The 2020 Federal Budget (postponed from May), has been characterised by spending and bringing forward tax cuts to get the economy moving again. Make no mistake, the numbers are big! However, COVID has been seen as a great a threat to the global economy has faced in a very long time (many suggest since The Great Depression), and so requires equally strong and unprecedented measures.
The Treasurer, Josh Freydenberg has said that once the economy recovers and unemployment falls comfortably below 6%, he will then look to tackle the deficit. This is forecast to be in 2023-2024.
Unlike other budgets where we find major changes to superannuation requiring more strategic assessment and planning, this budget is relatively straight forward.
Personal tax cuts have been brought forward 2 years. This means many of you earning over $50,000 pa will have at least an additional $41 per week in your pockets. This will be back dated to 1st July 2020.
Further support for pensioners, low income earners and job seekers. This includes two cash payments and incentives for employers to hire unemployed workers.
Making it easier to choose a super fund. There will be an interactive online comparison to assist you in making a decision on where to invest your super, as well as making it easier to have your new employer contribute to your existing fund.
First home buyer purchase caps lifted to assist an additional 10,000 first home buyers.
Business tax changes for small business including immediate tax write-off, and applying tax losses from 2019 – 2022 against previously taxed profits.
Increased business investment with $1.3bn for initiatives in ‘modern manufacturing’ and $5.7bn for new and accelerated infrastructure projects.
The attached article provides a comprehensive summary from Westpac Economics.
Scott Morrison’s first federal budget has seen the biggest changes to the superannuation system since Peter Costello’s ‘Simpler Super’ package announced in the 2006/2007 budget.
This budget is somewhat of a mixed bag, with changes targeting higher income earners and superfunds with larger balances. Improvements have been made to reduce red tape, while superannuation tax concessions have been tightened and new caps introduced.
The significant changes include:
$1.6m limit on assets in retirement phase that will receive tax-free earnings.
A lifetime limit of $500,000 for non-concessional (after-tax) contributions.
No work test for super contributions up to 74 years of age.
A reduction in concessional (pre-tax) caps for all taxpayers to $25,000 and removal of the ‘10% rule’.
A reduction in the income threshold from $300,000 to $250,000 from which an extra 15% tax applies on concessional contributions.
Transition to Retirement income streams will no longer receive tax free earnings.
Anti-detriment payments will be abolished.
$1.6m superannuation transfer cap
From 1 July 2017, the Government has proposed limiting the amount of superannuation that can be transferred to the retirement phase (i.e. an Account Based Pension) to $1.6m per person. Any earnings on the $1.6m cap will not be restricted. Amounts in excess of the $1.6m will remain in the superannuation accumulation phase incurring a concessional tax rate of 15%.
Those members already in the pension phase and with a balance greater than $1.6m will be required to reduce their retirement pension balances to $1.6m by 1 July 2017. The surplus amount will sit in the accumulation phase.
SW view: With the Labour party talking about taxing earnings above $75,000 in pension accounts, this is actually a much easier way to administer the reduction in tax concessions for pension accounts. With a couple being able to hold $3.2m in the pension phase generating tax free earnings, with any surplus being tax at only 15%, we believe it is a reasonable measure.
$500,000 lifetime cap for non-concessional contributions and work test
The $500,000 non-concessional lifetime cap will replace the current annual cap of $180,000 or $540,000 3 year brought forward provisions. This will apply from the time the budget was handed down, that is 3 May 2016 and will include all non-concessional contributions made from 1 July 2007.
From 1 July 2017, the new cap will allow members up to age 74 to make non-concessional contributions.
SW view: While we welcome the ability for those up to 74 years of age to contribute to superannuation without needing to satisfy a work test, the $500,000 lifetime cap is low. When you consider many Australians do not have the ability to make a substantial non-concessional super contribution until their later years, there may not be sufficient time to generate earnings to reach the $1.6m pension cap.
Reducing the concessional contribution cap to $25,000 for all Australians and removal of the ‘10% rule’
From 1 July 2017, the government wants to lower the concessional contributions cap to $25,000. For those with superannuation balances below $500,000, the government has proposed allowing the carry forward of unused concessional contributions cap for a rolling five year period from 1 July 2017.
The removal of the 10% rule essentially means you can make a contribution to super and claim a personal tax deduction for it (up to the cap) as long as you are under 75 years of age.
The existing caps of $30,000 for those under 50, and $35,000 for those over 50 years of age will be retained for 2016/2017.
SW view: It’s important that those who are in a position to maximize these contributions for the 2015/2016 and 2016/2017 financial years do so. This, coupled with the $500,000 non-concessional caps, means it is increasingly important to start a superannuation contribution plan as early as you can.
The removal of the ‘10% rule’ simplifies the system somewhat. This is particularly so for those who will not know how much they have contributed until late in the financial year.
Taxation of concessional superannuation contributions for those earning more than $250,000.
Currently, those who earn over $300,000 in taxable income plus superannuation contribution are required to pay an additional 15% contribution tax on their concessional super contributions, taking the total rate to 30%. From 1 July 2017, that income threshold will be reduced to $250,000.
SW view: Given the caps on concessional contributions have been reduced, this looks like a bit of a double whammy for higher income earners. However, we don’t expect this to reduce the level of concessional contributions made by those affected.
Transition to Retirement income streams will no longer receive tax free earnings
From 1 July 2017, it is proposed the tax exempt status of assets supporting a transition to retirement (TTR) pension will be removed. These assets will be taxed at the superannuation accumulation rate of 15%. This will apply to all TTR pensions, regardless of when they commenced.
SW view: The removal of the tax free status on earnings had been flagged, so it comes as no surprise. While TTR pensions will continue to exist, depending on an individual’s cash flow situation, they may become less popular going forward.
Anti-detriment payments will be abolished.
From 1 July 2017, the anti-detriment provision will be removed.
SW view: This was expected as Scott Morrison had previously flagged that it was one of the only taxes in the world whereby the deceased qualified for a refund of previously paid taxes.
Overall the federal budget contained few surprises given many of the revenue changes had been announced by the government over the past few weeks.
Interestingly, in a positive for equity markets, much of the impact of the cuts is not expected to be felt for a few years. Net savings measures in 2014/2015 are projected to be $1.7bn, increasing to $5.9bn (0.4% of GDP) in 2015/2016 and $10.4bn (0.6% of GDP) in 2016/2017.
This seems to be an acknowledgement that the economy is in the initial stages of a recovery that requires some more time to gain momentum.
The main policy initiatives that may be relevant to you include:
Personal Taxation
Temporary Budget Repair Levy of 2% for 3 years from 1 July 2014 on incomes over $180,000
Medicare Levy thresholds increased for 2013/2014
Several tax offsets to be abolished
Pensions
Age Pension increases to 67 in 2023 and 70 in 2035
Age Pension to be indexed to CPI rather than wages
Welfare
Family Tax Benefit (FTB) freeze on rates and tighter eligibility for FTB B
Medicare
$7 co-payment for 70% of existing services (i.e. GP, pathology, imaging)
Superannuation
Ability to withdraw excess non-concessional contributions without incurring a penalty. Currently excess contributions are taxed at 46.5%
Superannuation guarantee rate will rise to 9.5% on 1 July 2014 where it will remain until 2018, and then increase 0.5% each year until it reaches 12%
Other Changes
Fuel excise indexation to be reintroduced from 1 August 2014
The following summary of key budget announcements was prepared by Westpac
