Detailed in this ‘2016 Budget Edition’ of our newsletter is an update of key changes expected to be introduced as part of the budget. A detailed overview of each of these changes is provided, and for your ease of reference we have also categorised a brief summary of the relevant points, impacts and opportunities for Retirees, Pre-Retirees, Wealth Accumulators, Small-Medium Businesses and Income Tax. As a result, you can view an outline of key changes that are relevant to you and then read more about these changes in the Overview section.
It is also important to note all the budgetary changes are yet to be legislated, and with a federal election anticipated to be called shortly, approval of any budget announcements are expected to be delayed until after the election on 2 July and will be depending on who is in power at the time. Most changes are also not applying until after 1 July 2017 however there are a number of changes that will require significant planning and changes before then.
Overview
Superannuation Proposals
All of the superannuation measures, with one notable exception, are due to commence from 1 July 2017. As a result, we will need to discuss how the proposed changes will impact you personally and help develop strategies going forward as to how best to build your superannuation savings or manage your retirement as tax effectively as possible.
Introduction of lifetime cap for non-concessional super contributions
Effective date: 7:30pm AEST 3 May 2016
Impacted clients: Those making non concessional super contributions, particularly those who have already exceeded the announced cap of $500,000 or planning to top-up before retirement.
The Government has announced a $500,000 (indexed) lifetime non-concessional contributions cap. In determining where you currently stand against this new cap, the Government announced its intention to include any non-concessional contributions made from 1 July 2007.
The good news, if you have already exceeded this level of contributions is that no penalties will apply for being in excess and you won’t be forced to reduce your level of retirement savings. However, you won’t be able to make any more non-concessional contributions. If you do, penalties may apply. If you haven’t yet reached this level, then you will need to understand how much scope you have left for future contributions.
Allow catch-up concessional superannuation contributions
Effective date: 1 July 2017
Impacted clients: People who have unused concessional contributions with super balances of $500,000 or less
From 1 July 2017, those who have not utilised their concessional contribution caps in previous years will have the ability to play catch up. This measure is only available for those who have super balances of $500,000 or less. Amounts will be 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. This measure will also apply to members of defined benefit schemes.
This Budget measure allows flexibility for those who have had interrupted work patterns or those who experience uneven income and have not had consistent contributions or limited contributions to super. This measure is beneficial for most Australians as the “use it or lose it” approach to annual contribution caps will no longer exist. There will also be planning opportunities to identify in which income year a deduction for a concessional contribution will be most valuable with the option of deferring contributions and making a larger contribution in a higher income period.
Personal deductible contributions
Effective date: 1 July 2017
Impacted clients: All clients under age 75
The rules for making personal deducted contributions to super have been simplified to the extent that no tests apply to do this. Whatever your work status, you will be able to make a personal contribution to super (perhaps close to year end) and claim a deduction. Currently you are only able to do this if you meet a self-employed test. This removal opens up additional contributions to employees and provides greater flexibility for their tax and retirement planning. Australian tax residents who work overseas, employees who carry on a business and those who terminate employment during the financial year may also benefit from this measure.
Equalising contribution rules for those aged 65 to 74
Effective date: 1 July 2017
Impacted clients: People aged 65 to 74
From 1 July 2017, all persons aged below 75 will have the ability to make a voluntary super contribution without the need to meet the work test.
The change to remove the work test also applies for non-concessional contributions (subject to the new lifetime limit). But if you are in a situation where the ability to contribute a large lump sum only comes after age 65 as a result of an inheritance or downsizing your family home, there may be more flexibility available to you to be able to contribute some or all of those funds into super. Planning opportunities will now arise to keep building your superannuation through to age 75 even if you are retired.
$25,000 concessional (before-tax) contribution caps for everyone
Effective date: 1 July 2017
Impacted clients: All clients under age 75
The concessional contributions cap will be lowered to $25,000 for all age groups (currently $30,000 for those under 50 and $35,000 for those aged 50 and over). It’s important to remember that this cap includes salary sacrificed contributions, personal deducted contributions and compulsory superannuation guarantee contributions.
This change will impact a large number of clients who are trying to build their superannuation balances and strategies will need to be put in place to start contributing earlier, using the also announced catch-up provisions or maintaining contributions through to age 75 now that you are allowed to do so.
Introduction of low income super tax offset
Effective date: 1 July 2017
Impacted clients: Those on an adjusted taxable income of less than $37,000.
