How Will the 2016 Budget Affect You?
In case you haven’t heard, Treasurer Scott Morrison delivered his first budget last night under his repeated theme of Jobs and Growth. There were certainly a couple of headline acts though with tax cuts and significant changes to the superannuation landscape grabbing the headlines. The superannuation changes have seen the government go further than expected, and peg back some of the generosity of Peter Costello in 2007.
For many of our clients, the key proposals under tax and superannuation are as follows:
Marginal Tax Rate Threshold Increase
Whilst not really being a tax cut, the increase in the threshold at which the 37% marginal tax rate for individuals from taxable incomes of $80,000 to $87,000 from 1 July 2016 will net up to an extra $315 a year for people earning over $80,000, and is more a measure designed to address bracket creep.
The government also indicated that the 2% budget deficit levy for incomes over $180,000 would not be extended beyond its current legislated time period, which is due to cease at the end of the 2016-17 financial year.
Staggered Cuts to the Company Tax Rate
The government has proposed they will reduce the company tax rate progressively over the next 10 years to 25%. The measure will be phased in, depending on the company’s aggregated turnover. Small business will benefit sooner with tax rate for the 2016-17 being 27.5%. The phase in for all companies will be completed by 2026-27. The timetable is summarised below:
Financial year Companies with turnover below
Applicable tax rate
2016-17 - $10 million - 27.5%
2017-18 - $25 million - 27.5%
2018-19 - $50 million - 27.5%
2019-20 - $100 million - 27.5%
2020-21 - $250 million - 27.5%
2021-22 - $500 million - 27.5%
2022-23 - $1 billion - 27.5%
2024-25 - All companies - 27%
2025-26 - All companies - 26%
2026-27 - All companies - 25%
Note the Labour government has suggested whilst supporting rate cut for small business entities, it won’t support the cuts to larger businesses. Stay tuned.
Small Business Turnover Threshold Increase
Although the tax cuts and superannuation changes are gaining the headlines, the announced change to the small business entity threshold from $2 million to $10 million is a real win for business that now fall into that bracket. By increasing this threshold to $10 million, not only will these businesses now benefit from the lower tax rate of 27.5% from 2016-17, but can now access existing income tax concessions that include:
- Simplified Depreciation Rules (including immediate deduction for items less than $20k)
- Simplified Trading Stock Rules
- Simplified Method of Paying PAYG instalments
- Option to Account for GST on a Cash Basis
- 12 month repayment rule
- Certain FBT concessions
If your business now falls inside the turnover threshold for eligibility for these rules, we will be in touch to discuss possible planning opportunities to save you more tax.
Please note, that access to the Small Business CGT concessions is still only available to businesses who turnover under $2 million, or those that satisfy the maximum net asset test. The income threshold was not increased for these concessions.
Small Business Tax Discount Increased – Unincorporated Taxpayers
The unincorporated small business tax discount will increase from 5% to 16% over next 10 years to more align those tax payers running small businesses outside company structures to the reduced company tax rates.
2. Superannuation Concessional Contributions Caps Reduced
The annual concessional contributions cap will be reduced to $25,000 for all individuals regardless of age from 1 July 2017.
Non-Concessional Contributions: $500,000 lifetime cap from Budget Night
In a measure that will have significant impact on the ability for high income earners to build substantial superannuation balances, the government has announced a lifetime non-concessional contributions cap of $500,000 effective from budget night (7.30pm 3 May 2016) This will replace the existing cap of $180,000 per year (or $540,000 every 3 years under the bring forward rule for those under 65)
The $500,000 lifetime cap will take into account non-concessional contributions made on or after 1 July 2007. If you are over the $500,000 cap no excess will result if no further contributions were made after 3 May 2016. If excess non-concessional contributions are made after 3 May 2016, then penalty tax will apply.
Retirement Transfer Balance Cap Introduced
In another significant measure to reduce the ability for high income earners to accumulate large superannuation balances in a tax free environment, a transfer balance cap of $1.6 million has been proposed which restricts the total amount of super that can be transferred into pension phase.
If someone has more than $1.6 million in their member balance, they can maintain the excess in the accumulation phase, where the earnings on those assets are taxed at 15%.
Those already in pension phase who have balances exceeding $1.6 million will need to transfer the excess to accumulation phase, or alternatively they can withdraw the amount from their superannuation fund.
In some circumstances withdrawing the excess and accessing lower individual tax rates on those earnings may be more effective then leaving the assets in the fund, however each individual circumstance will be different, and we will discuss your options with you if you are in these circumstances.
Division 293 – Additional Contributions Tax Threshold Reduced
An additional 15% contributions tax payable by those earning over $300,000 will now apply from 1 July 2017 to those with income of more than $250.000. This takes the effective tax rate on concessional contributions into the fund from 15% to 30%.
The current work test that applies for people making contributions between 65 and 74 will be removed, making it easier for those in that age bracket to contribute.
Low Income Superannuation Offset
A Low Income Superannuation Offset will be introduced from 1 July 2017 for those who have taxable income under $37,000. This will rebate up to $500 of the tax paid by the fund on the concessional contributions of the member.
Transition to Retirement Pensions – Tax Concessions to be Reduced
One proposal that has not received much air play is the government’s plan to remove the tax exemption on earnings for pension assets supporting Transition to Retirement Income Streams (TRIS). These earnings will now be taxed at 15% instead of 0% as is currently the case.
This will apply from 1 July 2017 irrespective of when the TRIS commenced.
The government has also proposed that individuals will also no longer be able to treat certain TRIS payments as lump sums, which currently makes them tax free up to the low rate cap of $195,000.
Both these measures have significant impact on those entering or at preservation age (55 years +) and we will discuss what this means for you and the impact on those planning opportunities.
The above outlines some of the key measures that the government has proposed that we believe have the biggest impact for our clients in the areas of tax and superannuation.
Our team here at SiDCOR are across these and also some of the other measures contained in the budget, and are happy to discuss any questions or concerns you may have.
We are currently working on the many planning opportunities that these proposals will present and will be sure to discuss how your personal circumstances can be best placed to minimise your tax and maximise your wealth.