Author: Admin

Receptionist extraordinaire!

THE 123 OF SBEs

WHAT IS AN SBE?

SBEs can include companies, partnerships, trusts or sole traders. To qualify as an SBE the following two criteria must be met:

1. CARRYING ON A BUSINESS
To be an SBE you must in the first place be carrying on a business. The long-standing ATO tax ruling in this area is Taxation Ruling Tr 97/11 which contains the following series of factors that may indicate that a business is indeed being carried on:
  • There is a significant commercial purpose or character
  • There is more than a mere intention to engage in business
  • There is a repetition and regularity to your activities – and some genuine time spent on the activity
  • The business is carried on in a similar way to others within the same industry
  • There is organisation to your activity
  • There is size and scale to the activity
  • It is not a hobby or a form of recreation

Leaving aside the tax concessions on offer, carrying on a business (as distinct from a hobby) brings with it a range of tax obligations. If you are in any doubt as to whether your are indeed carrying on a business you should consult your Accountant.

2. TURNOVER <$2 MILLION
If you are carrying on a business, you will be an SBE if your aggregated annual business turnover (i.e. gross profit) is less than $2 million. This includes the turnover of:
  • Connected entities – an entity is connected with another entity if: either entity controls the other, OR Both entities are controlled by the same third entity.
  • Affiliates – an affiliate is any individual or company that, in relation to business affairs, acts or could reasonably be expected to act: According to your directions or wishes, OR In concert with you.
The aggregation rules ensnare quite a number of related businesses – requiring them to add their annual turnover together and as a result potentially take them over the $2 million threshold. If you are in any doubt as to the application of these rules, talk to your Accountant.

THRESHOLD
The $2 million turnover threshold is absolute. If it is exceeded by even $1, your business will be ineligible for many SBE concessions on offer (some detailed later). If your business’s turnover is around $2 million, it’s worth keeping a close eye on it at financial year-end. While we do not suggest that, you avoid growing your business just to stay under the threshold, if your turnover is nearing the threshold at financial year-end, it certainly pays to stay under that threshold from a tax perspective –  perhaps by deferring year-end invoicing where practical to the following financial year (post 30 June).

We now examine some of the SBE concessions available – 


IMMEDIATE DEDUCTIONS FOR PREPAID EXPENSES

As an SBE you can claim an immediate deduction for certain prepaid business expenses where either of the following 2 conditions is met:
1.  The payment is for a period that is 12 months or less and ends on or before the last day of the income year in which the expense is incurred, or
2.  The prepaid expense is “excluded expenditure” which is defined as expenditure that is:

  • Less than $1,000 (GST-exclusive) or 
  • Prepayments that are required to be made under a law or by court order under the Commonwealth, State, or Territory (e.g. car registration, workers compensation, etc) or 
  • Made under a contract of service (e.g. salary and wages).

EXAMPLE
In May 2016, Bruce’s business prepays $2,000 for an advertisement to be run in the local newspaper every fortnight for six months from May until November.

NON SBE
If Bruce’s business was not an SBE (i.e. had a turnover of $2 million or more) and the prepayment was for $1,000 or more, the deductions must be apportioned over the periods to which they relate.  Therefore only two months’ worth of deductions (for May and June) could be claimed in 2015/2016.  The remainder must be claimed in 2016/2017 being the period to which they relate.


SBE
If Bruce’s business is an SBE, then because the period for which the payment relates is for 12 months or less and ends before the conclusion of the following income year (2016/2017), Bruce can claim the entire $2,000 prepayment as a tax deduction in the 2015/2016 tax return.  This is irrespective of the fact that the amount exceeds $1,000.  This outcome reduces Bruce’s taxable income for the year, resulting in less tax and a consequent cash-flow benefit.


Assume instead that the above $2,000 amount was for vehicle registration for a vehicle used exclusively in the business.  Although the amount is for more than $1,000 and covers more than one income year, there is no requirement to apportion the payment.  It can all be claimed in 2015/2016 as it is required to be paid under State Government law.

