Wilson Teis Budget Briefing

It’s an optimistic government that builds its budget around a ten-year enterprise tax plan but regardless of the outcome of the Federal election on the 2nd July it's likely most of the measures announced this month will still be enacted.

So it’s worth understanding what they mean for you, and thinking about practical steps you might want to take in light of some of the planned changes.

Superannuation Shift

Pundits agree the biggest change this year was to superannuation. Top earners will be the most affected, but some of the changes will impact on everyone still saving to fund their retirement lifestyle whatever their income. First a quick recap:

• Concessional contributions are before-tax contributions such as the super guarantee paid by your employer, salary sacrifices, or any eligible pre-tax contributions you make from your business to your super fund

• Non-concessional contributions are voluntary after-tax contributions you pay to build your super balance and take advantage of any available tax benefits

Concessional Changes

All of the changes to concessional contributions come into effect from 1 July 2017 and include:

• A reduction in the annual limit on contributions from $30,000 for under-50s, and $35,000 for over 50s, to $25,000 for both

• The introduction of a $1.6million limit on the amount of super that can be transferred into a retirement phase account, capping the amount you can invest in superannuation assets eligible for tax-free earnings. Balances already in excess of this need to be held in an accumulation phase account from 1 July 2017 where they will be taxed at the concessional rate, currently 15%

• The income threshold that lifts the tax rate on super contributions from 15% to 30% will be reduced to $250,000 from $300,000

• Those with low super contributions thanks to interrupted work patterns will be allowed to make catch-up payments if their super balance is under $500,000

• Those earning less than $37,000 will no longer get a direct super contribution (capped at $500), instead they will get a tax offset capped at $500 on their concessional superannuation contributions

• The income threshold for spouse contributions eligible for a tax offset has been lifted from $10,800 to $37,000

• 65-74 year olds no longer need to pass a work test –i.e. demonstrate they were employed for 40 hours on 30 consecutive days – to make concessional contributions to their superannuation

• Restrictions on personal super contributions regardless of employment status have been lifted and employed persons as well as those in flexible work patterns – for example part employed, part self-employed – can make contributions. With this comes responsibility for ensuring contributions from all sources don’t exceed the new $25,000 annual limit.

Non-Concessional Changes

Effective immediately, the cap for non-concessional superannuation contributions has been fixed at a lifetime limit of $500,000, replacing the previous limits of $180,000 per annum, or $540,000 every three years for under-65s.

Balances over $500,000 on 3rd May don’t need to be reduced, but penalty tax rates will apply to payments that put balances in excess of $500,000 after the budget date.

Revisit your Savings Strategies

The superannuation changes are designed to prevent high earners using super savings as a harbour from tax but they are a useful prompt for anyone thinking about retirement planning to revisit existing strategies.

The concessional cap of $25,000 could limit the value of the new flexibility on making personal contributions for those who might otherwise be planning to invest bigger lump sums as they near retirement.

Business owners who are starting to see bigger returns as their businesses mature might also want to rethink their succession and exit planning strategies. Whether it’s to extract as much value from their business to invest in super, or limit their working hours after 65 but still make contributions, both could be impacted by these changes.

Tax Changes: Rates and Offsets

No budget is complete without some change to tax rates and both personal and business tax rates got a bit of a makeover along with a few other changes:

• From 1st July 2016 the 32.5% personal income tax threshold has been lifted from $80,000 to $87,000

• From 1st July the small business tax rate has been reduced from 28.5% to 27.5% with a plan to increase the turnover threshold for this tax rate over the next ten years and ultimately reduce the corporate tax rate for all businesses to 25% by 2026/27

• The small business turnover threshold has been lifted from $2m to $10m and along with it the number of businesses who can now access a range concessions including simplified depreciation and trading stock rules; capital gains tax concessions are still limited to businesses with a turnover of less than $2m.

• Sole traders or partnerships will benefit from an increase in the small business income tax offset which rises to 8% from 5% on 1 July 2016 (capped at $1000) where it will stay for the next 8 years before a staggered increase takes it to 16% by 2026/27.

• The 2% budget deficit levy imposed on those earning over $180,000 will stay in place for one more year

A reduction in the corporate tax rate along with access to small business concessions over the next 5 to 10 years will impact on the cash flow of a lot of businesses. So having an up-to-date business plan and cash flow forecast is vital if your business is to fully benefit from that.

Call Wilson Teis for help understanding how these changes could impact your business plan and cash flow forecast and start building a better future today.