The 2016 Federal Budget

This week’s technical update will cover: The 2016 Federal Budget

Tuesday nights Federal Budget ended a long-running public discussion as to whether the Government was going to act to stop Australians using generous tax concessions in the Superannuation environment to generate envious tax-free income, with the Government indeed acting to do just that.

So, do the changes impact you?

• Do you earn over $250,000 a year?
• Are you planning to contribute more than $500,000 of your post-tax savings into your Super?
• Do you have a balance of more than $1,600,000 and are you retired?

If your answer to all of the above is ‘no’, then the proposed changes to the Superannuation system won’t impact on you, in fact, the changes are mostly POSITIVE.

If you answered yes to one or more of the above, then yes, the changes will likely impact your plans.

How?
Firstly, the government has acted to cut the concessional contribution cap to $25,000 (this is what your employer contributes into your super account on your behalf).The cap was previously $30,000 for under-50s and $35,000 for over-50s.

A more radical move, the Government is also moving to impose a lifetime cap of $500,000 on all non-concessional contributions. This will limit the ability of wealthier individuals pouring large amounts into their Super in an attempt to access the tax benefits associated with the super environment.

Lastly, the Government is looking to impose a $1.6million cap on the amount of super that can be transferred into the pension account (that portion of your super that is tax free in retirement). What this means is that income in retirement derived from up to $1.6 million in super assets will be tax free. Any income derived from assets above this threshold will be taxed at 15%.It’s important to note here that the $1.6million cap is per individual – so $3.2million for a couple.

Example
A couple has $2 million in super ($1million each) and are in retirement (the pension phase). They generate 5% income from their super, so therefore draw an income stream of $100,000 collectively. As they both have less than $1.6million in super and are in the pension phase this $100,000 is completely tax free.

If the same couple had $2million each in super and earned the same 5% income on this amount, the first $80,000 each would be tax free. The additional income derived (5% on the additional $400,000 each) will be subject to 15% tax. So the entire tax bill will be 15% on $20,000, or $3,000 each. That is, they will pay only $6,000 in tax for a total combined income of $200,000!

With $6,000 in tax paid, which until yesterday was not payable, this couple was able to draw an after tax income of $194,000.

If the couple had not had these assets in super and they were held in their own name they would pay $49,894.

Super is still very sexy! 

They are $43,894 better off each year because the assets were held in the superannuation environment.

Another positive, the government has proposed changes that will make it easier for those with low balances to increase the size of their super to a figure on which they can rely on during retirement. Most notably here, the spouse tax offset will be extended to allow partners to support each other in accumulating super – the income threshold for the receiving spouse has been lifted from $10,800 to $37,000.

Other positive changes include the removal of the work test for 65-74 year olds that previously acted as an obstacle to making contributions, so if you’ve previously had troubles making contributions because of requirements under the work test, this reform has created an opportunity for you to review your ability to make contributions.

The Government has also introduced a roll-forward mechanism whereby you’re able to make up for previous concessional contributions that you’ve forgone in the last 5 years. For example, if you’ve been unemployed for 3 years and then find gainful employment, you can make concessional contributions in that fourth year up to the equivalent of $25,000 a year over that three year period (as long as you have a balance of less than $500,000).

The proposed changes will only have a negative affect on 4% of the Australian population. If you are just a hard working Australian who is looking to be self sufficient in retirement these changes work in your favour!

There are a couple of other, smaller changes that may impact you, depending on your plans. For this reason, we recommend you contact your SMSF adviser to arrange a one-on-one meeting so as you can discuss the proposed changes in full.