THE 2017 budget
With so much Superannuation Reform from last year’s budget still being worked through ahead of 1 July, unsurprisingly (and some might say thankfully) the 2017 Budget has little that impacts superannuation and retirement savings directly.
This suggests that we may have a period of stability; for now, at least.
While most Australians will be impacted in some way by the various revenue and savings measures in the 2017 Budget there are no immediate actions required.
That said there are changes that impact Superannuation and may warrant consideration as part of your strategy in due course. As with all measures announced in the budget, until we see the final legislation that is passed by both houses of Parliament, the measures announced may be subject to some change.
APW will review the budget announcements and subsequent legislation with your particular circumstances in mind and make sure that you are aware of, take advantage of and take steps to comply with any changes.
In addition there are general taxation changes that will impact all Australians.
We have provided some detail around the Superannuation and Tax changes and have included a useful matrix on the next page to provide an understanding of the scope and impact of the other elements contained within the budget.
Changes to operate within existing Superannuation arrangements
Additional super contributions for down-sizers
From 1 July 2018, people aged 65 and over will be able to make a non-concessional superannuation contribution of up to $300,000 from the proceeds of the sale of their home. Both members of a couple will be able to apply this measure allowing up to $600,000 per couple to be contributed to superannuation.
Contributions made under the downsizing cap will be in addition to any other contributions a person is able to make under the existing contribution rules and caps.
To facilitate this measure the Government will remove the existing contribution rules for those aged 65 and over making contributions under the new downsizing cap, including:
- removing the gainful employment requirement between age 65 and 74;
- removing the restriction on contributions from age 75; and
- removing the restriction applying from 1 July 2017 on non-concessional contributions by a person with a total superannuation balance of over $1.6 million.
This measure will only apply following the sale of a principal place of residence held for a minimum of 10 years.
First home super saver scheme
The Government will allow some superannuation contributions to be withdrawn for a first-home deposit.
- From 1 July 2017 an amount up to $15,000 per year of contributions (voluntary concessional or non-concessional) within the existing contribution caps can count towards this measure; up to $30,000 in total. Normal tax rules on contributions will apply.
- From 1 July 2018 these amounts can be withdrawn for a first home deposit up to the maximum of $30,000 along with associated deemed earnings.
- Withdrawals relating to concessional contributions will be taxed at a person’s marginal rate less a 30% offset. Non-concessional contributions withdrawn will not be taxed.
- The measure is applied per person, meaning both members of a couple buying their first home will be eligible to apply this scheme.
- The amount of earnings released will be calculated using a deemed rate of return based on the 90 day Bank Bill rate plus 3 percentage points (same as the Shortfall Interest Charge (SIC)). The current annual SIC is 4.78%. Before making contributions under this scheme, first home savers should consider their personal circumstances including what type of contribution could be most effective and the tax rate payable on earnings inside superannuation compared to their effective tax rate outside of superannuation.
- The scheme will be administered by the ATO and they will determine the amount of contributions a person can release and instruct super funds to make the payments accordingly.
Integrity of limited recourse borrowing arrangements
From 1 July 2017 the outstanding balance of a limited recourse borrowing arrangement (LRBA) will be included in a person’s annual total superannuation balance. This will affect a person’s ability to make non-concessional contributions and use the segregated method in an SMSF… is this correct?? Segregation for tax purposes is not permitted after 1 July 2017.Needs to be cleared up.
In addition, repayments of the principal and interest of a LRBA from an accumulation account will be a credit in the person’s transfer balance account. This is an integrity measure introduced to curb LRBAs being used to circumvent contribution caps and avoid growth in assets from the accumulation phase to the retirement phase being captured by the transfer balance cap.
Draft legislation released by the Government on 27 April 2017 proposed to include LRBAs by SMSFs in a member’s total superannuation balance and the $1.6m transfer balance cap on a prospective basis from 1 July 2017. The Budget proposals adjust this identifying the measures will also apply to outstanding LRBA balances from 1 July 2017.
Integrity of non-arm’s length arrangements
The Government will amend non-arm’s length income provisions to ensure expenses that would normally apply in a commercial transaction are included when considering whether a transaction is on a commercial basis.
The non-arm’s length provisions in the Income Tax Assessment Act 1997 are supposed to prevent artificially high levels of income being generated in a Self Managed Super Fund where it is taxed concessionally. The trouble is that the current provisions focus on income (e.g. artificially high levels of rent from a property, dividends from a company etc.) The Budget proposal is to introduce similar rules to ensure that expenses are not artificially low. (For example, not charging costs associated with maintaining a property.)
This measure will apply from 1 July 2018 to ensure the 2016-17 Superannuation Reform Package operates as intended by reducing opportunities for related party transactions on non-commercial terms to be used to increase superannuation savings.
Other Tax Measures
Major bank levy
From 1 July 2017, the Government will introduce a levy for banks with licensed entity liabilities of at least $100 billion. The $100 billion threshold will be indexed to grow in line with nominal gross domestic product (GDP). Currently this will only affect the five largest banks but does not apply to superannuation funds and insurance companies.
The levy will be calculated quarterly as 0.015% of a bank’s licensed entity liabilities (for an annualised rate of 0.06%).
Importantly, the levy will not apply to deposits of individuals, businesses and other entities protected by the Financial Claims Scheme. That means that banks will not incur this cost on funds held by an individual of up to $250,000.
0.5% increase in Medicare levy
From 1 July 2019, the Medicare levy will increase by 0.5% to 2.5% of taxable income, effectively increasing the top marginal tax rate (which includes the fringe benefits tax rate) to 47.5%. The increase ensures the National Disability Insurance Scheme (NDIS) is fully funded.
The Temporary Budget Repair levy will expire on 30 June 2017 as originally announced in the 2014-15 Federal Budget.
The Government will extend the current instant asset write-off threshold ($20,000) for small business entities (SBEs) by 12 months until 30 June 2018. SBEs will be businesses with aggregated annual turnover of less than $10m (the new laws to increase the threshold from $2m to $10m should come into effect shortly). The assets must be acquired by 30 June 2018 and first used or installed ready for use by 30 June 2018 for a taxable purpose. Only a few assets are not eligible for the instant asset write-off, for example horticultural plants and inhouse software.
Restrictions on deductions for Residential Investment Properties
From 1 July 2017, the Government will limit depreciation deductions on “plant and equipment” to costs actually incurred by investors in residential investment properties. Plant and equipment items are usually mechanical fixtures or those which can be “easily” removed from a property.
Travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017. This will not prevent investors from engaging third parties such as real estate agents for property management services and these expenses should continue to be tax deductible.
Changes affecting Foreign Investors
Australia’s foreign resident capital gains tax (CGT) regime will be extended by:
- denying foreign and temporary tax residents access to the CGT main residence exemption (from 9 May 2017),
- increasing the CGT withholding rate for foreign tax residents from 10% to 12.5% from 1 July 2017 and
- reducing the CGT withholding threshold for foreign tax residents from $2M to $750,000.