The Federal Treasurer, the Hon. Scott Morrison MP, delivered his first Federal Budget last night.  Significant budget initiatives were announced in regards to Superannuation Contributions and Superannuation Pensions. Also Small Business turnover threshold will increase to $10 million from 1 July 2016.

Personal tax rate

Small tax cut from 1 July 2016  

From 1 July 2016, the 32.5% personal income tax threshold will increase from $80,000 to $87,000.

Budget deficit levy not extended  

In the lead-up to the Budget, the Treasurer indicated that the 2% Budget deficit levy (tax) on incomes over $180,000 would not be extended beyond its initial three years. The levy applies for three years from 1 July 2014, and is due to cease at the end of the 2016–2017 financial year.

Small business threshold to increase to $10 million

From 1 July, 2016 small and medium-sized businesses will receive a tax cut, with their company tax rate falling to 27.5%.   As a result, a business with an aggregated annual turnover of less than $10 million will be able to access a number of small business tax concessions, including:

  • being eligible for the instant tax write-off for equipment purchases of up to $20,000 made next financial year
  • the simplified depreciation rules;
  • the simplified trading stock rules;
  • a simplified method of paying PAYG instalments calculated by the ATO;
  • the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
  • immediate deductibility for various start-up costs;
  • a 12-month prepayment rule; and
  • the more generous FBT exemption for work-related portable electronic devices

The Government has also announced a timetable to lower corporate tax for all businesses with the turnover threshold for the reduced tax rate rising incrementally to $100 million in 2019-20.
Franking credits will continue to be calculated in the usual manner, by reference to the amount of tax paid by the company making the distribution.   Non-incorporated businesses do not miss out on tax relief, with those turning over less than $5 million getting an 8% discount up to a maximum value of $1,000, effective 1 July, 2016.

Superannuation - Accumulation Phase

Lifetime cap for non-concessional contributions of $500,000

This cap replaces the existing non-concessional cap of $180,000 per annum (or $540,000 under the bring forward provision for those aged 64 or less at 1 July of the financial year) and commenced from 7.30pm (AEST) 3 May 2016.

  • will include all non-concessional contributions made on or after 1 July 2007
  • contributions made before commencement cannot result in an excess
  • contributions made after commencement that exceed the $500,000 cap will need to be returned or be subject to penalty tax
  • the cap will be indexed in increments of $50,000 in line with average weekly ordinary times earnings

Concessional contributions cap reduced to $25,000

Currently the concessional contributions cap is $30,000 per annum for those to age 50, and $35,000 for those aged 50 and over.  This threshold will be reduced to $25,000 from 1 July 2017 for all individuals, regardless of age.

Allow catch-up concessional contributions

From 1 July 2017 it is proposed that individuals who have not used their concessional contribution cap in a previous year will be able to make use of the unused cap in future years by making additional concessional contributions.

  • The amount of the unused concessional contribution cap will be carried forward for a period of five (5) consecutive years.
  • Only unused amounts accrued from the 2017/18 financial year can be carried forward.
  • The ability to use the catch-up rule is limited to those with a super balance of less than $500,000.
  • This measure will be extended to members of defined benefit schemes although no details on how this measure will be implemented for members in these funds has been provided.

Superannuation contributions tax (extra15%) for incomes $250,000+

From 1 July 2017, the threshold at which high income earners pay addition contributions tax will decrease from $300,000 to $250,000. An additional 15 per cent tax is payable on concessional contributions to the extent the threshold is exceeded.

Removal of the work test for those aged 65 to 74 (inclusive)

From 1 July 2017 it is proposed to remove the current work test. This test (the need to be gainfully employed for at least 40 hours in 30 consecutive days) applies to non-mandated contributions (including salary sacrifice and personal contributions) for those aged 65 to 74 (inclusive).

Tax deductions for personal superannuation contributions extended

All individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions from 1 July 2017.  This measure will apply to all individuals, regardless of their employment circumstances, allowing them to make concessional superannuation contributions up to the concessional cap.

Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements, will benefit from these changed arrangements.

Increase to income threshold for spouse contribution tax offset

It is proposed that from 1 July 2017 the income threshold for the spouse contribution tax offset will increase from $10,800 to $37,000. The offset will be phased out once income reaches $40,000.
Currently, an 18% tax offset is available on spouse contributions up to $3,000 where the receiving spouse’s income is less than $10,800 and is phased out once income reaches $13,800. The maximum offset will remain at $540.

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.  This measure will follow the cessation of the current Low Income Super Contribution (LISC) from 1 July 2017.

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.

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.

Superannuation - Pension Phase

Cap on superannuation transfer balances

From 1 July 2017, a $1.6 million cap is proposed to apply to the amount of accumulated superannuation benefits that can be transferred to the pension phase.

  • Subsequent earnings on the amount transferred to a pension will not be restricted.
  • Amounts transferred in excess of the cap will be subject to tax, similar to that which applies to excess non-concessional contributions.
  • It is also proposed that existing pension accounts that have a balance above the cap will need to be reduced (eg by moving funds back to the accumulation phase) to $1.6 million by 1 July 2017.
  • Accumulated benefits in excess of the $1.6 million cap will be able to be maintained in the accumulation phase.
  • The threshold will be indexed with consumer price index in $100,000 increments
  • Members of defined benefit schemes will also be subject to commensurate treatment for pension amounts above $100,000.

This transfer balance cap for amounts transferred into pension phase is intended to limit the extent to which the tax-free benefits of retirement phase accounts can be used for tax and estate planning.

Transition to retirement income streams

The earnings tax exemption for assets supporting transition to retirement (TTR) income streams is proposed to be removed from 1 July 2017. We understand this measure will apply to existing TTR income streams.

Tax treatment of payments from income streams

A tax rule that allows individuals to elect to have payments from superannuation income streams treated as lump sums for tax purposes is also proposed to be removed.

Removal of anti-detriment payments in super

The anti-detriment provision will be removed from 1 July 2017. 

The current provision allows superannuation funds to claim a deduction in relation to an increased death benefit payment which compensates certain death benefit beneficiaries (spouse, former spouse or child) for the tax paid on superannuation contributions.   The availability of the anti-detriment results in an increase of up to 17.6 per cent of the taxable component of a lump sum death benefit payment.

Start-up and small business tax concessions

Expanding tax incentives for early-stage investors:

  • Proposed changes will ensure start-up companies have access to investment capital through the expansion of tax incentives, including:
  • Reduction of the holding period from three years to 12 months for investors to access the 10 year capital gains tax exemption
  • Limiting the investment amount for non-sophisticated investors to $50,000 or less per income year in order to receive a tax offset

 CGT concessions

The threshold changes will not affect eligibility for the small business CGT concessions, which will only remain available for businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test).  

 GST small business taxpayers: election to use cash basis

From 1 July 2016, the Government proposes to extend the option for taxpayers to use the cash basis of accounting for GST to small businesses with an annual turnover of less than $10 million. Such entities would be able to account for GST on a cash basis and pay GST instalments as calculated by the ATO.

Social security and family assistance

Few social security and family assistance related measures were announced in this year’s Budget. The main item of note being the deferral of reforms to child care benefits until 1 July 2018. 

NOTE: As there are changes that may effect your circumstances, please feel free to contact your adviser at WLM to discuss strategies for your particular situation.