From 1 July 2017 those on an adjusted taxable income of less than $37,000 will effectively receive a refund of the tax paid on their concessional contributions up to $500. At 15% contributions tax this equates to a contribution of $3,333.33.
This measure avoids the situation where a person on adjusted taxable income below $37,000 is paying more tax on their super contributions than on income earned outside of super. For someone earning up to $35,000 they will receive an offset equal to all the tax withheld on their superannuation guarantee payments.
Improve super balances of low income spouses
Effective date: 1 July 2017
Impacted clients: Persons with a low income spouse
From 1 July 2017, the income threshold for a low income spouse to determine eligibility for low income spouse tax offset will increase from $10,800 to $37,000. The offset amount will remain at $540.
This Budget measure seeks to improve the super balances of low income spouses and due to more than tripling the income threshold this may open up the tax offset to more Australians.
Introducing a $1.6 million super transfer balance cap
Effective date: 1 July 2017
Impacted clients: Those who have more than $1.6 million in accumulation (or approaching this level) and want to commence an income stream (Pension). Those who have already commenced an income stream (pension) where the balance is above $1.6 million.
Changes have also been announced to the way you can draw down your super as you move to retirement phase. Rather than place a cap on the amount that you can have in super (from contributions and earnings), there will be limit of $1.6 million that can be moved to a retirement income stream (such as a superannuation pension) that attracts the tax exempt status on earnings in super. This limit applies to existing pensions at 1 July 2017 as well as those yet to be commenced. Amounts in excess of this limit can remain in super in the accumulation phase and taxed at the standard super rate of 15%. If you already have a pension in excess of $1.6M you will need to either transfer part back to accumulation or withdraw a lump sum from the pension account to bring under $1.6M.
This is a per individual cap and therefore a couple can potentially have a total of $3.2M in pension phase and still be taxed at 0% on earnings. Strategies will need to be considered to even up a couple’s balances, take lump sums or transfer to accumulation before 1 July 2017 if this legislation passes. For people preparing for retirement splitting contributions should be considered and re-contribution strategies. It is worth noting however that the balance above $1.6M that remains in accumulation will still only be taxed at 15% on earnings and potentially with franking credits reducing the tax impost there may be minimal or no tax to pay. It still remains a very tax effective environment compared to the alternatives but planning and consideration to other structures will now be important.
Earnings on transition to retirement (TTR) income streams to be taxed
Effective date: 1 July 2017
Impacted clients: Persons over preservation age (55) who are under 65, not retired and drawing a pension
Whilst TTR income streams will still be available, earnings on assets supporting the income stream will be taxed at 15%. TTR pension payments will continue to be tax free from age 60 and the taxable portion of pension payments will attract the 15% tax offset prior to age 60. This measure will remove a significant portion of the tax benefit available upon transferring superannuation assets to the currently tax-free TTR pension environment.
However, despite these proposed changes to the tax treatment of income streams within super, there has been no change to the taxation of benefit payments that you receive personally. If you are over age 60 at the time they are paid, they will continue to be received tax free.
If you are receiving a TTR pension you will now need to review the effectiveness of this strategy and in some cases may need to stop the strategy.
Taxation Proposals
Despite being an election year, the personal tax benefits often announced in an election year were generally missing. The main changes of potential significance announced were:
Personal income tax threshold increase from $80,000 to $87,000
Effective date: 1 July 2016
Impacted clients: Individuals with taxable income over $80,000
From 1 July 2016, the personal tax rate threshold of $80,000 at which the 37% tax rate cuts in will be lifted to $87,000. To the extent you have income in this band range, you will pay tax at the rate of 32.5%. The maximum tax saving from this change is $315 per annum.
The increase of this tax rate threshold is the first since it was lifted to $80,000 in the 2008/2009 financial year and intended to assist in tax “bracket creep” caused by inflation.
Increasing the Medicare levy low-income threshold
Effective date: From 1 July 2015
Impacted clients: Low income tax payers.
The Medicare levy low income thresholds will increase for the 2015/16 income year. The increase incorporates the movements in CPI so that low income taxpayers on incomes below the new threshold will continue to be exempt from paying the Medicare Levy.
The table below outlines the new thresholds that will apply for the 2015/16 income year.
Division 293 tax will apply to persons on adjusted taxable incomes exceeding $250,000
Effective date: 1 July 2017
Impacted clients: Persons with total income and concessional contributions over $250,000
If you are in a position of earning more than $250,000 in an income year, then you will be subject to the additional 15% tax on concessional contributions that currently applies to those earning more than $300,000 in a year. Whilst this is an additional tax, the total of 30% (which is paid by your super fund from your account) is less than the 49% (including current levies) that would be payable if taxed to you personally.
