Implications of the 2016 Federal Budget

Transcription

1 Implications of the 2016 Federal Budget

2 This information is correct as at 16 May Information contained in this presentation is general in nature and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this advice you should consider the appropriateness of this advice, having regard for your own objectives, financial situation and needs. You should seek personal financial advice from a qualified financial adviser before acting on the information. You should consider the Product Disclosure Statement in deciding whether to acquire, to continue to hold, or to sell a product. Performance is influenced by market volatility over time. Past performance is not necessarily indicative of future performance. Contact your adviser to discuss your individual needs. The taxation position described is a general statement only and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. Please contact a taxation specialist to discuss your individual situation. No representation or warranty is made or liability taken as to the accuracy, timeliness or completeness of this information. To the extent allowed by law, Millennium3 Financial Services Pty Ltd will not be liable for any loss arising as a result of anyone relying on this information.

3 Keeping you informed about the 2016 Federal Budget Major changes to superannuation Significant changes for small business owners Minor changes to social security

4 Who will be impacted? High net worth individuals Pre-retirees Retirees Wealth accumulators Small business owners These measures have the potential to affect the ability of many Australians to save and invest for retirement

5 All announcements are proposednot yet legislated Final legislation may differ from the original announcement Election on the 2 nd July may affect final legislation & timeframe of legislation being introduced

6 Superannuation reformmostly effective 1 July 2017 Negative 1. Lifetime non-concessional contributions cap of $500,000 effective 3 May, 2016 (Indexed) 2. $1.6 million transfer balance cap in tax-free retirement income streams 3. Reduction of concessional contributions cap to $25, Tax-free earnings removed from Transition to Retirement income streams 5. Removal of anti-detriment payments (increased super death benefits) 6. Reduction in income threshold for additional tax on super contributions by higher income earners 7. Changes to taxation of defined benefit income streams

7 Superannuation reformmostly effective 1 July 2017 Positive 1. Removal of work test for those aged Removal of the income test for personal deductible super contributions 3. Catch-up concessional contributions 4. Spouse tax-offset eligibility criteria extended 5. Replacement of Low Income Super Contribution with Low Income Superannuation Tax Offset

8 Lifetime non-concessional contributions- limit of $500,000 Effective 7.30 PM AEST 3 May 2016 capturing non-concessional contributions made since 1 July 2007 Contributions made before Budget night are quarantined and can leave those funds in superannuation Although for high value funds ($1.6 million) going to or already in retirement phase, may need to take action on 1 July 2017 Contributions made after Budget night cannot exceed $500,000 (indexed) Penalties Allowed to seek refund of excessive contributions - includes associated earnings If don t seek refund, taxed at the current non-concessional penalty regime (49% tax)

9 Lifetime non-concessional contributions- limit of $500,000 Case study John (60) has contributed $540,000 NCC between 1 July 2007 and 3 rd May John is not required to refund the excess contributions. No penalties will apply. John cannot make any further nonconcessional contributions as he has already used his lifetime cap.

10 Lifetime non-concessional contributions- limit of $500,000 Case study Jill (62) has contributed $400,000 NCC between 1 July 2007 and 3 rd May Jill can make additional non-concessional contributions up to $100,000 under the lifetime cap.

11 Lifetime non-concessional contributions- limit of $500,000 Issues Importance of records dating back to 1 July 2007 including ATO s support around providing data. Ensuring all non-concessional contributions have been captured Have you transferred overseas super? Have you made personal contributions to receive the Government Co-contribution? Have you received any contributions made by your spouse? The ATO will be updating the online display of super accounts through MyGov to include an individual s non-concessional lifetime balance The ATO will be working towards identifying and contacting those individuals with accumulation accounts that are close to, or have exceeded, their lifetime NCC cap

12 Lifetime non-concessional contributions- limit of $500,000 Issues Associated earnings tax on any excessive refunds Deemed rate of earnings 9.20% in generally for a period of at least 12 months but typically 18 months or longer Current excess non-concessional requires acting within 60 days of receiving the letter from the ATO

13 Lifetime non-concessional contributions- limit of $500,000 Case Study Maria made non-concessional contributions totalling $400,000 between 1 July 2007 and 3 May She made an additional $200,000 non-concessional contribution after 3 May Maria has exceeded her lifetime cap by $100,000. This amount is required to be refunded. Buy/sell spreads of 0.40% - $400 Entry fee of 3% - $3,000 In addition, Maria was exposed to market risk and incurred a personal tax liability of approximately $3,300 related to associated earnings. Note if this was invested outside of super, Maria would have had a personal tax liability anyway. This is an example only and may not be indicative of your personal position based on a marginal tax rate of 37% plus Medicare.