The prepaid expenditure concession provides SBEs with cash-flow relief by enabling them to bring forward deductions that would otherwise be apportioned over two income years.  Examples of business expenditure items that you may wish to prepay include rent, insurance, repairs to business assets, subscriptions, business trips, seminars and conference bookings, leases, deductible car registration fees, and telephone and internet services.

TRADING STOCK RELIEF

Conducting a stock-take usually involves physically counting your stock and valuing each item.  This can be a time-consuming process.  Rather than conduct an end-of-year stock-take in order to account for changes in the value of your trading stock, as an SBE you can elect not to conduct a stock-take where there is a difference of $5,000 or less between:

  • The value of your stock on hand at the start of the income year and
  • A reasonable estimate of the value of your stock on hand at the end of the income year.

TAX TIP
An increase in your trading stock’s value over the year is assessable income, while a decrease is an allowable deduction.  It follows that where there has been a decrease, you may wish to ignore this SBE option of not conducting a year-end stocktake (to not conduct a stocktake in such circumstances would be to deny your business a year-end deduction).

INSTANT ASSET WRITE-OFF

2016/2017 is the final year for SBEs to take advantage of the $20,000 instant asset write-off and provide your business with cash-flow relief.  Until 30 June 2017, SBEs can claim an immediate write-off for most depreciating assets used in their business if the asset cost less than $20,000.

TIME REQUIREMENTS
Being in its final year of operation the timing requirements around the instant asset write-off are important.

To claim a deduction in 2016/2017, the asset must be first acquired from 1 July 2016 and first used or installed ready for use in your business on or before 30 June 2017.

Assets acquired before 1 July 2016, but first used or installed ready for use between 1 July 2016 and 30 June 2017 are also claimable in full in 2016/2017.

If you miss the deadline (i.e. if the asset is not being used in your business or installed ready for use on or before 30 June 2017) then the write-off threshold reverts to $1,000.  Missing the deadline will result in a worse cash-flow outcome for your business than if the deadline is met (see later example).

Assets costing $20,000 or over are depreciable at a rate of 15% in the first year, and then 30% in subsequent years.

CASE STUDY: CASH-FLOW BENEFIT
An eligible SBE company purchases an eligible asset for $19,999 on 2 July 2017.  As the asset is not purchased and installed ready for use on or before 30 June 2017 the instant write-off threshold is only $1,000.  As this asset exceeds this threshold the standard pooling rules apply.  The asset will be written off at 15% in the first year of 2017/2018 ($3,000) and 30% in subsequent years.  The real benefit (i.e. the effect of the tax deduction in dollar terms) the company would receive from these depreciation claims is $855 for the first year (assuming a 28.5% small company tax rate) and $1,453 in the second year (assuming a small business company tax rate of 28.5%).  The company would continue to depreciate its general pool at 30% until the pool was under $1,000, at which point the entire pool could be written-off (after approximately 9 years).
By contract, if the purchase of the asset was brought forward a few days and the asset was used or installed ready for use on or before 30 June 2017 under the $20,000 threshold, the company would be able to immediately deduct the entire $19,999 in the first income year (2016/2017).  The real benefit (i.e. the effect of the tax deduction in dollar terms) the company would receive from this is $5,699 in the first year ($4,844 more than under the old rules – i.e. the benefit is brought forward rather than spread out and therefore assists the company’s cash-flow). 
The company is then free to apply this brought-forward cash immediately (e.g. pay off debt or re-invest in the business etc).  In the second income year, there is no further depreciation of this asset as it has been written-off completely.  This means that the company is paying more tax in the second year relative to the earlier scenario (but no more and no less tax overall).
This Case Study illustrates the importance of meeting the 30 June 2017 deadline this financial year.  After this date, the write-off threshold reverts back to $1,000.

