2016 Federal Budget
In his Budget speech, Treasurer Scott Morrison said this was “not just another Budget”. It was an “economic plan”. He then proceeded to mention “economic plan” 8 times, “hardworking Australians” 5 times and “jobs and growth” 5 times. So in the 2016 Budget speech bingo “economic plan” won out.
Given that within a few days the Government will dissolve Parliament and call a Federal election for 2 July, this is not your typical Federal Budget, but rather an election platform for the Government. However on the whole, it was a balanced and fair budget going into an election, and many of the initiatives – particularly the superannuation changes, the modest tax cuts and the ‘Google tax’ on multinational companies – are likely to get cross-party support from the ALP. Consequently, unlike recent past Budgets, this ‘non-Budget’ may actually get some traction.
For self-funded retirees, the big ticket items are the super changes. And there are quite a few more changes than we originally expected. Some we knew about – like the drop in the income threshold for higher income earners (division 293) tax to $250,000 – indeed there were suggestions it could have been reduced to $180,000. Others have long been on the cards, like the removal of the anti-detriment payment for super death benefits. Some changes are restoring tax benefits that should never have been removed in the first place, such as the Low Income Super Contribution (now called the Low Income Super Tax Offset).
Generally, the super changes are quite comprehensive and we will have a lot of work to do with a number of clients over the next year getting financial plans in line with the changes. For a start there will be a cumulative non-concessional (after-tax) contributions cap of $500,000, but the key issue here is that it starts on 3 May 2016 and is retrospective to the extent that it will take into account contributions going back to 2007.
The other super change that will cause some concern will be the $1.6m transfer balance cap, which will effectively limit the amount of super held in tax exempt pension phase (however it could have been worse as the Henry tax review recommended getting rid of the tax exempt pension phase altogether). Transition to Retirement (TTR) pensions have been hit as was rumoured, however, the strategy was not removed entirely. The tax exemption on earnings in TTR pensions has been removed, which will effectively turn TTR pensions into accumulation accounts from which a draw down is made.
The changes to concessional (pre-tax) contributions are a mixed bag. On the one hand the concessional contributions cap drops to $25,000 (which is a far cry from glory days of $50,000 and $100,000 caps we had nearly 10 years ago). However there is some good news. Unused cap amounts can be carried forward up to five years where account balances are under $500,000. This will go some way to helping people, particularly women, catch up on super contributions.
In another welcome move, some of the weird rules relating to super contributions will finally go. These are the rules that have evolved over time and for reasons best known to the ancient Treasury Mandarin who came up with them in the first place. They include the work test for contributions over age 65 and the age limit of 70 for spouse contributions. Also the employee/self-employed distinction for claiming a tax deduction for personal super contributions will be removed. This means from 1 July 2017 employees will be able to make concessional contributions up to the cap by compulsory super, salary sacrifice and/or personal deductible contributions. About time too.
The three key financial planning areas impacted by the Budget are as follows:
- Corporate tax review
- Personal taxation
Although the Government basically abided by their previous promise that there will be no adverse changes to superannuation in the current Government’s first term, it is now their second term and changes have been made. Superannuation areas impacted by the Budget announcements include:
Reduced concessional (pre-tax) contributions cap
From 1 July 2017, the Government will reduce the annual concessional contributions cap to $25,000 for all individuals. The cap is currently $30,000 for clients under age 50. The transitional concessional contributions cap of $35,000 for individuals aged 49 and over will be removed and the cap will be $25,000 for all ages.
From 1 July 2017, the Government will include notional and actual employer contributions in the concessional contributions cap for members of unfunded defined benefit schemes and Constitutionally protected funds. Members of these funds will have opportunities to salary sacrifice in line with the members of accumulation funds. For individuals who were members of a funded defined benefit scheme as at 12 May 2009, the existing grandfathering arrangements will continue.
Allow catch-up concessional (pre-tax) contributions
From 1 July 2017, individuals with a superannuation balance less than $500,000 will be able to make additional concessional (after tax) contributions, provided that they have not reached their concessional contributions cap in previous years. To work out how much in additional concessional contributions can be made in a given financial year, unused concessional cap amounts from 1 July 2017 can be carried forward on a rolling basis for a consecutive five year period. Amounts carried forward that have not been used after five years will expire.
