Budget 2016 Planning Implications

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1 Budget 2016 Planning Implications Budget day 2016 was a bigger day than in recent years. First, the Reserve Bank of Australia cut cash interest rates and banks actually passed this on to home loan rates within hours. Fantastic news for borrowers but yet more pain for self-funded retirees. Then Budget night itself produced some pretty fundamental changes, especially to superannuation and also in areas such as company tax rates and personal tax thresholds. This has been the biggest Budget in 10 years. In fact, it seeks to unwind the very generous measures announced in the 2006 Costello Budget. We believe the 2016 Budget will have an impact on every Australian, although some changes only come in on 1 July 2017, allowing 14 months for planning. Many people will have to take a much longer dripfeed approach to building super, with maximum concessional contributions now only $25,000 for all age groups (down from $100,000 less than a decade ago). There is room for variable work patterns and cross year tax planning with the introduction of a five-year catch up provision on concessional contributions missed. Theoretically, an individual could contribute $125,000 concessionally in a single year if they have skipped earlier years. Much of the nexus between work and super has been broken, such as the removal of the 10% rule for the self-employed, and the removal of a work test for contributions made over age 65. All Australians can now contribute to super until age 75 regardless of work patterns so there is now an opportunity for non-working or retired spouses under 65 with inadequate super to catch up. Key Budget announcements include: Personal income tax thresholds Superannuation Superannuation Pension Phase Social security and family assistance Start-up and small business tax concessions Corporate taxes

2 For wealthier Australians, there were two changes which have disrupted plans and are creating much angst and anger. 1. The immediate and retrospective lifetime cap on non-concessional contributions (NCCs) breaks the convention of not making retrospective changes and undermines confidence in the system. 2. The lifetime limit of $1.6m transfer balance into pension mode passes the pub test and allows 14 months of planning but more could be done to allow couples to even up balances in the interim. Timetable Other than the Budget Reply speech, there has been no opportunity for parliamentary debate, let alone legislation. An election will be held in early July and all Australians will have a say on these Budget measures before many come into effect. Other than the NCC immediate measure which requires careful considerations, there is time to pause and reflect on considering the various options. The next 14 months present an opportunity for Australians to reassess and plan in light of the budget changes. It is an opportunity to take a longer term, more strategic view of superannuation, while considering other wealth-building structures such as negative gearing, investment bonds and family trusts. Individuals who already have more than $1.6m in a pension fund will need to look at capital gains issues before rolling back into accumulation. Date of effect: 3 May 2016 A lifetime cap on non-concessional (after-tax) superannuation contributions of $500,000 applied from 7.30 pm on 3 May Date of effect: 1 July 2016 The income tax threshold at which the 37% tax applies will increase to $87,001 pa, from the current $80,001 pa. The small business tax rate will reduce to 27.5% for businesses with a turnover up to $10m in Date of effect: 1 July 2017 The annual cap on concessional (pre-tax) super contributions will reduce to $25,000, regardless of age. Concessional super contributions may exceed the annual cap if certain conditions are met. Those aged between 65 and 74 will be able to make super contributions regardless of whether they work or not. Tax deductions will be able to be claimed for personal contributions regardless of employment status. A lifetime limit of $1.6m will be placed on the amount of superannuation that can be transferred to start pensions. Earnings on investments held in transition to retirement pensions will be taxed at 15% (currently 0%). Personal Income Tax Thresholds The Government has proposed to increase the 32.5% personal income tax threshold from $80,000 to $87,000 from 1 July This measure will result in a tax saving of $315 for Australian tax residents with a taxable income in excess of $87,000. The change in personal income tax thresholds from to is shown in the table below. Superannuation Changes Lifetime cap for non-concessional contributions (NCCs) The Government has proposed the introduction of a lifetime non-concessional cap (NCC) of $500,000. This cap replaces the existing NCC of $180,000 pa (or $540,000 under the bring forward provision for those aged 64 or less at 1 July of the financial year). Features of the new cap: commences 7.30 pm (AEST) 3 May 2016 includes all NCCs 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 need to be returned or be subject to penalty tax 2

