Australian Federal Budget 2016-2017: Part Two

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

Tom Seymour PwC, Australia

Tom Seymour is Managing Partner Tax and Legal, PwC Australia

The 2016-2017 Federal Budget has been presented, setting out the economic and fiscal outlook for Australia. The second part of a two-part article considers personal tax, private business and wealth management changes and takes a look at the forward tax agenda.

I. Personal Tax

Individual taxpayers have been spared any direct tax increases in the 2016–2017 Federal Budget, but some high income earners are likely to be impacted by a range of other measures announced as part of the budget, including the reforms to superannuation. Some middle income earners have been afforded modest tax relief with a slight change to the threshold from which the second highest marginal tax bracket applies.

A. Income Tax Rates

It is well known that as the average income of Australians increases with wage inflation, without a corresponding change in income tax thresholds, an increasing number of taxpayers find themselves in higher marginal tax brackets—otherwise known as “bracket creep”. It is becoming inevitable that any comprehensive reform of the tax system will ultimately need to address this issue, since bracket creep if left unchecked has the potential to reduce workplace participation. 1 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% begins to apply, from AU$80,001 to AU$87,001. According to the Government's modeling, 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 in Table 1.

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

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

Table 2 sets out a comparative of the amount of income tax and Temporary Budget Repair levy payable on a range of taxable income amounts of a resident individual for the current tax year and for the year commencing July 1, 2016, ignoring the Medicare levy and surcharge, the low income tax offset and any other tax offset entitlements.

Table 1 Proposed tax rates for 2016-2017 Taxable income threshold range ($) Resident individual 2016–17 marginal income tax rate (%) Nonresident individual 2016-17 marginal income tax rate (%) –18,200 0 32.5 18,201–37,000 19 32.5 37,001–87,000 32.5 32.5 87,001–180,000 37 37 180,001 + 45 45 Table 2 Income tax and Temporary Budget Repair levy payable Taxable income ($) 2015–16 tax payable ($) 2016–17 tax payable ($) Temporary Budget Repair levy ($)—remains same for both tax years 2015–16 total payable ($) 2016–17 total payable ($) 37,000 3,572 3,572 0 3,572 3,572 75,000 15,922 15,922 0 15,922 15,922 100,000 24,947 24,632 0 24,947 24,632 150,000 43,447 43,132 0 43,447 43,132 180,000 54,547 54,232 0 54,547 54,232 200,000 63,547 63,232 400 63,947 63,632 300,000 108,547 108,232 2,400 110,947 110,632 400,000 153,547 153,232 4,400 157,947 157,632
B. Medicare

The Medicare levy rate remains at 2% 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 to ensure that low-income taxpayers are exempt from paying the Medicare levy. The increased thresholds are:

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

1. Private Health Insurance and Medicare Levy Surcharge

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

Accordingly, the current rebate entitlements and surcharge applicable to those individuals who do not have the appropriate health insurance hospital cover, from April 1, 2016 to March 31, 2017 are as set out in Table 3.

Table 3 Current rebate entitlements and Medicare levy surcharge 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 AU$1,500 for each child after the first.

C. Other

As expected, the government did not announce any changes to remove or limit “negative gearing” for rental property investment.

The government also made no announcement in regards to the so-called “backpacker tax” measures which were announced in the 2015–16 Budget. The original proposal (which was scheduled to apply from July 1, 2016) to treat most working holidaymakers to Australia as nonresidents for tax purposes, regardless of the length of time of their working holiday, has most recently been subject to further consideration.

II. Superannuation

Superannuation has been a strong focus of this year's Federal Budget. A raft of changes have been announced; some will impact on the ability of Australians to save for their retirement, while other measures will provide incentives and opportunities for lower income earners to bolster their superannuation savings. The following measures were announced as part of the government's superannuation reform package to improve the sustainability, flexibility and integrity of the super system.

A. Reduced Concessional Contribution Caps

With effect from July 1, 2017, concessional contribution caps, i.e. for contributions which come from pre-tax income, are to be reduced to AU$25,000 per annum (currently set at AU$30,000 for those individuals aged under 50 and AU$35,000 for those over 50 years of age), limiting the ability of people to grow their retirement savings.

