2016/17 Federal Budget - major superannuation changes
Scott Morrison delivered his first Budget as the Federal Treasurer and enlivened many of the rumors that have been circulating for weeks whilst also squashing some of the touted predictions. If implemented, the Budget measures will increase the deficit to $37.1B which represents 2.2% of GDP. A return to surplus is forecast for the 2020-21year. However, much will depend on the will of the Senate which is under pressure with a double dissolution election almost certain.
Unsurprisingly, proposed changes to superannuation again featured in the Budget, although it still remains a highly effective investment structure. What did surprise were the changes to company tax arrangements which were more generous than anticipated. Although perhaps this is because the reduction in company tax will also reduce the tax credits on dividends paid by Australian companies to shareholders.
With the prospect of an election of both houses of Federal parliament looming, it is too early to say what the final outcome of the Budget proposals will look like as they are not yet law, so this Insights Newsletter is necessarily limited to summarising some of the key announcements.
APW Partners will be following the progress over the coming months and analysing the implications along the way to determine how best to advise you.
This Budget is without doubt the antithesis of the 2006-07 Costello “Simple Super” Budget. The generosity exhibited as a result of a once in a lifetime mining investment boom now needs to be wound back at a time in Australia’s economic cycle where there is both a revenue and a spending problem.
The Budget contained a number of significant superannuation announcements as follows.
There will be a reduction in the pre-tax concessional contribution limit (cap) to $25,000 per annum from 1 July 2017. This will apply to everyone, regardless of age.
The annual after tax non concessional cap will be replaced with a life-time cap of $500,000 which will take effect from Budget Night – 3 May 2016. This proposal has a significant element of retrospectivity in that prior year non concessional contributions dating from 1 July 2007 will be aggregated to determine whether the life-time cap is exceeded. If so, no further non concessional contributions will be permitted.
Importantly, there will be no requirement to withdraw any excess non concessional contributions made prior to Budget Night 2016.
Under current rules, high income earners pay an additional 15% tax on concessional contributions which take total income over the $300,000 threshold. As was widely speculated, the income threshold at which the additional tax applies is to be reduced from $300,000 to $250,000 from 1 July 2017.
The “10% work test restriction” on the ability of employees to top up their concessional contributions will be removed. To date, only people who earn less than 10% of their income from employment can make personal, tax deductible contributions to superannuation. It is a complicated and unnecessary test and will be removed from 1 July 2017.
Further, for those between 65 and 75 years of age the ability to make superannuation contributions will cease to depend upon satisfying a “work test from 1 July 2017.
Lower balance and income levels
The government also announced a measure whereby individuals with superannuation balances under $500,000 will be able to carry forward any unused concessional contributions cap from the previous five years starting from 1 July 2017. This will be on a rolling basis and therefore gives people the opportunity to catch-up if there are periods where less than the cap has been contributed. We assume that the concessional contribution cap will be subject to indexation and therefore this measure will be increasingly beneficial for some individuals.
The low income superannuation tax offset has been extended from 1 July 2017 and will apply to adjusted taxable incomes of $37,000 or less. If the taxpayer makes a contribution of up to $3,333 in a year, a rebate of $500 will be paid into their super balance to compensate for the tax that has been paid. Contributions less than $3,333 will be subject to the rebate on a pro-rata basis. The maximum rebate will be $500.
A major initiative was in the form of the restriction on the level of capital that can be committed to a superannuation income stream. From 1 July 2017, regardless of the member’s balance in the superfund, they will only be able to have $1.6m in a pension account. For clients with pension balances above this level at 30 June 2017, a portion will have to be rolled back to accumulation phase.
Importantly, a superannuation accumulation account is still a highly tax effective investment structure, where income is taxed at 15% and capital gains typically attract concessional tax that results in an effective tax rate of 10%.
The proposed new rules will necessitate a comprehensive review of retirement planning strategies, cashflow needs and portfolio composition. The proposed rules potentially mean that there will be new opportunities to retain and accumulate wealth inside the concessionally taxed superannuation environment for extended periods, whilst still allowing scope for monies to be drawn upon as required.
Superannuation will cease to be a tax free investment structure unless the capital invested in a superannuation pension is less than $1.6m. Importantly, superannuation in excess of this amount still remains a highly tax efficient investment structure.