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Massive changes to superannuation

The 2016 Federal Budget has proposed the most significant changes to superannuation in many years. Whilst a range of measures were expected, some of the changes targeted towards those already in retirement have come as a bit of a surprise. The majority of changes have been targeted at reducing the tax benefits of members having large super balances. High income earners will also pay additional tax on concessional contributions going into their accounts.

Some of the most relevant changes affecting most SMSF members are:

A reduction in the concessional contributions cap

From 1 July 2017, the Government will reduce the concessional contribution cap to $25,000.  The concessional contribution cap currently sits at $30,000 for those under 49 at 1 July each year, or $35,000 for those above 49 at 1 July (temporary cap).  It appears the Government have forgotten their rhetoric when they were in opposition and the caps were reduced by the then Labor Government in 2012/13.

Lowering of Division 293 Threshold

It was one of the worst kept secrets… however political pressure clearly got the better of the Government who have decided on a reduction of the income threshold to $250,000.  This level matches the previously announced threshold by the Labor Government should they win the next Federal Election.  This will take effect from 1 July 2017.

Lifetime Non-Concessional Contributions cap

The Government will introduce a $500,000 lifetime non-concessional contribution (NCC) cap, taking into account all non-concessional contributions made on or after 1 July 2007, this means members who have contributed more than $500,000 of non-concessional contributions will be unable to make any further non concessional contributions going forward.  This measure takes effect from, 7.30pm on 3 May 2016 (Federal Budget night).

No retrospectivity will be applied to individuals who may have made non-concessional contributions in excess of the $500,000 lifetime threshold between 1/7/2007 to 3 May 2016. This effectively removes the annual $180,000 Non concessional contributions cap and replaces it with a total cap of $500,000. This means that should a member receive a large payout from the downsizing of their family home and wish to put $400,000 into their fund as a non-concessional contribution then they would be able to do so. However should they then receive a large inheritance of $300,000 they would only be able to contribute a further $100,000 to superannuation as a non-concessional contribution. The lifetime NCC cap will be indexed to average weekly ordinary time earnings (AWOTE).

$1.6 million transfer balance cap for retirement accounts

It is clear that the Government is resetting the rules for paying pensions as part of their approach to setting an objective for superannuation.  They have been quite clear in their messaging that superannuation is not an estate planning tool.  In the Budget, they have certainly delivered with this policy. From 1 July 2017, we will see an introduction of a $1.6 million transfer balance cap on amounts moving into pension phase.

Subsequent earnings on these balances will not be restricted (i.e. they can grow or reduce accordingly).  As a result of this measure, it significantly limits the extent of exempt current pension income (ECPI) applying to assets supporting the payment of pensions.  According to the Government, it better targets the sustainability and fairness of tax concessions within super. Where a member has a balance in excess of $1.6 million, they will be able to maintain this excess within superannuation, however it cannot be transferred into the post-retirement cap.  As a result of it remaining in accumulation phase, a 15% tax rate will apply to fund earnings the accumulation benefit generates.

Importantly, this measure does not grandfather existing pensions.  For members already in retirement phase whose balance is above $1.6 million, they will be required to reduce their pension balance to $1.6 million by 1 July 2017.  Excess balances for these members may be converted back to accumulation.

This measure by far has the biggest impact on those taxpayers that have accumulated large superannuation balances. The benefit though will be that the minimum pension amounts these taxpayers can draw down will be reduced and with some careful planning tax paid by the fund can still be minimised.

Transition to Retirement Pensions

This measure has been talked about for some time with regular discussion in the media taking place prior to the Budget. It appears the Government have followed the opposition on this one. From 1 July 2017 they will remove the tax exemption on fund earnings from assets supporting a transition to retirement income stream (TRIS).  In addition to this change, it will also remove the ability for a member to elect under Regulation 995-1.03 of the ITAR to have the payment treated as a lump sum for tax purposes. In reality those with smaller account balances will still be able to benefit from using this strategy. Those who have large balances will wear the brunt of this change.

Allowing catch up concessional contributions

Whilst seemingly trying to prevent taxpayers from building large superannuation balances, the Government has thrown in a few sweeteners to assist those who are unable to fully utilise their superannuation caps in al years.  From 1 July 2017, the Government will allow individuals with a super balance of less than $500,000 to utilise a rolling concessional contributions cap for a period of five consecutive years.

The unused portion of the concessional contribution cap can be accrued and carried forward. The basis for these changes is to allow for people with interrupted work patterns to benefit through periods of time where they may have an ability to catch up if they have a capacity to do so.

Removal of the 10% and work tests:

Finally! Long overdue, we finally see a level playing field for everybody to make personal contributions into super and claim a tax deduction. From 1 July 2017, the Government will provide greater flexibility for individuals to claim a tax deduction for personal super contributions.  The current 10% rule provides a ridiculous framework that limits an individual’s ability to make additional contributions where their salary represents more than 10% of their assessable income.  These new measures will allow all individuals, regardless of their employment circumstances to make concessional contributions up to the concessional contribution cap ($25,000).

From 1 July 2017, the Government will also remove the restriction on people aged between 65 to 74 to be gainfully employed for at least 40 hours within a 30 day consecutive period prior to making a contribution into super.  This applies for both concessional and non-contributions, along with extending to spouse contributions for people aged under 75. This decision allows older Australians to consider making additional contributions into superannuation that may result from events such as downsizing the family home.  Importantly, it removes the contrived arrangements by individuals needing the find work to make contributions into super up to reaching age 75.