However, Australians will now be given the opportunity to make additional concessional contributions where they have not reached concessional contribution caps in prior years. This measure, which will apply from July 1, 2017, will only be available to those individuals with super balances less than AU$500,000, and will enable a carry forward of “unused cap amounts” to allow a catch up on contributions. This measure is intended to allow people with interrupted work patterns (for example women or carers) to accumulate superannuation balances commensurate with those who do not take breaks from the workforce.

B. Removal of 10% Rule for Deductible Personal Contributions

From July 1, 2017, Australians up to age 75 will have the ability to claim a deduction for personal superannuation contributions regardless of their work circumstances. This will negate the need for salary sacrificing arrangements with employers and enable people to claim a deduction to top up their super contributions up to the new concessional contribution cap.

C. Decreased Threshold for “Division 293 Tax”

From July 1, 2017, the government will be reducing the threshold at which high income earners pay an additional 15% tax (commonly referred to as “Division 293 tax”) on their concessional superannuation contributions from AU$300,000 to AU$250,000.

D. Non-concessional (Aftertax) Contributions

A lifetime cap will be applied to non-concessional contributions. The new AU$500,000 lifetime cap takes effect immediately and applies to all non-concessional contributions made on or after July 1, 2007. However, amounts made before 7.30pm on May 3, 2016 (Budget night) cannot result in an excess. This new lifetime cap will replace the current non-concessional annual cap of AU$180,000 (six times the concessional contributions cap) as well as the three-year bring forward provisions that enabled contributions up to AU$540,000 to be made.

E. Work Test for Contributions

From July 1, 2017, the age at which Australians will have to satisfy a work test in order that they are able to make superannuation contributions will be increased from 65 to 74 years of age. This will facilitate people being able to improve their retirement savings for a longer period of time regardless of their working arrangements.

F. Contributions for Low Income Spouses

The ability to claim a tax offset of up to AU$540 per annum for spouse contributions has become more accessible with the income threshold for spouses increased from AU$10,800 to AU$37,000. This measure is intended to apply from July 1, 2017.

G. AU$1.6 Million Cap on Retirement Phase

The government has announced it will restrict the amount of a person's superannuation balance that can be transferred into pension phase, which attracts greater concessional tax treatment, to AU$1.6 million. While this does not restrict a person's ability to save in superannuation, balances above this amount will still be deemed to be in accumulation phase attracting the normal 15% tax rate on earnings. This measure will take effect from July 1, 2017. Those already in “pension” phase will be expected to reduce their retirement balance to AU$1.6 million by July 1, 2017, with the option of returning the excess amounts back to accumulation.

H. Low Income Superannuation Tax Offset

Effectively replacing the Low Income Super Contributions scheme, from July 1, 2017, low income earners will receive a tax offset (to their super fund) to compensate for tax paid on their super contributions. A non-refundable tax offset up to AU$500 will be paid to superannuation funds for those members for whom concessional contributions have been made, with adjusted taxable incomes of less than AU$37,000. This avoids the situation where low income earners were paying more tax on their super contributions than if they received this money as direct salary or wages.

I. Transition to Retirement Income Streams

Although it is not proposed to abolish Transition to Retirement Income Streams (“TRIS”s), the government has announced that earnings from assets supporting these benefits will no longer be eligible for tax exemptions. It appears these income streams will remain available to those who have reached preservation age (currently 56 years) regardless of any changes to their work circumstances; however the taxation of the earnings within the fund will be the same as if the fund was in accumulation phase (15%). This measure will apply to all TRISs from July 1, 2017.

J. Income Streams Taxed as Lump Sums

The government has announced that from July 1, 2017, it will remove rules that currently allow an election to be made for certain income stream payments to be taxed as lump sums.

K. Anti-detriment Payments to be Abolished

As predicted in the lead up to the budget, the government has announced that it will repeal the anti-detriment payment rules for payments after June 30, 2017.

These provisions enabled a refund of a member's lifetime super contributions tax payments to be paid to their dependants as part of a death benefit payment. Considered to be inconsistently applied and difficult to administer, this will potentially diminish the amount of a death benefit payment to dependants.

III. Private Business

Small businesses with aggregated annual turnover of less than AU$10 million appear to be the winners under this year's Federal Budget Ten Year Enterprise Tax Plan which is intended to encourage Australians to work, save and invest.

A. 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% to 27.5% for all incorporated businesses with an annual aggregated turnover of less than AU$10 million with effect from July 1, 2016.

