Peter Costello’s 2006 simplified superannuation rules seem a lifetime ago. In complete contrast the 2016 Federal Budget contains complexity, retrospective rule changes and personal and company tax cuts.
The Leader of the Opposition says they will support some changes however not others including the retrospective initiatives. Given the Federal election in July 2016 there will be no certainty which of the initiatives will become law however given the proposals will impact on current planning we have summarised the key points below. If you have any questions on specifics please call us before doing anything.
|Changes to Superannuation|
Immediate (3 May 2016)
1. $500,000 Lifetime Non-Concessional Contributions Limit (per person).
All contributions made on or after 1 July 2007 will count towards this cap. In cases where the cap has been exceeded prior to 3 May 2016, there will not be a requirement to withdrawal the excess out of superannuation. This new limit replaces the current $180,000 per annum limit (and the 3 year $540,000 bring forward limit).
This change has taken many by surprise and has wide ranging impacts on retirement planning limiting the amount which can be accumulated inside superannuation. It is important if you are considering making a non-concessional contribution in the future you take into account this change and the non-concessional contributions you have made since 1 July 2007. A reminder: this relates to non-concessional (after tax) contributions only and concessional (tax-deducible) contributions are not included in your lifetime limit.
|From 1 July 2017
2. Pension limit of $1.6M (per person)
The proposed account balance limit for tax-free pension accounts is $1.6M per person. Investors with existing pension balances above $1.6M will need to reduce the balance below the limit by 1 July 2017 to avoid penalties by transferring a portion of an existing pension account back to ‘accumulation’ phase (where it will become subject to normal superannuation rates of tax up to 15% per annum on investment earnings) or potentially withdrawing money from superannuation. There will be a number of planning aspects to consider if this change becomes law.
We note notwithstanding this change superannuation will continue to be a tax effective structure when you consider income earned personally is taxed starting from 19% for income exceeding $18,200 per annum however each situation is different and we look forward to discussing this with you further.
3. Reduction of Concessional Contribution Limit to $25,000
Concessional contribution limits include employer contributions and salary sacrifice contributions. This limit is reducing from current limits of $35,000 for over 50’s and $30,000 for under 50’s. Given this change it is important to consider utilisation of the concessional limits earlier than may have otherwise been the case for tax efficiency and we look forward to discussing this with you.
4. Catch Up Concessional Contributions
A welcome initiative to support those with interrupted work force participation (e.g. commencing a family) to enable the annual $25,000 concessional cap to be carried forward if not used for up to 5 years for individuals with superannuation balances below $500,000.
5. Contribution Work Test Eliminated (up to age 75)
Individuals under age 75 will not be required to satisfy a work-test (working 40 hours in 30 consecutive days) to make superannuation contributions which will avoid unnecessary administrative complexity and allow those currently over 65 to make contributions (but will still be subject to the lower thresholds as noted above).
This is a welcome change to simplify the eligibility “rules” for contributions to super and allow those who have permanently retired over age 65 to top up their balance as appropriate.
6. Personal Tax Deductions Available to Age 75
Another welcome initiative for individuals under age 75 who will be entitled to claim a tax deduction for concessional contributions regardless of employment status. This will replace the current complicated rules which apply to people who may be self-employed and employed in a financial year.
7. Transition to Retirement Pensions No Longer Tax Exempt
Transition to retirement pensions were brought in to allow those over 55 to reduce work hours whilst supplementing their income with a superannuation pension.
In starting the pension, earnings on assets within the pension account have been historically tax free but this change will introduce an earnings tax of 15% (currently 0%) regardless of the size of the account balance. Once the individual permanently retires from work or reaches age 65 it is expected the investment earnings in the pension account will become tax free (0% tax) subject to the above mentioned $1.6M pension limit.
We understand the driver behind this change by the Government is to reduce the tax “arbitrage” whereby people who continue working contribute to super (to receive a tax deduction) and withdraw a pension to receive tax free earnings in super.
8. Additional Tax on Contributions where personal income >$250,000 per annum
An additional 15% tax on concessional contributions will be payable by individuals with an adjusted taxable income of more than $250,000 per annum (reducing the current threshold from $300,000). This will capture more “high income” earners in Australia.
Notwithstanding this change there is still benefit to making a concessional contribution to super if you earn over $250,000 per annum whereby the contribution is taxed at 30% as opposed to the marginal tax rate of 49% in your personal name.
9. Increased Spouse Contribution Tax Offset Limit
The income threshold to make a spouse superannuation contribution to receive a tax rebate of $540 will increase from the current $13,800 to $37,000. This will provide a benefit to a couple who wish to build assets in the low income spouse’s name (however will still be subject to the non-concessional lifetime limit).
10. Low Income Superannuation Tax Offset
Individuals with an adjusted taxable income of $37,000 or less will receive an effective refund of the tax paid on their concessional contributions, up to a cap of $500. This removes the previous disincentive where superannuation contributions tax was higher than the rate of personal tax in the low income band.
|Changes to Taxation|
|From 1 July 2016
11. Increase in personal marginal tax bracket of 34.5% including Medicare levy to $87,000 (from $80,000) now.
This will convert to a tax saving of $316 per annum for each individual earning $87,000 or more. It is designed to ensure the average Australian worker remains in the middle personal income tax bracket rather than moving up to the second highest band.
12. Reduction in company tax rate to 27.5% (turnover up to $1 billion).
Currently only companies with turnover of < $2M had access to a lower tax rate of 28.5% while all other companies paid 30%.