2016 Budget Update & Implications

Superannuation Contributions

Concessional contributions cap reduced to $25,000

  • The annual cap on concessional contributions will be reduced to $25,000 from 1 July 2017 for all individuals, regardless of age.
  • Currently the concessional contributions cap is $30,000 pa for those to age 50, and $35,000 for those aged 50 and over.
Implications: This reduces the ability to salary sacrifice or make personal deductible contributions. Those who wish to save higher amounts each year may need to consider other tax-effective non-super options. Individuals should consider maximising the higher caps for 2015/16 and 2016/17.
  • Catch up for unused concessional contribution cap amounts
  • From 1 July 2017, the Government will allow individuals to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.
  • This change allows people to carry forward their unused concessional cap, providing an opportunity to ‘catch up’ if they have the capacity and choose to do so.
  • Access to these unused cap amounts will be limited to those individuals with a superannuation balance less than $500,000.
  • Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward.
Implications: This helps those with lower super balances who have not been able to maximise contributions each year.  It allows them to make catch up payments, potentially in excess of the normal caps.

New lifetime non-concessional contribution cap

  • The annual non-concessional contribution (NCCs) caps and bring-forward rule will be replaced with a $500,000 lifetime cap.
  • The lifetime cap will apply to all NCCs made on or after 1 July 2007. If contributions made before budget night (3 May 2016) exceed this cap excess tax will not apply. However, excess contributions made after this time will incur excess contributions tax if not withdrawn.
  • This means for those who have already partially used or exceeded this cap, they may only be able to contribute a reduced amount or may no longer be able to contribute at all.
Implications: This is a major change which significantly limits the ability to accumulate wealth inside superannuation. It adds a layer of complexity given the retrospective nature of its effect.

Contribution work test abolished

  • Under current rules, those aged 65-74 need to meet the work test before making a personal superannuation contribution. The work test will be abolished from 1 July 2017 allowing everyone under age 75 to make personal contributions 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.
Implications: This change provides greater flexibility and simplicity.  It will make it easier for older Australians to contribute to super and will allow those who are preparing for retirement to consider downsizing their home and contributing surplus amounts into super or contributing funds received from inheritances (subject to the limits imposed by contribution caps).

Taxation of contributions for high income earners

  • From 1 July 2017, the threshold at which high income earners pay additional contributions tax will decrease from $300,000 to $250,000
  • An additional 15 per cent tax is payable on concessional contributions to the extent the threshold is exceeded.
Implications: Cutting the threshold to $250,000 will catch more taxpayers with the higher 30% contributions tax and reduce the tax benefits on concessional contributions.  However, 30% is still less than the top marginal tax rate so contributing to super remains attractive.

Tax deductions for personal superannuation contributions

  • All individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions from 1 July 2017, irrespective of their employment arrangements.
  • This effectively allows all individuals, regardless of whether they are working or not, to make concessional superannuation contributions up to the concessional cap.
  • Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements.
Implications: This change provides everyone under age 75 with an equal opportunity to contribute to superannuation and fully use the concessional contribution cap regardless of employment status. It may create opportunities for strategies to manage tax liabilities that are not currently available.

Increased eligibility for spouse contribution tax offset

  • From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse from $10,800 to $37,000.
  • Currently, an 18% tax offset is available on spouse contributions up to $3,000 where the receiving spouse’s income is less than $10,800 and is phased out once income reaches $13,800.
  • The low income spouse tax offset provides up to $540 per annum for the contributing spouse.
Implications: Those with a spouse earning under $37,000 may be encouraged to make spouse contributions with the availability of a tax offset equivalent to 18%. Note that spouse contributions count towards the lifetime non-concessional contribution cap.

Low Income Superannuation Tax Offset (LISTO)

  • A low income superannuation tax offset (LISTO) has been reintroduced from 1 July 2017 for those with adjusted taxable income up to $37,000 per annum.
  • The LISTO is a refund of contributions tax paid on concessional contributions and is capped at $500 per annum. It will be paid into the superannuation account as a non-refundable tax offset.
Implications: Those on low incomes will no longer face a higher tax rate on super contributions than would be paid on salary or other income. Combined with the increased ability to make contributions up to age 75 and the ability for everyone to claim tax deductions for contributions, this may encourage those on lower incomes (including retirees under age 75) to top up super.