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

The threshold will then be progressively increased to have all companies ultimately at 27.5% in the 2023–24 income year. The annual aggregated turnover thresholds for companies facing a tax rate of 27.5% are set out in Table 4.

Table 4 Annual aggregated turnover thresholds for companies facing tax rate of 27.5% Income year Annual aggregated turnover threshold 2016–17 $10 million 2017–18 $25 million 2018–19 $50 million 2019–20 $100 million 2020–21 $250 million 2021–22 $500 million 2022–23 $1 billion 2023–24 No threshold

In the 2024–25 income year the company tax rate will be reduced to 27% and will then be reduced progressively by one percentage point per year until it reaches 25% in the 2026–27 income year.

Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution. It is unclear how the phasing of the corporate tax reduction will apply to investment companies, i.e. non-business entities.

The lowering of the small business corporate tax rate to 27.5%, coupled with an increase of the qualifying threshold to AU$10 million from July 1, 2016, is expected to bring early significant cash flow benefits to those small businesses operated through corporate entities.

However, the increased differential between the corporate tax rate and the top marginal tax rate will also have the effect of increasing the amount of “top up tax” payable when private company profits are ultimately distributed to shareholders. Small businesses will therefore need to consider the tax profile of their shareholders and their capacity to frank dividends when considering their annual dividend strategies.

B. Increased Concessions with an Increased Small Business Entity Threshold

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

Importantly, all business entities (incorporated or otherwise) that meet the new AU$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 AU$20,000 until June 30, 2017.

Increasing access to this scheme will provide significant incentives for many qualifying small businesses to increase their current capital expenditure spend. However, the after-tax 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 AU$10 million threshold will apply from July 1, 2016 include:

  •  simplified trading stock rules, giving the option to avoid end of year stocktake if the value of stock has changed by less than AU$5,000;
  •  a simplified method of paying pay as you go (“PAYG”) instalments calculated by the Australian Taxation Office (“ATO”) which removes the risk of under or overestimating 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 April 1, 2017 to align with the FBT year);
  •  a trial of simpler business activity statements reducing GST compliance costs, with a full roll-out from July 1, 2017.

The current AU$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 AU$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 AU$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 AU$6 million net asset value test or the AU$2 million aggregated turnover test. In contrast a AU$20 million aggregated turnover test applies for the research and development refundable tax offset rules and debt/equity rules.

Private business could benefit from having a consistent set of thresholds applying, and would have greater access to these small business concessions if the thresholds were increased and indexed annually.

C. Expanding the Unincorporated Small Business Tax Discount

The government will increase the tax discount for unincorporated small businesses incrementally over 10 years from 5% to 16%. The tax discount will increase to 8% on July 1, 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 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 AU$5 million. The current cap of AU$1,000 per individual for each income year will be retained.

D. Private Company Deemed Dividends

The government has announced that from July 1, 2018 it will make much-needed amendments to improve the operation and administration of the private company deemed dividends rules (Division 7A of the Income tax Assessment Act 1936) based on the Board of Taxation's 2015 Post-implementation Review into Division 7A.

These changes are intended to provide clearer rules for taxpayers and assist in easing their compliance burden while maintaining the overall integrity and policy intent of Division 7A. The changes include:

  •  a self-correction mechanism for inadvertent breaches of Division 7A;
  •  appropriate safe-harbor rules to provide certainty;
  •  simplified loan arrangements and a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.

We eagerly await the release of further details in relation to these measures.

IV. Taxation of Financial Arrangements

The government has announced major reforms to the taxation of financial arrangements (“TOFA”) rules to reduce their scope, decrease compliance costs and increase certainty through the redesign to the TOFA framework. The new simplified rules will apply to income years commencing on or after January 1, 2018, and represent the culmination of two years of work by the Board of Taxation and Treasury to overhaul the TOFA framework.

The existing TOFA provisions were introduced in two tranches in 2003 (in relation to foreign exchange gains and losses) and in 2009 in respect of a broader range of financial arrangements. Since their introduction, these rules have been broadly criticized for increasing complexity and uncertainty for both small and large taxpayers. In this budget announcement, the government has acknowledged that the 2009 amendments failed to deliver the anticipated compliance and simplification benefits, and has framed these changes up as “regulation reform”.

