2016 Federal Budget Update on Targeted personal income tax relief

Changes effective 1 July 2016 (i.e., 2016/17 income year)

1.1 Targeted personal income tax relief

From 1 July 2016, the government will increase the 32.5% personal income tax threshold from $80,000  to $87,000.  

This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37%  to 32.5%, preventing around 500,000 taxpayers facing the 37% marginal tax rate.  

1.2 Increasing the Small Business Income Tax Offset (‘SBITO’)

From 1 July 2016, the government will increase the current 5% tax discount (referred to as the SBITO)  to 8%. The discount is currently available to an individual in receipt of income from an unincorporated small business entity (‘SBE’) (i.e., basically, an entity with an aggregated turnover of less than $2  million), and applies to the income tax payable on the business income received from such an entity.     

The discount will remain constant at 8% for eight years, and will then increase to:

                                                    • 10% in 2024/25;

                                                    • 13% in 2025/26; and

                                                    • 16% from 2026/27.

The current tax discount (or SBITO) cap of $1,000 per individual for each income year will be retained. Furthermore, 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.  

1.3 Reducing the company tax rate over 10 years

The government will reduce the company tax rate to 25% over 10 years (i.e., by 1 July 2026).

This measure will commence from 1 July 2016, whereby the government will cut the small business  company tax rate to 27.5%, and make this tax rate available to small companies with an annual aggregated turnover of less than $10 million.    

This turnover threshold will then be progressively increased to ultimately have all companies eligible for  the 27.5% tax rate in 2023/24. The progressive increase in the annual aggregated turnover thresholds  for companies eligible for the 27.5% tax rate will be as follows:  

• $25.0 million in the 2017/18 income year;

• $50.0 million in the 2018/19 income year;

• $100.0 million in the 2019/20 income year;

• $250.0 million in the 2020/21 income year;

• $500.0 million in the 2021/22 income year; and

• $1 billion in the 2022/23 income year.

In the 2024/25 income year, the company tax rate will be reduced to 27% and then be reduced  progressively by 1 percentage point per year until it reaches 25% in the 2026/27 income year.    

Franking credits will be distributed in line with the rate of tax paid by the company.

1.4 Increasing the small business entity (‘SBE’) turnover threshold

From 1 July 2016, the government will increase the SBE turnover threshold from $2 million to $10  million. The current $2 million turnover threshold will be retained for access to the small business capital gains tax (‘CGT’) concessions, and access to the SBITO (i.e., the increased 8% tax discount) will be limited to entities with turnover less than $5 million (as noted above).   

The increased $10 million turnover threshold will allow an additional 90,000 to 100,000 business  entities to gain access to certain small business concessions, such as the following:  

• The lower (27.5%) small business corporate tax rate (noted above).

• The simplified depreciation rules in Subdivision 328-D of the ITAA 1997 (including the ability to       claim an immediate deduction for an asset purchased costing less than $20,000 until 30 June 2017).  

• Simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the  value of their stock has changed by less than $5,000.  

• The option to account for GST on a cash basis and pay GST instalments as calculated by the ATO.

1.5 Tax Integrity Package – Establishing the Tax Avoidance Taskforce

The government will provide $678.9 million to the ATO over the forward estimates period to establish a  new Tax Avoidance Taskforce. This will enable the ATO to undertake enhanced compliance activities targeting multinationals, large public and private groups and high wealth individuals.  

The Tax Avoidance Taskforce will conduct operations to improve tax compliance in high tax risk  sectors, resulting in better targeted audits and higher collections.  

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. This supports the operation of the Taskforce through improved risk analysis and detection.   

 (Note: The information is sourced through National Tax and Accountants' Association - NTAA)