Budget 2016: Business Tax Cuts & Incentives

The Budget introduces a series of tax cuts progressively applied to business.  Significantly, the threshold for accessing some of the small business entity concessions will increase dramatically from the current $2 million threshold to $10 million.

Reducing the Company Tax Rate to 25%

Date of effect: Progressively from 2016-17

The company tax rate will be reduced to 25% over 10 years.  The reduction will initially target companies with a turnover less than $10 million, then gradually increase access:

Year	Company annual aggregated turnover	Tax rate
2016-17	Less than $10 million $10 million or more	27.5% 30%
2017-18	Less than $25 million $25 million or more	27.5% 30%
2018-19	Less than $50 million $50 million or more	27.5% 30%
2019-20	Less than $100 million $100 million or more	27.5% 30%
2020-21	Less than $250 million $250 million or more	27.5% 30%
2021-22	Less than $500 million $500 million or more	27.5% 30%
2022-23	Less than $1 billion $1 billion or more	27.5% 30%
2023-24	All	27.5%
2024-25	All	27%
2025-26	All	26%
2026-27	All	25%

Franking credits will still be calculated with reference to the amount of tax paid by the company paying the dividends.

Tax discount for unincorporated small business entities – trusts, partnerships

Date of effect: Progressively from 1 July 2016

The tax discount for unincorporated small businesses will increase incrementally over 10 years from 5% to 16%.

The tax discount will increase to 8% on 1 July 2016, remain constant at 8% for eight years, then increase to 10% in 2024‑25, 13% in 2025‑26 and reach a new permanent discount of 16% in 2026‑27.  The measure coincides with staggered cuts in the corporate tax rate to 25%.

Year	Tax Discount
1 July 2016 – 30 June 2024	8%
2024-15	10%
2025‑26	13%
2026‑27	16%

The current cap of $1,000 per individual for each income year will be retained.

The tax discount applies to the income tax payable on the business income received from an unincorporated small business entity.  Access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million.

Small business entity threshold jumps to $10m

Date of effect: 1 July 2016

In a significant win for business, the small business entity turnover threshold will increase from $2 million to $10 million from 1 July 2016.  The reform will give a greater number of businesses access to a range of tax concessions such:

• The lower small business corporate tax rate (27.5%);
• Simplified depreciation rules including an immediate write-off for assets costing less than $20,000 that are acquired by 30 June 2017 and depreciation pooling provisions;
• Simplified trading stock rules;
• A different method of calculating PAYG instalments;
• The option of accounting for GST on a cash basis;
• FBT exemptions (this would start from 1 April 2017); and
• A trial system of using a simpler business activity statement.

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

Angel Investor Breaks Expanded

In December last year the Government announced incentives for angel investors that would provide a 20% non-refundable tax offset based on the amount of their investment capped at $200,000 per investor, per year. This would allow the investors to reduce their overall tax liability for the relevant year.

The Government also announced that the incentive would provide a 10-year CGT exemption for investments held for at least three years.

These tax concessions will only be available to investors in eligible companies:

• That undertake an eligible business
• Incorporated during the last three income years
• Are not listed on any stock exchange
• Have expenditure less than $1 million and income less than $200,000 in the previous income year.

The Budget extends the concessions by:

• Reducing the holding period from three years to 12 months for investors to access the 10 year capital gains tax exemption;
• Including in the definition of eligible start-ups a time limit on incorporation and criteria for determining if the startup is an innovation company;
• Requiring that the investor and innovation company are non-affiliates; and
• Limiting the investment amount for non-sophisticated investors to $50,000 or less per income year in order to receive a tax offset.

Venture capital initiatives expanded

In December 2016, the Government announced incentives to encourage venture capital investment including the introduction of a 10% non-refundable tax offset for capital invested in new Early Stage Venture Capital Limited Partnerships (ESVCLPs), and increasing the cap on committed capital from $100 million to $200 million for new ESVCLPs.  The Government also announced plans to remove the requirement for ESVCLPs to divest a company when its value exceeds $250 million.

In addition, the reforms relax eligibility and investment requirements to allow managers to undertake a broader range of investment activities and facilitate a greater diversity of investors.

Investors in ESVCLPs are already entitled to certain tax concessions.

The amendments are expected to apply from 1 July 2016.

The Budget extends these initiatives to:

• Add a transitional arrangement that allows conditionally registered funds that become unconditionally registered after 7 December 2015 to access the tax offset if the criteria are met;
• Relax the requirement for very small entities to provide an auditors’ statement of assets;
• Extend the increase in fund size from $100 million to $200 million for new ESVCLPs to also apply to existing ESVCLPs; and
• Ensure that the venture capital tax concessions are available for FinTech, banking and insurance related activities.