The proposed new rules will contain four key components:

  •  a “closer link to accounting” which will strengthen and simplify the existing link between tax and accounting in the TOFA rules;
  •  simplified accruals and realization rules, which will significantly reduce the number of taxpayers in the TOFA rules, will reduce the arrangements where spreading of gains and losses is required under TOFA and simplify the required calculations;
  •  a new tax hedging regime which is easier to access, encompasses more types of risk management arrangements (including risk management of a portfolio of assets), and removes the direct link to financial accounting;
  •  simplified rules for the taxation of gains and losses on foreign currency to preserve the current tax outcomes but streamline the legislation.

The simplified accruals and realization rules, which should see a simpler basis of taxation for many interest-bearing securities and remove the need for complex accruals calculations in many cases, will be welcomed by most taxpayers , whilst the closer link to accounting will assist more sophisticated taxpayers with complex financial arrangements. It is also pleasing to see an acknowledgement of the limitations of the current hedging regime with plans to introduce a more flexible regime that should be accessible to a wider range of taxpayers. It is hoped that this will include fund managers and superannuation funds that have had difficulties accessing the current regime.

According to the budget announcement, it will result in lower compliance costs, and provide simpler rules and more certainty whilst maintaining the objectives of reducing costs and minimizing distortions in decision making.

As part of this reform, the government has also indicated that it will incorporate the policy reflected in a number of measures which have previously been announced, but are not yet legislated. These are:

  •  taxation of financial arrangements —amendments to tax hedging rules; first announced in the 2011–12 Budget;
  •  functional currency rules—extending the range of entities that can use a functional currency; first announced in the 2011–12 Budget;
  •  taxation of financial arrangements —foreign currency regulations —technical and compliance cost savings amendments; first announced in the Mid-Year Economic and Fiscal Outlook 2004–05.

Whilst the start date is nearly two years away, it remains to be seen if the government can meet this ambitious time frame, considering that the previous iterations of TOFA were nearly 20 years in the making. As with any changes to the tax law of this extent, the devil will be in the detail. We will need to “watch this space” closely as it unfolds over the next two years.

A. Removing Barriers to the Use of Asset-backed Financing

The government has also announced that it will remove key barriers to the use of asset-backed financing arrangements, that is, financing arrangements which are supported by assets such as deferred payment arrangements and hire purchase arrangements. These amendments will ensure that these arrangements are treated in the same way as financing arrangements based on interest-bearing loans or investments, and improve access to more diverse sources of capital in Australia. This measure will apply from July 1, 2018.

V. Asset and Wealth Management
A. Government to Introduce new Collective Investment Vehicles

To complement the commencement of the Asia Region Funds Passport (the “Passport”), the government has committed to the introduction of two new types of collective investment vehicles (“CIV”s)—a corporate CIV and limited partnership CIV, both of which will have flow through status for tax purposes. The corporate CIV will be introduced for income years starting on or after July 1, 2017, with the limited partnership CIV to follow one year later. The new CIVs will be required to meet similar eligibility criteria as managed investment trusts, such as being widely-held and engaging primarily in passive investment.

Managed investment trusts are currently the most common form of CIV in Australia; however, many foreign investors are unfamiliar with trusts and this acts as a blocker for inbound investment into Australia. The introduction of these new vehicles is a welcome move which should increase the global competitiveness of Australia's funds management industry, and it is pleasing that the government has committed to implementing these measures swiftly to align with the commencement of the Passport in 2017.

The Passport is an international initiative that facilitates the cross-border offering of eligible collective investment schemes while ensuring investor protection in participating jurisdictions. According to the Statement of Intent signed by Australia in September 2013, the Passport aims to

facilitate the growth and competitiveness of financial markets in the region and the fund management industry, creating a common framework that has the effect of reducing the regulatory inconsistency and overlap faced by collective investment scheme operators seeking to offer CIS [Collective Investment Schemes] in multiple economies.

The Asian region is a growth area for funds management, with AU$4.5 trillion assets under management as at June 2015. A broader range of CIVs combined with the Passport and the new Attribution Managed Investment Trust regime will help Australian funds get a foothold throughout the broader Asian region.

Late April 2016 the Assistant Treasurer and Minister for Small Business signed the Passport Memorandum of Cooperation which sets out the internationally agreed rules and cooperation mechanisms of the Passport, and comes into effect on June 30, 2016. From this time, participating economies have up to 18 months to implement their domestic arrangements to support the Passport. It is expected that the first Passport-compliant schemes will be offered in 2017. 2

VI. Indirect Tax
A. Goods and Services Tax
1. Extending GST to Low Value Goods Imported by Consumers

Subject to the unanimous agreement of the States, the government has announced that the GST will apply to low value goods imported by consumers from July 1, 2017.