Aspect Comment

Overall many of the changes will serve to return some equity for lower to middle income earners with regards to their superannuation, however some may feel that these retrospective changes will discourage people from using superannuation to save for their retirement out of fear that the rules may be changed at any point and their savings diminished. Regardless of your view, there are still plenty of opportunities for taxpayers to save tax over their lifetime using their superannuation savings so all is not lost especially for middle income earners and many small business owners, some different structuring may just be called for. But it’s safe to say the days of massive superannuation account balances are numbered…

Reduced tax rates for unincorporated small businesses

In line with the proposed reduction of the company tax rates, the Government also proposes an increase to the tax offset for unincorporated small businesses, namely sole traders, partnerships and trusts, will increase from 5% to 16% over a 10-year period.

The tax offset will initially increase to 8% from 1 July 2016, then to 10% in the 2024-25 year, 13% in the 2025-26 year and then the final rate of 16% in the 2026-27 year. However, the maximum discount will remain at $1,000.  For the purposes of accessing the tax offset, the turnover threshold is increased from $2 million to $5 million from 1 July 2016.

Aspect Comment

Again, the proposed increase of the tax offset rate is a welcome move. However, this is at best some tinkering as evidenced by the increase of the threshold to ‘only’ $5 million (as opposed to $10 million for other concessions) and the maximum allowable tax offset amount remaining at just $1,000.

Reduced company tax rates

Another long-awaited change for small businesses is the proposed reduction in the company tax rate to 25% over the next 11 income years. The current rate for small businesses (e.g. entities with an aggregated turnover of less than $2 million) is 28.5%. The rate will be reduced to 27.5% in the 2016-17 year (bearing in mind this will apply to businesses with an aggregated turnover of less than $10 million), remain at 27.5% for 7 years but with an increase in the turnover threshold for eligible companies, then reduce for all companies to 27% in the 2024-25 year, 26% in the 2025-26 year and 25% in the 2026-2027 year.

Budget 2016 Graph

As shown in the Government’s graph above, more and more companies will be eligible for the reduced tax rates over the next 8 tax years.  Importantly from a shareholders’ perspective, companies will still be able to frank dividends up to the rate of 30%, whilst they have sufficient credits.

Aspect Comment
Any reduction in tax rates is not be scoffed at and the immediate targeting of those lower rates to small and medium businesses is a welcome move, however the rationale of bringing corporate Australia into line with our trading partners seems hard to justify when it takes a further 10 years to reach corporate tax rates currently enjoyed by those countries.  Where will they be in 10 years and will we continue to play catch up?

Increase to the small business entity threshold

One of the most significant measures in the Budget for small businesses is the increase of the small business entity threshold from $2 million to $10 million effective 1 July 2016. This is significant considering the current $2 million threshold has been in place since 1 July 2007 and is well overdue for an increase in line with the current business environment.

This means, from 1 July 2016, businesses with an aggregated annual turnover of less than $10 million will be eligible for the various small business concessions, including the following:

  •  the proposed reduction in company tax rates,
  • the proposed increase of tax offset for unincorporated small businesses (bearing in mind the threshold of $5 million applies instead),
  •  immediate deductions for depreciating assets costing less than $20,000 until 30 June 2017 and less than $1,000 thereafter,
  •  the simplified depreciation rules for other depreciating assets under the Small Business General Pool,
  •  immediate deductions for business start-up costs, such as the professional fees and government charges,
  •  immediate deductions for most prepaid expenses under the 12-month prepayment rules,
  •  simplified trading stock rules, giving them the option to avoid end of year stocktake if the value of their stock has changed by less than $5,000,
  •  a simplified method of paying PAYG instalments calculated by the ATO, which removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied,
  •  the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO, and
  •  FBT exemptions for work-related portable electronic devices and car parking fringe benefits.

Unfortunately, the increase does not extend to the Small Business CGT concessions. This means the current threshold of $2 million for turnover and $6 million for the net assets still applies

Aspect Comment
While the move to increase the threshold is welcome, it is disappointing that this does not extend to the Small Business CGT concessions. The Government estimates that there will be over 90,000 businesses that will benefit from the increase of the threshold and we see the ability for more business to change their GST accounting to a cash basis as attractive to those experiencing delays in their debtor collection.  Given the current Budget predicament, perhaps it is not surprising that the Government has applied the brake and is holding off the increase of the threshold for the purposes of the Small Business CGT concessions and the new Small Business Restructure Rollover.

Gold Coast businesses under the ATO’s microscope

As part of an ongoing, Australia-wide program, the ATO has advised that it will be visiting restaurants, cafés and take-aways, along with hair salons and nail bars, on the Gold Coast.

Assistant Commissioner Matthew Bambrick said “In all, we’ll be visiting around 250 businesses in the Gold Coast to talk about a range of topics, including business registration, record-keeping, superannuation and lodgment.”

Where taxpayers are unwilling to work with us or continue to cause us concern, we will undertake further investigation.  In Sydney and Melbourne, for example, we have now moved to auditing businesses that didn’t want to work with us.”