2016 FEDERAL BUDGET WRAP

By Paul Nicol

On Tuesday 3rd May 2016 the Government delivered the 2016–17 Federal Budget before a looming double dissolution election. Superannuation was a key focus of the Budget with the announced superannuation package being the most significant changes to the system since Peter Costello’s “Simpler Super” package was announced in the 2006–07 Budget.

Substantial changes within Superannuation were made to contributions, Transition to Retirement pensions (TtR’s) and taxation in the retirement phase. Without being too editorial, our general house view is that many of the proposed Superannuation changes are flawed and will be a nightmare to administer. The objective of superannuation is to allow people to save for a financially secure retirement. Research shows that most people make significant contributions to superannuation in a short period once they reach their late–50s. Capacity to make these ‘top–up’ contributions for pre–retirees is critical to ensure a financially secure retirement. Sadly, many of the budget measures will prevent significant ‘top–up’ contributions in a short period of time, which we view as extremely short sighted.

On the flip side, proposed reductions to company tax rates is a positive step. The current corporate tax rate in Australia of 30% by world standards is very high.

A summary of the major budget announcements are as follows:

Superannuation

1. Reduction to the concessional contribution cap – Proposed effective date 1 July 2017

Currently, the standard concessional (pre–tax) contribution cap is $30,000 per financial year. A higher concessional contributions cap of $35,000 applies to individuals who are aged 49 years or over on 30 June of the previous financial year.

The concessional contributions cap will now reduce to $25,000 per annum for everyone irrespective of their age from 1 July 2017.

As this measure is not being implemented until 1 July 2017, we would strongly recommend those with capacity to fully utilise the current concessional cap do so both in this financial year (2015/16) as well as in 2016/17.

2. Allowing catch up concessional contributions – Proposed effective date 1 July 2017

The current concessional contribution cap is applied on a “use it or lose it” basis. That is, the unused amount of the concessional cap cannot be carried forward.

Individuals will now be able to make concessional contributions above the annual cap of $25,000 where they have not fully utilised their concessional contribution cap in previous financial years.

Amounts are carried forward on a 5 year rolling basis. The new regime will only apply to unused amounts from 1 July 2017. However, to utilise the concessional contribution catch up an individual’s superannuation account balance must be below $500,000.

This measure is designed to assist people with an interrupted work pattern. It may also be possible to time catch up concessional contributions for a year whereby a larger deduction is required now that personal deductions will be possible for concessional contributions (covered in point 5).

3. Additional 15% contribution tax: threshold reduces to $250,000 – Proposed effective date 1 July 2017

Division 293 tax, which is an additional 15% contributions tax payable on concessional contributions by high income earners with income exceeding $300,000, will apply to those with income exceeding $250,000 from 1 July 2017.

The Government claims reducing the Division 293 tax income threshold will improve sustainability and fairness in the superannuation system by limiting the effective tax concessions provided to high income individuals.

4. Removal of contribution eligibility requirements for those aged 65 –74 – Proposed effective date 1 July 2017

Currently an individual who is aged 65 or over, at the time a contribution is paid into superannuation, must have satisfied the work test in that financial year for the fund to accept a contribution. This test will be abolished.

The ability to make a spouse contribution will also be extended from age 70 to 75.

5. Extension of deductions for personal super contributions – Proposed effective date 1 July 2017

Currently, where a person is engaged in employment activities during a financial year, a deduction for personal superannuation contributions can only be claimed where the “less than 10% rule” is satisfied. This rule broadly requires that the income attributable to employment activities does not exceed 10% of income from all sources.

The Government is proposing to abolish this test, allowing all individuals up to age 75 to claim an income tax deduction for personal superannuation contributions. If legislated, this will effectively allow all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap.

6. Lifetime cap of $500,000 for non–concessional (after tax) superannuation contributions – Proposed effective date 7.30pm (AEST) 3 May 2016

Currently, the non–concessional contributions cap is $180,000 per person, per financial year.

Where a person is under age 65 at any time in the financial year, they are able to make a non–concessional contribution of up to $540,000 under the bring–forward provisions.