Similar to the measures announced in last year's budget in relation to the supply of digital services and intangibles by nonresidents to Australian consumers, overseas suppliers that have an Australian turnover greater than AU$75,000 will be required to register for, collect and remit GST on the sale of low value goods to Australian consumers.

These arrangements will be reviewed in two years to ensure they are operating as intended and to take account of any international developments.

It is estimated this measure will increase GST payments to the States and Territories by AU$270 million over the forward estimates. This measure should also ensure that Australian and foreign suppliers of goods are treated equally under the GST law. Furthermore, imposing GST on the foreign supplier (rather than on the entry of the goods into Australia) should ensure that goods are not unduly delayed during customs clearance procedures.

2. Small Business GST Concessions Extended

As noted earlier, the government announced in the budget that it will increase the small business turnover threshold from AU$2 million to AU$10 million. This will provide small businesses with a turnover less than AU$10 million the option to elect to account for GST on a cash basis (rather than accruals) or to pay GST by instalments (as prescribed in the GST law).

This measure is designed to ease the tax burden on small businesses.

B. Increased Integrity Measures for the Wine Equalization Tax

To address a range of integrity concerns with the Wine Equalization Tax (“WET”) identified by the Treasury in a 2015 discussion paper, the WET rebate cap has been reduced and eligibility criteria tightened.

The cap will gradually reduce from AU$500,000 currently to AU$350,000 on July 1, 2017, followed by a further reduction to AU$290,000 by July 1, 2018. In addition, tighter eligibility criteria will apply from July 1, 2019. While we do not have the detail on specific eligibility criteria which may be introduced, based on the 2015 discussion paper, measures may include:

  •  tightening the definition of “producer of wine”;
  •  restricting eligibility to exclude bulk, unpackaged and unbranded wine;
  •  requirements to demonstrate payment of WET to access a rebate.

What can be concluded though, is that these measures will close perceived loopholes relating to the administration of the WET rebate and reduce the impact of the scheme on the budget bottom line.

C. Customs
1. Australian Trusted Trader

The Australian Government's trade facilitation pilot program, Australian Trusted Trader (“ATT”), has been fully funded to the tune of AU$69.9 million over four years. This funding includes AU$6.3 million in capital expenditure to facilitate implementation of the required people, process and systems changes to support ATT's ongoing operation. During a pre-budget announcement, the Minister for Immigration and Border Protection affirmed the government's commitment to ATT and the role the program plays in the achievement of Australia's G-20 growth strategy.

The announcement, and the size of initial funding allocated by the government, has provided the assurance that the Australian Border Force (“ABF”) will have access to sufficient resources to deliver real benefits to participants. It also helps to quell doubts of the capability of the ABF to work with industry and explore bespoke benefits that may be achievable for Trusted Traders under the umbrella of the ATT program.

Named benefits to be implemented in forward years include periodic and streamlined reporting, duty deferral and streamlined clearance in Australia and abroad. These benefits will reduce international supply chain compliance costs and provide greater certainty.

2. Excise Hike for Tobacco Products

Perhaps the worst-kept secret of the 2016–17 Budget, the expected hike in tobacco excise has received bipartisan support in recent weeks. Forecast to raise AU$4.7 billion over the forward estimates, the government plans to raise tobacco excise and equivalent customs duty by 12.5% per year from September 1, 2017 until 2020.

These measures will build on previous increases of 12.5% over the last four years and will come into effect in September of each forward year. In total, the changes will bring tobacco excise in Australia to almost 69% of the price per stick (based on current prices).

In addition to these changes, the government will make changes to the Customs Act 1901 and Excise Act 1901 to introduce tough new sanctions, including increasing the range of enforcement options available for illicit tobacco offenses. To enforce these sanctions, additional funding to strengthen efforts to combat illicit trade in tobacco has also been allocated, with AU$7.7 million provided over the next two years to support the Department of Immigration and Border Protection's “Tobacco Strike Team.”

