Superannuation pension phase – $1.6m transfer balance cap for retirement accounts
From 1 July 2017, the Government has proposed to introduce a transfer balance cap of $1.6m on the total amount of accumulated superannuation an individual can transfer into a tax-free “retirement account” (also known as retirement phase or pension phase). Subsequent earnings on these pension transfer balances will not be restricted.
According to the Government, this $1.6m transfer balance cap for amounts transferred into pension phase will limit the extent to which the tax-free benefits of retirement phase accounts can be used for tax and estate planning. For those who will have more than $1.6m in super you can leave the excess in accumulation mode.
Retirement account cap – $1.6m
Where an individual accumulates amounts in excess of $1.6m, they will be able to maintain this excess amount in an accumulation phase account (where earnings will be taxed at the existing concessional rate of 15%). The
$1.6m cap will be indexed in $100,000 increments in line with CPI (the same as the Age Pension assets threshold does).
Existing pension balances
Members already in the retirement phase as at 1 July 2017 with balances in excess of $1.6m will be required to either:
transfer the excess back into an accumulation superannuation account to reduce their retirement account balance to $1.6m by 1 July 2017; or
withdraw the excess amount from their superannuation.
Excess balances for these members may be converted to superannuation accumulation phase accounts. A tax on amounts that are transferred in excess of the $1.6m cap (including earnings on these excess transferred amounts) will be applied, similar to the tax treatment that applies to excess non-concessional contributions.
Date of effect
This measure will apply from 1 July 2017.
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Transition to retirement pensions – tax concessions to be reduced
The Government said it will remove the tax exemption on earnings for pension assets supporting Transition to Retirement Income Streams (TRISs), also known as transition to retirement pensions (TTRs). Under the changes, earnings from assets supporting TRISs will be taxed at 15% (instead of the current 0%). The change will apply from 1 July 2017 irrespective of when the TRIS commenced. For clients whose personal tax rate is higher than 15% this will still represent a tax effective strategy.
No election to treat as lump sum
In addition, the Government said individuals will no longer be able to make an election under reg 995-1.03 of the ITA Regs to treat certain TRIS payments as lump sums for tax purposes, which currently makes them tax-free
up to the low rate cap ($195,000).
Example
Sebastian is 57 years old, earns $80,000 and has $500,000 in his super account. He pays income tax on his salary and his fund pays $4,500 tax on his $30,000 earnings. Sebastian decides to reduce his work hours to spend more time with his grandchildren. He reduces his working hours by 25% and has a corresponding reduction in his earnings to $60,000. He commences a TRIS worth $20,000 per year so that he can maintain his lifestyle while working reduced hours. Currently, Sebastian pays income tax but his fund pays nothing on the earnings from his pool of super savings. Under the Government’s changes, while the earnings on Sebastian’s super assets will no longer be tax-free they will still be taxed concessionally (at 15%). He will still have more disposable income than without a TRIS. This ensures he has sufficient money to maintain his lifestyle, even with reduced work hours.
Date of effect
These measures will apply from 1 July 2017 (irrespective of when the TRIS commenced).
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Non-concessional contributions: $500,000 lifetime cap from Budget night
The Government has introduced a lifetime non-concessional contributions cap $500,000 effective from Budget night, i.e. 7.30 pm (AEST) on 3 May 2016. The lifetime non-concessional cap (indexed) will replace the existing annual non-concessional contributions cap of up to $180,000 per year (or $540,000 every 3-years under the bring-forward rule for individuals aged under 65). Non-concessional contributions include contributions which are not included in the assessable income of the receiving superannuation fund, e.g. non-deductible personal contributions made from the member’s after-tax income (formerly known as undeducted contributions).
The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007.
Contributions made before commencement (i.e. 7.30 pm AEST on 3 May 2016) cannot result in an excess of the lifetime cap. However, excess non-concessional contributions made after 7.30 pm AEST on 3 May 2016 will need to be removed or subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings (AWOTE).
