Wow – what a budget!
In a nutshell, the budget targets superannuation for those with a high superannuation balance or high income and for the most part encourages others to contribute to super. Some of the benefits of Transition to Retirement have been removed (unusually this is effective to TRIS that are currently in place). It supports small business (and widens the definition of “small business”) by providing further tax incentives, and will see a lowering of the company tax rate across the board in future years. There’s also a small win for individual taxpayers with the rate at which the 37% marginal tax rate starts being lifted from $80,000 to $87,000 (saving $315 per year). Read on for more detail;
Effective for the 2015/2016 Tax Return
Medicare Levy Income Thresholds
Effective from Budget Night
New lifetime cap for non-concessional (i.e. after tax) superannuation contributions;
The existing non-concessional contribution caps of $180,000 per year (or $540,000 per year for those over aged 65) are gone
A new lifetime cap applies to all individuals of $500,000 – and will include all contributions made from 1 July 2007
If contributions are made which will exceed this cap, the ATO will notify the member and they must withdraw the excess from super or the contributions will be subject to penalty tax
If an individual has exceeded their cap prior to 3 May 2016 they will no longer be able to make additional contributions but will not be required to take the excess out of superannuation
Effective from 1 July 2016
The 32.5% marginal tax rate will extend to income up to $87,000 (lifted from $80,000). This will save individuals with taxable incomes of more than $87,000 approximately $315 in tax per year, and prevent around 500,000 taxpayers from facing the 37% marginal tax rate.
Increasing the Small Business Income Tax Offset (for unincorporated small businesses e.g. individual beneficiaries of family trusts)
From 1 July 2016 the tax discount will be increased from the current 5% to 8% (capped at $1000 per individual)
It will apply to income received from businesses with an aggregated annual turnover of less than $5M (up from $2M)
It will be increased to 10% in 2024/25, 13% in 2025/26 and 16% in 2026/27
Reduction of Company Tax Rate
From 1 July 2016 the small business tax rate will be reduced to 27.5% and be extended to cover businesses with annual aggregated turnover of < $10M.
This will be extended to cover companies with increasing amounts of turnover progressively from the 2017/18 year (up to $25M) until it covers those with 1 billion turnover in 2022/23
Thereafter the tax rate will continue to reduce until it reaches 25% in 2026/27
Franking credits will be distributed in line with the tax rate paid by the company
The definition of small business entity will change to include businesses with aggregated turnover of 10 million (up from 2 million). This means another 100,000 entities will have access to the small business concessions including
The 27.5% tax rate (above)
The simplified depreciation rules and immediate write-off for assets < $10M
Small Business Capital Gains Tax Concessions
Option to account for GST on a cash basis and pay GST instalments as calculated by the ATO
Effective from 1 July 2017 (over 1 year away)
“Catch up” Concessional Super Contributions
Individuals with a superannuation balance < $500,000 can make additional concessional contributions where they have not used their concessional cap in prior years
Only unused amounts from 1 July 2017 can be carried forward and can only be carried forward on a rolling basis for 5 years
Taxing earnings on TRIS (Transition to Retirement Income Stream)
From 1 July 2017 the earnings of superannuation fund assets supporting a TRIS will be taxed at 15% instead of 0%
This applies to all TRIS irrespective of whey they commenced
Note tax benefits can still be obtained from TRIS for those over aged 60, however are must more limited in value and will effectively only benefit to those not otherwise contributing their maximum concessional superannuation contributions amount.
$1.6 Million “Superannuation Transfer Balance Cap”
By way of background, when a member moves from “accumulation phase” to “pension phase” earnings on the superannuation assets supporting that pension are tax free in the fund.
From 1 July 2017, the total amount of accumulated superannuation that can be transferred to pension phase will be $1.6 million
Amounts in excess of $1.6 million will stay in accumulation phase and be taxed at 15%
Importantly, fund members in pension phase with balances > $1.6 million will be required to reduce this to $1.6 million by 1 July 2017 (possibly by withdrawal of funds from superannuation or returning a portion of the balance from pension to accumulation phase).
Given that one of the Government’s key aims for superannuation is to reduce the need for the aged pension rather than create tax free income for wealthy it seems a logical move. The impact should not be dramatic as members’ balances over the cap will still receive the concessional, 15% tax rate.
The treasurer told parliament "A balance of $1.6 million can support an income stream in retirement around four times the level of the single age pension,"
Reduction of Concessional Contributions Cap
Changes to contributions to super rules for those aged 65-74
Tax deductions for Personal Superannuation Contributions
All individuals under age 75 will be able to claim a tax deduction for personal superannuation contributions
Essentially superannuation deductions are now tax-deductible to individuals (subject to contribution caps)
This could open up tax planning opportunities for dealing with capital gains
This is a removal of the “10% test” that required income from employment to be less than 10% of gross income before superannuation contributions could be claimed
More taxpayers caught by the “high income contribution rules” (Division 293)
Removal of the anti-detriment provisions in respect of death benefits
Removing election to treat pension payments as lump-sum payments
Currently, individuals that have reached their preservation age but are under age 60 have been able to nominate an amount to be a “lump sum” withdrawal rather than part of their account based pension and thus be tax free up to a low-rate cap of $195,000
The ability to treat certain superannuation payments in this way will be removed from 1 July 2017
Improving Superannuation Balances of Low Income Spouses
Individuals will be able to claim an offset for non-concessional contributions to their low-income earning spouse’s superannuation, where the spouse earns between $37,000 - $40,000. (previously the income threshold was much lower starting at $10,800).
The value of this offset is up to $540 for the contributing spouse
Low Income Superannuation Tax Offset
Replaces the Low Income Superannuation Contribution when it ends on 30/06/2017
Provides a non-refundable tax offset to superannuation funds based on tax paid on concessional contributions made on behalf of low income earners (adjusted taxable income up to $37,000), capped at $500 p.a
Effectively avoids the situation where low income earners would pay more tax on superannuation contributions than on income earned outside of superannuation
Effective 1 July 2018
Amendments to Division 7A (related entity loans)
To improve the operation and administration and maintain the overall integrity and policy intent of Division 7A
A self-correction mechanism for inadvertent breaches
Technical adjustments to improve clarity