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Family Court Looks at Dead Grandfather's Estate
Advisers and accountants in Estate Planning must also consider where the grandparent's money goes.

Mrs Hall is a doctor and Mr Hall is a property developer. They have two children. Mr & Mrs Hall dicorved. Mrs Hall sought spousal maintenance.

Mrs Hall's financial circumstances included an "interest" in the estate of her late father, controlled by her brothers. How much interest did she have? Mrs Hall did not disclose how much the interest was for or provide a copy of her dad's Will. Without that extra information, the judge made her ex-husband pay $10,833.00 per month.

Mr Hall appealed, Mr Hall was able to get his hands on the dead man's "wishes" that:
  1. Mrs Hall received from her family business a cash payment of $16.5 million if she divorces her husband and,
  2. Mrs Hall receives from the family business an annual payment of $150 K until the date of the above $16.5m payment.
There was clear evidence that Mrs Hall's brothers as Executors would carry out their father's "wish". Mrs Hall argued that she did not know how much the interest was for, and that she hadn't claimed if from her brothers even though her father died five years earlier. The court said this was irrelevant. The Family Court of course, is only interested in the means of Mrs Hall to support herself.

To date she has not yet apparently received the $16.5 million.

Nevertheless the court cancelled the maintenance that Mr Hall had to pay.

You must use experts to draft your Will. So much confusion can be caused by poor Estate Planning. The last time I saw such tomfoolery was when Robert Holmes a Court forgot to have a Will.
And as show, having "wishes" put into the will doesn't work. In this case, not only are the brothers not obligated to pay their sister but she still got punished for this "wish" in Family Court.

Make sure you draft your will complete with capital protected trusts and Appointors. 

For further information contact Lynne Gread of our office on (07) 3245 4566.

Breaking up is hard to do. What happens to your SMSF when you divorce?

Sophisticated couples love Self-Managed Superannuation Funds (SMSFs). There are over 500k SMSFs in Australia. Mostly Mums and Dads. The average balance is $1M. SMSF divorce, it's an unhappy matrimony.

However, one in three marriages end in divorce. In a divorce, the once advantageous SMSF becomes a legal nightmare. Complex superannuation rules add to the trauma. Your SMSF is a battleground where the victors are the family and taxation lawyers.

How to split your SMSF

Splitting your SMSF is simple when the divorce is amicable. You sign a Superannuation Splitting Agreement: s 90MT Family Law Act 1975 (Cth). It keeps the court from meddling in your private affairs.

If the love is too far gone, then you engage family lawyers. They go to court. Family lawyers are gladiators. They delight in extracting pain and money from your lying, cheating spouse.

The Superannuation Splitting Agreement or the Family Court may require you to write your spouse a cheque. However, it does not tell you how to find the cash. You decide which assets to sell in the SMSF.

How to value your assets

Assets differ in value depending on the valuers you use. Consequently, disputes are common. If you can’t decide then the Family Court looks at your valuations. It tells you the value.

The timing of valuation is important. It determines how much each spouse receives. Valuation should be on the date of the court order. However, usually the spouses agree when the valuation occurs.

A Valuation Example
Here is an example of my client’s suffering:

Sandy and Tim are married. Although Sandy’s mother warned her Tim would be trouble, Sandy entered into an SMSF with Tim as joint members. The SMSF’s primary asset is the premises where Tim conducts the family business. The property is valued at $1.8M. The SMSF has $200k of shares. Tim’s interest is $1.5M. Sandy’s is $500k.

 Sandy catches Tim having an affair with his marketing assistant. She is heartbroken. Every time she goes to the premises, she pictures them together. She wants nothing to do with the business. She files for divorce. The court orders Sandy and Tim to split the SMSF in half. Sandy receives an extra $500k. SMSF divorce proves fruitful for Sandy. The SMSF’s shares and property must be valued. 

 Sandy wants to value the assets at the time of the court order: Div 7A.1 Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR). The court applies the prescribed interest rate, 6%.

 Sandy receives:

1. Her base share, plus interest: $533,530

2. $500,000 of Tim’s base share

Her total is $1,033,530.

 Tim receives:

1. His base share, plus interest: $1,511,249

2. Less $500,000, which goes to Sandy

His total is $1,011,249.

