This is a summary of the effects from the budget on individuals’ wealth creation and management of their affairs.
Let me say it’s annoying that the major changes to Superannuation and Retirement were meant to be managed as part of a white paper covering a total tax review, later this year.
Then any changes were to be mandated by a committee to be formed that takes Superannuation changes away from the annual Budget shenanigans.
But here we are again with major changes to Super imposed as part of an annual Government Budget.
The significant changes that will affect many people are laid out as to when they take effect.
Most changes only take effect from 1st July 2017.
Since much of this needs to be legislated – some of it may not be implemented – depending on the results of the Double Dissolution election and the negotiations that may occur afterwards.
Here are the key changes.
A “lifetime” cap of $500,000 of non concessional (after tax) contributions – effective from 3rd May 2016. The “lifetime” contributions are measured from 1 July 2007.
If you have contributed more than that already then it will be allowed as a grandfathered payment – but may get caught later in the Pension cap of $1.6 million. (see below). Any excess payments made from 3rd May 2016 will need to be removed or subjected to a penalty tax.
Effective from 1 July 2016:
- Changed tax bracket: Raising the cut off of $80,000 for the 32.5 cent tax rate to a new cut off of $87,000. Tax saving of $315 p.a for those who earn $87,000 or more.
- Reduced taxes for small business companies and also for self employed individuals as sole operators. Small business will also be redefined as having a turnover as much as $10 million p.a Small company tax rate of only 27.5% and a sole operator tax concession of up to $1,000.
- Medicare levy will commence at a slightly higher threshold and be phased in. The full levy will be payable for Seniors from a joint income of $58,708.
Effective from 1st July 2017: – many changes to be legislated.
- Contributions to Super
Maximum annual concessional contributions reduced to $25,000. (which includes the Super Guarantee). Those over 50 have 1 more year to pay into their Super a total of $35,000, after which it’s cut to $25,000. Those under 50 can contribute $30,000 for another year.The unused portions of the new cap can be carried forward up to 5 years to be used at a later time. So if a taxpayer on $70,000 p.a only has the Super Guarantee paid in – in the 5th year they could pay into super up to $91,750 from say a capital gain made elsewhere. See 10% rule below.
- High Income contributions
Where the taxpayer earns $250,000 or more the contribution tax to Superannuation rises from 15% tax to 30% tax.
- Allocated Pensions
Maximum amount of funds which can be rolled into an Allocated Pension becomes $1.6 million. (Both tax deductible and non deductible funds). This effectively reintroduces the old Reasonable Benefit Limit (RBLs).For those who have more than $1.6 mil – the excess funds stay in Superannuation and are taxed at a low 15% rate – or can be withdrawn and invested and taxed as ordinary money. If left in Superannuation it could be treated as a low taxed bank account – but I suspect this may also be removed in the future.The superannuation industry was arguing for a $2.5 mill limit.
But for a couple the limits could be $1.6 mil each – so it’s still very generous.
- Transition to Retirement Strategies.
Any superannuation which is converted to a pension for those 55 to 60 years of age currently generates income in the fund tax free. Any pension payable to the individual is taxed at the standard tax rate less 15%.From 2017 the fund will continue to pay tax at 15% just as if it was still in Superannuation.
While this waters down the TTR benefits – it still has benefits for medium income individuals.
This ignores the fact that many middle income earners benefitted from a TTR and lifted their retirement funds and reduced their dependence on the age pension.It’s a rather low rent poor move on the government’s part.
The new $1.6 mil pension cap and specifically the $25,000 concessional contribution cap now makes this TTR step redundant.
No wealthy individual can benefit from a TTR – only the middle income group – but now less so.
- Super after age 65 to 74.
Currently you can only contribute to super if you can prove you are working – 30 hours in a 40 day period, of only in 1 month of the year.
This will become unnecessary from 2017.
- The 10% rule.
Currently you cannot make a concessional personal contribution – separate from a salary sacrifice – unless your income from salaried work is 10% or less of your total taxable income for the year. This will be abolished and is a long overdue elimination of an anachronism that should have been eliminated years ago.
BUT the $25,000 concessional cap will inhibit the flexibility of this move, except where there is unused past components. See bullet point 1.