There’s big differences in how the federal budget will hit high and middle-income clients, writes Byron Smith.
Without a doubt superannuation is the big area of change in this year’s federal budget.
New measures will particularly affect high net worth clients, and could impact how they view superannuation as an investment vehicle.
There’s also some changes for small business owners, which will benefit from more generous tax arrangements.
Many of the proposed changes to superannuation in the budget targets higher-income earners, which Treasurer Scott Morrison identified as a clear objective.
Perhaps the biggest impact is that superannuation will be more limited as a tax-effective investment vehicle for the following reasons:
- The threshold at which high-income earners pay an additional 15 per cent contributions tax (for a total of 30 per cent) will be lowered from $300,000 to $250,000 beginning July 1, 2017.
- Contributions at the tax concession rate will stop at $25,000 a year, down from $30,000 for those aged less than 50, and $35,000 for those aged 50 and over, effective July 1, 2017.
- Introducing a new cap at retirement, only $1.6 million can be transferred to the tax-free retirement phase, effective July 1, 2017. This will have implications for clients with substantial super savings, including those already in retirement phase.
- Over a lifetime, contributions that do not receive tax concessions will be limited to $500,000 – a big adjustment from the current limit of $180,000 a year or $540,000 for those that can bring forward two years of contributions.
- Earnings from assets that support ‘transition-to-retirement income streams’ will no longer be tax exempt from July 1, 2017.
Women, seniors and low-income earners
While measures for low-income earners are not specifically for women, the Treasurer made a point of focusing on them as beneficiaries of some new measures.
- From July 1, 2017, low-income earners will benefit from a superannuation tax offset. Those earning $37,000 or less who make a concessional contribution to their super will receive up to $500 to offset the tax paid on those contributions.
- More partners will become eligible for a tax offset (up to $540) for contributions made to a low-income earning spouse. From July 1, 2017, the low-income earning spouse’s income threshold will increase from $10,800 to $37,000.
- Those with a super balance less than $500,000 will be able to make additional contributions at a concessional tax rate. Unused amounts of the concessional contributions cap are carried forward on a rolling basis for a period of five consecutive years (only unused amounts accrued after July 1, 2017 can be carried forward).
- From July 1, 2017, anyone up to 75 years of age can claim income-tax deductions for their personal super contributions. Though the concessional limit of $25,000 still applies. This is particularly helpful for those who can’t use salary-sacrifice arrangements.
- Those aged 65 to 74 will no longer be restricted from making super contributions for their retirement with the removal of the work test from age 65, effective July 1, 2017.
- The government has also removed the anti-detriment provision in respect of death benefits from superannuation from July 1, 2017.
Personal income tax
The biggest change to personal income tax is when the 37 per cent marginal tax rate hits. Those earning $87,000-plus will be taxed at this rate, beginning this July. Currently the 37 per cent rate hits at $80,000.
The Treasurer says “this will stop around 500,000 taxpayers from facing the 37 per cent second top marginal tax rate”.
He also made it clear the government would not make changes to negative gearing.
The government announced in the budget that it will reduce the company tax rate to 27.5 per cent in 2016-17 for companies with earnings up to $10 million. This is a significant boost from the current level of $2 million.
Under the complicated arrangements for a rolling series of company tax cuts out to 2026-27, companies’ earning threshold for the lower rate will rise each year until 2023-24 when it will cover all businesses regardless of turnover.
In the 2024-25 income year the company tax rate will be reduced to 27 per cent and reduce progressively by 1 percentage point per year until it reaches 25 per cent in 2026-27.
The government also promises to simplify goods and services tax reporting for small business, beginning in the 2017-18 financial year.