 Tim wants to value the assets later, when Sandy transfers her interests to her new fund: Div 7A.2 SISR. This could be years later. Assume the value increase is 4%.

 Sandy receives:

1. Her base share, plus interest: $511,195

2. $500,000 of Tim’s base share

Her total is $1,011,195.

 Tim receives:

1. His base share, plus interest: $1,533,584

2. Less $500,000, which goes to Sandy

His total is $1,033,584.

What if you can't agree on the value?

It gets more difficult in SMSF divorce. What if your SMSF doesn’t have enough free cash? What if the main asset is the premises of the family business, which it must retain to operate? Do you sell the premises? This can affect other business partners. It can incur Capital Gains Tax (CGT).

Continuing with my client’s problem:

Sandy and Tim’s SMSF holds real estate worth $1.8M and $200k of shares. Depending on the valuation date, Sandy receives $1,011,195 or $1,033,530. The shares do not come close to enough to pay Sandy her interest.

 Tim wants to keep the business. He can’t operate without it. He is scared to lose his livelihood. They have three options:

1. In the divorce settlement, Tim gets the family home. He takes out a loan against the house. He pays this to Sandy. She also gets the shares from the SMSF

2. Tim sets up a unit trust. It acquires the business premises. The unit trust borrows money to pay Sandy her interest

3. They liquidate the real estate asset. Sandy gets cash to the value of her interest

How CGT applies

Rollover relief is available for the transfer of assets following a divorce: s 126-140 Income Tax Assessment Act 1997 (Cth) (ITAA97). This means the leaving spouse does not pay CGT. A win against the Tax Man.

To be eligible for the CGT concession: 126-140 Family Law Act:
  • You must transfer assets to a complying fund
  • The transfer must be ordered by the court, or it must due to a relationship breakdown
  • You must move all entitlements from the SMSF, and
  • The assets must be in their original form, such as shares or real estate. Where you liquidate the assets and transfer cash, CGT applies.
Where these conditions are not satisfied, CGT is payable. Here is an example of a transfer:

Mary and David co-manage their SMSF. Mary’s interest is $3M and David’s interest is $1M.

Mary is a successful businessperson with a strong character. David is sick of living in Mary’s shadow. Their relationship breaks down. Mary and David divorce. The court orders a 50-50 split of the SMSF’s assets. David receives an extra $1M on top of his base interest.

 David transfers his interest to a new fund. Firstly, he transfers his base interest of $1M. He pays no CGT.

 Then David transfers the additional $1M interest. Because the order specified this, he pays no CGT on it. However, the ATO contact David. The additional $1M was cash that Mary and David generated by selling real estate. This means CGT is payable.

SMSF Divorce: What happens during the divorce proceeding?

Divorce is often a drawn out process. This creates difficulties with the SMSF. Just because your marriage is on the rocks, it does not absolve you from your responsibilities as a trustee. You must still make investments, produce reports and make submissions to the ATO. You must remain compliant with your membership. When one spouse leaves, you must add a co-trustee or operate through a corporate trustee.

Here is an example of non-compliance:

Zahra and Kevin have been married for 30 years. Kevin is a successful dentist. Zahra runs the house. They have an SMSF with a corporate trustee. They are directors of the corporate trustee company. The SMSF holds real estate. They purchase a large property through the SMSF. Landgate records it as property of the company. But, Landgate does not specify that the property is held as trustee for the SMSF.

 Years later, the company goes bankrupt. It causes a relationship meltdown. Zahra and Kevin divorce. The company is wound up. Lawyers, accountants and financial planners advise Zahra and Kevin to sell the property to service the company’s debts. But, the ATO says the property is held as trustee for the SMSF. Selling it breaches the sole purpose test. 

On top of this, Zahra has never understood the SMSF. She signs documents when Kevin tells her to. Kevin tells the court “at no stage did my wife take any interest in our SMSF. She never made financial contributions to the SMSF.” Zahra says she shouldn’t be responsible for the sale of the property because of this. This is unacceptable. Members are responsible for all decisions made in the SMSF. The court fines both of them.