14 $1.6 million transfer balance cap Proposal date 1 July 2017 Limit on how much can be transferred from accumulation to retirement phase For new transfers, only $1.6 million can be transferred to retirement phase Action required: For those who already have >$1.6 million in tax-free retirement accounts, are required to reduce their balance 1. Transfer the excess back into accumulation mode 2. Withdraw the excess amount to outside superannuation If the cap is breached, excess amount, including earnings is taxed under the current excess non-concessional regime Proportionate method to work out how much cap balance is unused for subsequent transfers Subsequent earnings and pension payments disregarded

15 $1.6 million transfer balance cap Case study Hans (65) has $1.8 million in super. After 1 July, 2017, he transfers $1.6 million to commence a retirement income stream. $200,000 remains in accumulation phase and any earnings will be taxed up to 15%. Over time, his retirement income stream balance reduces to $1.3 million. Hans cannot transfer anymore money into retirement phase as he has already used 100% of his transfer balance cap.

16 $1.6 million transfer balance cap Hans $1.8m Super $1.6m Retirement income stream $200k Super Tax free earnings Tax free pension payments Tax free lump sums Earnings taxed up to 15% Tax free lump sums

17 $1.6 million transfer balance cap Issues SMSFs Single accumulation interest. Will impact tax components segregation planning CGT on assets for single member funds Value of contribution splitting to even up balances among spouses Cash out, re-contribution strategies to a spouse under 75. The work test being abolished helps although the lifetime cap is a hurdle Consideration of how much capital can be held outside of super before paying tax in looking at different structures

18 $1.6 million transfer balance cap Issues Long term planning on structures used for retirement Insurance bonds Family Trusts with a corporate beneficiary Direct investments with ability to make deductible super contributions Need clarity on disability and death benefit income streams Will a TTR balance be included? Need clarity on rollbacks and consolidations and impact on how much of the cap balance remains Need clarity on funds tied in super based annuities, TAPs and lifetime pensions payable by SMSFs

19 Changes to taxation of defined benefit income streams Proposal date 1 July 2017 Pension payments from unfunded defined benefit schemes continue to attract 10% tax offset if over 60 where the income stream is less than $100,000 If the income stream is >$100,000, then the 10% tax offset is limited to $10,000 Pension payments from funded defined benefit schemes continue to be tax-free if over 60 where the income stream is less than $100,000 If the income stream is >$100,000, then 50% the amount above $100,000 taxed at marginal rate Defined benefit pensions will also be valued and included in the assessment of an individual s position against their $1.6 million balance transfer cap

20 Reduction of Concessional Cap Proposal date 1 July 2017 Concessional cap reduced to $25,000 (indexed) Potential impact for constitutionally protected fund members with removal of unlimited concessional contributions Same cap for everyone, regardless of age Will need to start thinking about reducing salary sacrifice and personal deductible super contributions amounts Clients using the full cap of $30,000 or $35,000 will have surplus cashflow What are some of the options in dealing with the surplus cashflow?

21 Impact of the Reduced $100,000 wage/salary Concessional Cap Cap $ 35,000 $ 30,000 $ 25,000 SG $ 9,500 $ 9,500 $ 9,500 Room under the cap (eg salary sacrifice) $ 25,500 $ 20,500 $ 15,500 A reduction of potential salary sacrifice of 40% under the $35,000 concessional cap A reduction of potential salary sacrifice of 25% under the $30,000 concessional cap

22 No tax-free earnings in TTR income Proposal date 1 July 2017 Transition to Retirement income streams will be internally taxed as if they are in accumulation (up to 15%) No change to taxation of pension payments Lower concessional cap reduces effectiveness of TTR and salary sacrifice Do TTRs still add value? streams Transition to Retirement Income Stream Pension payments are taxed concessionally Earnings are taxed up to 15%

