Super shaken not stirred, small business stoked and smokers put out
Last night we saw the first Turnbull/Morrison budget. And whilst there were no major surprises the main focus was on a shift in tax from big (read multinational) businesses to small business and some tightening of superannuation rules. It is worth noting that this is not yet legislation and we expect the Government to call an election very shortly for July 2nd , making the budget really more of an election pitch. Ultimately we will not know what will transpire for some time and the end result will depend on lobbying and negotiations between the Government, cross benchers and the opposition post election.
Super has been the biggest area shaken up by the 2016 Budget – with annual concessional caps being lowered, lifetime non concessional contributions limits put in place and more high income earners facing higher contributions tax. Small and medium sized business has seen the greatest wins with great focus placed on lowering the company tax rate for them. The Government is targeting multinational tax avoidance and smokers will be burning money quicker than ever.
Annual concessional contribution caps have been lowered for everyone to $25,000. This will kick in from 1 July 2017. A lifetime non-concessional contribution of $500,000 will also be implemented from tonight.
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. And those with super balances over $1.6 million have also been hit, as they will no longer be able to roll all savings into retirement funds with tax-free earnings.
A change to Transition to Retirement (TTR) income streams will see super balances supporting a TTR income stream subject to a 15% earnings tax (as in accumulation phase) from 1 July 2017. Prior to this, balances were not subject to tax.
Yet there is some good news in super. Those earning between $10,800 and $37,000 will have the spousal tax offset extended to them which effectively means a refund of up to $500 into their super account of the tax paid concessional contributions.
The good news continues for those older Australians aged between 65 and 75 wanting to make contributions for themselves or their spouses – the work test requirements have been removed.
For small business a win with the company tax rate being reduced by 1.5% from 1 July 2016. And the rate is extended to all those businesses with annual turnover of less than $10 million. This is part of a larger raft of company tax rate cuts which will see the company tax reach 25% for all companies in 10 years in the tax year 2026-27.
Also, from 1 July 2016, the Government will extend access to instant write off for equipment purchases of up to $20,000 that will expire on 30 June 2017, to businesses with an annual turnover less than $10 million.
To address the issue of bracket creep in personal income tax, anyone earning above $80,000 from 1 July will pay less tax with the 37% marginal tax rate not kicking in until your taxable income reaches $87,000.
Those earning more than $180,000 will see the Budget Repair Levy end as scheduled in 2017.
Previously promised childcare subsidies will be delayed until 2018, one year later than scheduled.
The biggest losers from the budget are those who smoke cigarettes. With four annual 12.5% increases in tobacco excise starting from 1 September 2017, there has never been a better time to quit.
And finally the so called Google tax – the Diverted Profits Tax and other measures set to impose a penalty of up to 40% tax on certain multinationals.
Objective of superannuation
The Government has announced that it will legislate the objective of superannuation as ’to provide income in retirement to substitute or supplement the Age Pension’. The Government says that this objective has guided the other reforms announced and a legislated objective will enhance stability in the superannuation system.
Reduction in concessional contributions cap
From 1 July 2017, the concessional contributions cap will reduce to $25,000 per year. Currently the concessional contributions cap is $30,000 per year if under age 50 and $35,000 per year if aged 50 and over.
From 1 July 2017, notional (estimated) and actual employer contributions for members of unfunded defined benefit schemes and constitutionally protected funds will be included in the concessional contributions cap.
Tax deductions for personal superannuation contributions
From 1 July 2017, all individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions. In doing so, all individuals will, regardless of their employment circumstances, be able to make superannuation contributions up to the concessional cap. These amounts will count towards the concessional contributions cap and will be subject to contributions tax.
Similar to the current arrangements to claim the tax deduction, individuals will need to lodge a notice of their intention to claim the deduction before they lodge their income tax return for the relevant year.