How to stop the nightmare

Either before or during marriage enter into a Superannuation Splitting Agreement. Or, if you want to deal with all assets, then prepare a Binding Financial Agreement. That way you stop the Family Court meddling in your affairs. You can build these documents on our website.

If you have any questions, please contact Lynne Gread of our office on (07) 3245 4566.

SMSF's Unit Trust buys a necklace for wife - now what?

Do you operate a Unit Trust where some or all the units are owned by your Self-Managed Superannuation Fund? If so you have a 'related unit trust'.

A related unit trust is an SMSF unit trust. An SMSF is not permitted to invest more than 5 per cent in a related trust, including any other "in-house" asset. For example, an SMSF with $1 million of assets could not invest more that $50,000 in in-house assets, including any related trust. A related trust includes a unit trust where an SMSF member and his or her associates hold more than 50 per cent equity, exercise significant influence in relation to the trust, or can hire or fire the trustee. Under the in-house asset rules, if an SMSF held up to 5 per cent of its assets in units, that SMSF unit trust could invest in a real estate property where the other units are held by related parties, such as family members or a family discretionary trust.

This is a common and useful structure for holding real-estate. Through a Unit Trust, individuals and SMSF's can pool their resources to buy a bigger investment property.
However, we are seeing 3 common problems:

           1. Unit Trust buys a gift for a wife
           Be careful not to pay any personal from the Unit Trust. This creates a non-complying loan from the trust to you. Unless            your Unit Trust is pre-August 1999, your SMSF is potentially in breach. The Unit Trust Deeds that you build on our law              firm's website allow you to rectify, generally, without the Auditor being required to note the matter to the ATO, provided              you follow the rules set out in the Unit Trust (see our Unit Trust here).
           2. Journal entries instead of actual payments
           The second common issue it failure to physically pay distributions to the SMSF each year. Sure, this is not required                  under a modern Unit Trust Deed, t is required by the Superannuation legislation. A movement from the Unit Trust                      bank account to the SMSF bank account is required. Journal entries don't satisfy the Superannuation law. Failure to                  physically pay may cause an unpaid present entitlement, which the Superannuation will deem a 'loan'. And you now                  have a potential in house asset breach. Rectification is possible under our law firm's Unit Trust Deed, but only if you                  deal with it in time. Otherwise, the SMSF needs to sell its interest in the Unit Trust.
         3. Members also have units in the Unit Trust
          A SMSF is not permitted to invest more than 5 per cent in a 'related trust'. If your SMSF has $2m then it can only invest           $100,000 in in-house assets, including any related trust.
          A 'related trust' includes a unit trust where an SMSF member and associate:
  • hold more than 50% of the units; or
  • exercise significant influence over the trust; or
  • can hire of fire the trustee.
Therefore, if a SMSF held up to 5% of its assets in units, that unit trust can invest in a real estate property - even though the other unit holders are the members, their family and Family Trust ('associates').

Non-geared unit trusts permit a SMSF to invest up to 100% of its assets in the related unit trust. This is provided the unit trust satisfies the strict regulations. Failure results in the units becoming in-house assets. Remember a SMSF cannot hold more than 5 per cent of the portfolio in-house assets.

A non-geared unit trust works best holding real-estates with no borrowings against by the title deeds.

What happens if you go bankrupt and get someone else's superannuation?

If you go bankrupt and then get your Superannuation payout it is protected from creditors. But what happens if you go bankrupt and get someone else's superannuation? Does the protection from creditors extend this far?

Mrs Morris was bankrupt. She then received $110,000 from her dead husband's super fund. Her trustee in bankruptcy said, 'hand it over Mrs Morris'. She said no. It went to Court.

The Federal Court agreed with Mrs Morris. The superannuation payout was safe from her creditors.

Superannuation that you give at death , even though the person is bankrupt is now protected.

Background Note:

Mrs Morris also separately received $311,865.93 by way of a life insurance and anti-detriment adjustment payment. This was automatically protected and not in contention. See the Sir Thomas Clyne report, which led to the enactment of the Bankruptcy Act. In that report, at para 156, as Burchett J noted, it was stated:

                 It has been for many year the policy of Parliaments throughout Australia to give protection to                                                      policies of life insurance against the claims of creditors.