23 No tax-free earnings in TTR income streams John (56) has $200,000 in superannuation. He is currently not salary sacrificing. Funds are all taxable component. ^ Includes contributions tax on salary sacrifice + ML. Excludes super returns

24 No tax-free earnings in TTR income streams John (60) has $200,000 in superannuation. He is currently not salary sacrificing. ^ Includes contributions tax on salary sacrifice + ML as well LITO. Excludes super returns

25 No tax-free earnings in TTR income Issues streams It s the classification of the product being a Transition to Retirement income stream which changes the nature of internal taxation Since commencing the TTR income stream, have you met a new condition of release (e.g. permanently retired from the workforce)? Your TTR income stream can become an ordinary income stream and qualify for tax free earnings.

26 Removal of anti-detriment Proposal date 1 July 2017 payment Notionally represent the refund of contributions tax. Approximately 13% to 17% of the taxable component of your super death benefit (excluding insurance). Need to look at strategies to reduce tax payable on lump sum super death benefits to adult children. Withdrawal and re-contribute The NCC lifetime limit of $500,000 may present a hurdle Do you have an SMSF with anti-detriment reserves - unwind?

27 Work test abolished for retirees (at Proposal date 1 July 2017 least age 65) Clients between the age of 65 to 74 can contribute without having to meet the work test Allows opportunities to use the unused $500,000 lifetime cap + the concessional cap of $25,000 if you have income to offset Combined with the removal of the less than 10% test, presents opportunities to restructure assets into superannuation pre and during retirement With the removal of anti-detriment payments, considerations around recontribution strategies for those between 65 and 74 with unused lifetime cap Implications if considering downsizing or expecting an inheritance in the forseeable future

28 Work test abolished for retirees (at least age 65) Peter (68) is permanently retired and has taxable income from investments of $80,000. He can make personal deductible contributions of $25,000 in the 2017/18 financial year to reduce his personal income tax payable.

29 Anyone under the age of 75 can make personal deductible super contributions Proposal date 1 July 2017 Clients under the age of 75 can contribute without having to meet the work test The less than 10% test is abolished Employees can continue to salary sacrifice or make personal deductible super contributions Opportunities to pay for non-deductible debt during the FY and making a one-off contribution by the end of the year and claiming a tax deduction Requires you to submit a notice to the fund Strict guidelines apply as to when this notice must be provided We have to manage how much to claim as a tax deduction considering your taxable income, eligibility for tax offsets and contribution caps

30 Catch up concessional Proposal date 1 July 2017 contributions Current regime works on a use it or lose it basis per FY Clients whose superannuation balances are less than $500,000 will be able to access their unused concessional cap on a rolling basis for five years Can be used to catchup on retirement savings or to reduce a large capital gain

31 Catch up concessional contributions Mary (60) is currently retired. She is considering selling her investment property and wondering how much concessional contributions she can make to reduce the capital gains tax by?

32 Expanding eligibility for spouse contributions and tax offset Proposal date 1 July 2017 Currently, spouse contributions can only be received if the receiving spouse is under the age of 70. If over 65 and under 70, required to meet the work test. Spouse contributions can be made while the receiving spouse is under the age of 75 Income thresholds to qualify for the spouse contribution tax offset will also increase

33 Low Income Superannuation Tax Proposal date 1 July 2017 Offset A Low Income Superannuation Tax Offset Designed to refund contributions tax paid for low income earners Non-refundable tax offset of up to $500, which is provided to super funds Available for individuals with adjusted taxable income under $37,000 Amount of LISTO is based upon concessional contributions Replaces low income super contribution LISC will continue to be abolished on 30 June 2017

34 Increase in personal income tax threshold Increase in income threshold which attracts 32% tax from 80,000 to 87,000 from 1 July 2016

35 Other Measures Small business tax rate reduced to 27.5% (from 1 July 2016) for companies with turnover of less than $10 million Staggered cuts to larger companies so that by 1 July 2023, corporate tax rate would be 27.5% and by 1 July 2026, further reduced to 25% Medical reviews for some DSP recipients Ceasing Carbon Tax compensation for new recipients after 20 September 2016

36 Thank you If you have any questions please contact us The information provided in this document, including any tax information, is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out. Millennium 3 Financial Services Pty Ltd ABN , AFSL