ASSET ELIGIBILITY
Having determined that a business is eligible, the asset itself must be eligible for the write-off.  Basically, all depreciable assets (including second-hand assets) used in a business are eligible for the $20,000 write-off – including motor vehicles, furniture, computer equipment, machinery etc.  The following assets are however, specifically excluded from the write-off as they have their own unique depreciation treatment:

  • Horticultural plants
  • Buildings (these are dealt with under the Capital Works provisions)
  • Primary production assets for which an entity has chosen to use the Uniform Capital Allowance (UCA) depreciation rules rather than the small business depreciation rules, and
  • Assets leased out to another party on a depreciating asset lease.
Financed assets are also eligible.  Assets that are the subject of a commercial loan, chattel mortgage or hire purchase would all qualify.  Assets that are the subject of a lease however do not qualify for the write-off due to the fact that the ownership of the asset under lease remains with the finance company.

SBEs can access this instant asset write-off concession simply by claiming the write-off on the business’s return (or your personal return if you are a sole trader).

SIMPLIFIED PAYG INSTALMENTS

SBEs that report and pay PAYG instalments quarterly can elect to pay instalment amounts worked out for them by the ATO (known as ‘Option 1’).  This ATO fixed dollar amount is then printed on your quarterly Activity Statement at label T7 or your instalment notice.  Adopting this option can save you time in working out the instalment amount you need to pay.  It also removes the risk of under or over estimating PAYG instalments and the resulting penalties that may be applied by the ATO.

You can choose this option in your first quarter of the income year (typically, this is the Activity Statement or instalment notice due in October).  Once chosen, this option applies for the whole of the income year.

TAX TIP
Where you elect to pay using Option 1, you are still permitted to vary the ATO instalment amount if your current year business or investment income is trending less than last year.  This may be the case where for example:

1. You are downsizing
2.  You are experiencing reduced sales compared to last year
3.  Your expenses have increased from last year.

In making a downwards variation, be aware that penalties may apply if your variation results in you, or your business, paying an amount that is less than 85% of the actual tax payable on your business and investment income for the financial year.  Therefore, before you make a variation, consult your Accountant.

SIMPLIFIED GST INSTALMENTS

In a similar vein, SBEs may be eligible to pay their GST liability on an amount worked out for them by the ATO – therefore, decreasing administration time for your business.  The ATO will notify you of your eligibility on your business’ first quarterly Activity Statement for the year (generally the September quarterly Statement).  If you choose to use this method you must inform the ATO by selecting this option on that Activity Statement.  Generally, your business will be eligible where your business:

  • Is a SBE (see earlier criteria, and note the proposed increase in the turnover threshold to $10 million)
  • Is not required to lodge your Activity Statements on a monthly basis and have not elected to do so
  • Has a current lodgement record of at least 4 months
  • Is not in a net refund position.

Note that even if you are eligible, your election can be disallowed if your business has a history of failing to comply with your tax obligations.  The benefit of this concession is that it saves you time in working out the instalment amount you need to pay.  It also removes the risk of under or over estimating your GST instalments and the resulting penalties that may be applied by the ATO.

THE 123 OF SBE’S

BACKGROUND
Aside from company tax cuts, one of the major pro-business policies that the Government took to the 2016 Federal Election was to increase the Small Business Entity (SBE) turnover eligibility threshold from $2 million to $10 million effective 1 July 2016 (and therefore proposed to apply in the current financial year).  Treasury estimates that this increase to the threshold would result in an additional 90,000 to 100,000 businesses being eligible for the SBE concessions.  Promisingly for business, the Australian Greens party and the Nick Xenophon Team party have announced that they support this change.  This greatly increases the prospects that it will pass through the Senate and into law once the Federal Parliament reconvenes.  If legislated, this reform will pave the way for access to the following array of SBE concessions for businesses with a turnover of under $10 million (which businesses with a turnover of $2 million already enjoy):

  • The 27.5% company tax rate as at 1 July 2016

  • The simplified depreciation rules, including immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017

  • The simplified trading stock rules, which give businesses the option to avoid a financial year-end stocktake if the value of their stock has changed by less than $5,000 during the year

  • A simplified method of paying PAYG instalments which will be calculated by the ATO

  • The option to account for GST on a cash basis and pay GST instalments as calculated by the ATO

  • Immediate deductibility  for various start-up costs (e.g. professional fees and government charges)

  • A 12-month prepayment rule; and

  • The more generous FBT extemption for work-related portable electronic devices.


