The Budget 2016/17

The Federal Treasurer, Scott Morrison, handed down his 1st budget for 2016/2017.  We witnessed last night the most significant changes to superannuation for some time. You will be impacted primarily:

• Reduction of concessional and non-concessional contribution caps
• Limits on tax-free pension income
• Additional tax on contributions for high income earners
• Relaxation of eligibility to make concessional contributions

Also prominent in the budget was changes to the taxation of small businesses.

The following provides further details.

Superannuation

Div 293 income tax threshold reduced to $250,000

The point at which individuals pay additional 15% contributions tax (total of 30%) will be lowered to an adjusted income level of $250,000 from 1 July 2017.

Concessional Contributions Cap

The annual cap on concessional contributions will be reduced from $30,000 for under age 50 and $35,000 for ages 50 and above, to $25,000 for everyone.

Transition to Retirement income stream earnings exemption removed

From 1 July 2017, income earned by assets supporting a ‘transition to retirement’ income stream will not be tax free in the superannuation fund.

Lifetime cap for non-concessional superannuation contributions of $500,000

A lifetime non-concessional cap will replace the existing annual caps of $180,000 each year or $540,000 every 3 years for individuals under 65.  The new lifetime non concessional cap will apply from budget night (3 May 2016) and will be an amount of $500,000.  It will take into account all non-concessional contributions made on or after 1 July 2007 (from the time the ATO has record of it).  Individuals who have exceeded their $500,000 lifetime cap before budget night will not be penalised or required to remove the excess.

Contribution rules for people 65 -74

The current minimum work requirements for Australians aged 65 to 74 who want to make voluntary superannuation contributions will be removed from 1 July 2017.  Individuals under 75 will no longer have to satisfy a work test and will be able to make voluntary contributions and receive contributions from their spouse.  This will see the end of the ‘work test’ rule.

Catch-up concessional superannuation contributions

From 1 July 2017, individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.

Tax deductions for personal contributions

Individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions from 1 July 2017.  This will apply regardless of employment status (i.e., wholly employed, self-employed or a partially employed/self-employed.  This will see the end of the ‘10% rule’.

Low income spouse tax offset threshold increased

The Government will increase access to the low-income spouse tax offset from 1 July 2017 – which provides up to $540 per annum for the contributing spouse – will apply where the low-income spouse’s income is up to $37,000 (increased from the current $10,800).

1.6 million superannuation transfer balance limit

Currently there is no limit to the amount of assets that can be transferred into the tax-free pension account. From 1 July 2017 a balance limit of $1.6m on the total amount an individual can transfer into the tax-free pension account will be introduced.

This will limit the extent to which the tax-free benefits of pension accounts can be used by high wealth individuals.

This applies to all pension accounts including those already started.

Personal Income Tax

Personal tax rates for 2016-17

The threshold of the 37% marginal tax rate for individuals will increase from $80,000 to $87,000 from 1 July 2016. This measure reduces the marginal income tax rate on incomes between $80,000 and $87,000 from 37% to 32.5%.

Note: the rates listed below exclude the Medicare levy.

Small Business

Small business entity turnover threshold

From 1 July 2016, the small business entity turnover threshold will be increased from $2 million to $10 million. Some of the benefits include instant write of assets costing less than $20,000, and the lower company tax rate explained below. However, the increased $10 million threshold will not be applicable for accessing the small business capital gains tax concessions.

Company tax rate

The company tax rate will reduce to 25% over 10 years. From 2016-17 income year, the tax rate for business will an annual aggregated turnover of less than $10 million will be 27.5%. The threshold will then be progressively increased such that all companies are taxed at 27.5% in the 2023-24 income year.

Unincorporated small business tax discount (turnover < $5m only)

The tax discount for unincorporated small business entities will increase from the current rate of 5% to 8% of tax paid on small business income from 1 July 2016. This provides a tax offset of up to $1000 for individuals with income derived from a small business.

More information

If you would like to discuss with us further how this budget may impact you, please contact our office.