2015/16 Budget

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1.1 Expanding accelerated depreciation for small business – immediate write-off and small business pool

1. Changes effective 7.30pm (AEST) 12 May 2015 (i.e., 2013/14 income year)

1.1 Expanding accelerated depreciation for small business – immediate write-off and small business pool

The government will significantly expand accelerated depreciation for small businesses. It will do this 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 (currently, an immediate write-off is generally available for assets costing less than $1,000). This will apply for assets acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017.

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).

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2.1 Tax cuts for small business – 1.5% tax cut for small companies and 5% discount on income tax payable for unincorporated small business activity

2. Changes effective 1 July 2015 (i.e., 2015/16 income year)

2.1 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:

a)    Reduction in company tax rate – The company tax rate will be reduced to 28.5% (i.e., a reduction of 1.5%) 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.

b)    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.

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2.2 Claiming car expense deductions – modernising the existing car expense claim methods

2.2 Claiming car expense deductions – modernising 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 (e.g., by the individual) 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.

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2.3 Better targeting of Zone Tax Offset (‘ZTO’) to exclude ‘fly-in fly-out’ and ‘drive-in drive-out’ workers (‘FIFO/DIDO workers’)

2.3 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.

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2.4 Immediate deduction for professional expenses on commencing a new business

2.4 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.

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2.5 Release of superannuation for terminal medical condition – relaxing the release criteria

2.5 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.

From 1 July 2015, the government will extend access to superannuation for people with a terminal medical condition by extending the above certification period (i.e., the period within which the individual is likely to die) to two years. This will give terminally ill patients earlier access to their superannuation entitlements. 

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3.1 CGT roll-over relief for changes to entity structure

3.1 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.

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3.2 Accelerated depreciation for primary producers

3.2 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.

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3.3 Transition period to apply new tax system for managed investment trusts (‘MITs’)

3.3 Transition period to apply new tax system for managed investment trusts (‘MITs’)

By way of background, the former government announced that a new tax system was to be put in place for MITs. Some features of the proposed system were the introduction of an elective “attribution” system of taxation to replace the present entitlement system and the introduction of a 5% cap to deal with “over or under” distributions so that trusts are not required to reissue statements and investors are not required to revisit tax returns.

This proposed system was set to apply from 1 July 2011, but this application date has been deferred three times, most recently to 1 July 2015.

The 2015/16 Federal Budget confirms the current government’s intention to proceed with the implementation of a new tax system for MITs with a twelve month transition period. The modernised tax rules will now apply from 1 July 2016 (i.e., the 2017 income year), although MITs can choose to apply them from the earlier start date of 1 July 2015.

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