Major changes to Tax rates, Superannuation and Pensions

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superannuation and pension

With these proposed changes comes opportunity to review and revisit your Circumstances

The recent Federal Budget signalled some major changes to Tax rates, Superannuation and Pensions. With these proposed changes comes opportunity to review and revisit your circumstances to better understand the impact.

Please remember that, at this time, these measures are proposals only and require the passage of legislation to become effective. These measures may be subject to change through the implementation process

If you are a Chan & Naylor Wealth Planning client then we will be in touch to discuss this with you in your next review meeting, however in the interim, please find below the budget summary.

Tax – Company tax cut
A reduction in the company tax rate from 30% to 25% will be phased in over 10 years. The tax rate for all companies will be 25% by 2026/27.

Tax – Personal
The current $80,000 threshold above which each $1 earned is taxed at 37 cents will be increased to $87,000 from 1 July 2016.  The higher income cut-in means tax payable by middle income earners will be reduced from 37 cents to 32.5 cents for all income earned between $80,001 and the new threshold of $87,000. This equates to a tax saving of around $315 a year (ignoring Medicare levy) for those on incomes between $80,000 and $180,000.

Taxable income (current)Tax payable*
(current)
Taxable income (proposed)Tax payable*
(proposed)
0 – $18,200Nil0 – $18,200Nil
$18,201 – $37,00019c for each $1 over $18,200$18,201 – $37,00019c for each $1 over $18,200
$37,001 – $80,000$3,572 plus 32.5c for each $1 over $37,000$37,001 – $87,000$3,572 + 32.5c for each $1 over $37,000
$80,001 – $180,000$17,547 plus 37c for each $1 over $80,000$87,001  – $180,000$19,822 + 37c for each $1 over $87,000
$180,001 and over$54,547 plus 45c for each $1 over $180,000$180,001 and over$54,232 + 45c for each $1 over $180,000

The above rates do not include the 2% Medicare levy or the 2% temporary budget repair levy (expires on 30 June 2017)

Superannuation
The Government will enshrine in law that the objective for superannuation is “to provide income in retirement to substitute or supplement the Age Pension.”
Contribution caps
The concessional contributions (CC) cap will be reduced to $25,000 from 1 July 2017 and a lifetime non-concessional contributions (NCC) cap of $500,000 will apply from 7.30pm on 3 May 2016 for all individuals under age 75.

Concessional capCurrentProposed
Under age 49$30,000 pa$25,000 pa from 1 July 2017
Age 49 or over$35,000 pa
Non-concessional cap
Under age 65 at 1 July$180,000 pa or $540,000 over 3 years$500,000 lifetime cap from 7.30 pm on 3 May 2016
Age 65 or over at 1 July$180,000 pa

NCCs already contributed on or after 1 July 2007 count towards the $500,000 lifetime NCC cap, however NCCs over the lifetime cap (before commencement) will not result in an excess.  NCCs in excess of the $500k cap after commencement can be refunded and if not refunded will incur penalty tax.

The lifetime NCC cap will include after-tax contributions made to defined benefit accounts and constitutionally protected funds.  Where a defined benefit member exceeds their lifetime cap, ongoing contributions can continue but the member must, on an annual basis, remove an equivalent amount (including proxy earnings) from any accumulation account they hold (limited to the amount of NCCs made since 1 July 2007).  Contributions made to a defined benefit account will not be required to be removed.  Members who do not have NCCs available to be removed will be treated equitably under further government consultation.

Notional (estimated) and actual employer contributions will be included in the CC cap for members of unfunded defined benefit schemes and constitutionally protected funds, from 1 July 2017.  Members of these funds will have the opportunity to salary sacrifice. Existing grandfathering arrangements will continue for members of funded defined benefit schemes as at 12 May 2009.

Catch-up concessional contributions
Individuals with super balances under $500,000 will be able to bring forward previously unused concessional cap amounts from 1 July 2017.  For example, if an individual contributes $20,000 in the 2016/17 financial year, they will be able to make an additional $5,000 CC on top of the $25,000 CC cap in 2017/18.

The unused amounts can be carried forward on a rolling basis for a period of five (5) consecutive years. It must be emphasised, this will only apply to amounts accrued from 1 July 2017.

Tax deduction for super contributions extended
Individuals up to age 75 will be able to claim a tax deduction for their personal superannuation contributions up to the CC cap from 1 July 2017, regardless of their employment circumstances.

Super contributions tax – high income earners 
Individuals with adjusted taxable income (ATI) of $300,000 currently pay an additional 15% tax (total of 30%) on concessional super contributions. The income threshold will be reduced to $250,000 from 1 July 2017.

How this works in practice:

  • If ATI is $240,000 and concessional contributions (CCs) of $25,000 are made; 30% contributions tax will apply on $15,000 of CCs and 15% will apply on the remaining $10,000 CCs.
  • If ATI is over $250,000 without CCs, all CCs will be taxed at 30%.

The $250k threshold will also apply to members of defined benefit schemes and constitutionally protected funds currently covered by the additional tax. Existing exemptions (such as State higher level office holders and Commonwealth judges) will be maintained.
Removal of work test 
The work test (40 hours in 30 consecutive days) will be scrapped for individuals aged between 65 and 74 who wish to make super contributions.  Individuals age 65-74 will also be able to receive spouse contributions.
Retirement income balance cap of $1.6m
A $1.6 million cap will apply on the amount that can be transferred into the superannuation pension phase from 1 July 2017.  There will be no restriction on earnings on the cap amount.  Amounts in excess of the $1.6 million cap transferred (including earnings on the excess) will attract the same tax treatment as excess non-concessional contributions (excess unrefunded NCCs are currently taxed at 49%).

Accumulated super in excess of $1.6 million will be able to be retained in a member’s accumulation account (with earnings taxed at 15%).  Members already in pension phase with balances in excess of the $1.6 million cap will need to roll back the excess to accumulation by 1 July 2017.

Similar tax treatment will apply to members of defined benefit funds for pension amounts over $100,000 from 1 July 2017. The Government will consult with industry on the implementation of this measure.

Transition to Retirement
The tax exemption on earning on assets supporting transition to retirement income streams will be removed from 1 July 2017.  The ability to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.

 

If you would like to know more about how we may be able to help you plan for your future, call us on 1300 99 77 34 or email your inquiry to financialoptions@chan-naylor.com.au for a complementary initial consultation.

 

David Hasib


Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

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