2016 Federal Budget: what it means for financial services professionals

Strategies

Wednesday 04 May 2016

Last night the Federal Treasurer, the Hon. Scott Morrison MP, delivered his first Federal Budget. The announcements are far reaching for the superannuation system in particular, but also include measures which impact individual income tax, small businesses and corporate taxation.

In this summary we focus on the issues most likely to impact the advice that financial services professionals provide to their clients.

Personal income tax

Personal income tax

Very few changes relating to personal income tax were announced, with the main item of note being the increase in one of the personal income tax thresholds.

Personal income tax thresholds

  • The Government has proposed to increase the 32.5 per cent personal income tax threshold from $80,000 to $87,000 from 1 July 2016. This measure will result in a tax saving of $315 for Australian tax residents with a taxable income in excess of $87,000.
  • The change in personal income tax thresholds from 2015/16 to 2016/17 is shown in the table below.
Taxable income – 2015/16Taxable income – 2016/17Marginal tax rate *
Up to $18,200 Up to $18,200 Nil
$18,201 - $37,000 $18,201 - $37,000 19%
$37,001 - $80,000 $37,001 - $87,000 32.5%
$80,001 - $180,000 $87,001 - $180,000 37%
Above $180,000 Above $180,000 47%1

* Plus Medicare levy

Medicare levy

  • The Medicare levy low-income threshold for the 2015/16 financial year will be increased to $21,335 for singles, $33,738 for single seniors and pensioners and $46,966 for couples with no children. The additional amount of threshold for each dependent child or student will be increased to $3,306. Legislation implementing this change has already been tabled in Parliament.

Medicare levy surcharge and private health insurance rebate

  • Indexation of the income thresholds used to determine liability for Medicare levy surcharge and eligibility for the private health insurance rebate is proposed to be paused for a further three years from 1 July 2018. Indexation of these thresholds is currently paused until 30 June 2018.

Higher education reform

  • The Government has proposed to delay the implementation of the higher education reforms announced in the 2014/15 Budget and Mid-Year Economic and Fiscal Outlook.

Superannuation – Accumulation Phase

Superannuation – Accumulation Phase

The Government has announced a Superannuation Reform Package to improve the sustainability, flexibility and integrity of the superannuation system. The proposals announced include a reduction in contribution caps, measures to improve the superannuation balances of low income earners, reforms to superannuation tax concessions, and the removal of anti-detriment benefits.

Allow catch-up concessional contributions

  • From 1 July 2017 it is proposed that individuals who have not used their concessional contribution cap in a previous year will be able to make use of the unused cap in future years by making additional concessional contributions.
  • The amount of the unused concessional contribution cap will be carried forward for a period of five consecutive years.
  • Only unused amounts accrued from the 2017/18 financial year can be carried forward.
  • The ability to use the catch-up rule is limited to those with a super balance of less than $500,000.
  • This measure will be extended to members of defined benefit schemes although no details on how this measure will be implemented for members in these funds has been provided.
  • Budget 2016 Superannuation Fact Sheet 08

Lifetime cap for non-concessional contributions

  • The Government has proposed the introduction of a lifetime non-concessional contributions cap of $500,000. This cap replaces the existing non-concessional cap of $180,000 per annum (or $540,000 under the bring forward provision for those aged 64 or less at 1 July of the financial year).
  • Features of the new cap:
    • commences from 7.30pm (AEST) 3 May 2016
    • will include all non-concessional contributions made on or after 1 July 2007
    • contributions made before commencement cannot result in an excess
    • contributions made after commencement that exceed the $500,000 cap will need to be returned or be subject to penalty tax
    • after-tax contributions made to defined benefit accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional contributions cap. Where a member of a defined benefit scheme exceeds the cap, ongoing contributions to the defined benefit account can continue but an equivalent amount of the excess (including proxy earnings) will need to be removed from an accumulation account on an annual basis
    • the cap will be indexed in increments of $50,000 in line with average weekly ordinary times earnings.
    • Budget 2016 Superannuation Fact Sheet 04

Removal of the work test for those aged 65 to 74 (inclusive)

  • From 1 July 2017 it is proposed to remove the current work test
  • This test (the need to be gainfully employed for at least 40 hours in 30 consecutive days) applies to non-mandated contributions (including salary sacrifice and personal contributions) for those aged 65 to 74 (inclusive).
  • Budget 2016 Superannuation Fact Sheet 09