This measure will benefit those with interrupted work patterns, such as women and carers, by allowing them to make ‘catch-up’ contributions once they are able to do so. Under the current system, a strict application of annual concessional contributions caps results in a ‘use it or lose it’ system and puts individuals with irregular work patterns at a distinct disadvantage.
Division 293 tax
From 1 July 2017, the threshold at which an additional 15 per cent tax on contributions will apply will be reduced from $300,000 to $250,000. The definition of adjusted taxable income remains unchanged and includes:
- taxable income
- reportable fringe benefits
- total net investment losses
- reportable superannuation contributions.
The lower threshold will also apply to members of defined benefit schemes and Constitutionally protected funds currently covered by the tax. Existing exemptions for State higher level office holders and Commonwealth judges will be maintained as the Constitutional argument on which their exemption is based is unchanged.
Lifetime non-concessional (after-tax) contributions cap
As part of the reforms to super, the Government has announced the removal of the existing annual non-concessional contributions cap. This was previously set at six times the concessional contributions cap, and allowed for three years’ cap to be “brought forward” under the averaging provisions.
The Government is replacing this with a lifetime non-concessional (after-tax) contribution limit of $500,000, which will be indexed in line with AWOTE, presumably on an annual basis. This lifetime limit is effective 7:30pm on 3 May 2016, ie immediately after announcement, and takes into account all non-concessional contributions made since 1 July 2007.
For those who have already contributed more than $500,000 over this time, the excess will not be taxed however they will be precluded from making further contributions in the future. Amounts contributed above the new annual cap appear to be subject to the same excess non-concessional contributions tax arrangement as is currently in place, so those who breach their lifetime cap will be offered the ability to have their excesses refunded from super before heavy penalty taxes apply.
Contribution eligibility rules (and tax deductability)
From 1 July 2017, anyone under the age of 75 will be able to contribute to super or receive a spouse contribution. Additionally, from the same date, anyone under the age of 75 will be able to claim an income tax deduction for personal superannuation contributions, regardless of their employment arrangements.
Increasing access to the spouse tax offset
From 1 July 2017, the income threshold to qualify for the maximum amount of Low Income Spouse Superannuation Tax Offset will be increased from $10,800 to $37,000.
The Spouse Superannuation Tax Offset reduces the amount of tax that an individual pays, provided that the individual makes an after tax contribution to their spouse’s superannuation account. Currently, to qualify for the maximum amount of the tax offset ($540) income of the recipient spouse must not exceed $10,800. Income above $10,800 will reduce the amount of the tax offset and completely phases out at income above $13,800. The proposed measure means that a recipient spouse can earn up to $37,000 before the tax offset is reduced, and $40,000 before it completely phases out. This allows more people to benefit from the Spouse Superannuation Tax Offset.
Tax offset for low income earners
From 1 July 2017, a Low Income Superannuation Tax Offset (LISTO) will reduce tax on superannuation contributions for low income earners. The LISTO will provide a non-refundable tax offset for concessional contributions made on behalf of individuals who have adjusted taxable income up to $37,000. The LISTO will be capped at $500.
Transition to Retirement (TtR) pensions
From 1 July 2017 the tax exemption on investment returns supporting a TtR pension will be removed. In addition, withdrawals from TTR pensions will not be able to be taxed as lump sums.
Limiting superannuation in retirement phase – a $1.6 million superannuation transfer balance cap
From 1 July 2017, the amount of total accumulated superannuation that an individual can transfer into the retirement phase is proposed to be limited to $1.6 million. Future earnings on these balances will not be restricted, even if it increases the value of the retirement phase accounts above $1.6 million.
Individuals with accumulated superannuation balances in excess of $1.6 million will be allowed to keep the excess amount in an accumulation phase account. Earnings of the accumulation phase account will continue to be taxed at a maximum rate of 15 per cent.
Individuals who are already in retirement phase with balances above $1.6 million will be required to reduce their retirement phase accounts to $1.6 million by 1 July 2017. This can be done by converting the amount back to superannuation accumulation phase accounts or alternatively withdraw the excess amount out from their pension account.
Amounts in retirement phase accounts in excess of the $1.6 million cap which are not converted or withdrawn will attract the same tax treatment that applies to excess non-concessional contributions – that is the excess will be taxed at the top marginal tax rate.
