On Tuesday 3rd of May 2016 the Federal Treasurer Scott Morrison delivered his first budget titled “Jobs & Growth”. Who were the big winners on Budget night and what do the changes actually mean to you?
Superannuation reform changes
New lifetime cap for non-concessional superannuation contributions
The government will introduce a $500,000 lifetime non-concessional contributions cap. If an individual has exceeded the cap prior to commencement date (being 7.30 pm (AEST) on 3 May 2016 i.e., Budget night), they will be taken to have used up their lifetime cap but will not be required to take the excess out of the superannuation system.
It is important to be aware that the lifetime non-concessional contributions cap will replace the existing non-concessional contributions cap, which allowed non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65).
Effective Budget Night – 7.30pm (AEST) 3 May 2016
Introduction of a $1.6 million ‘superannuation transfer balance cap’
From 1 July 2017, the government will introduce a $1.6 million ‘superannuation transfer balance cap’ on the total amount of accumulated superannuation an individual can transfer into pension phase. Subsequent earnings on this pension balance will not be restricted.
It is proposed that, if the $1.6 million cap is exceeded, the excess amount plus earnings on the excess will be subject to a tax. It is not currently clear as to whether individuals will have the option to withdraw the excess to avoid this penalty tax (i.e., similar to the tax treatment currently afforded excess non-concessional contributions).
Reducing the concessional contributions cap
From 1 July 2017, the government will lower the annual cap on concessional superannuation contributions to $25,000. Until this time, the existing concessional contributions caps, being $30,000 for those aged under age 50 years, and $35,000 for those aged 50 years and over, will apply.
Changes to the contribution rules for those aged 65 to 74
From 1 July 2017, the government will remove the current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement. Specifically, the government will remove the requirement that an individual aged 65 to 74 must meet the ‘work test’ before making voluntary or non-concessional contributions to superannuation.
Tax deductions for personal superannuation contributions
From 1 July 2017, the government will change the law to allow all individuals under age 75 to claim an income tax deduction for personal superannuation contributions. Individuals who are, for example, partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from the proposed changes.
Changes to the ‘high income contribution rules’ (Division 293)
From 1 July 2017, the government will lower the Division 293 threshold (i.e., the point at which high income earners pay additional contributions tax of 15%) from $300,000 to $250,000.
Improve superannuation balances of low income spouses
From 1 July 2017, the government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse to $37,000 (from $10,800). The offset is gradually reduced for income above this level and completely phases out at income above $40,000. The low income spouse tax offset provides up to $540 per annum for the contributing spouse.
Introducing a Low Income Superannuation Tax Offset (LISTO)
From 1 July 2017, the government will introduce a Low Income Superannuation Tax Offset (‘LISTO’) to reduce tax on superannuation contributions for low income earners. 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 of up to $37,000 that have had a concessional contribution made on their behalf.
This will effectively avoid the situation in which low income earners would pay more tax on savings placed into superannuation than on income earned outside of superannuation. The LISTO will replace the Low Income Superannuation Contribution when it ends on 30 June 2017.
Other Budget announcements
Superannuation Complaints Tribunal
Additional funding is proposed to be provided to the Superannuation complaints Tribunal to improve processes and reduce a backlog of complaints. This measure is proposed to be funded by an increase in the Financial Institutions Supervisory Levy. #KATRINA
Multinational Tax Avoidance
A new taskforce of more than 1,000 specialist staff at the Australian Tax Office is being formed to prosecute companies, multinationals and high wealth individuals not paying the tax they should.
Income tax relief for Australian Defence Force personnel deployed overseas
The government will provide a full income tax exemption for Australian Defence Force personnel deployed on Operation PALATE II in Afghanistan. This income tax exemption has effect from 1 January 2016, and will remain in effect until 31 December 2016.
The government will also update the coordinates for Operation MANITOU in international waters, with effect from 14 May 2015, and Operation OKRA in the Middle East, with effect from 9 September 2015, to reflect the actual areas covered by the operations.
Changes effective for the 2015/16 income year
Medicare levy low income thresholds for 2015/16
For 2015/16, the Medicare Levy low income thresholds will be as follows:
• Individuals $21,335 (previously $20,896)
• Families $36,001 (previously $35,261)
The family income threshold (i.e., $36,001) will be increased by $3,306 (previously $3,238) for each dependent child or student. For single seniors and pensioners with no dependants who are eligible for the seniors and pensioners tax offset, the threshold will be increased to $33,738 (previously $33,044).
Changes effective 1 July 2016 (i.e., 2016/17 income year)
Employing Young People
There are 2 incentives for employing young people from 2017. Employing an Intern (for 4-12 weeks) will result in an upfront payment of $1,000 and employing an individual in an ongoing job will result in a subsidy of between $6,500 and $10,000 depending performance. This amount will be paid over 6 months. A young job seeker will need to have been unemployed for at least 6 months to be eligible for the payments.
Targeted personal income tax relief
From 1 July 2016, the government will increase the 32.5% personal income tax threshold from $80,000 to $87,000.
Increasing the Small Business Income Tax Offset (‘SBITO’)
From 1 July 2016, the government will increase the current 5% tax discount (referred to as the SBITO) to 8%. The discount is currently available to an individual in receipt of income from an unincorporated small business entity (‘SBE’) (i.e., basically, an entity with an aggregated turnover of less than $5 million), and applies to the income tax payable on the business income received from such an entity.
The discount will remain constant at 8% for eight years, and will then increase to:
• 10% in 2024/25;
• 13% in 2025/26; and
• 16% from 2026/27.
The current tax discount (or SBITO) cap of $1,000 per individual for each income year will be retained. Furthermore, 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.
Increasing the small business entity (‘SBE’) turnover threshold
From 1 July 2016, the government will increase the SBE turnover threshold from $2 million to $10 million. The current $2 million turnover threshold will be retained for access to the small business capital gains tax (‘CGT’) concessions, and access to the SBITO (i.e., the increased 8% tax discount) will be limited to entities with turnover less than $5 million (as noted above).
Reducing the company tax rate over 10 years
The government will reduce the company tax rate to 25% over 10 years (i.e., by 1 July 2026). This measure will commence from 1 July 2016, whereby the government will cut the small business company tax rate to 27.5%, and make this tax rate available to small companies with an annual aggregated turnover of less than $10 million.
Under this 10 year plan about 870,000 businesses that employ 3.4 million Australians will be eligible for the tax cut.
Changes effective 1 July 2018 (i.e., 2018/19 income year)
Targeted amendments to Division 7A
From 1 July 2018, the government will make targeted amendments to improve the operation and administration of Division 7A of the ITAA 1936, as a result of a number of recommendations from the Board of Taxation’s Post-implementation Review into Division 7A.
These changes will provide clearer rules for taxpayers and assist in easing their compliance burden while maintaining the overall integrity and policy intent of Division 7A. The amendments will include:
• a self-correction mechanism for inadvertent breaches of Division 7A;
• appropriate safe-harbour rules to provide certainty;
• simplified Division 7A loan arrangements; and
• a number of technical adjustments to improve the operation of Division 7A and provide increased certainty for taxpayers.
What to do now?
The above is a summary of some of the key features in relation to tax & superannuation delivered in Tuesday night’s Federal Budget and is a general overview of how these announcements may affect you.
We recommend that you contact us to discuss your personalised tax planning strategies so you can take action before 30 June so you minimise the tax you need to pay.
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