The increased turnover threshold will not however apply for the purposes of accessing the CGT Small Business Concessions.  The current access rules will continue to apply whereby your business’s aggregated turnover must be less than $2 million or alternatively, the net value of your assets must be less than $6 million just before the relevant CGT event (e.g. sale). Furthermore, it is not yet clear whether the increased turnover threshold of $10 million will apply to the new income tax and CGT exemption for genuine SBE restructures.

WHAT IS AN SBE?
SBEs can include companies, partnerships, trusts or sole traders.  To qualify as an SBE the following two criteria must be met:

1.  CARRYING ON A BUSINESS
To be an SBE you must in the first place be carrying on a business.  The long-standing ATO tax ruling in this area is Taxation Ruling TR 97/11 which contains the following series of factors that may indicate that a business activity is indeed being carried on:

  • There is a significant commercial purpose or character

  • There is more than a mere intention to engage in business

  • There is an intention to make a profit and a realistic prospect that a profit will be made

  • There is a repetition and regularity to your activities – and some genuine time spent on the activity

  • The business is carried on in a similar way to others within the same industry

  • There is organisation to your activity

  • There is size and scale to the activity

  • It is not a hobby or a form of recreation.


Leaving aside the tax concession on offer, carrying on a business (as distinct from a hobby) brings with it a range of tax obligations.  If you are in any doubt as to whether you are indeed carrying on a business you should consult your Accountant.

2.  TURNOVER LESS THAN $2 MILLION
If you are carrying on a business, you will be an SBE if your aggregated annual business turnover (i.e. gross profit) is less than $2 million.  This includes the turnover of:

  • Connected entities – an entity is connected with another entity if:
  • Either entity controls the other, or

  • Both entities are controlled by the same third entity.


  • Affiliates – an affiliate is any individual or company that, in relation to business affairs, acts or could reasonably be expected to act:
  • According to your directions or wishes, or

  • In concert with you.


The aggregation rules ensnare quite a number of related businesses – requiring them to add their annual turnover together and as a result potentially take them over the $2 million threshold.  If you are in any doubt as to the application of these rules, talk to your Accountant.

The aggregation rules ensnare quite a number of related businesses – requiring them to add their annual turnover together and a result potentially take them over the $2 million threshold.  If you are in any doubt as to the application of these rules, talk to your Accountant.

THRESHOLD
The $2 million turnover threshold is absolute.  If it is exceeded by even $1, your business will be ineligible for the many SBE concessions on offer (detailed later).  If your business’ turnover is around $2 million, it’s worth keeping a close eye on it at financial year-end.  While we do not suggest that you avoid growing your business just to stay under the threshold, if your turnover is nearing the threshold at financial year-end, it certainly pays to stay under that threshold from a tax perspective – perhaps by deferring year-end invoicing where practical to the following financial year (post 30 June).

We now examine the SBE concessions listed earlier:

COMPANY TAX CUT
SBE companies pay a lower rate of company tax.

Currently, the SBE company tax rate is 28.5% (as opposed to 30% for non-SBE companies).  The Government is proposing to reduce the SBE company tax rate by a full percentage point to 27.5% from 1 July 2016 to apply to the new definition of SBE (all companies with a turnover of less than $10 million will therefore be eligible).

EXAMPLE
Company X has a turnover of just under $10 million and taxable income of $9 million.
In 2015/2016 the tax payable would be $2.7 million.
Assuming the Government passes its changes into law (as stated it has preliminary support of other parties in the Senate), Company X would be paying $2.475 million in tax if the turnover was the same in 2016/2017 (a saving of $225,000).

Practically speaking however, a large number of small business owners (especially those with a turnover of less than the current SBE threshold of $2 million) do not retain the profits in the company as per the above example.  Rather, many of these owners will strip the profits out of their company as franked dividends in order to live.  Where this is the case, under the proposed new law the reduced company tax payable will be negated by the reduced franking credit that the shareholder will receive.

