Budget Update 2016 / 2017
How will the Budget affect you?
This was not your typical Budget. Instead, the Treasurer, Scott Morrison, attempted to build an election platform for the Government. While there were certainly some major alterations to superannuation, in other areas, such as Centrelink, there were only minor changes.
We’ve summarised some of the key points from the Budget below, but remember, given the upcoming election, these are proposals only and are subject to the passing of legislation. It is best if you seek advice between now and July 17 and discuss how these changes affect you with your MW Lomax Account Manager or Financial Adviser at your convenience.
- Introduction of a $500,000, lifetime, non-concessional superannuation contribution cap.
- A new transfer balance cap of $1.6 million on superannuation that can be held in pension phase.
- Changes that reduce the tax-effectiveness of transition to retirement strategies.
- Reduction of the superannuation annual concessional cap to $25,000, regardless of age.
- Introduction of ‘catch-up’ superannuation concessional contributions for those with super balances under $500,000.
- Changes to taxation rates and small business entity definitions.
Changes to super were wide-ranging and aimed to help those on lower incomes while trimming some of the more generous concessions available to those on higher incomes.
Lifetime cap on non-concessional contributions
The Government is replacing the previous cap of $180,000 per year (or $540,000 over 3 years under the ‘bring forward’ provisions) with a lifetime cap of $500,000. This will be indexed, presumably on an annual basis. While this change is effective from Budget night, importantly it is also retrospective as it will take into account all non-concessional contributions made since 1 July 2007.
If you’ve already contributed more than $500,000 during this time, the extra amount will not be taxed but you won’t be able to make any future contributions. If you breach your lifetime cap, you can have the excess refunded to avoid penalties.
Reduced concessional contributions cap
The Government intends to reduce the annual concessional contributions cap to $25,000 for everyone, from 1 July 2017. The cap is currently $30,000 for people under age 50 and $35,000 if over age 50.
Concessional contributions catch-up
For those people who have a super balance under $500,000, the Government proposes to allow them to make ‘catch-up’ concessional contributions. The aim of this change is to help people who have irregular work patterns, such as, contractors, the self-employed or women, to grow their super. Unused concessional cap amounts can be carried forward on a rolling basis over a consecutive five-year period. Under the current system, a strict application of annual concessional contributions caps means that those people with irregular work patterns are at a distinct disadvantage, so this addresses that issue. The changes will become effective from 1 July 2017.
Transition to retirement strategies less effective
The tax exemption on earnings in a transition to retirement (TTR) pension will be removed, thereby reducing the tax-effectiveness of a TTR strategy. Withdrawals from TTR pensions will also not be able to be taxed as lump sums. If you are over 60 you will still benefit from receiving tax-free pension payments. The changes will become effective from 1 July 2017.
New limit on amount transferred to retirement accounts
In a move to limit the amount of tax-free earnings on your super, the Government intends to place a cap of $1.6 million on the amount you can transfer into your pension account. Any future earnings generated in your pension account will not be affected, even if the balance goes over $1.6 million.
Those people already in retirement will need to reduce the balance of their pension account to $1.6 million by 1 July 2017. The $1.6 million cap will be indexed in $100,000 increments in line with the consumer price index. If you breach the limit then the excess will be taxed at the highest marginal tax rate, a very harsh penalty!
Removing the work test
The government has decided to remove the work test for people aged less than 75 who want to make voluntary superannuation contributions. The advantage for those affected is that they no longer need to satisfy a work test and can receive contributions from their spouse. This measure also applies to small business owners who often want to contribute the proceeds from their business after age 65. This change takes effect from 1 July 2017.
Tax deductions for personal super contributions
This change means anyone up to age 75 can claim an income tax deduction for personal concessional super contributions up to the proposed $25,000 cap. This change abolishes the 10 per cent self-employed test and benefits people who can’t take advantage of salary sacrifice.
Lower income threshold captures more high income earners
This change means that higher income earners will now have to pay an extra 15 per cent on their concessional contributions when their income is over $250,000, down from $300,000 previously. This change means more people will now have to pay an extra 15 per cent on their concessional contributions.
Assistance for lower income earners
There are two initiatives that assist lower income earners. The first is the Low Income Super Tax Offset, which provides a tax offset to the super fund of the member of up to $500 and effectively refunds the contributions tax that the member’s super fund has already paid. This only applies for those who don’t earn more than $37,000. The second initiative increases the eligibility for the Spouse Tax Offset so that the spouse who receives the contribution can now earn up to $37,000 instead of only $10,800, as was previously the case.
Anti-detriment provision removed
Anti-detriment payments used to effectively refund the superannuation contributions tax paid by a member who died. This increased the lump sum death benefit paid to spouses, former spouses and children. The government wishes to remove this provision because it reduces the amount of tax they receive from super funds. This change will be effective from 1 July 2017.
Support for unemployed young people was increased with the announcement of a program to encourage them to explore the potential of self-employment, while offering subsidies for businesses to employ young people. Additionally, from 1 October 2016, job seekers will enter the Work for the Dole phase after 12 months of participation in ‘jobactive’, instead of the current six months.
To address bracket creep, the government has proposed an increase in the 32.5 per cent personal income tax threshold from $80,000 to $87,000. Business also benefits, with a proposed reduction of the company tax rate to 25 per cent. This new rate will be phased in depending on the size of the company or its turnover.
Franking credits will still be calculated with reference to the amount of tax paid by the company paying the dividends.
There will also be an increase on the tax discount for unincorporated small businesses which will reach 16% from the current rate of 5% over a 10 year period. The current cap of $1,000 per individual for each income year will be retained.
Access to the discount will be extended to individual tax payers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million (from 1 July 2016).
Small business entity threshold jumps to $10 million
The small business entity turnover threshold will increase from $2 million to $10 million from 1 July 2016. The reform will give greater number of businesses access to a range of tax concessions such as:
- The lower small business corporate tax rate (27.5%);
- Simplified depreciation rules including an immediate write-off for assets costing less than $20,000 that are acquired by 30 June 2017 and depreciation pooling provisions;
- Simplified trading stock rules;
- A different method of calculating PAYG instalments;
- The option of accounting for GST on a cash basis;
- FBT exemptions (this would start from 1 April 2017); and
- A trial system of using a simpler business activity statement.
The current $2 million turnover threshold will be retained for access to the small business CGT concessions and access to the unincorporated small business tax discount will be limited to entities with turnover less than $5 million.
Personal tax cuts for middle income earners
The 32.5% personal income tax threshold will increase from $80,000 to $87,000 from 1 July 2016. The new tax rates from 1 July 2016 would be as follows:
|Taxable income||Tax rate from 1 July 2016|
|$0 – $18,200||0%|
|$18,201 – $37,000||19%|
|Taxable income||Tax rate from 1 July 2016|
|$37,001 – $87,000||32.5%|
|$87,001 – $180,000||37%|
|$180,001 and over||45%|
These tax rates exclude the Medicare Levy and the 2% debt tax on high-income earners over $180,000 which will come to an end on 30 June 2017.
Small Business Capital Gains Tax Concessions
The previous provisions in relation to rollover to superannuation of proceeds from the sale of an Active Business Asset remain unchanged.