Pensions

Introduction of $1.6 million cap on pension balance

From 1 July 2017, the maximum amount of superannuation that a person can transfer into pension phase is limited to $1.6 million.

A tax on amounts that are transferred to pension phase in excess of the $1.6 million cap will be applied, similar to the tax treatment that applies to excess non concessional contributions.

Those who are already in pension phase before 1 July 2017 will be required to transfer any balance above $1.6 million back into accumulation phase.

Individuals who are starting pensions from 1 July 2017 cannot roll more than $1.6 million into the pension phase, but the balance rolled over can grow over $1.6 million due to earnings without penalty.

Implications: This is effectively a reversion back to reasonable benefit limit days. However, under this measure the rules limit the tax-free benefits generated from pension phase but do not limit the amount that can be saved in accumulation phase (which is limited by changes to contribution caps). For those that have pension balances in excess of $1.6 million they could choose to leave savings in the accumulation phase of superannuation where tax on earnings is applied at 15% or withdraw to invest outside superannuation.

Transition to retirement income streams

  • The earnings tax exemption for assets supporting transition to retirement (TTR) income streams is proposed to be removed from 1 July 2017. This measure will apply to existing TTR income streams and affects income streams of individuals over preservation age who have not retired.
  • The ability to treat certain superannuation income stream payments as lump sums for tax purposes has also been removed.
Implications: From 1 July 2017, 15% tax will be applied to the earnings derived in a TTR pension and combined with the lower concessional contribution caps these strategies are likely to be less effective.

Changes to defined benefit schemes

  • From 1 July 2017, 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.
  • 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.
  • Pension payments over $100,000 pa paid to members of unfunded defined benefit schemes will continue to be taxed at marginal rates. However, the 10% tax offset will be capped at $10,000.

Super Death Benefits

Anti-detriment payments

  • Anti-detriment provisions will be abolished from 1 July 2017. Currently, upon the death of a member, some superannuation funds pay an extra anti-detriment amount to eligible beneficiaries on top of the deceased member’s account balance. It is essentially a refund of contributions tax that has been paid by the deceased member.

Taxation

Increased marginal tax threshold

  • From 1 July 2016, the Government will increase the 32.5 per cent personal income tax threshold from $80,000 to $87,000.
  • This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37 per cent to 32.5 per cent.
Implications: Small business owners may have limited salaries to $80,000 per annum to stay around the 30% tax mark which is comparable to company tax rates. These salary arrangements should be reviewed to consider increasing salaries to $87,000 if appropriate.

Medicare levy low income thresholds

  • The Government will increase the Medicare levy low income thresholds for singles, families, seniors and pensioners from the 2015/16 income year.
  • The threshold for singles will be increased to $21,335. For couples with no children, the threshold will be increased to $36,001 and the additional amount of threshold for each dependent child or student will be increased to $3,306.
  • For single seniors and pensioners, the threshold will be increased to $33,738. For senior and pensioner couples with no children, the threshold will be increased to $46,966 and the additional amount of threshold for each dependent child or student will be increased to $3,306.

Medicare Levy Surcharge, Private Health Insurance Rebates

  • The Government will continue the pause on indexation of the income thresholds for the Medicare Levy Surcharge and Private Health Insurance Rebate for a further three years.

Reducing the company tax rate to 25 per cent

  • The Government has announced it will progressively reduce the company tax rate to 25% over 10 years. The tax rate for businesses with an annual aggregated turnover of less than $10.0 million will be 27.5% from the 2016/17 income year.
  • The threshold will then be progressively increased to ultimately have all companies at 27.5% in the 2023/24 income year.
Implications: The lower tax rates may help to increase profitability of small businesses to help them with cash flow. As the corporate tax rate reduces, this will reduce the level of franking credits that are passed onto shareholders.

Increase to the small business entity turnover threshold

  • Tax concessions for small businesses are dependent on the entity meeting the definition of a small business based on annual turnover. The Government will increase the small business entity turnover threshold from $2 million to $10 million from 1 July 2016.
  • This will allow more business entities to gain access to the small business concessions, such as the lower small business corporate tax rate (27.5% from 2016/17), accelerated depreciation (including the ability to write off balances up to $20,000 until 30 June 2017) and depreciation pooling provisions.
Implications: This measure will allow more small-medium businesses to access tax concessions to encourage development and growth.

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