What are the changes for Small Business

Small Businesses were certainly the winners in this year’s budget. And the exciting news was that the term *small business* now applies to any business with a turnover of less than $10 million for these new measures. So let’s take a look at what’s changing:

Company Tax Rate Cut to 27.5%. From the 1st July Companies will now pay 27.5% tax on profits instead of 30%. So for every $100,000 in profit you keep an extra $2,500. This tax rate cut applies to ALL companies with a turnover of less than $10 million.

Last year the Instant Asset Write Off was introduced. This means any assets you purchase that cost less than $20,000 can be written off as an immediate deduction rather than needing to be written off over a number of years. This is continuing and now extends to any business with a turnover of less than $10 million from 1 July 2016.

If you are trading as a Trust, Partnership or Sole Trader you still have access to a tax cut. You get 5% tax offset up to a maximum of $1,000 this year. This will increase to 8% from 1 July 2016 but is still capped at $1,000. So if you make $50,000 profit for the year you pay $1,000 less in tax.

As an aside note last year the budget included a concession for people wanting to change entity structure. So from 1 July 2016 if you are a sole trader, you can transition to a Company with no tax implications. The same would apply if you transferred from a Trust to a Company, as long as the owners are the same. So all assets & stock can be rolled over to your Company, with no tax implications in your personal name.

There are 2 incentives for employing young people from 2017. Employing an Intern (for 4-12 weeks) will result in an upfront payment of $1,000 and employing in an ongoing job will result in a subsidy of between $6,500 and $10,000 depending on how job ready the young person is. This amount will be paid over 6 months. A young job seeker will need to have been unemployed for at least 6 months

What are the changes for the Startup Industry

Not many changes for the Startup Industry other than those already announced in last years $1.1 billion innovation statement.

Investors in Early Stage Innovation Companies (ESIC). You will be eligible for a 20% tax offset for amounts invested up to $200k per annum. So if you invest $200k in an ESIC you will get a $40k tax offset. This is a great start for funding for startups. An ESIC has to have started in the last 3 years, have expenses of less than $1million and income of less than $200k, as well as be involved in innovation. Start date 1 July 2016.

More great news for Investors. If you hold less than 30% of the shares in an ESIC you have a 10 year exemption from Capital Gains. Note you have to have held these shares for a minimum of 12 months. That means any gains you make on the sale of these shares will be tax free. Non-sophisticated investors will be limited to a tax offset on a maximum of $50,000 Investment per year.

Fintech is a focus with $200,000 allocated to promote Australia internationally as a financial technology destination. ASIC will also be working on a “regulatory sandbox” for fintech startups to test ideas for up to 6 months.

What are the changes for Super & Retirees

Super could certainly be seen as the loser in this year’s budget.

The amount you can contribute to Superannuation has decreased. You will now only be able to contribute a maximum of $25,000 per year. This has decreased from $30,000 limit if you are aged under 50 or $35,000 if aged over 50.  This will apply from 1 July 2017.

You will now have a lifetime (non deductible) limit of $500,000 per person.  This limit takes into account any non-concessional contributions made since 1 July 2007. If you have contributed more than that prior to 3 May 2016 you will not be required to withdraw that super.   You will not be allowed to contribute any more.

The good news is that you can now contribute to super up to the age of 75 without having to pass a work test. This doesn’t start until 1 July 2017.

If you have more than $1.6million in Super and are in Pension phase (ie your earnings are tax-free) the budget brings bad news. Starting 1 July 2017 you will now be paying tax on earnings on any amount above this level. Any earnings on your balance over $1.6 million will be taxed at 15%. Anyone with more than $1.6million already in pension phase will need to reduce this to $1.6million by 1 July 2017 and move the remainder to accumulation phase.

If your Taxable Income + Super contributions for the year is over $250,000 your super contributions will be taxed at 30% not 15%. Start date 1 July 2017.

For those using Transition to Retirement strategies the current tax exemption will no longer apply. Start date 1 July 2017. This means people who are not retired will no longer be able to access tax free earnings for income used to support these pensions.

If you have a Superannuation balance of less than $500,000 you will be able to make additional catch-up contributions. Unused amounts accrue from 1 July 2017 & roll-over for 5 years. So let’s assume you only contribute $10,000 to Super for each of the 2018 or 2019 Financial Year. In 2020 you could contribute your $25,000 contribution as well as 2 x $15,000, being your catch-up from previous years.

This means people will certainly need to be building wealth both inside and outside super to be able to fund their retirement

What are the changes for Individuals

Good news for Individuals earning more than $80,000. Now you pay 37% tax on any earnings over $80,000 (and below $180,000). The threshold is going to be increased so you won’t pay 37% until you earn $87,000. A tax saving of $315 if you earn $87,000 or above.

There have been rumblings in the press over the last few months about scrapping Negative Gearing. The good news is nothing is changing with Negative Gearing. You can still claim any loss on your rental property against your normal wage and salary income

Action Items / What next

As always this is a general overview of how the budget affects you. The next step is for Growthwise to embark on your personal tax planning, ie what you need to do before 30th June to pay less tax. Look out for your personal checklist of action items over the coming weeks.

It was a long night keeping up with all the changes, here are some videos from our annual budget party. Head on over to our Facebook Page to join in on the discussions or ask any questions.