Superannuation
Changes to concessional superannuation contributions
The annual concessional contribution cap will be reduced from 1 July 2017 to $25,000 per annum for all ages. From 1 July 2017, high income earners will pay an increased level of contributions tax on concessional contributions – from 15% to 30% for income of $250,000 and above.
What this means:
Those currently maximising their pre-tax superannuation contributions will need to ensure that this cap is not breach, therefore adjustment in salary sacrifice arrangements will need to be made from 1 July 2017. Individuals with an annual income above $250,000 may be subject to additional contributions tax on concessional contributions.
Increased flexibility to claim a tax deduction for personal superannuation contributions
From 1 July 2017 it has been proposed that all individuals up to age 75 will be able to claim a deduction for concessional contributions, regardless of their employment arrangements.
Importantly, members of certain prescribed funds – untaxed funds, all Commonwealth defined benefit schemes and other schemes that elect to be ‘prescribed’ – will not be eligible to receive a tax deduction for concessional contributions made to these schemes.
What this means:
You will soon have enhanced choice about how you plan for your retirement. In particular, making concessional contributions up to the cap annually may become an attractive option if you have surplus cashflow, especially if you can benefit from a corresponding tax deduction.
We can review your salary sacrifice arrangements leading up to 1 July 2017 to determine whether making personal contributions in order to receive a tax deduction in your own hands is more suitable than via your employer.
Lifetime non-concessional superannuation contributions cap
Effective 7:30pm (AEST) on 3 May 2016, the lifetime non-concessional contributions (NCC) cap is $500,000. This lifetime NCC cap will replace the current annual NCC cap of $180,000 per year (or $540,000 when the bring-forward rule is triggered).
The lifetime NCC cap will include any NCCs made into superannuation on or after 1 July 2007. Any NCCs made prior to budget night can be retained within the fund, and therefore will not need to be removed. After this date those in excess of the cap will need to be removed, or be subject to penalty tax. At present, there are no details available surrounding how such a penalty tax may operate.
There will be additional flexibility enabling individuals the choice to make NCCs up to the lifetime cap until the age of 74, without having to meet a work test.
What this means:
You now have a very limited ability to contribute to superannuation on an after-tax basis. This will result in additional retirement planning surrounding overall tax structures within your personal financial position.
Changes to Transition to Retirement Income Streams
Introduced on 1 July 2005, Transition to Retirement (TTR) income streams are a popular way of tax-effectively accumulating wealth for those who have reached preservation age but not yet retired. This is especially true when the income streams are coupled with salary sacrifice strategies which result in a positive net accumulation within an individual’s superannuation interest. Currently, assets supporting TTR income streams enjoy tax-free earnings status.
From 1 July 2017, this tax exemption will be removed. While specific details on the new arrangements are still to be confirmed, it appears likely that TTR income streams may revert to being taxed in the same way as funds in accumulation phase – that is, a maximum of 15% on earnings and 10% on capital gains.
The flexibility to treat pension payments from TTRs as lump sums for tax purposes will also be eliminated. At this stage no other structural changes to TTR income streams have been proposed.
What this means:
The ability to utilise superannuation as a tax minimisation vehicle will be reduced, especially for those of you in the pre-retirement phase looking to aggressively build your wealth by utilising a combination of salary sacrifice and TTR income streams.
The removal of the tax-free earnings status for an individual’s TTR income stream will adversely affect those earning an income or looking to sell down assets within the fund. As no detail has currently been provided on whether any capital gains tax relief will be available to affected individuals, it appears likely that where a capital gain is realised on or after 1 July 2017, it will be taxed at 10%.
For those of you below age 60 with room under your Low Rate Cap who maintain a TTR income stream beyond 1 July 2017 will be worse off. This is because you will be taxed on your pension income at your prevailing marginal rate less a 15% tax offset, compared to your former position where you received this income tax-free.
Work test abolished for those aged 65 to 74
From 1 July 2017, older Australians will be able to contribute to superannuation regardless of their work status. The current work test requirement to contribute to superannuation for those aged between 65 and 74 will be removed – placing them on the same footing as those under age 65.
What this means:
This measure will allow retirees to continue increasing their retirement savings for a longer period, and from sources that may have otherwise not been available to them previously. This has been a retirement planning issue for many years and has been long overdue for change.
$1.6 million superannuation transfer balance cap
From 1 July 2017, a $1.6 million cap on the total amount that can be rolled over from accumulation phase to retirement phase will apply. This cap will apply to existing pension balances as of 1 July 2017.
