focus on integrity measures in both the taxation and welfare systems.

A staggering $10bn has been allocated to families and small businesses; some suggesting that this is a planned measure to help stimulate the economy and also help lift the Coalition’s standing in the polls.

Following, is a summary of the key taxation reforms from the 2015-16 Federal Budget as provided by the National Tax & Accountants Association Ltd (NTAA):

Changes effective Budget Night – 7.30pm (AEST) 12 May 2015
Expanding accelerated depreciation for small business – immediate write-off and small business pool
The government will significantly expand accelerated depreciation for small businesses – by allowing small businesses with aggregate annual turnover of less than $2 million to immediately deduct assets they start to use or install ready for use, provided the asset costs less than $20,000.

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool (‘the pool’) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

The government will also suspend the current ‘lock out’ laws for the simplified depreciation rules until 30 June 2017. Currently, these ‘lock out’ rules prevent small businesses from re-entering the simplified depreciation regime for five years, if they opt out.

From 1 July 2017, the thresholds for the immediate depreciation of assets and the value of the pool will revert back to existing arrangements (which are currently based on a ‘less than $1,000’ threshold).

Changes effective 1 July 2015 (2015/16 income year)
Tax cuts for small business – 1.5% tax cut for small companies and 5% discount on income tax payable for unincorporated small business activity
From the 2015/16 income year, the government will deliver a tax cut to all small businesses:

  • Reduction in company tax rate – The company tax rate will be reduced to 28.5% for companies with aggregated annual turnover of less than $2 million. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30% rate on all their taxable income.

Note that, the current maximum franking credit rate for a distribution will remain at 30% for all companies, maintaining the existing arrangements for investors, such as self-funded retirees.

  • 5% discount on tax payable for other taxpayers – Individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be 5% of the income tax payable on the business income received by an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and will be delivered as a tax offset.

Changes to the existing car expense claim methods
Currently, an individual (or a partnership which includes at least one individual partner) can claim car expense deductions in respect of a car owned or leased using one of the four methods in Division 28 of the ITAA 1997 (i.e., the ‘cents per km method’, the ‘12% of original value method’, the ‘one-third of actual expenses method’ or the ‘log book method’).

From the 2015/16 income year, the government will modernise the methods of calculating work-related car expense deductions, as follows:

  • The ‘12 per cent of original value method’ and the ‘one-third of actual expenses method’ (which are used by less than 2% of those who claim work-related car expenses) will be removed.
  • The ‘cents per kilometre method’ will be modernised by replacing the three current (cents per kilometre) rates based on engine size, with one rate set at 66 cents per kilometre (in respect of all cars). The Commissioner will be responsible for updating the rate in following years.

Better targeting of Zone Tax Offset (‘ZTO’) to exclude ‘fly-in fly-out’ and ‘drive-in drive-out’ workers (‘FIFO/DIDO workers’)
The ZTO is a concessional tax offset available to individuals in recognition of the isolation, uncongenial climate and high cost of living associated with living in identified locations. Eligibility for the ZTO is based on defined geographic zones.

Currently, to be eligible for the ZTO, a taxpayer must reside or work in a specified remote area for more than 183 days in an income year. It is estimated that around 20% of all claimants do not actually live full-time in the relevant zone. Many of these are FIFO/DIDO workers who do not face the same challenges of remote living that the ZTO was designed to address.

From 1 July 2015, the government will exclude FIFO/DIDO workers from the ZTO where their normal residence is not within a particular ‘zone’. Furthermore, for those FIFO/DIDO workers whose normal residence is in one zone, but who work in a different zone, they will retain the ZTO entitlement associated with their normal place of residence.

Immediate deduction for professional expenses on commencing a new business
Currently, some professional costs associated with commencing a new business (i.e., black hole expenditure) are deducted over a five-year period under S.40-880 of the ITAA 1997.

From 1 July 2015, the government will allow businesses to claim an immediate write-off for a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice.

Release of superannuation for terminal medical condition – relaxing the release criteria
Broadly, before an individual with a terminal medical condition can currently access their preserved superannuation benefits (generally as a tax-free lump sum), two registered medical practitioners (including a specialist) must certify, jointly or separately, that the person is likely to die within a one-year period.

To give terminally ill patients earlier access to their superannuation entitlements. From 1 July 2015, the government will extend access to superannuation for people with a terminal medical condition by extending the above certification period to two years.

Changes effective 1 July 2016 (i.e., 2016/17 income year)
CGT roll-over relief for changes to entity structure
CGT roll-over relief is currently available for individuals who incorporate, but other entity type changes have the potential to trigger a CGT liability. From 1 July 2016, the government will allow small businesses with an aggregated annual turnover of less than $2 million to change legal structure without attracting a CGT liability at that point. This measure recognises that new small businesses might choose an initial legal structure that they later find does not suit them when the business is more established.

