With the federal budget now just a week away, the rumours and “leaks” about the taxation changes seem to be achieving some consensus. We now have a reasonable idea of what some of the major proposals will be.
The four points to watch out for next week… and it’s all about super
We have detected a general theme to the proposed changes. There appears to be a political position that a certain level of super (somewhere around $500,000 to $1 million) is sufficient. Any amount above is just rorting the system.
We have summarised and explained some of the mooted changes below:
1. Higher tax on super contributions for high-income earners
At present, tax deductible contributions are generally taxed at 15%. For the past few years, there has been an extra 15% charge on top of that for those individuals earning over $300,000 a year. It seems likely that the government will bring down the threshold for the 30% tax rate to $180,000. This is also the point where the top tax rate (currently 49%) kicks in.
The rationale is that high-income earners receive a much bigger discount on tax on their super. Earning over $180,000 means your marginal rate is 49%, compared to 15% in super. That’s a 34% differential. This compares to a 19.5% discount for individuals earning between $37,000 and $80,000 with a marginal rate of 34.5%.
These speculations suggest that if you are earning over $180,000, the government thinks you will probably have enough super at retirement anyway.
We don’t expect any changes to be applied to the current year. If implemented we believe this would most likely apply from 1 July 2016.
2. Changes to super contribution caps
There has also been talk of lowering contribution caps. The current limits on money that can be put into super are as follows:
|Contribution type||Annual cap ($)|
|Concessional [before tax money] (aged under 49)||30,000|
|Concessional (aged 49 & over)||35,000|
|Non-concessional [after tax money]||180,000|
|Non-concessional if “bring-forward” rule triggered||540,000 over 3 years|
We don’t know what changes (if any) might be made to these caps. However, their existence doesn’t fit within the new superannuation shake-up theme so we consider them under threat.
More likely than not, the changes will apply from the 2016-17 year. However, the government has been known to announce changes effective from 7:30pm budget night. In particular, the bring-forward rule seems most open to tinkering with effect from 3 May, 2016.
We believe changes will happen at some point, if not next week. Again, the goal seems to be limiting member balances to be only enough for a comfortable retirement.
If you were planning to take advantage of these limits in the next two months, you might be wise to make the contribution before budget night.
3. Transition to Retirement (“TTR”) pension restrictions
At the moment, if you are over 55, you can begin withdrawing super and paying lower or no tax on this pension income. At the same time, you can continue to work and contribute before-tax dollars to your super fund.
There is a good chance the Treasurer will announce changes to these rules. He may abolish the TTR pension altogether. This could mean no new pensions commenced after budget night. Alternatively, there might be restrictions put around contributing to super while at the same time withdrawing from it.
If you have been considering a TTR pension, starting it and making the first payment before budget night might be wise.
4. What hasn’t been said
We have also thought of a few “dark horse” changes. Although we don’t expect to hear them, if they were announced next Tuesday, it would not be a complete surprise. In any event, we expect to find them on a future government’s agenda.
Currently excess franking credits (credits for tax paid by companies, passed on to their shareholders) are refundable to individuals and super funds. The biggest beneficiaries of this are self-managed superannuation funds. Removing this refund would raise tax for comparatively less pain, given that tax on super feels much less immediate for many.
Tax on pensions
The government has ruled out changing how payments from superannuation are taxed (currently they are tax-free for most people). However, they might continue to keep their tax-free treatment but count the pensions towards an individual’s taxable income. This would push them up the tax brackets when calculating the tax payable on their other taxable income.
Our Federal Budget prediction
Given our analysis, we would not be surprised to see more changes in this budget or in the coming years that target the super of high-income earners. There will generally be higher taxes and more limits on contributions to super for individuals with higher balances.
All of this means that it is time to start building the non-superannuation retirement vehicle that is not subject to the whims of the polls.
If you think you should take action based on our thoughts above, please contact Murray Howlett or our tax team on (07) 3023 1300.