The Government has proposed to replace the current contribution cap with a $500,000 lifetime limit. This lifetime cap is proposed to commence at 7:30 pm (AEST) on 3 May 2016. The cap will be indexed to average weekly ordinary time earnings (AWOTE).

The lifetime cap will take into account all non–concessional contributions made on or after 1 July 2007.

Contributions made between 1 July 2007 and 3 May 2016 will be counted towards this lifetime cap. However, excess contributions made before the commencement of this measure, that is 7:30 pm (AEST) on 3 May 2016, will not result in a penalty or the need to refund the excess out of superannuation.

Excess contributions above $500,000 made after 3 May 2016 will need to be removed or subject to penalty tax.

After–tax contributions made into defined benefit and constitutionally protected funds will also be included in an individual’s lifetime non–concessional cap. Special rules will apply to members of these schemes.

7. Changes to the taxation of Transition to Retirement (TtR) – Proposed effective date 1 July 2017

The earnings on superannuation fund assets that support a pension are exempt from tax at fund level for all TtR pensions. TtR pensions are usually set up at a point whilst the individual is still working and below age 65.

This tax exemption, where the assets are supporting a TtR Income Stream, will no longer be available from 1 July 2017. This means that earnings on fund assets supporting a TtR after this date will be subject to the same maximum 15% tax rate applicable to an accumulation fund.

Further to this, an election can currently be made for tax purposes to allow certain superannuation income stream payments to be taxed as lump sums. This can result in tax advantages for certain people under age 60 who make this election. The Government is proposing to remove this opportunity.

It is important to understand that Account Based Pensions (ABP’s) will continue to be exempt from tax at a fund level. Typically ABP’s are an income stream set up when an individual is not gainfully employed or has reached age 65 or older when setting up the pension.

8. Introduction of a $1.6 million superannuation transfer balance cap – Proposed effective date 1 July 2017

The Government is proposing to introduce a $1.6 million transfer balance cap. This cap will limit the total amount of accumulated superannuation benefits that an individual will be able to transfer into the retirement income phase. Subsequent earnings on pension balances will not form part of this cap.

Where an individual accumulates superannuation amounts in excess of $1.6 million, they will be able to maintain this excess amount in their superannuation accumulation account (where earnings will be taxed at the concessional rate of 15 per cent).

Fund members who are already in the retirement income phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017.

9. Low Income Super Tax Offset – Proposed effective date 1 July 2017

From 1 July 2012, individuals with an income of up to $37,000 automatically received a Government contribution of up to $500 paid directly into their super. However, this Low Income Superannuation Contribution (LISC) will not be available in respect of concessional contributions made after 1 July 2017.

From 1 July 2017, the Government is proposing to introduce a replacement Low Income Superannuation Tax Offset (LISTO). 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 who have had a concessional contribution made on their behalf.

10. Spouse Contributions – Proposed effective date 1 July 2017

Currently, an individual making a contribution into their spouse’s account is entitled to a tax offset of up to $540 if certain requirements are met. One of the requirements to qualify for the maximum offset is that the receiving spouse’s assessable taxable income in the financial year must be less than $10,800.

To be eligible to receive the contribution, the receiving spouse must currently be:

• Under age 65; or
• Aged between 65 and 70 and has met the work test for the financial year in which the contribution is made.

The Government proposes to remove the work–test restrictions for all individuals aged up to 75 and increase access to the spouse superannuation tax offset by raising the lower income threshold for the receiving spouse to $37,000 (cutting out at $40,000).

Taxation

1. Personal Income Tax changes – Proposed effective date 1 July 2016

A tax cut has been proposed at the current $80,000 taxable income threshold. As a result, marginal tax rates are proposed to change as follows:

2. Decrease in company tax rate – Proposed effective date 1 July 2016

The company tax rate will be reduced from 30% to 25% over 10 years. Currently, small business companies with aggregated turnover less than $2 million pay tax at 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. The proposed reduction of company tax rates is below: