Reflection on the 2016 Budget proposed changes
Below is a summary of the 2016 Budget’s most important proposed changes. The Budget changes are susceptible to the upcoming election, and they will need to be passed by the parliament of the day in order to be effective.
- $1.6 million super transfer balance cap
On 1 July 2017, the Government will introduce a $1.6 million transfer balance cap on the total amount of super that an individual can transfer into retirement phase accounts.
This will then limit the amount of super assets that will be subject to a zero tax rate whilst in the retirement phase.
What does this mean for you?
- If you accrue more than $1.6 million in super, you must now maintain the excess in an accumulation account.
- If you are currently in the retirement phase with account balances exceeding $1.6 million, you have until 1 July 2017 to transfer the excess amounts out of these accounts.
- Income from assets supporting the retirement phase accounts will continue to be tax exempt, but any income on the excess amounts that remain in super will be subject to the concessional tax rate of 15%
Importantly, if you are in retirement phase before 1 July 2017 and you exceed the $1.6 million limit, you will be required to either withdraw the excess amount entirely or transfer the amount back into an accumulation account.
It is vital that you adhere to this change. Those who breach the cap will be subject to a “penalty” tax on both the excess amount as well as the earnings on the excess amount.
Transition-to-retirement income streams (TRIS) tax exemption removed
From 1 July 2017, the tax exempt status of income from assets supporting TRIS accounts will be removed. This means earnings from assets supporting TRIS accounts will now be taxed at the concessional tax rate of 15%.
Individuals will also not be allowed to treat certain super income stream payments as lump sums for tax minimisation purposes which make them tax-free up to the low rate cap of $195,000.
Contribution cap changes
Non-concessional contributions lifetime cap
Be aware – a lifetime cap of $500,000 for non-concessional contributions has been introduced effective from 7:30 PM on 3 May 2016, and it includes all non-concessional contributions made from 1 July 2007.
Non-concessional contributions exceeding $500,000 transferred and cleared by the commencement date will not result in an excess contribution. However, it is important to note that contributions made after the commencement date that exceed the cap should be removed or they will be subject to penalty tax.
The proposed lifetime cap replaces the current existing annual non-concessional cap of $180,000 per year as well as the bring-forward three year rule of $540,000 for those aged under 65.
Catch up concessional contributions allowed
From 1 July 2017, individuals with super balances under $500,000 can make additional catch up concessional contributions where they have not reached their concessional contributions cap in previous years. Further, these unused cap amounts can be carried forward on a rolling basis for a period of 5 consecutive years.
Threshold from 300k to 250k reduced
Individuals with income and super contributions exceeding $250,000 per year will pay 30% tax rather than 15% tax on their concessional contributions made during that year. This is referred to as Division 293 tax and was reduced from $300,000 to $250,000 from 1 July 2017.
Personal contributions can be made by anyone
From 1 July 2017, any individual under the age of 75 can now claim an income tax deduction for any personal contributions made to a complying super fund up to their concessional cap.
This is good news because it allows anyone to claim a deduction regardless of their employment circumstances.
It is important to note that individuals need to notify their super fund or retirement savings provider of their intent to claim the deduction before they lodge their tax return.
Work test removed
The work test for those aged 65 to 74 will be abolished from 1 July 2017.
What does this mean for you? You will no longer be required to satisfy the work test in order to make voluntary contributions into your super fund if you are 74 years of age or younger. This also applies to your spouse, and voluntary contributions can be made without consideration of the work test.
TAX CHANGES IN GENERAL TO BUSINESSES AND INDIVIDUALS
Company tax rate reduced
Companies will get access to the lower tax rate – eventually.
From 1 July 2016, Australia’s company tax will be reduced to 25% over 10 years. Companies with an annual aggregated turnover of less than $2 million per year will pay tax at a rate of 28.5% from the 2016 income tax year, and from the 2017 income tax year, companies with an annual aggregated turnover of less than $10 million per year will pay tax at a rate of 27.5%.
Additionally, franking credits can be distributed in line with the rate of tax paid by the company making the dividend.
Small business threshold increased
Small businesses have been named the big winners of the 2016 Budget proposals. The small business entity turnover threshold will be increased from $2 million to $10 million so that more businesses can access certain existing tax concessions.
What does this mean for small businesses?
- Immediate tax deduction for assets costing less than $20,000 until 20 June 2017 and then less than $1,000.
- Avoidance of end-of-year stocktake if the difference in the value of stock is less than $5,000 between the start of the year and a reasonable estimate at the end of the year.
- Immediate deduction for those prepaid expenses that cover a period of 12 months or less.
- Simplified method of paying PAYG through instalments as calculated using a GDP adjusted amount.
- Option to account for GST on a cash basis and/or pay GST instalments as calculated by the ATO.
Personal income tax reduced
Individuals who earn about $80,000 annually are also one of the winners in this year’s Budget proposals. From 1 July 2016, the 32.5% personal income tax threshold will increase from $80,000 to $87,000.
Rather than being taxed at 37% on every dollar earned over $80,000, workers will stay on the 32.5% tax rate. People in this bracket will happily be walking away $315 richer come tax time.
Want to know how the 2016 Budget has impacted on your business? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.