'Curse' of the homemade Will

     “When dealing with so-called homemade Wills, I have observed they are a curse. Homemade Wills which utilise what              is sometimes known as a ‘Will kit’ are not much better. This case proves the point….”

      Master Sanderson, Rogers v Rogers Young [2016] 

Kathleen Rogers loved her daughter, Alexandra. Mum's Will left everything to her. Mum died of cancer when Alexandra was not yet 18. The Estate was intended to be held on trust until Alexandra was 25. Unfortunately, mum’s newsagency Will kit did not agree. The Will was ambiguous as to what '25 years of age' meant.

The penny dreadful Will kit cost the daughter $200,000: $100,000 to attack a Will and $100,000 to defend. It’s paid by the estate, so 18-year-old Alexandra lost out here. Mum could have gone to our law firm’s website and built a professional Will for a mere few hundred dollars.

The daughter not wanting to wait another 7 years for her money is understandable.

If you have a penny dreadful Will, talk to a senior Accountant such as Lynne Gread. Save your loved ones the headaches and stress.
Ensuring your Superannuation is Adequately Covered in your Will

Muriel’s husband died a few years ago. At 54 she fell in love again and was the oldest mother in Capalaba.  She called her love child Colin. Her two oldest children, Ian and Brian, are successful engineers.
 Muriel's assets are all in her Self-Managed Super Fund.
 As the sole director of her SMSF’s corporate trustee she leaves her super via a reversionary pension to her  love child, Colin. He is now 16.

 While she does not own much outside her Superannuation, Muriel leaves everything in her Will to her  financially successful oldest boys, Ian and Brian.
 She does the right thing and tells her 3 children what she is doing. Ian and Brian say that they understand
 and will protect their half brother.
 Years pass. On her death bed, she looks at Colin proudly at what her now 23 year old has achieved in his  trade.
 Muriel dies peacefully in her sleep.
 As executors of their mum’s Will the two oldest boys take control of the corporate trustee of mum’s SMSF.
 They are heartened to know that mum did, indeed, leave her entire SMSF to their younger half brother via a  reversionary pension. Not knowing how they work they seek clarification from their advisers.
 The older boys are dismayed to find that since Colin is now over 18 and not maintained by his mother the  automatic reversionary pension is not valid.

 "A superannuation income stream ceases when there is no longer a member who is entitled, or a dependent  beneficiary of a member who is automatically entitled, to be paid a superannuation income stream benefit  from a superannuation interest that supports a superannuation income stream

 As dutiful brothers, Brian and Ian see if mum made a binding nomination to Colin. There is none.
 The older boys now have the sole discretion as to who gets mum’s superannuation.
 After talking to their wives they decide to pay the superannuation to themselves, and none to young Colin.
 Young Colin sees his own lawyer. He is told he can’t challenge his brothers' discretion to pay the super to  themselves. The Will contains few assets and is not worth challenging.
 If you know a Muriel then get them to speak to Lynne Gread of our office on (07) 3245 4566.
 Sisters steal farm using Family Trust

 Dying Dad’s Family Trust had a farm (worth $2m) and two apartments (worth $2m each). Dad said ‘you 
 girls get a $2m apartment each, the boy gets the $2m farm – it is all fair’. 
 The girls said nothing.

 Upon Dad’s death his 3 children became co-Appointors.

 The son went back to the farm.

 The girls went to a lawyer. The lawyer said that the Family Trust allowed a majority of Appointors to control  the trust. The majority overrides the minority. The girls distributed the farm and apartments to 
 themselves ONLY. They called the police to remove their brother from the farm. The girls sold the farm.

 Check your Family Trust Deed to make sure that the Appointors must act unanimously and to build 
 a Family Trust General Update of the Deed.

 If not, speak to Evelynne Gread for help in Estate Planning. 

 Employment Contracts are useless -
 ‘she is only a secretary’

 The engineering company built Employment Contracts for their engineers. They didn't waste time getting    Employment Contracts for secretaries.

 Joanne joined the company as a secretary. She typed letters for the manager. She sent gifts to the clients'    wives. She memorised the names of key client employees. Her boss was impressed with Joanne - and she    was cheap labour. She was a loyal and dutiful employee.