The $1.6 million cap will be indexed in $100,000 increments in line with the Consumer Price Index.
Where ‘unused cap space’ remains, the individual will be allowed to make another transfer into a retirement phase account. The amount of ‘unused cap space’ will be calculated according to a proportionate method. The percentage of the cap that has been used in the past will determine how much ‘unused cap space’ is available to an individual at any single point in time.
Subsequent fluctuations in retirement phase accounts due to earnings growth or pension payments are not considered when calculating ‘unused cap space’.
Currently, there is no limit to how much superannuation can be converted to retirement phase accounts. This means an individual’s entire accumulation superannuation account can be converted to a retirement phase account and benefit from the tax free treatment of earnings of such accounts.
From 1 July 2017, the anti-detriment provisions will be removed. The existing provisions are difficult to implement in small funds and for pension accounts. The removal will provide more consistency between all superannuation funds.
Corporate tax review
In line with the Government’s position that this Budget should be seen as an economic plan, substantial consideration has been given to corporate tax affairs. Below we review the major changes relevant to small and medium businesses.
Small business entity turnover threshold
The Government will increase the small business entity turnover threshold from $2.0 million to $10.0 million from 1 July 2016. The current $2.0 million turnover threshold will be retained for access to the small business capital gains tax concessions. Access to the unincorporated small business tax discount will be limited to entities with turnover less than $5.0 million.
This will provide over 90,000 additional small businesses with access to tax concessions including the reduced corporate tax rate and the instant asset write-off provisions.
Small business tax rate and corporate tax rate ten year plan
For the 2016/17 income year the tax rate for businesses with an annual aggregated turnover of less than $10.0 million is proposed to reduce to 27.5 per cent from the 2016/17 income year. The current tax rate for small business is 28.5 per cent for businesses with a turnover of less than $2 million.
This will impact approximately 870,000 small business. Furthermore the Government will implement a phased reduction in the company tax rate to 25 per cent over 10 years.
The turnover threshold will also be progressively increased to ultimately have all companies at 27.5 per cent in the 2023/24 income year. The annual aggregated turnover thresholds for companies facing a tax rate of 27.5 per cent will be:
- $25.0 million in the 2017/18 income year
- $50.0 million in the 2018/19 income year
- $100.0 million in the 2019/20 income year
- $250.0 million in the 2020/21 income year
- $500.0 million in the 2021/22 income year
- $1 billion in the 2022/23 income year.
In the 2024/25 income year the company tax rate will be reduced to 27 per cent and then be reduced progressively by 1 percentage point per year until it reaches 25 per cent in the 2026/27 income year.
Small business CGT concessions
Despite the above changes in relation to small business, the area of capital gains tax exemptions has been retained as is.
The current eligibility criteria remains unchanged. For example the aggregated turnover test remains at $2 million and the net asset value at $6 million, however the sting is in the tail. For instance the 15 year rule exemption retains its current upper threshold currently $1.395 million for the 2015/16 income year and the retirement exemption retains its $500,000 lifetime limit. These CGT exempt contributions naturally add towards the $1.6 million maximum capital that can fund a retirement income stream whilst receiving pension earnings tax concession of zero percent.
A great development for small business operators is the removal of the work test for contributions made on or after the age of 65.
Although there have been no major changes in relation to personal income tax, some small adjustments have been made. We have reviewed the major changes below.
Reduction in personal income tax for middle income earners
In an effort to combat bracket creep (increased income tax resulting from wage inflation), the Government has announced an increase in the middle personal income tax bracket from $80,000 to $87,000, effective from the 2016/17 financial year. The table below compares the current tax rates to the rates effective 1 July 2016.
|Tax rate applied||Current thresholds||Thresholds for 2016/17 onwards|
|0%||$0 to $18,200||$0 to $18,200|
|19%||$18,201 to $37,000||$18,201 to $37,000|
|32.5%||$37,001 to $80,000||$37,001 to $87,000|
|37%||$80,001 to $180,000||$87,001 to $180,000|
|45%||Above $180,000||Above $180,000|
As a result, people with taxable income above $87,000 will save $315 in personal income tax each year, with those earning below $80,000 not impacted by the change.