Image source: “Parliament House Canberra Dusk Panorama” by JJ Harrison
On Tuesday, the Treasurer, the Hon Scott Morrison, handed down his first Federal Budget, stating that this was not just a budget, but an economic plan for the future to support innovation and growth.
One of the key components of his budget is a comprehensive bundle of changes to superannuation which will target super tax concessions with the aim of creating a ‘more sustainable super system’. Continuing its pre-budget discussion, superannuation is to be legislatively defined as a vehicle “to provide income in retirement to substitute or supplement the Age Pension”. We believe that this is a watered-down version of its previously understood purpose, which was to provide for the retirement and death of its members.
Given the ongoing volatility of governmental policies on superannuation as well as the further limitations that these announcements bring, we are increasingly considering alternative savings vehicles for our clients.
So how will the 2016 Federal Budget affect you and your superannuation in the future?
Key Budget Announcements
Increased flexibility to claim a tax deduction for personal superannuation contributions
From 1 July 2017, Australians under 75 will be able to claim an income tax deduction for any personal contributions made to a complying super fund up to their concessional cap, regardless of their employment arrangements.
Changes to Transition to Retirement Income Streams
The tax-exempt status of income from assets supporting TTR income streams will be removed, with earnings taxed at 15%. This change will apply regardless of when the TTR income stream commenced.
Work test abolished for those aged 65 to 74
The current work test that applies for people making voluntary contributions between age 65 and 74 will be abolished. Individuals will also be able to make contributions for a spouse aged under 75 without requiring the spouse to satisfy a work test.
Changes to concessional superannuation contributions
From July 1, 2017, the cap on concessional contributions will reduce to $25,000 a year for everyone, regardless of age. The Concessional contributions cap is currently $30,000 for those under 50, and $35,000 for those aged 50 and over.
The 30% tax on concessional contributions for those earning over $300,000 has now been extended to apply to those earning more than $250,000.
Catch-up concessional contributions allowed
From July 1, 2017, individuals with a super balance under $500,000 who don’t reach their concessional cap in a given year will be able to carry forward their unused cap amounts on a rolling basis over five consecutive years.
Lifetime non-concessional superannuation contributions cap
A lifetime cap of $500,000 for non-concessional contributions has replaced the existing annual cap of $180,000 (or $540,000 every three years under the bring-forward rule). The lifetime cap takes into account all non-concessional contributions made from 1 July 2007. Contributions made from 7.30pm AEST on 3 May 2016 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.
$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.
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.
Removal of the superannuation anti-detriment payment
Anti-detriment provisions will be abolished, effectively removing the ability of super funds to increase lump sum death benefits when paid to eligible beneficiaries.
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.
Company Tax changes
From 1 July 2016, the small business turnover threshold will be increased from $2 million to $10 million so that more businesses can access certain small business concessions.
The company tax rate will be reduced to 25% from 28.5% over 10 years, with the rate reducing to 27.5% from July 1, 2016. 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.
Franking credits will be available according to the rate of tax paid by the company.
The unincorporated small business tax discount will be increased in phases over 10 years from the current 5% to 16%. The discount rate for 2016–17 will be 8%.
Personal tax changes
The 32.5% personal income tax threshold will increase from $80,000 to $87,000. This will reduce the marginal rate of tax on income between $80,000 and $87,000 from 37% to 32.5% to ensure that the average full-time wage earner will not move into the second highest tax bracket in the next three years.
If you would like to discuss these changes further with your advisor, please get in contact via email firstname.lastname@example.org or phone 1300 850 757.
It is important to remember that this material relates merely to proposals which have not yet been legislated, and our analysis contained here should be viewed in that context. We recommend that you do not take any specific action until the Government provides greater detail in any relevant draft legislation.
This article is for general information purposes only. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the information, consider its appropriateness to your circumstances.
Why not follow, like or link in with us on social media?
You can find all the latest news and posts from Complete Financial Balance, ask us a question, send us your comments and more by following the links below.