RSM Australia

Budget 2016 for Corporations

Cuts to Company Tax Rate

The company tax rate will be reduced to 25% over the next 10 years.

The company tax rate will be progressively reduced to 25% between the 2016/17 and 2026/27 income years.

A company tax rate of 27.5% will apply to companies with an annual aggregated turnover of less than $10 million for the 2016/17 year, increasing to an aggregated turnover of $1 billion by 2022/23. The tax rate will be further reduced progressively for all companies from the 2024/25 income year.

Summary of corporate tax rates

Franking credits will be eligible for distribution in line with the underlying tax rate paid by the company. We would expect that franking account balances will be adjusted upwards as company tax rates fall.

In addition, administrative penalties will be imposed on ‘significant global entities’ (companies with global revenue of $1 billion or more) will be increased from 1 July 2017.

Penalties relating to the lodgement of documents with the Commissioner will increase 100-fold, raising the maximum penalty from $4,500 to $450,000.  Penalties relating to the making of statements to the ATO will be doubled.

Winners

The reduction in Company tax rates should result in increased investment, higher real wage growth and larger dividends for shareholders.

Losers

  • Resident shareholders (e.g. retirees and superannuation funds) seeking franking offsets to shelter tax payable;
  • Large corporates who do not comply.

Case Study

ABC Pty Ltd has $100 million turnover each year, and earns a consistent $10 million profit before tax. 

Income Year

Profit Before Tax

Tax Rate

Tax Paid

Profit After Tax

Maximum Franking Credit Rate

2017/18

$10 million

30%

$3 million

$7 million

30%

2018/19

$10 million

30%

$3 million

$7 million

30%

2019/20

$10 million

27.5%

$2.75 million

$7.25 million

27.5%

2020/21

$10 million

27.5%

$2.75 million

$7.25 million

27.5%

2021/22

$10 million

27.5%

$2.75 million

$7.25 million

27.5%

2022/23

$10 million

27.5%

$2.75 million

$7.25 million

27.5%

2023/24

$10 million

27.5%

$2.75 million

$7.25 million

27.5%

2024/25

$10 million

27%

$2.7 million

$7.3 million

27%

2025/26

$10 million

26%

$2.6 million

$7.4 million

26%

2026/27

$10 million

25%

$2.5 million

$7.5 million

25%

ABC Pty Ltd will therefore be unable to frank distributions at greater than its corporate tax rate (i.e. 30% for the first 2 years, 27.5% for 2019/20 to 2023/24, 27% for 2024/25, 26% for 2025/26, and 25% for 2026/27).

Tax Consolidation Integrity Measures

The Tax Consolidation Integrity Measures introduced in the 2016/17 Budget include:

  • Disregard liabilities arising from securitisation arrangements that are not recognised for tax purposes;
  • Remove adjustments relating to deferred tax liabilities (“DTL”) for joining and exit calculations; and
  • Defer amendments relating to deductible liabilities.

Three integrity measures will be introduced that relate to how the joining entity liabilities are measured in determining the Allocable Cost Amount (“ACA”) for tax consolidation purposes.

Where an entity with a securitised asset (for example a mortgage securitisation investment) joins or exits a tax consolidated group, a mismatch can occur in the calculations because the securitised asset and the corresponding liability are not recognised in the same way. If a securitised asset won’t be recognised for tax purposes, any liabilities arising from the securitisation arrangement will be disregarded for tax consolidation purposes.

The 2016/17 Budget Papers don’t provide any detail about what Deferred Tax Liability ("DTL") adjustments will be removed from the joining and exit calculations as a consequence of this announcement. It is likely, that the “iteration” calculations will be removed so that the value of a joining entity’s equity will reflect its DTL rather than the value of the DTL that will be reflected in the group accounts.

The government issued an Exposure Draft that had proposed to introduce a new measure requiring a consolidated group to bring assessable income to account over a period of time if it acquired a joining entity with deductible liabilities from 14 May 2013. The 2016/17 Budget announcement will modify this proposed rule to exclude deductible liabilities from a joining entity’s ACA from 1 July 2016.

Winners

  • Consolidated groups with exiting securitisation entities; and
  • Tax consolidated groups that have acquired joining entities with deductible liabilities from 14 May 2013. These groups will not need to apply the proposed measures applicable to deductible liabilities.