For example, if Company X paid out the remaining post-tax earnings to its Directors as franked dividends, then the Directors would only receive a reduced 27.5% franking credit.  Assuming they were in the top marginal tax rate of 49%, they would in effect pay “top-up tax” of 21.5% (49 – 27.5) when they lodge their personal income tax return (instead of top-up tax of 19% (49-30) under the current rules.  Therefore, in real terms they would personally be no better off.  We will need to await the Explanatory Memorandum to the new law to confirm that the franking credit will equal the amount of tax paid by the company, but this appeared to be the case in the Budget Papers released back in May 2016.

OTHER GOVERNMENT INITIATIVES

While the Opposition has at the time of writing not proposed any further changes to superannuation, the Government by contrast announced a number of changes in the Federal Budget which it intends to implement if re-elected on 2 July.  It is not yet known whether the Opposition supports these changes which are as follows:


REDUCTION OF CONCESSIONAL CONTRIBUTIONS CAP

From 1 July 2017, the annual cap on concessional contributions will be reduced to $25,000 for all taxpayers (down from the current $30,000 for taxpayers under 50, and $35,000 for older taxpayers).  This change will limit the capacity to make deductible contributions to superannuation, as well as salary sacrificed contributions.  Softening the blow however, individuals with a superannuation balance less than $500,000 will be allowed to make additional “catch-up” concessional contributions where they have not reached their concessional contributions cap in previous years, with effect from 1 July 2017.  Unused cap amounts will be carried forward on a rolling basis for a period of 5 consecutive years.  Only unused amounts accrued from 1 July 2017 will be available to be carried forward.  The Government states that this measure will make it easier for people with varying capacity to save and for those with interrupted work patterns (such as women who leave the workforce to have children) to provide for retirement.

EXAMPLE

Jake is an employee accountant whose employer contributed $15,000 in Superannuation Guarantee contributions in 2017/2018.  Jake also salary sacrificed $5,000 to superannuation.  In 2018/2019, Jake’s concessional contribution cap will effectively be $30,000 (consisting of the standard $25,000 annual cap, plus the $5,000 unused cap from 2017/2018).  This will provide Jake with a greater capacity to make concessional contributions such as salary sacrifice in 2018/2019 than would otherwise by the case.

If the concessional contributions gap is reduced, employees may need to review salary sacrifice arrangements that are in place at the end of 2016/2017 to ensure that you do not exceed the new, reduced cap from 1 July 2017.

LIFETIME NON-CONCESSIONAL CONTRIBUTIONS CAP

Effective 3 May 2016, if the Government is re-elected the non-concessional (after-tax) contributions cap will become a lifetime cap of $500,000, rather than the current annual cap of $180,000. This new cap will be retrospective by taking into account all non-concessional contributions made on or after 1 July 2007. Contributions made before the commencement date of 3 May 2016 cannot result in an excess over the lifetime cap.  However, excess non-concessional contributions made after 3 May 2016 will need to be removed or will be subject to penalty tax.  Going forward, the lifetime cap will be indexed to average weekly ordinary time earnings.

To recap, non-concessional contributions (also commonly referred to as an after-tax contribution) include:
  • Personal contributions for which an income tax deduction cannot be claimed as you fail the ‘10% rule’
  • Contributions made for you by your spouse
  • Contributions in excess of your CGT Cap Amount for small business owners
  • Amounts transferred from foreign superannuation funds, excluding amounts included in the fund’s assessable income, and
  • Contributions made for the benefit of a person under 18 years of age that are not employer contributions for that person.

IMPACT

This change limits the amount of after-tax savings that can be contributed into the concessionally taxed superannuation environment, and is retrospective in that it takes into account non-concessional amounts that have been contributed since 1 July 2007.  This reform will not only impact high income earners but also those who have significant one-off windfalls that they wish to contribute to superannuation such as the sale proceeds of capital assets, or inheritances.
This lifetime cap may also limit the ability of taxpayers to undertake re-contribution strategies, whereby you convert a superannuation interest from a taxable component to a tax-free component.  For more information on re-contribution strategies see our 2013 Superannuation Tax Savers publication available at our website www.mytaxsavers.com.au.

