11 May 2016 Federal Budget Update
Macquarie Partners Central Coast 2016 Federal Budget Update
INTRODUCTION
On the 3rd May 2016 the Federal Government handed down the Budget for the 2016 year that includes some of the biggest changes to superannuation since 2007. Some of the major changes include:
- Changes to contribution caps including the introduction of a lifetime non-concessional cap.
- Limits to how much can be transferred into pension phase.
- Removal of work test for contributions between age 65 and 74.
- Extended eligibility to claim deductions for personal super contributions.
- Restricting tax concessions associated with transition to retirement pensions.
The budget also included a number of changes to a number of company tax rates and concessions. Finally it is important to note that budget announcements are still only proposals at this stage and will depend on the outcome of the upcoming election and on the proposals actually being legislated.
SUPERANNUATION
Probably the most dramatic impact on superannuation that will affect the client base is the lifetime cap for non-concessional contributions of $500,000. This has come into effect from 7.30pm from the 3rd May 2016.
The $500,000 lifetime cap will take into account all non-concessional contributions made on or after the 1st July 2007. Contributions made before the commencement (i.e. 7.30pm AEST on the 3rd May 2016) cannot result in an excess of the lifetime cap, however those who have exceeded the cap prior to commencement will be taken to have used up their lifetime cap.
Non-concessional contributions made after Budget night that exceed the cap (taking into account all non-concessional contributions since the 1st July 2007) will need to be removed or be subject to current penalty tax arrangements.
The lifetime non-concessional cap will be replace the existing annual non-concessional contribution cap of up to $180,000 per year (or $540,000 every 3 years under the bring forward rule for individuals aged under 65). Those aged 65-74 who are currently limited to $180,000 per year will have access to the $500,000 cap without having to meet a work test. The lifetime cap will be indexed in $50,000 increments in line with AWOTE (Australian Weekly Ordinary Time Earnings).
Accordingly it is extremely important that any client that is considering making a non-concessional contribution in the time period between the 3rd May 2016 and 30th June 2016 urgently contact this office to ensure that they are not going to breach the new rules. Also care will need to be taken with regard to making non concessional contributions after the 30th June, 2016 to ensure no breach is made therefore it is important you consult with the office before any such contributions are made.
All of the other following proposed changes to superannuation are effective from the 1st July 2017 therefore we have sufficient time to see whether these proposals are actually legislated and how they will impact all of us moving forward.
Concessional Contribution Cap Reduced to $25,000 – Effective 1 July 2017
The concessional contributions cap will reduce to $25,000 per annum for everyone regardless of age from 1 July 2017. Currently the concessional contributions cap is $30,000 for clients under the age 50 and $35,000 for ages 50 and over.
Catch-up Concessional Contributions – Effective 7.30pm (AEST) 3 May 2016
Unused concessional contribution cap amounts will be able to be carried forward on a rolling basis over 5 year consecutive years. This applies to unused cap amounts from the 1 July, 2017.
Access to unused cap amounts will be limited to individuals with a superannuation balance less than $500,000.
The Government states this measure will allow those who take breaks from the workforce the opportunity to “catch-up” if they have the capacity and choose to do so. The wording does however appear to infer that the carry forward concessional contribution cap amounts appear to be available to everyone who has contributed less than the concessional cap, not just those who take breaks from the workforce.
Remove Contribution Eligibility Requirements for those aged 65 to 74 – Effective 1 July 2017
The current work test that applies for people making voluntary contributions between age 65 and 74 will be removed. This change will allow individuals to make contributions for a spouse aged under 75 without requiring the spouse to satisfy a work test.
The Government says this will simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including downsizing their home. This budget proposal is certainly a good one for superannuants.
Introduce a $1.6 million Superannuation Transfer Balance Cap – Effective 1 July 2017
A transfer balance cap will be introduced to restrict the total amount of superannuation that can be transferred from accumulation to pension phase to $1.6 million. Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess in accumulation phase (where earnings will be taxed at the concessional rate of 15 per cent or 10% for discount capital gains).
The cap will be indexed in $100,000 increments in line with the consumer price index. A proportionate method which measures the percentage of the cap previously utilised will determine how much cap an individual has available at any point in time.
For example, if an individual has previously used up 75 per cent of their cap they will have access to 25 per cent of the current (indexed) cap. Subsequent fluctuations in retirement accounts due to earnings growth or pension payments will not be considered when calculating the remaining cap.
Existing Pension Balances
Members already in pension phase as at 1 July 2017 with balances in excess of $1.6 million will need to either:
- transfer the excess back into an accumulation; or
- withdraw the excess amount from their superannuation if they meet a condition of release.
Individuals who breach the cap will be subject to a tax on both the amount in excess of the cap and the earnings on the excess amount similar to the tax treatment that applies to excess non-concessional contributions.
Additional 15% Contributions Tax: Threshold Reduces to $250,000 – Effective 1 July 2017
Division 293 tax, which is an additional 15% contributions tax payable by high income earners with income exceeding $300,000, will apply to those with income exceeding $250,000 from 1 July 2017.
The Government claims reducing the Division 293 tax income threshold will improve substantially and fairness in the superannuation system by limiting the effective tax concessions provided to high income individuals.
The following table compares the tax concessions applicable on concessional contributions at various marginal tax rates:
| Marginal tax rate* | Contributions Tax | Tax Concession |
| 21% | 15% | 6% |
| 34.5% | 15% | 19.5% |
| 39% | 15% | 24% |
| 49% | 15% | 34% |
| 49% | 30%** | 19% |
*Including Medicare Levy and Temporary Budget Repair Levy
**Includes additional 15% contributions tax (Division 293)
It is important to note the definition of income for Division 293 purposes includes:
- Taxable income (including the net amount on which family trust distribution tax has been paid)
- Reportable fringe benefits
- Total net investments loss (including net financial investments loss and net rental property loss)
- Low tax contributions (non-concessional contributions) including super guarantee, salary sacrifice and personal concessional contributions.