Losers

  • Consolidated groups with joining securitisation entities.

Case Study

A tax consolidated group (TCG) acquired an entity (JE) for $1,000. At the joining time the balance sheet of JE comprises plant with a book (and adjustable) value of $2,000 and deductible accruals (liability) for $1,000. Under the proposed measures TCG would have been required to recognise $1,000 as assessable income over a 12 month period from the joining time. Following the 2016/17 Budget announcement, TCG would not need to bring any amount into its assessable income relating to the deductible accruals of JE. If JE is acquired from 1 July 2016, the deductible accruals would not be recognised in the ACA of JE.

TOFA rules to be simplified

The Taxation of Financial Arrangement (“TOFA”) rules are designed to calculate the amount and timing of gains and losses on financial arrangements.  These rules will be reformed to reduce their scope, decrease compliance costs and increase certainty.

The current TOFA rules were primarily designed for the largest taxpayers however in practice also apply to a significant group of smaller taxpayers who have not enjoyed the envisaged compliance cost savings and simplification benefits.

This measure will reduce the scope of these provisions, decrease compliance costs and increase certainty through the redesign of the TOFA Framework.

The main components of this measure include:

  • A closer alignment between tax and accounting in the TOFA rules;
  • Simplified accruals and realisation rules;
  • A new tax hedging regime which is easier to access, encompasses more types of risk management arrangements and removes the direct link to financial accounting; and
  • Simplified rules for the taxation of gains and losses on foreign currency.

In addition, the Government will incorporate the policy reflected in a number of measures which have previously been announced but are yet to be legislated, including:

  • Amendments to TOFA tax hedging rules; first announced in the 2011/12 Budget;
  • Technical and compliance cost saving amendments to TOFA foreign currency regulations; first announced in the Mid-Year Economic and Fiscal Outlook 2004/05; and
  • Extending the range of entities that can use a functional currency, first announced in the 2011/12 Budget.

These rules will apply to income years commencing on or after 1 January 2018.

Winners

Reform of the TOFA rules is intended to remove the majority of taxpayers from the TOFA regime, resulting in lower compliance costs, provide simpler rules and more certainty.

Losers

None.

National Innovation  and Science Agenda

  • Tax incentives for early-stage investors will be expanded
  • Arrangements for Early Stage Venture Capital Limited Partnerships (‘ESVCLP’) to be extended

The 2016/17 Budget restates a number of measures and tax incentives applicable to investors in early-stage innovation companies and ESVCLPs that are incorporated within the raft of proposed amendments in the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016. This bill is currently before the Federal Parliament.

Measures to promote investment in early-stage innovation companies:

  • A 20% non-refundable but carry-forward tax offset for investment in ‘eligible’ early-stage innovation companies;
  • Increasing accessibility to the CGT exemption, by reducing the minimum holding period from three years to 12 months;
  • Including a time limit on incorporation and criteria for determining whether a company is an ‘innovation company’ in the definition of eligible startups;
  • Requiring that investors and innovation companies are not affiliates; and
  • Limiting the annual investment amount for non-sophisticated investors to $50,000 or less to receive a tax offset.

Measures to promote investment in ESVCLPs:

  • A 10% tax offset for investments in ESVCLPs;
  • Adding a transitional arrangement that allows conditionally registered funds that become unconditionally registered after 7 December 2015 to access the tax offset if the criteria are met;
  • Relaxing the requirements for very small entities to provide an auditors’ statement of assets;
  • Extending the increase in fund size to $200 million for new ESVCLPs to existing ESVCLPs; and
  • Ensuring that the venture capital tax concessions are available for FinTech, banking and insurance activities.

Winners

Innovation companies, investors, entities seeking early-stage or venture capital.

Losers

Cynics will bemoan that the 2016/17 Budget did not contain any new policy for early-stage innovation companies or ESVCLPs.

Case Study

ABC Pty Ltd was incorporated on 1 July 2018 and conducts an ‘eligible business’.  It is not listed on a stock exchange, and for the year ended 30 June 2019 had income of $150,000 and expenses of $500,000.  John, an early-stage investor in ABC Pty Ltd, subscribed for shares at a cost of $20,000. John is entitled to claim a tax offset for $4,000. John sells his ABC shares in 2021 for $50,000. As he has held the shares for longer than 12 months the capital gain he has realised will be exempt from CGT.

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