DEDUCTIONS FOR ALL! 

From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.  Currently, only those who receive little or no employer superannuation contributions can claim a deduction such as if:
  • You run your own business, but were not an employee of the business (e.g. you are a Sole Trader or a Partner in a Partnership)
  • You are under the age of 65 (that is, you are eligible to contribute to superannuation) and receiving pension or investment income only
  • You are a contractor who is not eligible for Superannuation Guarantee from the organisations that you contract to
  • You only received workers’ compensation payments during the year
  • You are a non-working spouse/individual
  • You are an employee for only a small part of the year
This change is good news for the many employees who wish to make contributions to superannuation but whose employers do not offer salary sacrifice.  By making an after-tax superannuation contribution, employees (and all individuals under the age of 75) will be able to reduce their income tax liability while providing for their retirement.

‘WORK TEST’ ABOLISHED

The current restrictions on people aged 65 to 74 from making superannuation contributions will be removed from 1 July 2017.Currently, if people in this age bracket wish to make personal contributions to superannuation they must meet a ‘work-test’ which requires them to have worked for at least 40 hours over 30 consecutive days in the financial year.  This change is therefore good news for older taxpayers who do not meet the current ‘work-test’ but who wish to inject money into the occasionally taxed superannuation environment.

LOW INCOME SUPER TAX OFFSET

From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO).  Its purpose is to reduce tax on the superannuation contributions made by or on behalf of low income earners.  The LISTO is a non-refundable tax offset provided to your superannuation account (not you personally) based on the tax paid on the concessional contributions of low income earners up to a cap of $500.The LISTO will apply to taxpayers with an adjustable taxable income of up to $37,000 that have had concessional contributions made on their behalf (i.e. Superannuation Guarantee contributions by their employer).  The LISTO will replace the current Low Income Superannuation Contribution (LISC) which is a very similar regime.  In effect, the LISTO will ensure that low income earners do not pay more tax on their superannuation contributions than on their take-home pay.  In terms of administration, the ATO will determine your eligibility for the LISTO and will advise your superannuation fund annually.

EXAMPLE

Chase is a part-time university tutor.  In 2017/2018 he earned $35,000 and his employer made contributions of $3,325 on his behalf.  Chase is eligible for the LISTO.  He will receive $498.75 of LISTO in his account.  Chase would have received the same amount under the LISC regime.

TRANSITION TO RETIREMENT CRACKDOWN

The Government intends to remove the tax exemption that currently applies on earnings on pension assets that support Transition to Retirement Income Streams/Pensions.  Earnings from assets supporting these Income Streams/Pensions will be taxed at 15% (currently they are tax-free).  This change will apply from 1 July 2017, irrespective of when your Transition to Retirement Income Stream/Pension commenced.  To be clear, for those under 60 if your pension is paid from a taxed source, you will still receive a tax offset equal to 15% of the taxable part of the income stream.  Those 60 and over will still receive their income stream tax-free.  It’s just that earnings supporting the income stream for both under 60s and over 60s will be taxed at 15%.

EXAMPLE

Ken is 58 years of age, earns $100,000 and has $440,000 in his superannuation account.  He pays income tax on his salary and his superannuation funds pays $3,750 at 15% on the superannuation earnings of $25,000.Nearing retirement, Ken wishes to reduce his working hours by 15% and has a corresponding reduction in his salary down to $85,000.  So as to have no reduction in his current lifestyle, he commences a Transition to Retirement Pension for $15,000 per year.Currently, although Ken pays income tax at his current marginal rate on the pension (less a 15% tax offset) his superannuation fund pays no tax on the earnings on his superannuation account.Under the new law from 1 July 2017, the earnings on his superannuation will be taxed at 15% as he is receiving a Transition to Retirement Pension.While this measure makes the Transition to Retirement strategy less attractive, the concessional rate of 15% tax on earnings still compares favourably to the marginal tax rates that may apply on earnings outside of superannuation.  Additionally, as stated, the 15% tax offset on Transition to Retirement amounts received by people under the age of 60 will remain, as will the tax-free treatment of those amounts for those aged 60 and over.