D. Other Key Indirect Tax Measures

In addition to these measures:

  •  The government has committed to the signing and implementation of the Trans-Pacific Partnership (“TPP”) Free Trade Agreement—with an associated revenue reduction of AU$195 million from associated tariffs. This relatively small reduction highlights that much has already been achieved through existing Free Trade Agreements with TPP countries.
  •  In accordance with the World Trade Organization Information Technology Agreement, the government will reduce tariffs on information technology products from January 1, 2017. This reduction will be reciprocal and reduce costs associated with IT products for consumers and businesses.
  •  A limited excise refund scheme for distillers and producers of low-strength fermented beverages will be introduced from July 1, 2017, with an estimated cost to revenue of AU$9 million over the forward years.

VII. Other Tax Measures

A. Establishing the Tax Avoidance Taskforce

The government will provide AU$678.9 million to the ATO over the forward estimates period of four years to establish a new Tax Avoidance Taskforce which will consist of around 1,300 jobs in the ATO, including 390 new specialized officers. This will enable the ATO to undertake enhanced compliance activities targeting multinational corporations (“MNC”s), large public and private groups and high-wealth individuals.

According to the Treasurer, this measure provides the ATO with a 55% increase in funding for compliance programs targeting MNCs and high wealth individuals, with a 43% increase in resources devoted to tackling MNCs. The government will also ensure the ATO has access to the information it needs by enhancing information sharing between the ATO and the Australian Securities and Investments Commission (“ASIC”). The Tax Avoidance Taskforce will be led directly by the Commissioner of Taxation who will provide regular progress reports to the government to provide transparency to the community, with the first report to be provided before the end of 2016.

In his media statement, the Treasurer states that external experts will be appointed to play a critical role in supporting the Taskforce, including the formation of a panel of eminent former judges which will review any proposed settlement arrangements to ensure they are fair and appropriate. Additionally, the Treasurer has stated that the Taskforce will work closely with its partner agencies including the Australian Crime Commission, the Australian Federal Police and the Australian Transaction Reports and Analysis Centre, and that new legislation will be introduced allowing the ATO to improve information sharing and analysis with ASIC which will lead to a more efficient approach to dealing with tax crime.

This increased funding comes at a time when the ATO is keenly focused on international tax risks, as evidenced by the release just last week of four taxpayer alerts dealing with thin capitalization, implementation of the Multinational Anti-Avoidance Law that was legislated last year, arrangements involving related party cross currency swaps, and cross-border leasing arrangements.

VIII. Forward Tax Agenda

Both Houses of Parliament were shortly dissolved after the budget, with a double dissolution election to be held on July 2, 2016. Whilst the practicality of implementing any measure originating from a budget handed down in an election year is complicated, this year it is even more so due to the fact that the election will be held so soon after the budget. In particular, none of the key tax measures announced in this year's Federal Budget were legislated before Parliament was dissolved, meaning this year's budget is, for all intents and purposes, the current government's election policy platform.

Given that the forward tax agenda will largely hinge on the outcome of the next election, Table 5 gives a comparison of the tax and superannuation policies of the two major political parties that have been announced to date. Of course, with a long election campaign, there is surely more to come from both major political parties on tax reform.