Concessional contributions cap cut to $25,000 from 1 July 2017
The annual concessional contributions cap will be reduced to $25,000 for all individuals regardless of age from 1 July 2017. The cap will be indexed in line with wages growth. The concessional concessional cap is currently set at $30,000 for those under age 49 on 30 June for the previous income year (or $35,000 for those aged 49 or over on 30 June for the previous income year) for the 2015-16 and 2016-17 income years.
Concessional contributions (i.e. before tax) include all employer contributions, such as superannuation guarantee and salary sacrifice contributions, and personal contributions for which a deduction has been claimed. Members of defined benefit schemes will be permitted to make concessional contributions to accumulation schemes. However, the $25,000 cap will be reduced by the amount of their “notional contributions”.
Excess concessional contributions
Existing processes for the administration of the concessional contributions caps and the imposition of the additional 15% on contributions, including the ability to withdraw the excess from super to pay the additional liability, will be maintained. Currently, concessional contributions exceeding an individual’s annual concessional cap are automatically included in an individual’s assessable income and taxed at the individual’s marginal tax rate (plus an interest charge). An individual is also entitled to a 15% tax offset for the contributions tax paid by the fund. Individuals can elect to release up to 85% of their excess concessional contributions from their superannuation fund to the Commissioner as a “credit” to cover the additional personal tax liability.
Concessional contributions catch-up for account balances less than $500,000
From 1 July 2017, individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions for “unused cap amounts” where they have not reached their concessional
contributions cap in previous years. Unused cap amounts will be carried forward on a rolling basis for a period of 5 consecutive years. Only unused amounts accrued from 1 July 2017 will be available to be carried forward. It will
improve flexibility for those with interrupted work arrangements. The measure will also apply to members of defined benefit schemes. Consultation will be undertaken to minimise additional compliance impacts for these schemes.
According to the Government, allowing individuals with account balances of $500,000 or less to make catch-up concessional contributions will make it easier for people with varying capacity to save and for those with interrupted work patterns, to save for retirement to the same extent as those with regular income.
Superannuation contributions tax (extra 15%) for incomes $250,001+
The income threshold above which the additional 15% Division 293 tax cuts in for superannuation concessional contributions will be reduced from $300,000 to $250,000 from 1 July 2017.
Currently, individuals above the high income threshold of $300,000 are subject to an additional 15% Division 293 tax on their “low tax contributions” (essentially concessional contributions). The Division 293 tax effectively doubles the contributions tax rate from 15% to 30% for concessional contributions. Note that Labor has also proposed that, if elected, it would reduce the high income threshold to $250,000. A taxpayer’s “low tax contributions” are essentially their concessional contributions less any excess concessional contributions for the financial year. Concessional contributions (before tax) include all employer contributions, such as superannuation guarantee and salary sacrifice contributions, and personal contributions for which a deduction has been claimed. Importantly, the extra 15% Division 293 tax does not apply to concessional contributions which exceed an individual’s concessional contributions cap (which is proposed to be set at $25,000 for all taxpayers from 1 July 2017: see para [567] of this Bulletin). Such excess concessional contributions are effectively taxed at the individual’s marginal tax rate in any event. As such, the maximum amount of Division 293 tax payable each year will be limited to $3,750 (i.e. 15% of the $25,000 cap) from 1 July 2017.
Division 293 tax – high income threshold
The Division 293 tax high income threshold is currently based on the individual’s “income for surcharge purposes” plus the individual’s low tax contributions. Given the broad definition of “income for surcharge purposes” (which adds back net investment losses to taxable income), negative gearing and many salary packaging arrangements generally will not assist in bringing a taxpayer under the high income threshold. If a taxpayer’s income for surcharge purposes is less than the high income threshold, but the inclusion of their low tax contributions pushes them over the threshold, the 15% Division 293 tax only applies to the part of the low tax contributions that are in excess of the income threshold.