Medicare Levy Surcharge and Private Health Insurance Rebate Thresholds paused
Effective date: 1 July 2018
Impacted clients: Singles/families whose income exceeds $90,000/$180,000 before 1 July 2021
In the 2014 Budget the Government froze Medicare Levy and private health insurance rebate thresholds for 3 years to the 2017/18 financial year. In this budget the thresholds ($90,000 for singles and $180,000 for families) have been frozen for a further 3 years from 2018/19 to 2020/21.
With average earnings increasing over time, the freeze on these thresholds may mean that a person who is eligible for the Private Health Insurance Rebate today may not be eligible in future years. We recommend periodically reviewing your family income and advising your Private Health Insurer of the need to change your tier for rebate purposes.
Effective date: 1 July 2016
Impacted clients: Businesses with a turnover between $2-$10 million
The turnover threshold to qualify for certain small business concessions will be increased from $2 million to $10 million. Businesses who become eligible, will have the ability to access concessions including:
– simplified depreciation rules, including an immediate tax deduction for asset purchases costing less than $20,000 until 30 June 2017,
– simplified trading stock rules allowing businesses to avoid an end of year stocktake where the value of stock has changed by less than $5,000,
– 12-month prepayment rule, simplifying income tax treatment of prepaid expenses,
– the option to account for GST on a cash basis,
– simplifying BAS reporting requirements,
– more generous FBT exemption for work related portable electronic devices (e.g. mobile phones, laptops and tablets)
The small business entity concessions are designed to assist business simplify accounting processes and/or provide a timing benefit. There can be a significant cashflow benefit to businesses when accessing immediate tax deductions for asset purchases or accounting for GST on a cash basis. We encourage our clients to contact us to discuss how these concessions could improve your cashflow.
We note, the lower existing limit continues to apply for small business CGT exemptions (which includes the ability to contribute additional amounts to super). This measure will increase the number of small businesses that will be eligible for the lower tax rate afforded to small businesses and accelerated depreciation provisions.
Reduction of the company tax rate
Effective date: 1 July 2016
Impacted clients: Persons operating through certain company structures.
The company tax rate will reduce progressively to 25% over 10 years. The annual aggregated turnover for companies that will be eligible for the 27.5% tax rate will increase each year:
Targeted amendments to Division 7A
Effective date: 1 July 2018
Impacted clients: Owners of private companies.
The Government will seek to implement a number of recommendations from the Board of Taxation’s post implementation review into Division 7A. The changes are designed to remove some of the complexity of the measures while maintaining the overall integrity and policy intent of the legislation. These changes include:
• a self-correction mechanism for inadvertent breaches
• appropriate safe-harbour rules to provide certainty
• simplified Division 7A loan arrangements and
• a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.
Division 7A is a tax integrity measure whereby a benefit provided by a private company to a shareholder or associate can be treated as a dividend even if it is treated as something other than a dividend such as a loan, an advance, a gift or a writing off a debt. While the precise details of these changes are unknown at this stage, it is likely that they will provide greater certainty and comfort in using accumulated private company profits in funding investments across the broader family group.
GST on low value imports
Effective date: 1 July 2017
Impacted clients: Consumers who buy overseas goods (e.g. online shoppers).
Overseas suppliers of low value goods who have an Australian turnover of $75,000 or more will be required to register for, collect and remit GST for low value goods supplied to consumers in Australia. Arrangements are to be reviewed after two years to ensure they are operating as intended in light of any international developments.
If implemented, it is anticipated this change will increase the cost of certain imported goods, often purchased via the internet, however the difficulty will be in successfully having foreign entities register for GST purposes.
Increase the unincorporated small business tax discount
Effective date: 1 July 2016
Impacted clients: Individuals who own an unincorporated small business
The small business tax discount on income tax payable on business income from an unincorporated business will increase incrementally from 5% to 16% over 10 years. The discount will increase to 8% from 1 July 2016, 10% in 2024-25, 13% in 2025-26 and 16% in 2026-27. The aggregated annual turnover threshold will increase from less than $2 million to less than $5 million from 1 July 2016. The discount remains capped at $1,000 per individual.
The measure will encourage the establishment and expansion of small businesses by providing more after tax income for their owners for personal expenses, savings or investment in the business.
