2016-17 Budget Update

On Tuesday 4 May 2016, Treasurer Scott Morrison delivered his first Federal Budget, with many changes outlined for superannuation. We have identified a number of key announcements from within the Budget that may be relevant to our clients.

Negative Gearing

Mr Morrison made it abundantly clear that there was not going to be any changes made to negative gearing, stating the issue was firmly ‘off the agenda’.

According to Mr Morrison, changes to negative gearing would only serve to ‘undermine the value of an Australian’s investments’.

But while negative gearing was kept off the table, other changes to superannuation, income tax and small business tax were all discussed at length.

Superannuation – Accumulation Phase

Lifetime Cap for non-concessional contributions

Effective 7:30pm (AEST) on 3 May 2016, the lifetime non-concessional contributions (NCC) cap is $500,000. This lifetime NCC cap will replace the current annual NCC cap of $180,000 per year (or $540,000 when the bring-forward rule is triggered).

The lifetime NCC cap will include any NCCs made into superannuation on or after 1 July 2007. Any NCCs made prior to budget night can be retained within the fund, and therefore will not need to be removed. After this date those in excess of the cap will need to be removed, or be subject to penalty tax, however there are no details available surrounding how such a penalty tax may operate at this stage.

What this may mean for you

Individuals will have a very limited ability to contribute to superannuation on an after-tax basis - of no more than $500,000 over their lifetime.

Your overall retirement planning strategy may need to vary in light of this cap, and you may need to consider alternative structures in situations where your lifetime cap will be breached in order to ensure your overall income needs can be met in retirement.

On a positive note, there will be additional flexibility enabling individuals the choice to make NCCs up to the lifetime cap until the age of 74, without having to meet a work test.

Concessional Contributions Cap reduced to $25,000

The concessional contributions (CC) cap will be reduced to $25,000 from 1 July 2017 for ALL individuals regardless of age.

Concessional capCurrentProposed
Under age 49$30,000 p.a.$25,000 p.a. from 1 July 2017 regardless of age
Age 49 or over$35,000 p.a.$25,000 p.a. from 1 July 2017 regardless of age

Catch-up concessional contributions allowed

From 1 July 2017, an individual who has not reached their concessional contributions cap in a year will be able to carry forward the unused amount to future years, on a rolling basis for up to five years, provided their superannuation balance is less than $500,000.

As an example, if an individual only uses $9,500 (i.e. 9.5% x $100,000) of their concessional contributions cap in a year, their cap in the following year will be $40,500 (i.e. ($25,000 - $9,500) + $25,000) and so on.

Low Income superannuation tax offset (LISTO)

The LISTO will provide a non-refundable tax offset to superannuation funds, based on concessional contributions tax paid up to a cap of $500, from 1 July 2017. The LISTO will apply to concessional contributions made on behalf of low-income earners with adjusted taxable income up to $37,000. The LISTO replaces the existing low-income super contribution (LISC) which will be abolished for concessional contributions made from 1 July 2017.

Low Income tax offset spouse threshold

The income threshold of a low income spouse for the purposes of the spouse contribution tax offset will increase from $10,800 to $37,000, from 1 July 2017. To be entitled to the maximum tax offset of $540 from 1 July 2017, the eligible spouse contributions must be made on behalf of a spouse whose assessable income, reportable fringe benefits and reportable employer super contributions in a financial year is less than $37,000.

Changes to Concessional superannuation contributions for high income earners

On the flip side, from 1 July 2017, high income earners will pay an increased level of contributions tax on concessional contributions - from 15% to 30% for income of $250,000 and above. If your income is likely to exceed $250,000 in 2017/18, you should be aware that concessional contributions may be subject to additional contributions tax.

Superannuation – Pension Phase

Transition to Retirement (TTR)

The tax exemption on earning on assets supporting transition to retirement income streams will be removed from 1 July 2017. The ability to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.

We understand that this measure will apply to existing TTR income streams. Whilst specific details are yet to be confirmed if you have a TTR strategy in place, or were considering one as a means of tax effectively accumulating wealth, now is a good time to talk to us.

Income Tax

Middle income earners are expected to benefit from income tax relief with the 32.5% tax threshold to be increased from $80,000 to $87,000. This equates to additional after tax income of $24.00 per month for those earning between $80,000 and $86,999 (inclusive).

Small Businesses

From 1 July 2016, small businesses with a turnover up to $10 million will pay a reduced company tax rate of 27.5%. Furthermore, businesses with a turnover of $100 million will gradually receive the 27.5% tax rate by 2020. These changes are positive news for small business owners who will now have more money in their back pocket to re-invest in their business, people and assets.

The above summary of key announcements is not intended to be an exhaustive list, so if you would like more information on last night’s Budget, contact us today. Alternatively, you can read a detailed analysis of the 2016-17 Federal Budget from the Budget Website by clicking here.