Tax deductions for personal super contributions extended
From 1 July 2017, the Government will improve flexibility and choice in super by allowing all individuals up to age 75 to claim an income tax deduction for personal super contributions. This effectively allows all individuals,
regardless of their employment circumstances, to make concessional super contributions up to the concessional cap. Individuals who are partially self-employed and partially wage and salary earners (e.g. contractors), and
individuals whose employers do not offer salary sacrifice arrangements will benefit from these proposed changes. To access the tax deduction, individuals will be required to lodge a notice of their intention to claim the deduction
with their super fund or retirement savings provider. Generally, this notice will need to be lodged before they lodge their income tax return. Individuals will be able to choose how much of their contributions to deduct.
Individuals that are members of certain prescribed funds would not be entitled to deduct contributions to those schemes. Prescribed funds will include all untaxed funds, all Commonwealth defined benefit schemes, and any
State, Territory or corporate defined benefit schemes that choose to be prescribed. Instead, if a member wishes to claim a deduction, they may choose to make their contribution to another eligible super fund.
Superannuation contribution rules – work test to be removed for age 65 to 74
The work test for making superannuation contributions for people aged 65 to 74 will be removed from 1 July 2017. Instead, people under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.
Low income super tax offset (LISTO) to be introduced
From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on super contributions for low income earners. The LISTO will provide a non-refundable tax offset to super 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. Note that the proposed LISTO will replace the current Low Income Superannuation Contributions (LISC). The Government said this will provide continued support for the accumulation of super for low income earners and ensure they do not pay more tax on their super contributions than on their take-home pay. The ATO will determine a person’s eligibility for the LISTO and will advise their super fund annually. The fund will
contribute the LISTO to the member’s account. The Government said it will consult on the implementation of the LISTO.
Low income spouse super tax offset to be extended
From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse to $37,000 from $10,800. The offset will gradually reduce
for income above $37,000 and will phase out at income above $40,000. The low income spouse tax offset provides up to $540pa for the contributing spouse. The Government noted the proposed changes build on its co-contribution and superannuation splitting policies to boost retirement savings, particularly of women.
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Changes affecting Businesses
The Budget announced that the small business entity threshold will increase from $2m to $10m from 1 July 2016. As a result, a business with an aggregated annual turnover of less than $10m will be able to access a number of
small business tax concessions from 1 July 2016, including:
- the simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017 and then less than $1,000;
- the simplified trading stock rules, which give businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000;
- a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied;
- the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;
- immediate deductibility for various start-up costs (e.g. professional fees and government charges);
- a 12-month prepayment rule; and
- the more generous FBT exemption for work-related portable electronic devices (e.g. mobile phones, laptops and tablets) – the FBT car parking exemption for small business already applies to entities with “annual gross income” of less than $10m.
CGT concessions
The threshold changes will not affect eligibility for the small business CGT concessions, which will only remain available for businesses with annual turnover of less than $2m or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test).
Reduced tax rates for small business
The company tax rate for small business entities will reduce to 27.5% (from 28.5%) from the 2016-17 income year. The rate is set to reduce further to 27% in 2024-25 and then by 1 percentage point per year until it reaches 25% in 2026-27.
GST reporting on a cash basis
The reporting of GST on a cash basis will be extended as an option to businesses with a turnover of less than $10m (previously $2m)
GST and the importation of low-value goods
The Government is to impose GST on goods imported by consumers regardless of value. The new rules will commence on 1 July 2017.
The liability for the GST will be imposed on overseas suppliers, using a vendor registration model. This means that those suppliers which have Australian turnover of $75,000 or more will be required to register for, collect and remit GST for all goods supplied to consumers in Australia, i.e. regardless of value.
The Budget papers state that the measure will have a gain to GST revenue of $300m over the forward estimates period (i.e. the next 4 years). There will be additional funding of $13.8m over the next 4 years to implement the measure. The arrangements will then be reviewed after 2 years to “ensure they are operating as intended and take account of any international developments”.