Overview of the 2016 Federal Budget

The government was elected in 2013 without an arts policy and it has run an almost full term without being able to enunciate one.

In the Tony Abbott era, no direct tax measures for the arts were announced and the model of peer-reviewed grants funding, based on the 2002 Myer Report, endorsed by John Howard and supported by the Rudd-Gillard administrations, was overturned.

The change in policy affecting direct arts grants seeks to replace Australian cultural policy from a facilitator model, where artistic output is encouraged through taxation and other concessions, to a patron model, where the government supports practitioners it regards as excellent.

The patron model was the traditional cultural policy in Australia until the election of the Hawke-Keating administration in 1983. It commissioned the McLeay Report in 1986, also known as Patronage, Power and the Muse. The McLeay Report resulted in the artist income averaging scheme.

In 2015 a substantial amount of funding was taken away from arts bodies, with no formal consultation, and redirected to a yet-to-be-created organisation under the direct control of the Ministry of the Arts. This new body was to be called the National Program for Excellence in the Arts (NPEA).

NPEA was rebadged as Catalyst late last year after Malcolm Turnbull, widely seen as an arts-friendly politician, replaced Mr Abbott as Prime Minister. Some of the funds taken from the arts bodies in 2015 have been restored, however the timing of the cuts to grants, allied with the absence of an arts policy, has created conditions of great uncertainty for artists. It has certainly not been an exciting time for them.

In both the Abbott and Turnbull incarnations of the government, no decision has been made on the resale royalty review that concluded in 2013. No changes have been made to the storage, insurance and related-party rules that create disincentives for super funds to buy artworks, even though small business has been given generous write-off rules to deduct the cost of art under certain conditions.

The 2016 Federal Budget is being promoted as a ‘jobs and growth’ document. Glenn Stevens, Governor of the Reserve Bank of Australia, coined this term in a 2015 tax reform summit when he said:

‘Your topic of ‘reform’ is broad. What does it mean? I submit that the general public is much more likely to grasp, intuitively, a conversation about growth. Growth in jobs, in incomes, in their standard of living, wealth and prosperity.’

Innovation is a central feature of this year’s Budget. New measures were announced for so-called ‘angel investors’, who could receive non-refundable tax offsets of up to $200,000, by investing in new businesses that meet certain criteria. The Turnbull government is particularly targeting businesses that invest in science and technology. Like Tony Abbott’s 2013 ‘My Plan’ pre-election document, the arts are not mentioned in Mr Turnbull’s innovation policy.
How do artists share in the growth in jobs, income, standard of living, wealth and prosperity if their industries are excluded from taxation policy? The question arises when an innovation statement has no room for the arts, which are after all prima facie innovative.

It could be argued the lack of an arts taxation policy is why cultural policy is returning to a patronage model, with governments simply trying to pick winners instead of creating incentives for new artistic output.
At no charge, here are a few taxation measures the government (or the opposition) could announce for the arts with no material impact on the Budget:

  • Resale royalties: retain the scheme, streamline the administration and increase the reporting threshold to $10,000
  • Super art: relax the rules to allow artwork bought from dealers with professional indemnity insurance to be eligible and let 10% of the fund balance be held in art that can be displayed at home
  • Status of the artist: legislate the meaning of ‘artist’ to prevent non-artists accessing government concessions
  • Professionalise arts bodies: proscribe minimum standards for membership, codes of ethics and continuing professional education as recommended by the 2014 report by the Inspector-General of Taxation into the administration of valuation matters.

Company tax
Three main changes have been announced:

  • By 2026/27 all Australian companies regardless of their size will have their income tax reduced from 30% to 25%
  • Small companies will receive a tax cut of 1% (from 28.5% to 27.5%) starting 1 July 2016
  • Franking credits on dividends will be adjusted in line with the decrease in company tax

The change in the franking credits regime effectively represents an increase in tax on dividends received by investors as the following table shows:

Self-managed funds currently receive a tax rebate of $21 for each $100 of fully franked dividends they receive, which will reduce to $13 under these changes. An individual taxpayer on a marginal rate of 39.0% (marginal rate from $87,000 to $180,000) will pay $19 income tax for each $100 of fully franked dividends received in the future rather than $13 currently.

The rationale behind the company tax rate changes is to encourage businesses to re-invest their profits into their enterprises, either in equipment or in their staff. The change to the franking credits arrangements works in concert with the company tax reduction by providing a disincentive to companies to pay out their retained earnings in dividends to their shareholders.

The 2010 Henry Tax Review recommended a cut in company tax because many of Australia’s overseas trading partners have lower tax rates.

Angel investor tax breaks

Investors in eligible businesses, incorporated in the last three income years, not listed on a stock exchange, having income of less than $200,000 and expenses of less than $1 million, may be granted tax concessions that include:

  • a non-refundable tax offset of up to $200,000
  • quicker access to capital gains tax exemptions

Individuals not in business
Minor tax relief has been granted by extending the 32.5% marginal tax rate from its current upper threshold of $80,000 to $87,000.

Individuals in business
Individuals in business will receive an income tax cut, but as this is limited to $1,000 per year, there may be an incentive for sole traders to incorporate – however, before you rush to form a company, it is important to understand:

  1. your average rate of taxation may be less than your marginal rate; and
  2. the obligations required of directors to operate a company.

In relation to marginal v average rates of taxation, the table below (which includes medicare levy) compares a sole trader with a taxable income of $87,000 against a sole trader with a taxable income of $115,000.

It is apparent that individuals in business who earn a taxable income of about $115,000 or less will not receive a tax benefit by incorporating their business, even though their marginal rate of tax is 37.0%. This is because the company tax rate is levied on all taxable income and the personal tax rate is based on a progressive scale. That is, it increases the higher the taxable income an individual receives.

In relation to operating a company, directors are governed by the Corporations Act and have an obligation to act in the best interest of all stakeholders. Once a company makes a profit, directors can pay out retained earnings as dividends to shareholders or as wages to themselves. If directors are paid money from company bank accounts that are neither dividends nor wages, they may be in breach of the Corporations Act. Dividend payments are subject to special rules, including franking credits. Wages payments require ATO registration, are subject to superannuation rules and may attract workers compensation and payroll tax laws.

Individuals in business seeking to incorporate to take advantage of lower company tax rates should properly plan their transition.

Family trusts
The operations of family trusts have been left largely unaffected by the Budget, however the company tax changes may provide an incentive for trusts to substitute individual trustees with a company trustee or to create special-purpose companies to act as beneficiaries.

Small business depreciation rules
From 1 July 2016 the definition of ‘small business’ will change to include entities with a turnover of $10 million, up from the previous threshold of $2 million, to allow more businesses to access various tax concessions including:

  • immediate write-off of depreciating assets up to $20,000
  • lower corporate tax rate of 27.5%
  • option of accounting on a cash basis

However, the $2 million threshold will be retained in relation to the generous capital gains tax rules for selling small businesses.

GST to apply to all imported consumer goods
The GST exemption that applies to imported goods with a value of less than $1,000 will be removed from 1 July 2017. Effectively, all consumer goods imported into Australia will face the same tax regime as those bought in Australia.
Overseas supplies with an Australian turnover of more than $75,000 will be required to register for, collect and remit GST for all goods supplied to Australian consumers. Details of the administration of this measure will be worked out by the ATO.

Superannuation – reintroduction of reasonable benefits limits (RBLs)
In a surprise return to Keating-era tax law, super fund balances for retirees will lose their tax-free status when their balance exceeds $1.6 million. The start date for this measure is 1 July 2017.

Superannuation – lifetime cap on non-concessional contributions
A new lifetime cap of $500,000 will be imposed on after-tax contributions made to super, commencing from 1 July 2007, with effect from 3 May 2016.

This cap replaces the previous system, which allowed up to $180,000 per year to be contributed as non-concessional. There will be no penalty imposed on taxpayers exceeding the cap, who contributed from the start date to Budget night.
The lifetime cap is available to age 74.

Superannuation – concessional contributions cap reduced
From 1 July 2017 this cap will be set at $25,000 for all, replacing the previous caps of $30,000 for those under 50 years of age and $35,000 for those over 50 years of age.

Superannuation – expansion of tax deductible contributions
All individuals up to age 75, regardless of their employment status, will be able to claim a tax deduction for contributions to super of up to $25,000 per year.

This measure eliminates the need to pass a ‘work test’ for taxpayers to make concessional contributions and is particularly helpful for people transitioning from PAYG employment to self-employment.

Individuals aged 65 to 74, will also no longer have to pass a work test to make contributions to super. They may also make spousal contributions and access more generous concessions.

These measures commence 1 July 2017.

Superannuation – LISTO (low income tax offset) and spousal contributions changes
A LISTO will be available for taxpayers with a taxable income of $37,000 making concessional contributions of up to $500 per year. And the low-income spouse superannuation tax offset will be widened to increase the taxable income threshold from $10,800 to $37,000. The offset provides for a maximum rebate of $540 for the contributing spouse.

These measures commence 1 July 2017.

Superannuation – TRIS (transition to retirement income stream) tax-free status removed
A measure that will impact heavily on taxpayers who are literally transitioning to their retirement, the tax-free status of the assets supporting these TRIS pensions will be removed from 1 July 2017. And the rule that allows lump sums to be interpreted as income streams also goes.

Superannuation – 30% tax for taxpayers earning more than $250,000
The threshold for Division 293 taxation will be reduced from an adjusted taxable income of $300,000 to $250,000 from 1 July 2017.

Negative gearing – not touched
Except to the extent that the ‘adjusted taxable income’ definition, which adds back negative gearing losses to various thresholds such as the private health insurance rebate and the high earners tax (above) will result in tax cascades for unwitting taxpayers.

Cigarettes, wine and whiskey
If the 2016 Federal Budget leaves you reaching for a cigarette, a wine or a whiskey, the government has you covered.
Cigarettes will be subject to four annual excise increases of 12.5% each from 2017 to 2012, in addition to the usual increases for cost of living. The duty free tobacco allowance will reduce from 50 cigarettes to 25, from 1 July 2017.
The wine equalisation tax (WET) will be halved to $250,000 from 1 July 2017 and producers will have to meet new criteria to be eligible: they must own or have a long-term lease over a winery and sell, packaged branded wine in Australia.

Whiskey producers will be allowed to access the distillers refund scheme to seek rebates of excise up to $30,000 per year. Commencement date is 1 July 2017.

Image credit:
Barry Tate
Cathedral (2014)
See more at Fox Galleries