 One day Joanne was poached by another engineering company. Joanne telephoned her old company's 20    largest clients. Four moved with her. Her old employer's lawyer wrote a letter threatening her with all manner  of punishments. She smiled. She had no confidential clause restriction. She suffered no restraint of trade.    She didn't even have an Employment Contract. Relying on the latest court cases, she used her mobile as a    database to contact more clients.

 Talk to us at EEA Accountants if you have a Joanne in your business. We work with our lawyers to build you Employment Contracts. It is never too late to sign Employment Contracts.    

 Our interpretation of the 2016/17 Federal Budget as it affects our clients.

This year’s Federal Budget includes the most significant changes to Australia’s superannuation system since 2007, plus tax initiatives to support low income earners and small businesses.

On Tuesday 3 May, Federal Treasurer Scott Morrison handed down the Federal Budget for the 2016–17 financial year. The Budget measures are designed to aid Australia’s transition from a mining-led economy to a stronger, more diversified economy that encourages innovation and supports job growth.

Although the Budget offers tax breaks to support low income earners and small businesses, far-reaching changes to superannuation rules are likely to impact the retirement strategies of many Australians.

Key Budget announcements include:

• reduced caps on concessional and non-concessional super contributions 

• tax offsets for low income earners and those with low super balances 

• reduced tax concessions on super contributions for high income earners 

• a reduced company tax rate for small and medium businesses. 

Superannuation changes

Contribution caps reduced

From 1 July 2017, the cap on concessional contributions will reduce to $25,000 a year for everyone, regardless of age. Currently the concessional contributions cap is $30,000 under age 50 and $35,000 for ages 50 and over.

Individuals with super balances under $500,000 who don’t reach their concessional cap in a given year will be able to carry forward their unused cap amounts on a rolling basis over five consecutive years.

A lifetime cap of $500,000 for non-concessional contributions has been introduced, effective immediately. This replaces the existing annual cap of $180,000 (or $540,000 every three years under the bring-forward rule).

The lifetime cap takes into account all non-concessional contributions made from 1 July 2007. Contributions made after the Budget announcement that exceed the cap (taking into account all previous non-concessional contributions) will need to be removed or will be subject to the current penalty tax arrangements. However, there will be no penalties if the cap has been reached or exceeded prior to the Budget announcement (7.30pm AEST, 3 May 2016).

Contribution eligibility requirements updated

The current work test that applies for people making voluntary contributions between age 65 and 74 will be removed as of 1 July 2017. This will make it easier for older Australians to contribute to super.

Individuals will also be able to make contributions for a spouse aged under 75 without requiring the spouse to satisfy a work test.

Tax exemption on TTR pensions removed

The tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed from 1 July 2017, with earnings to be taxed at 15%. This change will apply regardless of when the TTR income stream commenced.

Further, individuals will no longer be able to treat certain income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000.
Transfer balance cap introduced

On 1 July 2017, a transfer balance cap of $1.6 million will be introduced to restrict the total amount of super that can be transferred to the pension phase. If an individual accumulates more than $1.6 million, they will be able to maintain the excess in the accumulation phase (where earnings will be taxed at 15%).

Those already in the pension phase on 1 July 2017 and whose balances exceed $1.6 million will need to either withdraw the excess or transfer it back into the accumulation phase.

Individuals who breach the cap will be subject to a tax on both the excess amount and the earnings on the excess amount —similar to the tax treatment for excess non-concessional contributions.

Threshold reduced for additional contributions tax

Division 293 tax — an additional 15% contributions tax payable by high income earners with earnings over $300,000 — will also apply to those with incomes above $250,000 from 1 July 2017.

For Division 293 purposes, the definition of ‘income’ includes:

• taxable income (including the net amount on which family trust distribution tax has been paid) 

• reportable fringe benefits 

• total net investment loss (including net financial investment loss and net rental property loss) 

• low tax contributions (non-excessive concessional contributions) including super guarantee, salary sacrifice and personal concessional contributions. 

Division 293 tax will apply to any low tax contributions that exceed the $250,000 threshold, assuming they form the top slice of income.

The following table compares the tax concessions applicable on concessional contributions at various marginal tax rates.

 Marginal tax rate*                    Contributions tax              Tax concession  
            21%                                                       15%                                              6%       
           34.5%                                                      15%                                           19.5%  
             39%                                                       15%                                            24%  
             49%                                                       15%                                            34%  
             49%                                                       30%**                                        19%  
*Including Medicare Levy and Temporary Budget Repair Levy 
**Includes additional 15% contributions tax (Division 293)
Low income superannuation offset introduced

A Low Income Superannuation Tax Offset (LISTO) will be introduced to reduce the tax on contributions for low income earners. The LISTO will replace the Low Income Superannuation Contribution (LISC) scheme when it is abolished on 1 July 2017.

The LISTO will provide a non-refundable tax offset to super funds, based on the tax paid on concessional contributions up to a cap of $500. The LISTO will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.

The ATO will determine a person’s eligibility for the LISTO and advise their super fund annually. The fund will contribute the LISTO to the member’s account.

Access increased to tax offset for spouses

The current spouse super tax offset will be available to more people when the spouse income threshold changes on 1 July 2017. The threshold will increase from $10,800 to $37,000.

A contributing spouse will be eligible for an 18% offset worth up to $540 for contributions made to an eligible spouse’s super account.

Deductions for personal contributions extended

As of 1 July 2017, Australians under 75 will be able to claim an income tax deduction for any personal contributions made to a complying super fund up to their concessional cap. This effectively allows anyone, regardless of their employment circumstances, to claim a deduction for their personal contributions up to the value of the cap.

Individuals will need to notify their super fund or retirement savings provider of their intention to claim the deduction, before lodging their tax return.

These amounts will count towards the concessional contributions cap and will be subject to 15% contributions tax. Individuals can choose how much of their contributions to deduct — however, if they end up exceeding their concessional cap the deduction claimed on the excess contributions will have no effect, as these amounts will be included in the member’s assessable income.

Members of certain prescribed funds would not be entitled to deduct contributions to those schemes. These include all untaxed funds, all Commonwealth defined benefit schemes, and any state, territory or corporate defined benefit schemes that choose to be prescribed.
Anti-detriment payments removed

Anti-detriment provisions will be abolished from 1 July 2017, effectively removing the ability of super funds to increase lump sum death benefits when paid to eligible beneficiaries.

The anti-detriment provisions currently allow a fund to claim a corresponding tax deduction where it is able to increase the amount of a member’s death benefit to compensate for the tax paid on contributions.

Tax exemptions extended on retirement products

The tax exemption on earnings in the retirement phase will be extended to products such as deferred lifetime annuities and group self-annuitisation products.

This initiative aims to allow providers to offer a wider range of retirement income products. This will provide more flexibility and choice for retirees and help them to better manage consumption and risk in retirement.

The Government also says it will consult on how these new products are treated under the age pension means test.

Changes to defined benefit schemes

From 1 July 2017, the cap on concessional contributions will reduce to $25,000. Individuals with super balances under $500,000 who don’t reach their concessional cap in a given year will be able to carry forward their unused cap amounts on a rolling basis over five consecutive years.

The Government will include notional (estimated) and actual employer contributions in the concessional contribution cap for members of an unfunded defined benefit schemes and constitutionally protected funds. For individuals who were members of a funded defined benefit scheme as at 12 May 2009, the existing grandfathering arrangements will continue.

A lifetime cap of $500,000 for non-concessional contributions has been introduced, effective immediately. Non-concessional contributions made into defined benefit accounts and constitutionally protected funds will be included in an individual’s lifetime cap.

If a member of a defined benefit fund exceeds their lifetime cap, ongoing contributions to the defined benefit account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold.

To broadly replicate the effect of the proposed $1.6 million transfer balance cap, the government has announced that pension payments over $100,000 a year paid to members of unfunded defined benefit schemes and constitutionally protected funds providing defined benefit pensions will continue to be taxed at full marginal rates. However, the 10% tax offset will be capped at $10,000 from 1 July 2017.

For members of funded defined benefit schemes, 50% of pension amounts over $100,000 per year will now be taxed at the individual’s marginal tax rate.