Amounts in excess of this cap, including associated earnings, may be subject to penalty tax. It is anticipated this will be applied in a manner similar to excess NCC tax. It is uncertain at this stage whether this cap will be indexed.
What this means:
This proposal will restrict your ability to access tax-free benefits of superannuation balances in retirement phase
Catch-up concessional contributions allowed
A sweetener to a number of the more restrictive superannuation measures will be the ability to carry forward unused concessional contributions cap to future years.
From 1 July 2017, an individual who has not reached their concessional contributions cap in a year will be able to carry forward the unused amount to future years, on a rolling basis for up to five years, provided their superannuation balance is less than $500,000.
What this means:
For example: If you only use $11,400 (i.e. 9.5% x $120,000 salary) of your concessional contributions cap in a year, your cap in the following year will be $38,600 (i.e. ($25,000 – $11,400) + $25,000) and so on.
This measure is designed to address the age-old problem of people who are outside the workforce for extended periods being disadvantaged, for example, a parent raising a child. This measure will give those people the opportunity to catch-up with their retirement savings upon returning to the workforce
Low Income Superannuation Contributions re-invented
From 1 July 2017, a new non-refundable Low Income Superannuation Tax Offset (LISTO) will be introduced to reduce the tax on superannuation contributions for low income earners. This policy is similar to and replaces the Low Income Superannuation Contribution, finishing on 30 June 2017.
The LISTO is capped at $500, and will apply to members with adjusted taxable income up to $37,000 that have concessional contributions made on their behalf.
What this means:
This improves the tax effectiveness of concessional contributions for low income earners, particularly for individuals earning less than the effective tax-free threshold (i.e. $20,542). Without this measure, from 1 July 2017, these individuals will pay more tax for the privilege of their money going into superannuation, for example compulsory Superannuation Guarantee contributions.
Removal of the superannuation anti-detriment payment
From 1 July 2017, anti-detriment payments will be abolished. Currently, this payment is an additional amount paid by a super fund on the death of a member as compensation for the 15% tax deducted from that member’s contributions. In many instances, the additional amount can be as high as 17.65% of the taxable component of the member’s death benefit.
What this means:
You will no longer be able to rely on the prospect of the anti-detriment payment as part of their estate planning.
Tax
Income tax relief
To limit the impact of bracket creep, the personal income threshold for the 32.5% tax bracket will be increased from $80,000 to $87,000 from 1 July 2016.
What this means:
This measure will provide a buffer against the effect of bracket creep for middle income earners.
Spouse contribution tax offset improved
From 1 July 2017, the ability to claim a tax offset of up to $540 per year for non-concessional contributions made on behalf of a low/no income spouse will be extended from those earning $10,800 up to a higher threshold of $37,000.
What this means:
This measure is designed to improve the superannuation balances of low income spouses.
Business
A major pillar of this year’s Federal Budget is the Ten Year Enterprise Tax Plan that aims to support small business growth through a number of measures.
Turnover threshold increases to $10 million
To be eligible for a range of small business concessions, a business must currently have an annual turnover of less than $2 million. From 1 July 2016, the annual turnover threshold will be increased to $10 million. The annual turnover threshold for small business entity capital gains concessions will remain at $2 million.
Company tax rate reduced to 25%
From 1 July 2016, the small business company tax rate will reduce from 28.5% to 27.5%. The eligible annual turnover will be progressively increased each year until 2022-23 when companies with a turnover under $1 billion will have access to the reduced company tax rate. The rate will continue to decrease until it reaches 25% in 2026-27. Franking credits will be available according to the rate of tax paid by the company.
Unincorporated small business tax discount increase
Individuals receiving business income outside of a company structure may be eligible for the unincorporated small business tax discount. From 1 July 2016, the rate will increase from 5% to 8% for individuals with business turnover of less than $5 million. Further increases to the discount are scheduled after 8 years, with the rate of the discount increasing to 16% by 2026-27. A discount cap of $1,000 per year will remain in place.
Division 7A compliance simplified
From 1 July 2018, the burden of Division 7A compliance is set to be simplified, with a number of changes planned. Simplified loan arrangements, safe-harbour rules and self-correction mechanisms are examples of the proposed changes aimed to assist companies in meeting their Division 7A requirements.
What this means:
Business owners will have greater access to valuable small business concessions. Small businesses trading through a company structure will benefit from a lower tax rate and proposed changes aimed at simplifying compliance with Division 7A
