The buzzwords coming out of Canberra in the Federal Budget of 2016/17 are ‘innovation’ and ‘jobs growth’. In handing down his first budget as Treasurer, Scott Morrison outlined new Budget measures that offer tax breaks to support low-income earners and small businesses, along with significant changes to superannuation rules that have the potential to impact on the retirement strategies of hundreds of thousands of Australians.
The Key Announcements include:
- Reduced caps on concessional and non-concessional super contributions
- Tax offsets for low income earners and individuals with low super balances
- Reduced tax concessions on super contributions for high income earners
- A reduced company tax rate for small and medium businesses.
Reduced caps on concessional and non-concessional super contributions
From 1 July 2017, the cap on concessional contributions will reduce to $25,000 a year for everyone, regardless of age. Currently the concessional contributions cap is $30,000 under age 50, and $35,000 for ages 50 and over.
Individuals with super balances under $500,000 who don’t reach their concessional cap in a given year will be able to carry forward their unused cap amounts on a rolling basis over five consecutive years.
A lifetime cap of $500,000 for non-concessional contributions has been introduced, effective immediately. This will replace the existing annual cap of $180,000 (or $540,000 every three years under the bring-forward rule).
The lifetime cap also takes into account all non-concessional contributions made from 1 July 2007. Contributions made after the Budget announcement that exceed the cap will need to be removed or will be subject to the current penalty tax arrangements. It’s also worth noting that there will be no penalties if the cap has been reached or exceeded prior to the Budget announcement.
Changes encourage older Australians to contribute to super
From 1st July 2017, the current work test that applies for people making voluntary contributions between age 65 and 74 will be removed. This change will make it easier for older Australians to contribute to super. In addition, individuals will also be able to make contributions for a spouse aged under 75 without requiring the spouse to satisfy a work test.
Tax exemption on TTR pensions removed
From 1st July 2017, the tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed, with earnings to be taxed at 15%. This change will apply regardless of when the TTR income stream commenced. In addition, individuals will no longer be able to treat certain income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000.
The introduction of Low Income Superannuation Tax Offset
A Low Income Superannuation Tax Offset (LISTO) will be introduced to reduce the tax on contributions for low income earners. The LISTO will replace the Low Income Superannuation Contribution (LISC) scheme when it is abolished on 1 July 2017.
The LISTO will provide a non-refundable tax offset to super funds, based on the tax paid on concessional contributions up to a cap of $500. The LISTO will apply to members with adjusted taxable income up to $37,000 who have had a concessional contribution made on their behalf.
Other notable changes include an increase to the spouse income threshold from $10,800 to $37,000, and income tax deductions for any personal contributions made to a complying super fund up to their concessional cap.
This means that anyone, regardless of their employment circumstances, can claim a deduction to their personal contributions up to the value of the cap.
Reduced tax concessions on super contributions for high income earners
There’ll also be a retrospective cap on the transfer of superannuation balances into the retirement phase, set at $1.6 million, limiting the amount of tax-free income wealthy retirees can earn, and which will come into effect on 1st July 2017.
Those already in the pension phase on 1 July 2017 and whose balances exceed $1.6 million will need to either withdraw the excess or transfer it back into the accumulation phase.
Individuals who breach the cap will be subject to a tax on both the excess amount and the earnings on the excess amount — similar to the tax treatment for excess non-concessional contributions.
A reduced company tax rate for small and medium businesses.
There’s some good news for small and medium businesses. Starting from 1st July 2016, the company tax rate will be reduced to 25% over 10 years. Currently, small companies with aggregated turnover less than $2 million pay tax at a rate of 28.5%. Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.
In addition, the small business entity turnover threshold will be increased from $2 million to $10 million so that more businesses can access certain existing income tax concessions. These include:
- simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017 and then less than $1,000.
- simplified trading stock rules, giving businesses the option to avoid an end-of-year stocktake if the value of the stock has changed by less than $5,000
- a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under- or over-estimating PAYG instalments and the resulting penalties that may be applied
- the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO
- other tax concessions currently available to small businesses, such as the Fringe Benefits Tax concessions (from 1 April 2017, the beginning of the next fringe benefit tax year).
Personal income tax reduced
The Federal Budget also has some sweeteners for average full-time wage earners. From 1 July 2016, the 32.5% personal income tax threshold will increase from $80,000 to $87,000. This measure will reduce the marginal rate of tax on income between $80,000 and $87,000 from 37% to 32.5%. This means that a taxpayer earning $87,000 will save $315 per year as a result.
*Source: Federal Budget 2017-17 ‘What You Need to Know’ (Financial Wisdom Limited)