Super objective to be enshrined in law

The objective of superannuation is to provide income in retirement to substitute or supplement the age pension. The government says it will embed this objective in a standalone Act, with an accountability mechanism to ensure that new superannuation legislation is considered in the context of the objective.

Tax changes

Company tax rate reduced

Starting from 1 July 2016, the company tax rate will be reduced to 25% over 10 years. Currently, small companies with aggregated turnover less than $2 million pay tax at a rate of 28.5%. Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.

 Financial year            Companies with turnover below           Applicable tax rate    
      2016-17                                         $10 million                                                          27.5%  
      2017-18                                         $25 million                                                          27.5%  
      2018-19                                         $50 million                                                          27.5%  
      2019-20                                        $100 million                                                         27.5%  
      2020-21                                        $250 million                                                         27.5%  
      2021-22                                        $500 million                                                         27.5%  
      2022-23                                           $1 billion                                                            27.5%  
      2024-25                                      All companies                                                       27%  
      2025-26                                      All companies                                                       26%  
      2026-27                                      All companies                                                       25%  
Small business turnover threshold increased

The small business entity turnover threshold will be increased from $2 million to $10 million so that more businesses can access certain existing income tax concessions. These include:

• simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017 and then less than $1,000 

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

• a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under- or over-estimating PAYG instalments and the resulting penalties that may be applied 

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

• other tax concessions currently available to small businesses, such as the Fringe Benefits Tax concessions (from 1 April 2017, the beginning of the next fringe benefit tax year). 

Small business tax discount increased

The unincorporated small business tax discount will be increased in phases over 10 years from the current 5% to 16%. The following table indicates when the discount rates will apply.
         Financial year                         Discount rate  
                2016-17                                                  8%  
       2017-18 to 2024-25                                     10%  
               2025-26                                                  13%  
               2026-27+                                                16%  
Personal income tax reduced

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

This measure will reduce the marginal rate of tax on income between $80,000 and $87,000 from 37% to 32.5%. For example, a taxpayer earning $87,000 will save $315 per year as a result. This will ensure the average full-time wage earner will not move into the second highest tax bracket in the next three years.
                                    Current tax rates 2015–16  
          Taxable Income                                             Tax Payable * 
                $0 - $18,200                                                                     0%  
             $18,201 - $37,000                                                   19% over $18,200 
             $37,001 - $80,000                                                 $3,572 + 32.5% over 
           $80,000 - $180,000                                                 $17,547 + 37% over 
                 $180,000+                                                           $54,547 + 45% over 
*Excludes Medicare Levy and Temporary Budget Repair Levy 

                                   Proposed tax rates 2016–17  

         Taxable Income                                                Tax Payable* 
              $0 - $18,200                                                                         0%  
           $18,201 - $37,000                                                       19% over $18,200 
           $37,001 - $87,000                                                      $3,572 + 32.5% over 
          $87,000 - $180,000                                                    $19,822 + 37% over 
                 $180,000+                                                             $54,232 + 45% over 
*Excludes Medicare Levy and Temporary Budget Repair Levy

Social security changes

Payments simplified and savings introduced

Means testing arrangements for students and other payment recipients will be simplified from 1 January 2017. The changes include aligning the:

• assets test for all Youth Allowance and Austudy recipients, including those partnered to a Social Security or Veterans’ Affairs income support recipient 

• means test rules used to assess interests in trusts and private companies for all student payment recipients, including independent Youth Allowance and ABSTUDY recipients 

• social security benefit and ABSTUDY income test treatment of gift payments from immediate family members with existing pension rules 
• Family Tax Benefit (FTB) income test and youth Parental Income Test, and authorising the use of FTB income details for the youth Parental Income Test low tax contributions (non-excessive concessional contributions) including super guarantee, salary sacrifice and personal concessional contributions. 

• A range of social security measures aimed at savings to fund the National Disability Insurance Scheme are also proposed.  These include: 

• new welfare recipients from 20 September 2016 will not be eligible for carbon tax compensation. 

• backdating provisions for new Carer Allowance claims will be aligned with other social security payments. From 1 January 2017, Carer Allowance will be payable to eligible applicants from the date of the claim, or the date they first contact the Department of Human Services. 

• increased reviews of Disability Support Pension recipients by assessing their capacity to work. 

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