Venture capital initiatives expanded

In December 2016, the Government announced incentives to encourage venture capital investment including the introduction of a 10% non-refundable tax offset for capital invested in new Early Stage Venture Capital Limited Partnerships (ESVCLPs), and increasing the cap on committed capital from $100 million to $200 million for new ESVCLPs.  The Government also announced plans to remove the requirement for ESVCLPs to divest a company when its value exceeds $250 million.

In addition, the reforms relax eligibility and investment requirements to allow managers to undertake a broader range of investment activities and facilitate a greater diversity of investors.

Investors in ESVCLPs are already entitled to certain tax concessions.

The amendments are expected to apply from 1 July 2016.

The Budget extends these initiatives to:

• Add a transitional arrangement that allows conditionally registered funds that become unconditionally registered after 7 December 2015 to access the tax offset if the criteria are met;
• Relax the requirement for very small entities to provide an auditors’ statement of assets;
• Extend the increase in fund size from $100 million to $200 million for new ESVCLPs to also apply to existing ESVCLPs; and
• Ensure that the venture capital tax concessions are available for FinTech, banking and insurance related activities.

Buying something online? GST will apply to all imported consumer goods

Date of effect: 1 July 2017

Currently, the GST system provides an exemption for goods that are imported into Australia with a value of less than $1,000.  This exemption will be removed so that GST can apply to all goods imported by consumers from 1 July 2017.

In effect, all goods imported by consumers will face the same tax regime as goods that are purchased in Australia.

Overseas suppliers that have an Australian turnover of $75,000 or more will be required to register for, collect and remit GST for all goods supplied to consumers in Australia (regardless of their value), using a vendor registration model.

While this is unlikely to have a direct impact on Australian businesses importing goods from overseas, this should at least level the playing field so that foreign suppliers will need to factor in GST obligations when selling goods to Australian customers.

It will be interesting to see how the ATO enforces these new rules.  The Government has indicated that the measure will be reviewed after two years to ensure that the new rules operate as intended and to take account of any international developments.

UK style diverted profits tax – Further measures to reign in multinationals

Date of effect: 1 July 2017 and applies whether or not a relevant transaction (or series of transactions) was entered into before that date

In April 2015, the UK introduced a 25% tax on diverted profits created by activity in the UK.  The intent was to “target large multinational enterprises with business activities in the UK who enter into contrived arrangements to divert profits from the UK by avoiding a UK taxable presence and/or by other contrived arrangements between connected entities.” The UK tax rules apply to entities with sales revenue in the UK greater than £10m.

Australia intends to introduce it’s own version of the diverted profits tax (DPT), applying to multinationals with global revenue of $1 billion or an entity that is a member of a group of entities, consolidated for accounting purposes, which has annual global income of $1 billion or more.  The DPT will:

• Impose a penalty tax rate of 40% on profits transferred offshore through related party transactions with insufficient economic substance that reduce the tax paid on the profits generated in Australia by more than 20%;
• Apply where it is reasonable to conclude based on the information available at the time to the ATO that the arrangement is designed to secure a tax reduction;
• Provide the ATO with more options to reconstruct the alternative arrangement on which to assess the diverted profits where a related party transaction is assessed to be artificial or contrived;
• Impose a liability when an assessment is issued by the ATO (that is, it will not operate on a self-assessment basis);
• Require upfront payment of any DPT liability, which can only be adjusted following a successful review of the assessment; and
• Put the onus on taxpayers to provide relevant and timely information on offshore related party transactions to the ATO to prove why the DPT should not apply.

The Australian DPT will not apply to multinationals with an Australian turnover of less than $25 million unless they are artificially booking their revenue offshore.

The DPT is part of a broader suite of measures including:

• Eliminating hybrid mismatch arrangements where corporates take advantage of differences in the tax treatment of financial instruments or entities in different countries to avoid paying tax;
• Implementing the OECD’s recently updated Transfer Pricing Guidelines to ensure that Australia continues to have best practice transfer pricing rules to help prevent multinationals from using excessive related party payments to shift profits overseas;
• Introducing a new disclosure regime which would require tax and financial advisers to report aggressive tax planning schemes;
• Increased protection measures for people who disclose information about tax misconduct to the ATO; and
• Establishing a new Tax Avoidance Taskforce within the ATO to enhance its audit activity for large corporates and high wealth individuals.

SOURCE: Knowledge Shop

To discuss how this may impact your circumstances please contact PPT on (03) 5331 3711.

DISCLAIMER: The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.