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Dear <<First Name>>,

Federal Budget 2016: What you need to know

On Tuesday 3 May, Federal Treasurer Scott Morrison handed down the Federal Budget for the 2016 – 17 financial year, which included the most significant changes to Australia’s superannuation system since 2007.

It is important to note that none of these changes in their current form have been enshrined in legislation. Some components are retrospective (going back in time), which can be a political minefield; in particular the non-concessional contributions from 1 July 2007. Forward-looking legislation is more politically favourable, so perhaps some of the changes could be commenced from budget night. At this stage, we just don’t know what the final outcome will be and some details have not been finalised.

We will be providing specific advice to our clients who are affected by these measures in due course.

In this report we outline:

  • Superannuation changes and
  • Tax changes

Superannuation changes

Transfer balance cap of $1.6m introduced

On 1 July 2017, a transfer balance cap of $1.6 million will be introduced to restrict the total amount of super that an individual can transfer from the accumulation phase to the pension phase/income stream.

The $1.6m cap accounts for contributions to the pension phase only. Any earnings that increase the value of the pension above $1.6m can remain in pension phase, tax exempt and not be counted towards the cap.

Where accumulation accounts are above $1.6m, only $1.6m may move to the pension phase. Any amounts above this must remain inside the accumulation phase with the earnings taxed at 15%. Although benefits remaining inside the accumulation phase will continue to be taxed at 15%, those over 60 can continue to make lump-sum withdrawals, free of tax.

Those already in the pension phase on 1 July 2017 whose balances exceed $1.6 million, will need to either withdraw the excess or transfer it back into the accumulation phase.

At this stage there is no cap on the amount that can be held in accumulation phase.

Concessional contribution caps reduced

From 1 July 2017, the cap on concessional contributions will reduce to $25,000 a year for everyone, regardless of age. Currently the concessional contributions cap is $30,000 under age 50 and $35,000 for ages 50 and over. Concessional contributions include the 9.5% superannuation guarantee paid by the employer, salary sacrifice, and personal contributions claimed as a tax deduction. For small business owners, this includes any super contributions you are claiming as a tax deduction.

Non-concessional contribution cap introduced

A lifetime cap of $500,000 for non-concessional contributions has been introduced, effective immediately. This replaces the existing annual cap of $180,000 (or $540,000 every three years under the bring-forward rule). Non-concessional contributions include personal contributions made where no tax deduction is claimed, contributions made on behalf of a spouse and certain other amounts.

The lifetime cap takes into account all non-concessional contributions made from 1 July 2007. Contributions made after the Budget announcement that exceed the cap (taking into account all previous non-concessional contributions) will need to be removed or will be subject to the current penalty tax arrangements. However, there will be no penalty if the cap has been reached or exceeded prior to the Budget announcement (7.30pm AEST, 3 May 2016) and any excess will not have to be removed.

Contribution eligibility requirements updated

The current work test that applies for people making voluntary contributions between age 65 and 74 will be removed as of 1 July 2017. This will make it easier for older Australians to contribute 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.

Tax exemption on TTR pensions removed

The tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed from 1 July 2017, with earnings and capital gains to be taxed at 15% (CGT of 10% for assets held more than 12 months). This change will apply regardless of when the TTR income stream commenced.

If you are 60 years or older, the pension stream will still be received tax free and not added to your assessable income.

Further, individuals will no longer be able to treat certain income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000.

Threshold reduced for additional contributions tax

An additional 15% contributions tax payable by high income earners with earnings over $300,000 — will also apply to those with incomes above $250,000 from 1 July 2017.

Low income superannuation offset introduced

A Low Income Superannuation Tax Offset (LISTO) will be introduced to reduce the tax on contributions for low income earners. The LISTO will replace the Low Income Superannuation Contribution (LISC) scheme when it is abolished on 1 July 2017.

The LISTO will provide a non-refundable tax offset to super 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.

Access increased to tax offset for spouses

The current spouse super tax offset will be available to more people when the spouse income threshold changes on 1 July 2017. The threshold will increase from $10,800 to $37,000.

A contributing spouse will be eligible for an 18% offset worth up to $540 for contributions made to an eligible spouse’s super account.

Deductions for personal contributions extended

As of 1 July 2017, Australians under 75 will be able to claim an income tax deduction for any personal contributions up to their concessional cap ($25,000). This effectively allows anyone, regardless of their employment circumstances, to claim a deduction for their personal contributions up to the value of the cap, subject to 15% contributions tax.

Super objective to be enshrined in law

The objective of superannuation is to provide income in retirement to substitute or supplement the age pension. The government says it will embed this objective in a standalone Act, with an accountability mechanism to ensure that new superannuation legislation is considered in the context of the objective.

Tax changes

Company tax rate reduced

Starting from 1 July 2016, the company tax rate will be reduced to 25% over 10 years. Currently, small 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.

Small business turnover threshold increased

The small business entity turnover threshold will be increased from $2 million to $10 million so that more businesses can access certain existing income tax concessions. These include:

  • 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

Small business tax discount increased

The unincorporated small business tax discount will be increased in phases over 10 years from the current 5% to 16%.

Personal income tax reduced

From 1 July 2016, the 32.5% personal income tax threshold will increase from $80,000 to $87,000.

This measure will reduce the marginal rate of tax on income between $80,000 and $87,000 from 37% to 32.5%.

Talk to us

If you would like individual advice to understand more about what the Budget means for you, please contact us.

With Compliments,

Simon Chesson
Director
 

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