LOW INCOME SPOUSE SUPER CONTRIBUTION EXTENDED

From 1 July 2017, if it is re-elected the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income earning spouse to $37,000 (up from $10,800).  The offset will gradually reduce for incomes above $37,000, before phasing out completely for incomes above $40,000.
To recap, this offset provides up to $540 each year for the contributing spouse.,br>

EXAMPLE

David earns $38,000 per year.  His wife Bobby wants to make a superannuation contribution on his behalf.Under the current rules, Bobby would not be entitled to a tax offset as David’s income exceeds $10,800.  Therefore there is no tax incentive for Bobby to make a contribution on behalf of her spouse.Under the new proposed law, Bobby would be eligible for a tax offset as David’s income is below $40,000.  However, as David earns more than $37,000, Bobby will not receive the maximum $540 tax offset.  Rather, the offset will be 18% of the lesser of:
  • $3,000 reduced by every dollar over $37,000 that David earns, or
  • The value of the spouse contributions made by Bobby.

RETIREMENT INCOME PRODUCTS – TAX EXEMPTION

From 1 July 2017, if re-elected the Government will remove the tax barriers to the development of new retirement income products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products.     

THE SUPER NEW LANDSCAPE

ADDITIONAL TAX ON CONCESSIONAL SUPER CONTRIBUTIONS OF HIGH INCOME EARNERSBoth the Opposition and the Government if elected will reduce the income threshold above which the additional 15% “Division 293 tax” cuts in for concessional superannuation contributions. The threshold will be reduced from $300,000 to $250,000 from 1 July 2017.  For those who earn below this amount, the tax on concessional contributions will remain at 15%.  To recap, concessional contributions consist of employer Superannuation Guarantee contributions, salary sacrifice contributions, and after-tax contributions for which you can claim a deduction under the “10% Rule”.  The $300,000 / $250,000 income threshold consists of:
  • Taxable income
  • Total reportable fringe benefit amounts
  • Net financial investment losses
  • Net rental property losses
  • Net amount on which family trust distributions tax has been paid
  • Concessional superannuation contributions made within the concessional contributions cap for the financial year.
Note that if an individual’s income excluding their concessional contributions is less than the threshold but the inclusion of their concessional contributions pushes them over the threshold, the extra 15% tax will only apply to the part of the contributions that are in excess of the threshold.EXAMPLEGrace has Division 293 income of $240,000, and has made concessional contributions of $20,000.2015/2016 AND 2016/2017As her Division 293 income plus concessional contributions is below $300,000, Grace’s concessional contributions will be taxed at 15% (payable by her superannuation account in the year that the contributions are made).2017/2018 ONWARDSAs her Division 293 income plus concessional contributions is above the new threshold of $250,000, Grace is liable for an additional 15% tax (30% in total).  The 30% tax will be applied to the $10,000 concessional contributions above the $250,000 threshold.  The total superannuation contributions tax will be $4,500.$1,500 (15% x the $10,000 below the $250,000 threshold) plus$3,000 (30% x $10,000 above the $250,000 threshold)Although this policy has attracted significant attention in the media, the actual impact will not be widespread as only 4% of taxpayers earn above $250,000, and the lowering of the threshold will only affect an estimated 110,000, people (those who earn between $250,000 and $300,000).  Even if this tax increase makes it into law, those who salary sacrifice will still enjoy a tax benefit of up to 19 cents in the dollar on amounts that they sacrifice into superannuation.CAPPING THE AMOUNT OF TAX-FREE INCOMEAlthough they have gone about it differently, both the Government and the Opposition have announced policies to limit the amount of tax-free superannuation income that can be enjoyed in retirement.GOVERNMENTFrom 1 July 2017, the Government proposes to introduce a transfer balance cap of $1.6 million on the total amount of accumulated superannuation that an individual can transfer into a tax-free retirement account (retirement phase or pension phase).  Earnings made when your account is in the retirement phase or pension phase are tax-free.  Earnings on these balances will not be restricted.  