The 2016 Federal Budget

Malcolm Turnbull has released his first budget with a focus on super and business. While there may have been some surprises in the announcements, the targeted areas were as most expected. So what does this mean for you and other Altus clients? Below is a summary of the key items that you need to know and how it may impact you.

Superannuation

• $1.6 million superannuation transfer balance cap (start date 1 July 2017) – There will be a limit on the total amount an individual can transfer into retirement phase where earnings on the balance will not be taxed. Earnings on any balance over $1.6 million will continue to be in accumulation phase and taxed at 15%.

There is no grandfathering for accounts currently in pension phase. Where you are already in retirement phase, from 1 July 2017 any balance in excess of $1.6 million may be converted to accumulation phase.

• Lifetime cap for non-concessional superannuation contributions (start date 3 May 2016) – There will now be a lifetime cap (as opposed to the previous $180,000 per annum, or $540,000 under the three year bring forward caps) of $500,000 for non-concessional contributions. The cap includes all non-concessional contributions made on or after 1 July 2007. The cap is to be indexed to average weekly ordinary time earnings.

If you have previously made non-concessional contributions after 1 July 2007 of $300,000, you would now only be able to make a future non-concessional contribution of $200,000. However, where the contributions were made prior to 1 July 2007 you will still be eligible for the full $500,000 lifetime limit.

• Changes to Transition to Retirement Income Streams “TTR” (start date 1 July 2017) – The tax exemption on earnings of assets used in TTRs will cease. Individuals will also no longer be able to treat certain superannuation income stream payments as lump sums for taxation.

If you currently have $500,000 in assets supporting Transition to Retirement (TTR) income stream, assuming you earn an 8% (i.e. $40,000) return on  your investment, the change will result in the $40,000 being taxed at 15 %, i.e. $40,000 * 15% =  $6,000,  rather than the current 0% tax rate. 

• Harmonising contribution rules for those aged 65 to 74 (start date 1 July 2017) – If you are under the age of 75 you will no longer have to satisfy the work test to make superannuation contributions.

This may be beneficial where you have sold an investment and do not wish to hold the funds outside of superannuation. Currently, if you are 65 year of age or older you must meet a working requirement test to put the funds into super. This will no longer be a requirement.

Business

•  Increase the small business entity turnover threshold (start date 1 July 2016) – The definition of a small business entity will increase from the current $2 million turnover to $10 million. This means businesses with turnovers up to $10 million will be able to utilise benefits such as the lower corporate tax rate (see below), accelerated depreciation (instant write-offs on assets less than $20,000) and depreciation pools. However, to access the small business CGT concessions the turnover threshold remains $2 million.

A business with a turnover of $8 million acquires a new server costing $15,000 on 1 December 2016. The server can be written-off in full in the 2017 financial year. Previously the business would need to capitalise the server and depreciate over its effective life.

• Reduction in the corporate tax rate (start date 1 July 2016) – Incorporated businesses with turnovers less than $10 million will be taxed at 27.5%. The turnover threshold will gradually increase to $1 billion for the 2022-23 income year. Thereafter, the corporate tax rate will progressively reduce to 25% in the 2026-27 income year. The ability to frank dividends will be in line with the rate of tax paid by the company.

For a company with a turnover of $6 million and taxable profit of $1 million, the reduction in the corporate tax rate will mean a reduction in tax of $25,000 from the 2017 income year.

• Unincorporated small business tax discount (start date 1 July 2016) – The tax discount for unincorporated small businesses (sole traders, trading trusts) will increase to 8%, giving an discount rate similar to the 27.5% for small business companies. The cap of $1,000 per individual will remain unchanged.

A sole trader has turnover of $500,000 and taxable profit of $50,000 resulting in a basic tax liability of $7,800. They will receive a reduction in tax of $624 as this is less than the $1,000 cap.

Personal

• Reduction of marginal tax rate for those earning over $80,000 (start date 1 July 2016) – The personal income tax threshold for the 32.5% rate will increase from $80,000 to $87,000.

The threshold increase will reduce tax on income by up to $315.

• Reduction of the concessional superannuation contributions amount (start date 1 July 2017) – The annual cap for concessional superannuation contributions will reduce to $25,000, regardless of age.

In the 2016 tax year an individual who is 55 made total concessional contributions of $35,000 utilising salary sacrifice. From the 2018 financial year the same individual will only be able to contribute $25,000 in concessional contributions.

• Catch-up concessional superannuation contributions (start date 1 July 2017) – Individuals will be able to make additional concessional contributions for unused amounts for a period over five consecutive years. However, this is limited to individuals with a superannuation balance of less than $500,000.

For example, if you sell a property in the 2020 financial year and have a taxable capital gain of $100,000 and only made concessional contributions of $10,000 the previous two years you could salary sacrifice an additional $30,000 concessional superannuation contributions (plus maximise the current year concessional contributions) to help offset the capital gain.

• Reduction of the concessional superannuation contributions threshold (start date 1 July 2017) – Where your income and employer contributions exceeds $250,000 (currently $300,000), your concessional superannuation contributions over the threshold will be taxed at 30% as opposed to 15%.

In the 2016 income year an individual receives assessable income of $250,000 and concessional superannuation contributions of $25,000. The superannuation contributions are taxed at 15%. In the 2018 income year the same individual will have their superannuation contributions taxed at 30% (an additional $3,750 in tax).

While this is a general overview of the budget, our next step at Altus is to make a start on your tax planning - what you need to do before 30th June to improve your tax position. 

To make the most out of these new budget measures, contact your Altus Adviser to make a time to meet and discuss your tax planning options.

The Altus Team.