Certain untaxed and defined benefit superannuation funds will be prescribed, meaning members will not be eligible to claim a deduction for contributions to these funds however, they may choose to make their contribution to another eligible superannuation fund.
Allowing catch-up concessional contributions
From 1 July 2017, individuals with superannuation balances of $500,000 or less will be able to accrue unused concessional contributions cap amounts.
Unused amounts can be carried forward on a rolling basis for a period of five years. Amounts carried forward that have not been used after five years will expire. Carrying forward unused concessional contributions cap will make it easier for individuals with varying capacity to make contributions to superannuation.
More tax on contributions for more high earners
From 1 July 2017, the ‘Division 293’ threshold will reduce from $300,000 to $250,000 per year meaning individuals earning over this amount will have to pay an additional 15% tax on concessional contributions. The existing administration process for levying this tax will remain unchanged, but a larger number of people will be drawn into it. Individuals will still have the ability to pay the additional 15% tax liability from their superannuation fund if they choose to. Similar measures will apply to high earning members of defined benefit funds.
Lifetime cap for non-concessional superannuation contributions introduced
From 7:30 pm (AEST) on 3 May 2016, a $500,000 lifetime cap on non-concessional contributions will be introduced. The cap will take into consideration all non-concessional contributions made since 1 July 2007. In addition the cap will apply to individuals aged up to 75, and will be indexed in $50,000 increments in line with average weekly ordinary time earnings.
In cases where the individual exceeded the cap prior to commencement of the new rules, they will not be required to take the excess out of the superannuation system. Where the excess occurs after commencement, they will be notified by the Australian Tax Office to withdraw the excess from their superannuation account, or be subject to the penalty arrangements.
The lifetime non-concessional cap will replace the existing non-concessional contributions cap which allows an individual to contribute up to $180,000 per year (or $540,000 under the bring-forward provision for those aged under 65).
Non-concessional contributions made into defined benefit and constitutionally protected funds will also be included in an individual’s lifetime non-concessional cap. If the member of a defined benefit fund exceeds their lifetime cap, contributions going into the defined benefit account can continue. However they will be required to remove an equivalent amount (including earnings) annually, from any accumulation interest they hold where it contains non-concessional contributions made after 1 July 2007. In cases where no post-1 July 2007 non-concessional contributions exist, the Government will consult to determine the appropriate treatment.
Contributions will not be required to be removed from the defined benefit account.
Extending the spouse contributions tax offset
From 1 July 2017, the 18% tax offset of up to $540 will be available for any individual contributing to a recipient spouse’s superannuation whose income is up to $37,000. Currently, the 18% tax offset of up to $540 is available for any individual contributing to a recipient spouse whose income is up to $10,800.
The tax offset will be calculated as 18% of the lesser of: $3,000 reduced by every dollar over $37,000 or the amount of spouse contributions.
Low Income Superannuation Tax Offset (LISTO)
From 1 July 2017, a Low Income Superannuation Tax Offset (LISTO) will be introduced to replace the Low Income Superannuation Contribution. The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners, 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.
Contribution rules for those aged 65 to 74
Currently, individuals aged 65 to 74 must meet a work test to be eligible to make contributions to superannuation. From 1 July 2017 this requirement will be removed, increasing the ability of older Australians to contribute to their superannuation. From 1 July 2017, individuals will also be able to make contributions to a spouse up to age 74. Currently, individuals can make contributions to a spouse up to age 69. From 1 July 2017, individuals will no longer have to satisfy a work test to receive contributions from their spouse.
Removal of anti-detriment payments
From 1 July 2017, superannuation funds will no longer be able to make anti-detriment payments.
The anti-detriment provision allows superannuation funds to refund a lump sum to a member’s estate on death, in compensation for the 15% contributions tax deducted from contributions over that member’s working life. This ‘anti-detriment payment’ is paid as a top-up to the member’s superannuation death benefit, applying only when eligible dependents exist.
The Government has announced that it will remove barriers to innovation in retirement income stream products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self annuitisation products.