Table 5 Forward tax agenda Policy area Coalition Government policy Labor Party policy Company income tax rate • Progressive reduction of the corporate tax rate to 25% over 10 years for all companies• Small business companies (those with annual aggregated turnover of less than AU$10 million) will benefit from lower rates sooner • Whilst the Labor Party has previously stated that it supports a lower corporate income tax rate, it has more recently indicated that it does not support corporate income tax rate cuts for businesses with aggregated turnover of more than AU$2 million Personal income tax rates • Increase in the threshold at which the 37% marginal tax rate cuts in from AU$80,001 to AU$87,001 to address bracket creep• Increase in the unincorporated small business tax discount phased in over 10 years • No announced policy, however the Labor Party has indicated that it will make the Temporary Budget Repair levy a permanent feature Goods and services tax (“GST”) • No change to GST rate or base• GST to be extended to low value imported goods • No announced policy, however the Labor Party has indicated it will make no changes to the GST rate or base Multinational tax avoidance/transparency/transfer pricing • Introduction of a Diverted Profits Tax, a 40% tax on profits that are artificially diverted from Australia • Amendments to the transfer pricing rules to give effect to OECD BEPS recommendations. • Implementation of the OECD BEPS recommendations to eliminate hybrid mismatch arrangements with minor amendments as recommended by the Board of Taxation • Increased penalties for “significant global entities” that fail to disclose information to the ATO (100 times current penalty amounts) • More funding to the ATO to establish a new Tax Avoidance Taskforce (also targeting tax avoidance by high wealth individuals) • Amend the thin capitalization rules to limit the amount of debt deductions MNCs can claim in Australia to the debt-to-equity ratio of a company's entire global operations • Better align Australia's tax treatment of hybrid entities and instruments with those of foreign countries to reduce the opportunity for companies to claim tax exemptions and deductions in more than one country • Provide additional funding to the ATO to properly investigate and pursue multinational profit shifting • Increase penalties for “significant global entities” that fail to lodge a country-by-country report (50 times current penalty amount) • Restore the AU$100 million threshold for public reporting of tax information of large private companies by the ATO • Establish a publicly accessible central register of beneficial ownership of Australian companies, trusts and other corporate structures Superannuation • Reduce the threshold for the additional 15% contribution tax for high income earners from AU$300,000 to AU$250,000 • AU$1.6 million cap on balances in pension phase • Reduce concessional contributions caps to AU$25,000 • Removal of 10% rule for deductible personal contributions• Introduce a AU$500,000 lifetime non-concessional contributions cap • Changes to the work-test age requirements • Increased income threshold for low income spouse contributions• Introduce a Low Income Superannuation Tax Offset • Changes to transition to retirement income streams • Remove ability for certain income stream payments to be taxed as lump sums • Anti-detriment payments to be abolished • Reduce the threshold for the additional 15% contribution tax for high income earners from AU$300,000 to AU$250,000 • Introduce a 15% tax on superannuation fund income exceeding AU$75,000 in the pension phase Tobacco excise • Four annual 12.5% increases in excise commencing on September 1, 2017 • Four annual 12.5% increases in excise commencing on September 1, 2017 Capital gains tax (“CGT”) • No changes to CGT • Reduce the CGT discount for individuals to 25% for all assets purchased on or after July 1, 2017. Investments made before this date will not be affected by this change. Negative gearing • No changes to negative gearing • From July 1, 2017, negative gearing will be limited to new housing. Investments made before this date will not be affected by this change. Innovation • The National Innovation & Science Agenda contains the following tax-related measures: – new tax incentives for investors who support innovative startups including a 20% non-refundable tax offset based on the amount of the investment (capped at AU$200,000) and a CGT exemption for investments held for between one and 10 years* – increasing access to company losses by replacing the same business test with a more flexible “predominantly similar business test” – changes to Venture Capital Limited Partnerships, including a new 10% non-refundable tax offset for partners in Early Stage Venture Capital Limited Partnerships* – providing a new option to self-assess the effective life of acquired intangible assets for depreciation purposes. • Introduce an “Australian Angel Investment Scheme” which will provide: – an upfront 50% tax deduction for an investment up to a maximum of AU$200,000 per year – investors can “carry back” tax relief if they do not reach the maximum AU$200,000 cap in any particular year – full CGT exemption for equity held in the startup venture for more than three years – allow realized losses following investment in the scheme to be deducted against wage and salary income, and – defer CGT on investments if the investor directs a prior capital gain into a new startup venture.

*Note: this measure was enacted soon after the budget.

In addition to the measures announced in the budget and noted above, there are a number of other tax measures that the government has been pursuing which have not yet been enacted. These include:

  •  introduction of a statutory remedial power for the Commissioner of Taxation. This was previously included in a Bill that lapsed on proroguing of Parliament on April 15, 2016;
  •  implementation of the new double tax agreement between Australia and Germany that was signed on November 12, 2015;
  •  reform of the GST law to address the “double GST treatment” of digital currencies such as Bitcoin (a Treasury discussion paper was released on budget night to commence consultation on this measure).

Whilst this year's Federal Budget has contained a range of substantial reforms focusing on growth and fairness, it is disappointing that the government has not delivered comprehensive tax reform. It is hoped that once the “fairness” debate has subsided, both sides of the political divide can refocus their efforts on real tax reform, which will include a close look at the way in which consumption and investment are taxed in Australia and the interaction of State and Federal taxes.

For More Information

Tom Seymour is Managing Partner Tax and Legal, PwC Australia.


1 For broader analysis on this issue please refer to the recent PwC Australia publication ‘Bracket creep: Do we treat the symptoms or cure the disease?’.

2 For further information on the Passport, please refer to PwC publication Asian Passports, the coming of age.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax