2016 Federal BudgetPresented by:

Keat Chew - Head of Technical Services Nigel Smith - Technical Services Consultant

Session overview• Superannuatio

n• Taxation• Social Security• Small business

Lifetime non-concessional contribution cap

• From commencement date, 7.30pm (AEST), 3 May 2016• Lifetime non-concessional contributions cap of $500,000• Cap indexed in $50k increments in line with AWOTE• Immediately replaces annual cap of $180,000 and brought

forward rule• Retrospective impact- counts all contributions from 1 July

2007• Therefore, some may have no cap or reduced cap at

commencement

Lifetime non-concessional contribution cap

• Any contributions before commencement in excess of the cap will not be regarded as excess and allowed to be retained in system

• However, if exceed the cap post commencement, must withdraw excess or otherwise penalty applies

• Similar changes apply to DB funds

Lifetime non-concessional contribution cap• Strategic considerations and impacts:

• Re-contribution strategy should now be used sparingly

• Max out both spouses caps for a $1m total contribution

• Have to make the limited amount in super work harder

• Insurance proceeds (eg TPD) should not impact the cap• Another reason to have insurance in super

• LRBA assume greater strategic importance?

• Doesn’t affect other traditional contribution caps• Small business cgt contributions• Personal injury contributions

• Doesn’t appear to have an annual limit other than lifetime cap• Max contribution to the cap earlier rather than later• BUT beware of interaction with unused c/fwd concessional cap

amounts ($500k threshold)• Interesting to see the process working, expect many

excess NCC determinations to surface

Lifetime non-concessional contribution cap

Superannuation transfer balance cap

• From 1 July 2017• Only cap of $1.6m can be transferred to pension phase• Cap indexed in $100k increments in line with CPI• Earnings on the amount transferred is unrestricted, ie will not

impact cap• Any accumulated amount in excess of $1.6m can remain in

accumulation• By 1 July 2017, existing pension accounts above $1.6m must

be reduced to the cap, either back to accumulation or withdrawn

Superannuation transfer balance cap

• If transfer in (or pension account in) excess of the cap, penalty similar to excess NCC to apply

• Remaining ‘cap space’ on subsequent transfer is done on a proportional basis (earnings do not utilise ‘cap space’)• Eg previously utilised 75% of cap, will have 25% left of current

(indexed) cap• Similar treatment to apply to DB funds

Superannuation transfer balance cap

• Strategic considerations and impacts:• Enjoy the tax free run while available until 1 July 2017

• Use time wisely to reorganise and realise taxable income if necessary

• Pensions commenced and commuted prior to 1 July 2017 don’t count towards cap- only ones continuing at 1 July 2017 counts

• Segregate assets with high income and growth potential into pension phase

• Run down accumulation account in preference to pension account

• LRBA (geared products) in pension phase?

Superannuation transfer balance cap

• Deceased and reversionary pension• Pension initially counts against the deceased, on reversion should be

no impact on reversionary pensioners $1.6m cap?• Major impact on some of the existing strategies for example

• Huge insurance proceeds received in super and commencing a pension

• Huge personal injury contribution or TPD proceeds and starting a pension

• Death benefit pensions? Child pensions?• Minimise value of investments at point of transfer to pension

• Low point in the market• Shares gone ex-div

Transition to retirement income streams

• From 1 July 2017• TTR continues BUT• Tax exemption on earnings abolished• No grandfathering• May no longer be able to elect to treat pension payment

as lump sum• For the purpose of the low rate cap of $195,000• Indication that this applies to all income streams, not just

TTR

Transition to retirement income streams

• Strategic considerations and impacts:• Enjoy while you can (start while you can)

• Reorganise and realising any taxable income in TTR pension phase if necessary

• Perhaps it can now be used for the purpose intended• For those in TTR, if meet a condition of release convert to ABP• TTR as a tax arbitrage strategy still alive and well

• Only lost the tax exemption on earnings• Age 60-64 more ‘tax arbitrage’ gain than under Age 60• Look for those who are unable to salary sacrifice outright

Concessional contributions

• From 1 July 2017,• Annual cap reduced to $25,000 (from $30k and $35k for

over fifties)• Allow c/fwd of unused concessional cap

• Only for those with balance less than $500,000– Not sure how the $500,000 is established if there are withdrawals?

• On a rolling basis of 5 consecutive years (ie max of $125,000)• Unused cap only accrues from 1 July 2017

Concessional contributions

• Strategic considerations and impacts:• Reduction of the cap compensated with ability to accumulate

the cap• Excellent planning opportunity moving forward

• Now with the availability of more flexible tax deduction (see later)• In conjunction with other structures such as family trust

• Defer our contributions and deduction to a higher income year• A 5 year plan eg accrue unused super contributions for 5 yrs,

then contribute in year of cgt realisation• Maximise contributions under current rule for this and next

year• Watch that the $500,000 balance is not exceeded (for c/fwd

rule)• Super split to higher balance spouse, timing of NCC

Contributions for high income earners

• From 1 July 2017,• Additional contributions tax of 15% on concessional

contributions above the ‘income threshold’• The ‘income threshold’ now $250,000 (reduced from

$300,000)• Generally: Taxable income + reportable fringe benefit + net

investment losses + low tax contributions

Contributions for high income earners

• Strategic considerations and impacts:• Investment losses will not improve the situation• Aim to reduce taxable income (especially close to the

$250k margin)• Income protection premium paid personally rather than in

super fund• Other deductible expenses will help

• Salary packaging items such as motor vehicles

Low income spouse & low income contribution

• From 1 July 2017,• Low income spouse superannuation tax offset

• Raising income threshold to $37,000 (from $10,800), cut out at $40,000

• Tax offset of $540 (based on $3,000 contribution) for contributing spouse

• Low income superannuation tax offset (LISTO)• Replaces LISC• Available up to max of $500 (based on $3,330), for up to ATI of

$37,000

• Strategic considerations and impacts:• A big win for low income earners ($1,500 + $3,000 + $3,300 =

$7,800)• Co-contribution of $500• Low income spouse superannuation tax offset of $540• LISTO of $500

• Flexible tax deductibility (see later) of concessional contributions makes it easier to achieve max LISTO of $500 for lower income earner

• Chance to build up lower balance spouse

Low income spouse & low income contribution

Other contribution changes

• From 1 July 2017,• Improve flexibility of contribution for those aged 65 to

74• No longer have to meet the work test

• Tax deduction for contributions• All individuals up to Age 75 regardless of employment

arrangement can claim• Seems to remove the 10% rule

Other contribution changes

• Strategic considerations and impacts:• No ‘work test’ buys extra time for contribution eg NCC- downsizing

house• If too much assets outside super, concessional contributions can help

manage• For those who are not able to contribute now due to work test

• Wait till 1/7/2017• A significant change allowing a personal tax deduction of

contribution• On top of employers contributions for example• Provides opportunity to utilise the concessional cap to the max (where

salary sacrifice is not available)• Together with the c/fwd of unused concessional cap (under the 5

year rule), this represents a powerful tax deduction planning tool

Death of Anti-detriment

• From 1 July 2017,unfortunately• End of 29 years winning streak!

• No longer available if die after 1 July 2017• No change in the tax treatment of death benefit

• Just no additional benefit representing refund of all contributions tax

Death of Anti-detriment

• Strategic considerations and impacts:• Another year to go

• Can still get the payment, then wait 1 July 17 for ability to contribute (if work test a problem)

• A win for smsf• Major loss particularly for surviving spouse• Can now re-contribute without fear of anti-detriment (but

watch preserving the $500k lifetime cap)

Taxation

• From 1 July 2016• Increase the 32.5% personal income tax threshold

from $80,000 to $87,000• Reduces tax rate from 37% to 32.5% for taxable income

between $80,000 and $87,000

Taxation

• Strategic considerations and impacts:• Reduce the impact of bracket creep• Prevents some individuals from paying tax

at the second highest tax rate• Tax saving of $315

Increase in Medicare levy low income thresholds• ML low income threshold increase by CPI, from the 2015/16

income year:• $36,001 for families (up from $35,261) (plus $3,306 per

dependant child)• $21,335 for singles (up from $20,896)• $33,738 (up from $33,044) for single Seniors and Pensioners

• Medicare levy surcharge and Private Health Insurance Rebates• Continue pause of indexation of income thresholds for a further 3 years

Increase in Medicare levy low income thresholds• Strategic considerations and impacts:

• Bear in mind the thresholds (particularly if close to the threshold) to reduce payment of Medicare levy

• Given the pausing of income thresholds for Private Health Insurance Rebates, improvement in income may reduce the rebate available

Social Security

• Not a highlight of this budget!• Youth PaTH program for young jobs seekers under Age 25, 3

pathways:• From 1/4/17: training for up to 6wks to develop employability

skills• From 1/4/17: internship placement for up to 12 wks (receive $200

per fn incentive payment; host get $1,000 upfront• From 1/1/17: Youth bonus subsidies- employers receives $10,000

for those with barriers to employment and up to $6,500 for most job ready job seekers

Social Security

• Strategic considerations and impacts:• A program to help our young job seekers get into the

employment market• Nothing in this Budget that directly impact our Age

pensioners or Aged Care

Reduction in company tax rate

• Reduction of company tax rate to 25% over 10 years (by 2026/27)

• Transitional tax rates for companies based on turnover:• Annual aggregated t/o < $10m: tax rate of 27.5% for 2016/17• Progressively increasing t/o (from $25m to $1b) from 2017/18 to 2022/23 to

apply the 27.5% tax rate• Tax rate will reduce to 27% for 2024/25, 26% for 2025/26 and finally 25% for

2026/27• Unincorporated small business tax discount

• 5% tax discount (applies to income tax payable) last year will be increase to 16% over a 10 year period

• Given in the form of a tax offset, the cap of $1,000 per individual per year retained

Reduction in company tax rate

• Small business entity turnover threshold increase to $10m (from $2m)

• Unfortunately, not for the purpose of small business cgt concessions

• Strategic considerations and impacts:• Appears that franking credit rate will reduce in line

with tax rate• Given the super restrictions, may see company

structure being used more in tax planning

Winners and losers

• Winners• Low income earners• Middle income earners• Companies • Small businesses• Pensioners

Winners and losers

• Losers• High income earners• Multi-nationals• Superannuation believers• Potential anti-detriment

beneficiaries

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