May 2016: Just in case you haven’t heard: what’s with the 2016 Federal Budget?
SUMMARY
On the back of an interest rate cut by 25 basis points to 1.75%, Treasurer Scott Morrison handed down his first Federal Budget at 7.30pm on 3 May 2016. For the full Federal Budget Report, visit http://www.budget.gov.au/.
You’ve probably heard the good, the bad and the ugly. In summary, there were many proposed changes to thresholds and also proposals to encourage growth of small businesses. There were also announcements which proposed a significant reform of the superannuation regime for Australians. Most measures were to proposed to take effect from 1 July 2017, whilst some proposals had no grandfathering or were proposed to operate retrospectively, giving rise to much anxiety and concern. The key thing for advisors and clients is to be aware of what can still be done by Australians wishing to make the most of superannuation.
SUPERANNUATION
There were several proposed changes, the extent of which has not been seen since former Treasurer Peter Costello delivered the budget some 10 years ago. Whilst many were expecting change, the measures went further than most people expected. Just in case you haven’t heard, here’s the summary:
Reduction in the income threshold of Division 293 tax: from 1 July 2017, the Division 293 tax threshold will be reduced from $300,000 to $250,000, meaning that individuals earning more than $250,000 will be required to pay the higher 30% contributions tax (an extra 15% on top of the regular 15% contributions tax).
Reduction in concessional contributions limit: from 1 July 2017, the concessional contributions limit will be reduced to $25,000 for all individuals (but will be indexed in line with growth in wages). The reduction effectively undoes the increase in the concessional contributions caps which we enjoyed for a short period of time from 1 July 2014 (the general $30,000 cap and the$35,000 cap for individuals 49 years and over).
Catch up concessional contributions: from 1 July 2017, individuals with superannuation balances less than $500,000 are able to carry forward unused concessional contributions for five years to “catch up” what they did not use. For instance, an individual may look back over 5 prior consecutive years and make concessional contributions in a given year to use up what they had not contributed in previous years. Only unused amounts from 1 July 2017 can be used under the “catch up” rule. This change would allow people with changing work conditions to maximise their concessional contributions to superannuation.
Lifetime non-concessional contribution (NCC) $500,000 limit to replace $180,000 annual limit: a lifetime non-concessional contribution cap of $500,000 has been announced to replace the existing annual $180,000 NCC cap from 7.30pm on 3 May 2016. The new $500,000 lifetime cap takes into account all NCCs made from 1 July 2007. Excess NCCs made after then will result in penalty tax. However, where an individual made NCCs above $500,000 prior to 7.30pm on 3 May 2016, such excess NCCs will not be subject to penalty, but the individual will not be able to make further NCCs. The proposed $500,000 limit will be indexed in line with wages.
Notably, such announced changes are retrospective and count all NCCs since 1 July 2007. Individuals may need to revise their strategies if they made plans to make NCCs to their fund in June 2016, in time for the end of the financial year.
$1.6m transfer balance cap for pension accounts: from 1 July 2017, there will be a $1.6m cap on the total amount an individual can transfer to their tax-free pension account. Individuals with pension accounts of more than $1.6m will have to reduce their pension account balance and transfer the excess back to their accumulation account (where earnings will be taxed at 15%) from 1 July 2017. Notably, the proposals do not allow grandfathering for members’ existing pension accounts.
Amounts in excess of the $1.6m cap will be taxed in a similar manner to excess non-concessional contributions with the excess amount and earnings being taxed. The proposed $1.6m cap will be indexed in line with the CPI. The proposed $1.6m cap may result in more segregation within funds to earmark particular assets for pension accounts.
Transition to Retirement Income Stream (TRIS) tax-exemption to be removed: from 1 July 2017, the tax-exemption on superannuation fund earnings of assets supporting TRISs are to be removed. Such a proposal is not surprising, and seeks to apply to all TRISs, regardless of when they commenced and there is no grandfathering. This budget measure does not appear to impact the taxation of an individual’s income stream itself (and the tax-free status of such income streams, if an individual is 60 years or over).
Removal of “work test” for individuals aged between 65 and 74: from 1 July 2017, there will no longer be the requirement for individuals aged between 65 and 74 years to be gainfully employed for a period of 40 hours or more in a 30-day consecutive period in a financial year to be able to make contributions. This will allow an ageing population to make super contributions without having to go back to work or finding creative ways to meet the work test.
Personal deductions for personal contributions: from 1 July 2017, all individuals up to 75 years of age will be able to claim an income tax deduction on concessional contributions made. This effectively abolishes the “10% rule” (which only allowed concessional-contributions to be made by individuals whose employment income was less than 10% of their total income). This change will allow people to claim personal income tax deductions for concessional contributions, regardless of their income source; be it salary and wages, self-employment or passive income.
Low income superannuation tax offset introduced: from 1 July 2017, a low income superannuation tax-offset (LISTO) is to be introduced to replace the existing Low Income Superannuation Contribution (LISC). The LISTO will effectively provide a non-refundable tax-offset up to $500, based on the tax paid on concessional contributions for individuals with an adjusted taxable income of up to $37,000.