3 after-tax contributions made to defined benefit accounts and constitutionally protected funds are included in an individual s lifetime NCCs cap. Where a member of a defined benefit scheme exceeds the cap, ongoing contributions to the defined benefit account can continue but an equivalent amount of the excess (including proxy earnings) needs to be removed from an accumulation account on an annual basis the cap is 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. From 1 July 2017, the Government will include notional (estimated) and actual employer contributions in the concessional contributions cap for members of unfunded defined benefit schemes and constitutionally protected funds. Members of these funds will have opportunities to salary sacrifice commensurate with members of accumulation funds. For individuals who were members of a funded defined benefit scheme as at 12 May 2009, the existing grandfathering arrangements will continue. 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 consecutive years. Only unused amounts accrued from the 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. Lowering of the cut-in threshold for 30% tax on concessional contributions From 1 July 2017, the threshold at which high income earners pay additional contributions tax will decrease from $300,000 to $250,000. An additional 15% tax is payable on concessional contributions to the extent the threshold is exceeded. Tax deductions for personal superannuation contributions All individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions from 1 July 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. 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. 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 (inclusive). Increase to income threshold for spouse contributions 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 3

4 cessation of the current Low Income Super Contribution (LISC) from 1 July 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 The Superannuation Reform Package also included the following measures impacting superannuation pensions: Cap on superannuation transfer balances From 1 July 2017, a $1.6m 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 $1.6m by 1 July Accumulated benefits in excess of the $1.6m 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. 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 We understand this measure will apply to existing TTR income streams. Tax treatment of payment 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. 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. Child care reforms The Government has proposed to defer the start date for the package of child care reforms that was announced in the Budget. The reforms announced last year included a new Child Care Subsidy to replace the current Child Care Benefit, Child Care Rebate and Jobs, Education and Training Child Care Fee Assistance programs. These reforms are now proposed to commence from 1 July 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 nonsophisticated investors to $50,000 or less per income year in order to receive a tax offset Increase the small business entity turnover threshold Currently, small businesses can access the small business tax concessions if their turnover is less than $2m. From 1 July 2016, the small business turnover threshold will be increased to $10m. The $2m threshold will continue to apply to the small business CGT concession and a $5m threshold will apply to unincorporated small businesses wishing to access the unincorporated small business tax discount Examples of small business tax concessions include: Simplified depreciation rules Immediate tax deduction for the purchase of assets costing less than $20,000 4

5 Simplified trading stock rules GST accounting on a cash basis Increase the unincorporated small business tax discount The unincorporated small business tax discount will increase from 5% to 16% progressively over the next 10 years. From 1 July 2016, the tax discount will be increased to 8%, where it will remain until the tax year, from which it will increase to 10%. A 13% discount will apply in the tax year and a 16% discount will apply in the following tax year. Reduction in tax rate for small business companies from tax year The company tax rate will be reduced to 27.5% from the income year for companies with an annual aggregated turnover of less than $10m (the small business threshold). The general corporate tax rate will reduce progressively to 25% by the tax year. Corporate Taxes Diverted Profits Tax A 40% tax on profits diverted from Australia by large multinational companies will apply from 1 July The so-called Google Tax will apply to companies that have global revenue of $1b or more and Australian revenue of $25m or more. This follows the 2015 Senate Economics Committee Hearing into Corporate Tax Avoidance. Reduction in company tax rate to 25% While company tax rate cuts will first be applied to small businesses, the Government proposes to progressively reduce the general corporate tax rate to 25% by the tax year: The following approximate corporate tax rates apply in other countries across the globe United Kingdom 20%, Malaysia 25%, China 25%, Singapore 17% and Ireland 25% (passive business), A reduction in corporate tax rate generally leads to a decline in the available franking rate for corporate dividends. Companies should consider present franking policies to ensure tax paid is not trapped within the company in later years. Applying GST to low value importations of goods The Government intends to remove the low value GST importation threshold from 1 July The changes will impose a registration obligation on foreign entities that have an Australian turnover (essentially business income derived in Australia) of $75,000 or more. Such entities will have to register for, and charge, GST to consumers. The current threshold exempts from GST all goods imported into Australia where the value is $1,000 or less. After the proposed changes, GST will still not be payable by the consumer where the importer has an Australian turnover of less than $75,000 and the value of the goods is lower than $1,000. Taxpayer certainty for Division 7A (private company) loans In general, loans made by private companies must comply with rules relating to minimum interest rates, minimum repayments and maximum terms. In order to avoid significant tax costs, technical adjustments will be introduced to ensure inadvertent breaches of the law can be rectified and the certainty of tax outcomes can be given to taxpayers. Simplification of Taxation of Financial Arrangement (TOFA) rules The Government will reduce the scope, decrease compliance costs and increase taxpayer certainty by redesigning the TOFA framework. The current rules have unintended application to a significant number of taxpayers. The changes will remove a large number of taxpayers from the rules. *information sourced from Macquarie Bank Rosenfeld Kant & Co. Po Box 86 Bondi Junction, NSW 1355 Australia p e. w. 5

6 The information (including taxation) contained within this document is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Rosenfeld Kant Wealth Advisors strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances. Licensed under AFSL

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