Increase to income threshold for spouse contribution tax offset

  • It is proposed that from 1 July 2017 the income threshold for the spouse contribution tax offset will increase from $10,800 to $37,000. The offset will be phased out once income reaches $40,000.
  • Currently, an 18% tax offset is available on spouse contributions up to $3,000 where the receiving spouse’s income is less than $10,800 and is phased out once income reaches $13,800. The maximum offset will remain at $540.
  • Budget 2016 Superannuation Fact Sheet 10

Low Income Superannuation Tax Offset (LISTO)

  • From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on superannuation contributions for low income earners. This measure will follow the cessation of the current Low Income Super Contribution (LISC) from 1 July 2017.
  • The LISTO will provide a non-refundable tax offset to superannuation 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.
  • This will effectively avoid the situation in which low income earners would pay more tax on savings placed into superannuation than on income earned outside of superannuation.
  • Budget 2016 Superannuation Fact Sheet 06

Lowering of the cut-in threshold for 30 per cent tax on concessional contributions

  • From 1 July 2017, the threshold at which high income earners pay additional contributions tax will decrease from $300,000 to $250,000. An additional 15 per cent tax is payable on concessional contributions to the extent the threshold is exceeded.

Concessional contributions cap reduced to $25,000

  • Currently the concessional contributions cap is $30,000 per annum for those to age 50, and $35,000 for those aged 50 and over. This threshold will be reduced to $25,000 from 1 July 2017 for all individuals, regardless of age.
  • From 1 July 2017, the Government will include notional (estimated) and actual employer contributions in the concessional contributions cap for members of unfunded defined benefit schemes and constitutionally protected funds. Members of these funds will have opportunities to salary sacrifice commensurate with members of accumulation funds. For individuals who were members of a funded defined benefit scheme as at 12 May 2009, the existing grandfathering arrangements will continue.
  • Budget 2016 Superannuation Fact Sheet 03

Tax deductions for personal superannuation contributions

  • All individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions from 1 July 2017. This measure will apply to all individuals, regardless of their employment circumstances, allowing them to make concessional superannuation contributions up to the concessional cap.
  • Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements, will benefit from these changed arrangements.
  • Budget 2016 Superannuation Fact Sheet 07

RIP anti-detriment payments

  • The anti-detriment provision will be removed from 1 July 2017.
  • The current provision allows superannuation funds to claim a deduction in relation to an increased death benefit payment which compensates certain death benefit beneficiaries (spouse, former spouse or child) for the tax paid on superannuation contributions.
  • The availability of the anti-detriment results in an increase of up to 17.6 per cent of the taxable component of a lump sum death benefit payment.
  • Budget 2016 Superannuation Fact Sheet 02

Superannuation – Pension Phase

Superannuation – Pension Phase

The Superannuation Reform Package also included the following measures impacting superannuation pensions:

Cap on superannuation transfer balances

  • From 1 July 2017, a $1.6 million cap is proposed to apply to the amount of accumulated superannuation benefits that can be transferred to the pension phase. Subsequent earnings on the amount transferred to a pension will not be restricted. Amounts transferred in excess of the cap will be subject to tax, similar to that which applies to excess non-concessional contributions.
  • It is also proposed that existing pension accounts that have a balance above the cap will need to be reduced (eg by moving funds back to the accumulation phase) to $1.6 million by 1 July 2017.
  • Accumulated benefits in excess of the $1.6 million cap will be able to be maintained in the accumulation phase.
  • The threshold will be indexed with consumer price index in $100,000 increments
  • Members of defined benefit schemes will also be subject to commensurate treatment for pension amounts above $100,000.
  • Budget 2016 Superannuation Fact Sheet 02

Transition to retirement income streams

  • The earnings tax exemption for assets supporting transition to retirement (TTR) income streams is proposed to be removed from 1 July 2017. We understand this measure will apply to existing TTR income streams.
  • Budget 2016 Superannuation Fact Sheet 12

Tax treatment of payments from income streams

  • A tax rule that allows individuals to elect to have payments from superannuation income streams treated as lump sums for tax purposes is also proposed to be removed.

Other superannuation measures

Other superannuation measures

Superannuation Complaints Tribunal

  • Additional funding is proposed to be provided to the Superannuation Complaints Tribunal to improve processes and reduce a backlog of complaints. This meaure is proposed to be funded by an increase in the Financial Institutions Supervisory Levy.

