If you own a small business, will a reduction in your tax rate really help you retire with success? This is what Treasurer Scott Morrison would want you to believe.
With an election looming, will people who don’t own a business benefit or suffer? There are significant changes to superannuation in the 2016 budget with annual concessional caps being lowered, and high income earners facing higher contributions tax.
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Here are the more significant changes from the 2016 budget.
Tax Wins for You
A Reduction In The Company Tax Rate
A reduction in the company tax rate from 30% to 25% will be phased in over 10 years. The corporate tax rate for small businesses, that turnover less than 2 million, is currently 28.5% (since 1 July 2015). By reducing this rate, the disparity increases between the corporate rate and the highest individual marginal tax rate, which is currently 49%.
If you are a small to medium business owner, tax savings may lead to increased capital to re-invest into your business, or in other areas. One such area is your Superannuation, where the money can be used to fund your retirement. The reduction will be phased in incrementally based on the aggregated turnover of the business.
The $20,000 instant asset tax write-off has been extended
In last year’s federal budget, one of the biggest wins was, the instant asset write-off of any assets up to $20,000, which cannot be immediately deducted.
The time frame has been extended until the end of June 2017 and now includes businesses with a turnover of up to $10 million from $2 million. If you own a small business, you will be able to immediately start deducting assets costing less than $20,000, between 1 July 2016 and 30 June 2017.
The $20,000 threshold will change back to $1,000 from 1 July 2017.
Sole Trader’s/ Partnerships Can Save Tax Too.
If you are a sole trader or partnership and have turnover of less than $5 million, you may be able to access an increased tax discount of up to $1,000 from 1 July 2016. This will be delivered as a tax credit in their tax return. The current tax discount for business income, will be increased over 10 years from 5% to 16% on your marginal tax rate. Refer to the attached spreadsheet for further details.
A Tax break for Middle Income Earners
If your income is greater than $80,000, your tax rate is 37 cents in the dollar. As of the 1st of July 2016, the tax bracket will increase to $87,000. This effectively could mean a saving of around $315 per tax year.
The higher income cut-ins means tax payable will be reduced from 37 cents to 32.5 cent. Unfortunately if your income is below $80,000 there is no benefit.
Is the government helping with your Superannuation?
In the past, we have reported studies showing that 94% of people will be reliant on the government in retirement and discussed the concept of salary sacrificing into super is generally a financial sound idea. Clients also got the benefit of being able to do that without being taxed at a higher rate.
The government are proposing some positive and negative changes.
Catch-up On Concessional Contributions
If your balance in your superannuation is below $500,000, you will be able to carry forward previously unused amounts of the concessional cap into the financial year. Refer to the below spread sheet for further details.
This initiative will go some way to help clients, particularly women, who on average have lower balances to retire on due to the time out of the workforce. (You can check out the article we wrote on this subject here). This will allow individuals with fluctuating work patterns to make additional concessional contributions. An example of this is Sue contributes $20,000 in the 2016/17 financial year. As a result, she will be able to make an additional $5,000 contribution, on top of the $25,000 contribution cap in the 2017/18 year.
This initiative, should it pass through parliament, will begin on the 1 July 2017. The unused amounts can be carried forward on a rolling basis for a period of five (5) consecutive years. It must be emphasised, this will only apply to amounts accrued from 1 July 2017.
Reduction in the Overall Contributions
In the past, if you are under 49 years old you can make up to $30,000 in concessional contributions extra into super per annum and up to $35,000 for individuals 49 Years Old and over.
As of the 1 July 2017, you will only be allowed to contribute up to $25,000 per financial year without penalty or extra tax. When you make after tax contributions into Super, as long as it is still within the cap of $25,000, you will be able to claim a tax deduction for these personal superannuation contributions, regardless of your employment circumstances. After tax or non-concessional contributions, will be capped up to $500,000 over a person’s lifetime. This applies to individuals up to the age of 75 and will be applied from 1 July 2017, should it be passed as a law.
How are our younger generation supposed to survive?
Are the government in touch with reality?
In the current arrangement the government are capping the amount of after-tax contributions a person can make. If you have been contributing extra amounts already (on top of the concessional cap), on or after 1 July 2007, all after tax contributions will count toward the $500,000 lifetime cap. Any amount of super contributed in after tax salary before the 1 July 2007, will not be counted.
The government are allowing individuals to receive their extra contributions back who have exceeded this cap. If you don’t take action to get the refund , then you will incur penalty tax. This lifetime cap is in force now as at 7.30pm on 3 May 2016 for all individuals under age 75.
This change could mean that there will be more people reliant on the government in retirementas the opportunities to contribute to super are being further restricted. Currently as per the article printed in May 2015, 94% of people are in some form reliant on the government in retirement. Anyone who is over 60 or whose income is at the lower tax bracket is probably not affected by this arrangement, however anyone who is trying to retire comfortably is now restricted, especially if you are trying to catch up on super contributions leading up to your retirement.
Employers Beware- You and Your employers Superannuation Cap.
An employer has no obligation to pay anything above the maximum Superannuation Guarantee contribution. This is an amount of $18,783.40 or 9.5% of a salary of $197,720. This means if your salary is higher, an employer has not obligation to pay more. However with the super concessional cap at $25,000 per annum, employers and employees need to be aware not to exceed this cap. It is important to seek advice and use a financial planner to ensure this is maintained and monitored. If it is not, you could be penalised at the highest tax rate.
A Break for those whose income is below $37,000?
Any clients whose incomes is less than $37,000 p.a, who make concessional contributions towards super are normally tax at 15% within the super fund. Up to a maximum of $3,333, this will be now tax free and paid back as a tax rebate in the tax return automatically by the ATO in the 2017/2018 year.
An Example is, Linda is a part-time worker who earns $20,000 in the 2017/18 financial year. Her employer makes compulsory Super payments of 9.5% which is $1,900 per year. The $1,900 amount will be taxed at 15% which is $285. At the end of the year, Linda pays no tax in the super fund and receives a Low Income Super Tax Offset of $285 in her tax returns.
Transition to Retirement tax savings to be scrapped!
If you are drawing down a pension, the earnings within your superannuation (in pension phase) are not taxed. This is going to be scrapped and as of the 1 July 2017 for Transition To Retirement and Non-Commutable Allocated Pensions.
Despite the proposed changes, Transition to Retirement strategies can still help you build higher retirement assets especially if you are over 60. It is important to speak to one of our team now to see if this strategy will continue to assist you maximise retirement savings.
No Change to Negative gearing benefits
Despite the Labor party’s proposal regarding negative gearing, the Government has decided not to make any changes in this area.
We hope the information shared in this budget newsletter helps with your superannuation and tax efficiency. If it is important to you to retire with success, why not make contact with us. Getting started will give you Peace of Mind. Simply contact us today on 03 9848 5933.
This newsletter is distributed to provide information of a general nature only. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their adviser for advice on specific matters.