This change will enhance both choice and flexibility for Australian retirees and help provide clients with retirement income throughout their lives, regardless of how long they live.
These products will help Australians better manage consumption and risk in retirement, including longevity risk.
In conjunction with the Federal Budget, the Government also released the final report of the review of retirement income stream regulation. The Report recommends that current annual minimum drawdown requirements are consistent with the objective of the superannuation system to provide income in retirement.
The Report also recommended that an additional set of income stream rules should be developed which would allow lifetime products to qualify for the earnings tax exemption provided they meet a declining capital access schedule. The alternative product rules should be designed to accommodate purchase via multiple premiums but additions to existing income stream products should continue to be prohibited.
Transition to retirement income streams
From 1 July 2017, the tax exempt status of income from assets supporting transition to retirement (TTR) pensions will be removed.
Transition to retirement pensions allow individuals to access their superannuation whilst still working between preservation age (currently 56) and age 65. Under the new rules, people can continue existing TTR pensions and start new ones; however, the earnings on these assets will be taxed at 15% in line with accumulation assets.
The ATO has recently clarified that a member can elect to make a lump sum payment from a TTR pension and it will be treated as such for tax purposes allowing tax-free withdrawals for the under 60s up to the low rate cap (currently $195,000). The Government will also move to close this loophole.
Transfers to pension accounts capped at $1.6 million
From 1 July 2017, a $1.6 million cap on the total amount of superannuation that can be used to commence a pension will be introduced. New rules will limit the amount that individuals can transfer into a tax-free retirement account.
For those entering retirement after 1 July 2017, any superannuation in excess of the cap can remain in accumulation, where earnings are taxed at 15%. Subsequent earnings on these balances will not be restricted. A proportionate method which crystallises a percentage of the cap each time a pension is commenced will be used to keep track of unutilised caps.
For those with existing pensions on 1 July 2017, amounts in excess of the cap on this date will need to be rolled back into an accumulation account or withdrawn. Punitive taxes will be applied to pension commencements in excess of the cap including the earnings on the excess. The $1.6 million cap will increase in $100,000 increments in line with the Consumer Price Index (CPI). Similar measures will be applied to defined pension schemes by changing the tax treatment of pension amounts over $100,000. The Government will undertake a consultation on the implementation of these changes for both accumulation and defined benefit funds.
Personal income tax
Increase to Medicare Levy low-income thresholds
From the 2015-16 financial year, the Medicare Levy low-income threshold will be indexed for individuals and families. The threshold for singles will increase to $21,335 per annum and for couples with no children will increase to $36,001 per annum. For those individuals and couples who are eligible for Seniors and Pensioners Tax Offset (SAPTO) the thresholds will increase to $33,738 per annum and $46,966 per annum respectively. The additional threshold amount for each dependent child or student will increase to $3,306 per annum. The increase in these thresholds takes into account movements in the CPI. The Tax and Superannuation Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2016 which proposes the increase has passed both houses of government as of 3 May 2016, but is still yet to receive Royal Assent.
From 1 July 2016, the income threshold where the 37% marginal tax rate starts to apply will increase from $80,001 to $87,001.
Extending the existing freeze on the Medicare Levy Surcharge and Private Health Insurance Rebate thresholds
From 1 July 2018, the Medicare Levy Surcharge and Private Health Insurance Rebate will remain paused for three more years.
Currently these thresholds are legislated to be paused from the 2014-15 tax year through to the 2017-18 tax year. As a result of this proposal, the thresholds would remain frozen until 30 June 2021. This means that clients earning near or above $90,000 for a single or $180,000 for a family, may expect to pay higher private health insurance premiums or a higher Medicare Levy Surcharge where no approved private health insurance is held.
The Government has announced officially that they will not remove or limit negative gearing because it would increase the tax burden on Australians trying to invest for their future.