Low income spouse tax offset threshold increase: from 1 July 2017, the low income threshold for the receiving spouse will be increased from $10,800 to $37,000. A tax-offset of up to $540 per year will be available for the contributing spouse where contributions are made on behalf of their spouse. This change may assist couples making contributions to super, in particular for those with changed work patterns.
Anti-detriment death benefit provision removed: from 1 July 2017, the anti-detriment provision (which would otherwise allow a refund of a member’s lifetime contributions tax into an estate, where the beneficiary is a SIS dependant of the member such as their spouse, former spouse or children). This removal would result in more consistent death benefit payments between SMSFs and APRA-regulated funds.
WHAT NEXT?
On Thursday 5 May 2016, Australian Labour Party leader Bill Shorten delivered his address in reply where he raised concerns about the Coalition’s proposed respective changes to superannuation laws.
The Coalition’s superannuation budget announcements and the Opposition’s reply dealing with superannuation have caused much anxiety and uncertainty amongst individuals wishing to save up for retirement or contribute more into super before the end of financial year. The lowering of the concessional contribution limits and abolishment of the annual non-concessional contribution limits may mean that other legal ways to maximise superannuation savings need to be considered with the advice of appropriately licensed advisors, including:
Making more regular concessional contributions to the fund, utilising the announced “catch up rule”;
Segregating assets within superannuation funds to earmark greater income generating assets as pension assets and other assets for members’ accumulation accounts;
Gearing within the fund with the use of limited recourse borrowing arrangements in the hope the acquired asset will appreciate in value;
Utilising the small business-CGT concessions to restructure businesses and assets and contribute more to superannuation (which do not appear to be impacted by the Budget announcements); or
Utilising other tax-effective ways outside superannuation to invest funds, eg through negative gearing.
Individuals must seek independent financial advice as to the appropriateness of particular strategies, including whether a self-managed superannuation fund is suitable in their circumstances. Nathan Yii, Principal Lawyer & SMSF Specialist AdvisorTM of Nathan Yii Lawyers – Structuring & Estate Planning Law works closely with advisors and clients to implement strategies appropriate for the client’s circumstances based on the advice of an appropriately licensed financial advisor or accountant.
Any legal questions, please contact Nathan Yii on 03 8658 5898 or email nathan.yii@nylawyers.com.au
OTHER MEASURES
Other key changes for the private client services and SME sector include:
Small businesses: from 1 July 2016, the small business entity (SBE) turnover is proposed to increase from $2m to $10m. This will make it easier for small businesses to access small business income tax concessions including the lower small business corporate tax rate (which will be reduced to 27.5% from 1 July 2016), simplified depreciation rules, simplified trading stock rules and the ability to opt to account for GST on a cash basis.
Notably, the $2m turnover threshold will still be retained to be eligible for the small business CGT concessions.
Company tax rate: the current company tax rate of 30% is to be progressively reduced to 25% over a 10 year period, by the 2023/24 financial year. Franking credits should still be able to be distributed in accordance with the rate of tax paid by the company making the distribution.
Amendments to Division 7A: drawing on a number of recommendations from the Board of Taxation’s post-implementation review of Division 7A, the rules will be amended to include a self-correction mechanism for inadvertent breaches of Division 7A, appropriate safe-harbour rules to provide certainty, simplified Division 7A loan arrangements, and adjustments to improve the operation of Division 7A and to provide clarity.
Unincorporated small business tax discount increase: on 1 July 2016, the tax discount for unincorporated small businesses with an aggregated annual turnover of less than $5m will increase to 8% and will increase to 16% over 10 years. The discount will remain at 8% for 8 years and is to increase to 10% in the 2024-25 financial year, 13% in 2025-26 and 16% in 2026-27. The current cap of $1,000 per individual per financial year will continue.
Early Stage Innovative Companies: several thresholds for the Mid-Year Economic and Fiscal Outlook 2015/16 announced incentives for ESICs are to change including reducing the holding period of assets from 3 years to 12 months for investors to access the CGT exemption, a time limit on incorporation and criteria for determining if a company is an “innovation company”, requiring the investor and innovation company to be non-affiliates and limiting the investment amount for non-sophisticated investors to qualify for the tax-offset to $50,000 or less per income year, down from $200,000.
Personal income tax thresholds: from 1 July 2016, there will be an increase in the 32.5% marginal tax rate income threshold from $80,000 to $87,000 and the 37% marginal tax rate income threshold from $80,000 to $87,000.
Medicare levy low income thresholds and Medicare levy surcharge: the Medicare levy low income thresholds as well as the Medicare levy surcharge on taxable income for income will increase, taking into account movements in the CPI.
GST to be extended to low value goods imported by customers: overseas suppliers with an Australian turnover of $75,000 or more will be required from 1 July 2017 to register for, collect and remit GST for low-value goods supplied to Australian consumers, where a “vendor registration model” is to be used.
Tax Avoidance Taskforce: the ATO will receive $697m over four years to establish the Tax Avoidance Taskforce to target large multinationals, private groups, high net worth individuals to target and penalise those who engage in deliberate tax avoidance.
Any legal questions, please contact Nathan Yii on 03 8658 5898 or email nathan.yii@nylawyers.com.au
DISCLAIMER: This newsletter is prepared for training, educational & general information purposes only & should not be relied on as (or in substitution for) legal, accounting, financial or other professional advice.