Division 293 tax will apply to any low tax contributions that exceed the $250,000 threshold, assuming they form the top slice of income.
Transition to Retirement Pensions: Removal of Earnings Tax Exemption – Effective 1 July 2017
The tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed from 1 July 2017. Earnings will then be taxed at 15 per cent. This change applies irrespective of when the TTR income stream commenced, ie. No grandfathering applies.
The Government states that reducing the tax concessional nature of transition to retirement income streams will ensure they are fit for purpose and not primarily accessed for tax minimisation purposes.
Further, individuals will no longer be able to treat certain superannuation income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate of $195,000.
Increased Access to Spouse Superannuation Tax Offset – Effective 1 July 2017
The current spouse superannuation tax offset will be available to more people due to an increase in the spouse income threshold from 1 July 2017.
The income threshold for the spouse superannuation tax offset is increasing from $10,800 to $37,000.
A contributing spouse will be eligible for an 18 per cent offset worth up to $540 for contributions made to an eligible spouse’s superannuation account.
Low Income Superannuation Tax Offset – Effective 1 July 2017
A low Income Superannuation Tax Offset (LISTO) will be introduced from 1 July 2017 to reduce tax on superannuation contributions for low income earners.
The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions up to a cap of $500. The LISTO will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
The ATO will determine a person’s eligibility for the LISTO and advise their superannuation fund annually. The fund will contribute the LISTO to the member’s account.
Extend Deductions for Personal Contributions – Effective 1 July 2017
Australians under 75 will be able to claim an income tax deduction for any personal superannuation contributions made to a complying superannuation fund up to their concessional cap. This effectively allows all individuals, regardless of their employment circumstances, to claim a deduction for their personal contributions up to the value of the concessional cap.
To access the tax deduction, individuals will need to lodge a notice of their intention to claim the deduction with their superannuation fund or retirement savings provider prior to lodging their tax return. These amounts will count towards the individual’s concessional contributions cap, and be subject to 15 per cent contributions tax. Individuals can choose how much of their contributions to deduct however if they end up exceeding their concessional cap the deduction claimed on the excess contributions will have no effect as these amounts will be included back into the member’s assessable income.
TAXATION
Reducing the Company Tax Rate to 25 per cent – Effective from 1 July 2017
The company tax rate will be reduced to 25 per cent over 10 years. Currently, small business companies with aggregated turnover less than $2 million pay tax at a rate of 28.5%. Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.
PROPOSED REDUCTION TO COMPANY TAX RATES – Effective 1 July 2016
| Financial Year | Companies with annual aggregated turnover of less than | Applicable company tax rate |
| 2016-17 | $10 million | 27.5% |
| 2017-18 | $25 million | 27.5% |
| 2018-19 | $50 million | 27.5% |
| 2019-20 | $100 million | 27.5% |
| 2020-21 | $250 million | 27.5% |
| 2021-22 | $500 million | 27.5% |
| 2022-23 | $1 billion | 27.5% |
| 2024-25 | All companies | 27% |
| 2025-26 | All companies | 26% |
| 2026-27 | All companies | 25% |
Small Business Entity Aggregated Turnover Threshold Increased – Effective 1 July 2016
The small business entity turnover threshold will be increased from $2m to $10m for the purposes of accessing certain existing income tax concessions.
This will allow more business entities to gain access to the small business concessions, such as:
- simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017 and then less than $1,000
- simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000
- a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied
- the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO, and
- other tax concessions available to small business currently, such as the Fringe Benefits Tax concession (from 1 April 2017, the beginning of the next fringe benefit tax year)
The increased threshold will not apply for the purpose of accessing existing small business capital gains tax concessions.
Access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.
Increase the Unincorporated Small Business Tax Discount – Effective 1 July 2016
The unincorporated small business tax discount will be increased in phases over 10 years from the current 5% to 16%. The following table is a summary of when the discount rates will apply.
| Financial Year | Discount Rate |
| 2016-17 | 8% |
| 2017-18 to 2024-25 | 10% |
| 2025-26 | 13% |
| 2026-27+ | 16% |
Individual tax payers with business income from an unincorporated business that has aggregated annual turnover of less than $5m will be eligible for this tax discount. The discount is currently 5% of the income tax payable on business income received from an unincorporated small business entity. The current cap of $1,000 per individual for each income year will be retained.
Personal Income Tax Reduction – Effective 1 July 2017
The Government will increase the 32.5 per cent personal income tax threshold from $80,000 to $87,000 from 1 July 2016.
This measure will reduce the marginal rate of tax on income between $80,000 and $87,000 from 37 per cent to 32.5 per cent. This will ensure that the average full-time wage earner will not move into the second highest tax bracket in the next three years.
PERSONAL TAX RATES
| Current tax rates 2015-16 | Proposed tax rates 2016-17 | ||
| Taxable Income | Tax Payable* | Taxable Income | Tax Payable* |
| $0 – $18,200 | 0% | $0 – $18,200 | 0% |
| $18,201 – $37,000 | 19% over $18,200 | $18,201 – $37,000 | 19% over $18,200 |
| $37,001 – $80,000 | $3,572 + 32.5% over $37,000 | $37,001 – $87,000 | $3,572 + 32.5% over $37,000 |
| $80,000 – $180,000 | $17,547 + 37% over $80,000 | $87,000 – $180,000 | $19,822 + 37% over $80,000 |
| $180,000 | $54,547 + 45% over $180,000 | $180,000 + | $54,232 + 45% over $180,000 |
*Excludes Medicare Levy and Temporary Budget Repair Levy
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