Budget repair levy
On 30 June 2017, the three year Temporary Budget Repair Levy on high income individuals will cease. Up until then the temporary levy will continue to apply at a rate of two percent on individuals’ taxable income in excess of $180,000 per annum. This will mean that the top marginal tax rate will reduce from 49% to 47% from 1 July 2017.
Reducing the company tax rate to 25%
From 1 July 2016, the company tax rate will be progressively reduced to 25 per cent over 10 years.
The tax rate for businesses with an annual aggregated turnover of less than $10 million will be 27.5 per cent from the 2016-17 income year. The annual aggregated turnover threshold will then be progressively increased to ultimately have all companies at 27.5 per cent in the 2023-24 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. Franking credits will be based on the rate of tax paid by the company making the distribution.
Increasing the small business entity turnover threshold to $10 million
From 1 July 2016, the small business entity turnover threshold will be increased from $2 million to $10 million.
This will allow eligible incorporated businesses to gain access to small business concessions such as the lower small business company tax rate of 27.5 per cent from 1 July 2016, the ability to claim an immediate deduction for assets they start to use or install ready for use that costs less than $20,000, and access the depreciation pooling provisions implemented as part of last year’s budget measures.
The current $2.0 million turnover threshold will be retained for access to the small business capital gains tax concessions.
Increasing the unincorporated small business tax discount
Currently, individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million, are eligible for a small business tax discount of five per cent of the income tax payable. The discount is capped at $1,000 per individual per income year.
From 1 July 2016, the tax discount for unincorporated small businesses will be increased incrementally over 10 years to 16 per cent. Additionally, access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million. The current cap of $1,000 per individual for each income year will be retained.
New collective investment vehicles
1 July 2017 will see the introduction of two new types of collective investment vehicle (CIV), a corporate CIV allowing investors to pool funds for management by a professional funds manager and from 1 July 2018, limited partnership CIVs.
CIVs will be required to meet similar eligibility criteria as managed investment trusts and investors in these products will generally be taxed as if they had invested directly. Internationally recognised and easy to use, these structures will make managed funds based in Australia a more attractive place for foreigners to invest.
Diverted Profits Tax
Effective Date: 1 July 2017 a new Australian Diverted Profits Tax (DPT) is proposed to impose a 40% penalty rate of tax on certain multinational corporations that attempt to shift their Australian profits offshore to avoid paying tax.
The 40% tax will apply to profits diverted offshore through arrangements involving related parties:
- that result in less than 80% tax being paid overseas than would otherwise have been paid in Australia;
- where it is reasonable to conclude that the arrangement is designed to secure a tax reduction; and
- that do not have sufficient economic substance.
The DPT will apply to companies with global revenue of $1 billion or more. The tax will not apply to companies with Australian revenue under $25 million unless the company is artificially booking their revenue offshore.
The Government is currently consulting with interested parties on the key design features of the DPT.
Whilst most measures will need legislation to be introduced, it is important to have a plan in place to maximise existing opportunities and to be positioned appropriately for any potential changes.
If you have any questions about how the Budget or other Government measures may impact you or your family please do not hesitate to call our office on 02 9492 0444.
The information contained in this document dated 3 May 2016 has been given in good faith and has been derived from laws current at this date and our interpretation of them. It has also been devised from the 2016 Federal Budget Papers, Ministerial statements, associated materials, and our interpretation of them. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice. This document is to be used as general information only and should not be considered a comprehensive statement on any matter and should not be relied upon as such. This document has been prepared without taking into account any individual objectives, financial situation or needs. No member of the Equitas Wealth, Westpac Group, or the BT Financial Group, nor any of their employees or directors gives any warranty of accuracy or reliability nor accepts any liability in any other way, including by reason of negligence for any errors or omissions contained herein, to the extent permitted by law. It is important to note that the policies discussed here are yet to be passed as legislation and therefore may be subject to change or further refinement. This disclaimer is subject to any contrary requirement of the