Accelerated depreciation for primary producers
Currently, the effective life for fences is up to 30 years, water facilities is three years and fodder storage assets is up to 50 years. For income years commencing on or after 1 July 2016 (i.e., from the 2017 income year), the government will allow all primary producers to:

  • immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills; and
  • depreciate all capital expenditure on fodder storage assets such as silos and tanks used to store grain and other animal feed over three years.

FBT announcements
Relaxing the FBT exemption for work-related electronic devices
Currently, an FBT exemption under S.58X of the FBT Act applies in respect of eligible work-related items. In respect of a portable electronic device, the FBT exemption generally does not apply to multiple items provided by an employer to an employee in the one FBT year, where those multiple items have substantially identical functions.

From 1 April 2016, the government will allow an FBT exemption for small businesses (with an aggregated annual turnover of less than $2 million) that provide employees with more than one qualifying work-related portable electronic device, even where the items have substantially similar functions. It appears that, consistent with the current rules, the FBT exemption will only apply if the relevant item is primarily for use in the employee’s employment.

Removing the restriction that a tax exemption is only provided for one work-related portable electronic device of each type will remove confusion where there is a function overlap between different products (such as between a tablet and a laptop).

Other Budget announcements
GST-related measures announced by the government
The government has announced various GST-related measures, broadly as follows:

  • Cross border supplies of digital products and services – From 1 July 2017, GST will be extended to cross border supplies of digital products and services imported by consumers.
  • GST-free treatment for supplies of going concerns and farmland – The government will not proceed with the previously announced but unenacted measure to replace the current GST-free treatment for supplies of going concerns and farmland with a reverse charge mechanism.
  •  GST compliance – The government will provide $265.5 million to the Australian Taxation Office over three years from 2016/17 to continue a range of activities to promote GST compliance.

Changes to Parental Leave Pay (‘PLP’)
Currently, individuals are able to access government assistance in the form of PLP, in addition to any employer-provided parental leave entitlements.

From 1 July 2016, the government will remove the ability for individuals to ‘double dip’, by taking payments from both their employer and the government. The government will ensure that all primary carers would have access to parental leave payments that are at least equal to the maximum PLP benefit (currently 18 weeks at the national minimum wage).

Child care (workforce participation stream)
A new single Child Care Subsidy (‘CCS’) will be introduced on 1 July 2017. Families meeting the activity test with annual incomes up to $60,000 (2013/14 dollars) will be eligible for a subsidy of 85% of the actual fee paid, up to an hourly fee cap. The subsidy will taper to 50% for eligible families with annual incomes of $165,000.

The CCS will have no annual cap for families with annual incomes below $180,000. For families with annual incomes of $180,000 and above, the CCS will be capped at $10,000 per child per year. Eligibility will be linked to a new activity test.

The CCS will replace the current child care fee assistance provided by the Child Care Benefit, Child Care Rebate and the Jobs, Education and Training Child Care Fee Assistance payments which will cease on 30 June 2017.

Additional support will be provided to eligible disadvantaged or vulnerable families through the introduction of a ‘Child Care Safety Net’.

Furthermore, the 2015/16 Federal Budget announces the introduction of a new Interim Home Based Carer Subsidy Programme, which is a limited pilot programme to subsidise care provided by a nanny in a child’s home from 1 January 2016.

Change to the asset test thresholds for the aged pension
The government will increase the asset test thresholds at which pensions are reduced once the threshold is exceeded, as follows:

  • For a single person – a full pension may be received if the relevant value of included assets (i.e. assets other than excluded assets) is less than $250,000 for a homeowner (currently $202,000).
  • For a pensioner couple – a full pension may be received if the relevant combined value of included assets is less than $375,000 for a homeowner (currently $286,500).

Non-home owner pensioners will also benefit by an increase in their threshold to $200,000 more than homeowner pensioners.

However, the current ‘taper rate’ at which the age pension begins to phase out will be increased from $1.50 to $3 for every $1,000 of assets over the relevant assets test threshold.

Pensioners who lose pension entitlements on 1 January 2017 as a result of these changes will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card for those under Age Pension age.

Research and Development (‘R&D’) tax incentive – introducing a $100 million expenditure cap from 1 July 2014
Currently, under the R&D tax incentive, companies can claim a refundable tax offset of 43.5% if their turnover is less than $20 million, or a non-refundable tax offset of 38.5%.

The government has introduced a cap of $100 million on the amount of eligible R&D expenditure for which companies can claim a tax offset at a concessional rate under the R&D tax incentive. Expenditure beyond the $100 million cap will receive a lower offset at the company tax rate.

These changes apply in relation to assessments for income years commencing on or after 1 July 2014. This measure also includes provisions for the changes to be reviewed five years following Royal Assent and to sunset 10 years following the start date of 1 July 2014.

Please feel free to contact our office on 03 9081 0400 should you wish to discuss how these changes will specifically affect you and your business.