Social security and family assistance

Social security and family assistance

Few social security and family assistance related measures were announced in this year’s Budget. The main item of note being the deferral of reforms to child care benefits.

Child care reforms

  • The Government has proposed to defer the start date for the package of child care reforms that was announced in the the 2015/16 Budget. The reforms announced last year included a new Child Care Subsidy to replace the current Child Care Benefit, Child Care Rebate and Jobs, Education and Training Child Care Fee Assistance programs. These reforms are now proposed to commence from 1 July 2018.

Start-up and small business tax concessions

Start-up and small business tax concessions

Expanding tax incentives for early-stage investors

  • Proposed changes will ensure start-up companies have access to investment capital through the expansion of tax incentives, including:
    • Reduction of the holding period from three years to 12 months for investors to access the 10 year capital gains tax exemption
    • Limiting the investment amount for non-sophisticated investors to $50,000 or less per income year in order to receive a tax offset

Increase the small business entity turnover threshold

  • Currently, small businesses can access the small business tax concessions if their turnover is less than $2million. From 1 July 2016, the small business turnover threshold will be increased to $10million.
  • The $2million threshold will continue to apply to the small business CGT concession and a $5million threshold will apply to unincorporated small businesses wishing to access the unincorporated small business tax discount
  • Examples of small business tax concessions include:
    • Simplified depreciation rules
    • Immediate tax deduction for the purchase of assets costing less than $20,000
    • Simplified trading stock rules
    • GST accounting on a cash basis

Increase the unincorporated small business tax discount

  • The unincorporated small business tax discount will increase from 5 per cent to 16 per cent progressively over the next 10 years.
  • From 1 July 2016, the tax discount will be increased to 8 per cent, where it will remain until the 2024-2025 tax year, from which it will increase to 10 per cent.
  • A 13 per cent discount will apply in the 2025-2026 tax year and a 16 per cent discount will apply in the following tax year.

Reduction in tax rate for small business companies from 2016-2017 tax year

  • The company tax rate will be reduced to 27.5 per cent from the 2016-2017 income year for companies with an annual aggregated turnover of less than $10million (the small business threshold). The general corporate tax rate will reduce progressively to 25 per cent by the 2026-2027 tax year.

Corporate tax

Corporate tax

Diverted Profits Tax

  • A 40 per cent tax on profits diverted from Australia by large multinational companies will apply from 1 July 2017.
  • The so-called “Google Tax” will apply to companies that have global revenue of $1bilion or more and Australian revenue of $25million or more.
  • This follows the 2015 Senate Economics Committee Hearing into Corporate Tax Avoidance.

Reduction in company tax rate to 25%

  • While company tax rate cuts will first be applied to small businesses, the Government proposes to progressively reduce the general corporate tax rate to 25 per cent by the 2026-2027 tax year:
    • The following approximate corporate tax rates apply in other countries across the globe – United Kingdom 20 per cent, Malaysia 25 per cent, China 25 per cent, Singapore 17 per cent and Ireland 25 per cent (passive business),
    • A reduction in corporate tax rate generally leads to a decline in the available franking rate for corporate dividends. Companies should consider present franking policies to ensure tax paid is not trapped within the company in later years.

Goods and Services Tax

Goods and Services Tax

Applying GST to low value importations of goods

  • The Government intends to remove the low value GST importation threshold from 1 July 2017.
  • The changes will impose a registration obligation on foreign entities that have an Australian turnover (essentially business income derived in Australia) of $75,000 or more. Such entities will have to register for, and charge, GST to consumers.
  • The current threshold exempts from GST all goods imported into Australia where the value is $1,000 or lower
    • After the proposed changes, GST will still not be payable by the consumer where the importer has an Australian turnover of less than $75,000 and the value of the goods is lower than $1,000

Other tax measures

Other tax measures

Taxpayer certainty for Division 7A (private company) loans

  • In general, loans made by private companies must comply with rules relating to minimum interest rates, minimum repayments and maximum terms. In order to avoid significant tax costs, technical adjustments will be introduced to ensure inadvertent breaches of the law can be rectified and the certainty of tax outcomes can be given to taxpayers.

Simplification of Taxation of Financial Arrangement (TOFA) rules

  • The Government will reduce the scope, decrease compliance costs and increase taxpayer certainty by redesigning the TOFA framework
  • The current rules have unintended application to a significant number of taxpayers. The changes will remove a large number of taxpayers from the rules.

Further information

For further information on the measures detailed above, see:

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