Summary

Tax measures

  • The income tax threshold at which the 37% tax applies will increase to $87,000 p.a. on 1 July 2016, from the current $80,000 p.a.
  • The tax rate for small business companies will reduce to 27.5% for businesses with a turnover up to $10 million in 2016/17. Further tax concessions will apply in future years.

A range of superannuation measures will also apply from 1 July 2017

  • A lifetime cap on non-concessional (after-tax) superannuation contributions of $500,000 will apply from 7.30 pm on 3 May 2016.
  • The 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 no longer be subject to a work test.
  • Tax deductions can be claimed for personal contributions regardless of employment status.
  • A lifetime limit of $1.6m will be placed on the amount transferred to start pensions.
  • Earnings on ‘transition to retirement’ pensions will be taxed at 15% (currently 0%).

 

Overview

The Federal Treasurer, Scott Morrison, announced a budget deficit of $37.1bn for 2016-17 (compared to a deficit of $39.9bn in 2015-16), falling to $6.0bn in 2019-20 as shown below.

The budget deficit of $37.1bn for 2016-17 is stuck at very similar levels to 2014-15 and 2015-16. The budget is relying on better economic growth of 3% p.a. (currently 2.5% p.a.) and an improvement in commodity prices to help improve tax receipts going forward. But the budget deficit is being funded by higher net debt of $427bn (or 24.8% pf GDP) which has continued to grow since the GFC.

In the current economic environment, both Liberal and Labor have struggled to reduce the deficit. This perhaps reflects the fact that Government has little ‘real’ control over the economy and growth, even though they like to pretend they have their hands on the levers when things are going well.

 

Personal Taxation

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. There are no other changes to marginal tax rates. Individual taxpayers with an income below the new threshold will not receive any tax cut. Those currently receiving above $80,000 pa will receive a tax saving. The maximum tax saving is $315 p.a.

Note: These tax rates do not include the Medicare levy and Temporary Budget Repair Levy

The budget repair levy of 2% on taxable income in excess of $180,000 will expire on 30 June 2017.

 

Company Taxation

Date of effect: 1 July 2016 and beyond

The tax rate that applies to small business companies will reduce to 27.5% for businesses with a turnover up to $10 million in 2016/17 and will be extended to larger business thereafter.

From 1 July 2024, the company tax rate will progressively reduce to 25%.

 

Unincorporated small businesses

Individuals with business income from an unincorporated business with an annual turnover of less than $5 million (up from $2 million) will be eligible for a small business tax discount.

The discount will increase to 8% (from 5%) on 1 July 2016. This applies to the income tax payable on the business income received from an unincorporated small business. This discount will be capped at $1,000 per individual for each income year and delivered as a tax offset.

 

Superannuation

Change effective immediately

Lifetime non-concessional cap of $500,000

A lifetime non-concessional contribution (NCC) cap of $500,000 will apply from 7.30 pm on 3 May 2016. All NCCs made on or after 1 July 2007 will count towards this lifetime cap.

NCCs include personal contributions made where no tax deduction is claimed, contributions made on behalf of a spouse and certain other amounts.

Any contributions made after commencement exceeding the lifetime limit (as well as assumed earnings on these amounts), will be subject to penalty tax if not withdrawn.

These measures will replace the current NCC cap of $180,000 pa, or $540,000 over a three year period if certain conditions are met.

 

Changes effective 1 July 2017

The following superannuation reforms are proposed to apply from 1 July 2017.

Cap on concessional contributions

The annual cap on concessional super contributions will reduce to $25,000, regardless of age. This change will reduce the amount of concessional contributions that can be made each year without a tax penalty. There will, however, also be the opportunity for certain people to contribute more if they haven’t fully utilised the cap in previous financial years—see below.

Concessional contributions include:

  • salary sacrifice
  • superannuation guarantee
  • personal contributions claimed as a tax deduction, and
  • certain other amounts.

Currently the cap on concessional contributions depends on age—see table below.

 

Additional tax on concessional contributions

Broadly, an additional 15% tax on concessional contributions will be payable by those earning more than $250,000 p.a. Currently this additional tax only applies to those earning more than $300,000 p.a.

 

‘Catch-up’ concessional contributions

Concessional super contributions may exceed the annual cap if:

  • the annual cap in previous financial years is not fully utilised, and
  • the superannuation balance is less than $500,000.

Only cap amounts unused from 1 July 2017 can be carried forward for up to five years.

This measure will help people who have not been able to utilise the caps in earlier years, to make additional or ‘catch-up’ super contributions.

This is particularly attractive for small businesses who have a tough year, followed by a good year, to allow them to ‘catch-up’ with their concessional super contributions.

 

Contributions between ages 65 and 74

Those aged between 65 and 74 will be able to make super contributions regardless of whether they work or not. Currently, you need to work 40 hours in 30 days to make super contributions.

This is a positive change for retirees to continue making contributions up to the age of 75 years.

 

Tax deduction for super contributions

Tax deductions will be able to be claimed for personal contributions regardless of employment status. Currently only self-employed people (e.g. sole traders) and those who earn less than 10% of total income from employment sources are eligible to claim a tax deduction.

Again, this is a positive, and allows people to make concessional contributions at the end of the financial year, even if they have not been salary sacrificing into super during the year.

 

Superannuation pension limits of $1.6m per individual

A lifetime limit of $1.6m will be placed on the amount of superannuation that can be transferred to start pensions. This limit will be called the ‘transfer balance cap’.

Earnings on investments held in pensions will continue to be taxed at 0%.

Any amounts over the $1.6m cap will need to be transferred back into the accumulation account inside super. Earnings on money transferred back to the accumulation will be taxed at 15%.

People with existing pensions over $1.6 million will need to reduce the balance below this limit by 1 July 2017 to avoid penalties.

 

Transition to retirement pensions

Change effective 1 July 2017

Earnings on investments held in ‘transition to retirement (TTR)’ pensions will be taxed at 15% (currently 0%) from 1 July 2017. A transition to retirement pension is a pension that is started with superannuation money when you have reached your preservation age, which is between 55 and 60 depending on date of birth. Once permanently retired (or another condition of release is met), it is expected that the underlying earnings will then be taxed at 0%.

This will have an adverse impact on TTR strategies, although there will still be some benefit to people aged 60 years who can still withdraw the money tax-free from super.

 

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If you have any questions about the Budget, please do not hesitate to contact the team from Centaurus Wealth on 07 5585 2150 with any questions about how it might apply to you.

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