By limiting the amount of capital to $1.6 million, this will in effect limit the amount of earnings/income that can be received tax-free when your account is in the retirement/pension phase.  This applies to existing pensions as well as future pensions.To be clear, you will still be able to have amounts in excess of $1.6 million inside superannuation, however these excess amounts must be in an accumulation phase account (where earnings are taxed at the existing concessional rate of 15%).  The $1.6 million cap will be indexed in $100,000 increments in line with the Consumer Price Index (CPI).For those of you who have accounts in the retirement phase as at 1 July 2017, if you have amounts in excess of $1.6 million you will be required to either transfer the excess back into an accumulation account, or withdraw the amount from your superannuation fund (only if you are over 60 will the withdraw be tax free – if under 60, there will be tax on the taxable component). Regarding the total cap amount of $1.6 million, once amounts are transferred into the retirement account, subsequent fluctuations due to earnings growth or pension payments will not affect the amount of the cap used.EXAMPLEBrad is 64 and retires from work and therefore meets a Condition of Release in December 2017.  He has $2.3 million in superannuation.He can transfer $1.6 million into a retirement account, the earnings on which will be tax-free.  The remaining $700,000 can sit in an accumulation account (the earnings on which will be taxed at the standard 15%).  All pension amounts received will be tax-free in Brad’s hands as he has turned 60.Alternatively, Brad can withdraw the $700,000 tax-free as he has turned 60.
STRATEGYThis proposal may allow couples to have a combined pension balance of up to $3.2 million.  However, where most of the superannuation savings are in one spouse’s name, the Government’s lifetime non-concessional superannuation cap (see later) may limit the ability to equalise account balances and maximise the combined transfer balance cap.
OPPOSITIONAlong similar lines, the Opposition if elected will tax the superannuation pensions of high-income earners.  Under their policy, from 1 July 2017 future earnings on assets supporting income streams will be tax free up to $75,000 per year for each individual.  Earnings above the $75,000 threshold will attract the same tax rate of 15% that applies to earnings in the accumulation phase.EXAMPLESusie is 63 years old, retired and she has $1.8 million in superannuation.  Susie is drawing an account-based pension, thus her account is in pension mode where her earnings are tax-free. Last year, Susie’s superannuation earned $90,000 (at a rate of 5%) which she has taken as income.  Under Labor’s proposal, Susie will pay 15% tax on earnings over $75,000.  This equates to $2,250 tax (payable out of her superannuation savings, not charged to her personally) which reduces her after-tax earnings to $87,750.
IMPACTBoth the Government’s and Opposition’s policy again will not have a widespread impact as only 60,000 people are estimated to be impacted under either policy (those who have account balances in excess of $1.6 million).  Even for those who are impacted, the maximum rate on earnings (15%) is more attractive than the individual marginal tax rates that may apply to earnings on investments made outside of superannuation.
 

TAX TIP

The Federal Budget and Bringing Forward DeductionsIn this week’s Federal Budget the Government reduced personal income taxes by increasing the taxable income threshold at which the 37% rate applies from $80 000 to $87 000. This has been voted on by Parliament and will apply from 1 July 2016.If you earn between $87 000 and $80 000 and have deductible expenses that are due to be paid within the next few months, by paying them before 1 July you can maximise your tax deduction.For example if you earn $85 000 and are needing to make repairs to your rental property worth $4 000, by bringing that expenditure forward to before 1 July you can increase your tax deduction by $180 as per the following example:Scenario 1  (Total tax outcome if deduction claimed in 2017) 
20162017Total Tax Paid Over Two Years
Taxable Income$85 000$81 000 
Tax Payable $21 097$19 492$40 589
 Scenario 2  (Total tax outcome if deduction brought forward and claimed in 2016) 
20162017Total Tax Paid Over Two Years
Taxable Income$81 000$85 000 
Tax Payable $19 537$20 872$40 409
   
 Tax Saving as a result of bring forward is $180  ($40 589  –  $40 409)