Budget changes update (Super, Tax, Property Investors & SMSF)

Many clients have made contact with the WAI Group team to discuss the changes from the recently announced Federal Budget, and how those changes will impact them and their SMSF.

This post is a run down of some of the more important changes to aid in your understanding.

Superannuation Changes

Under the new superannuation law, from 1 July 2017, every SMSF member is limited to $1.6 million in their pension account where the investment income is tax free. Members with amounts in excess of $1.6 million in their pension account are required to either retain the excess in the accumulation phase or withdraw the money as a lump sum benefit. Earnings accumulated in the pension account can remain if the account grows in excess of $1.6 million. If the pension account reduces due to poor investment performance, members will not be able to “top-up” their pension account back up to $1.6 million.

Things to consider

  • SMSF members with multiple pensions can choose which pension to commute. Members under the age of 60 may prefer to commute the pension with the higher taxable component to minimise the tax payable on their pension income.
  • Members also need to consider whether their pension commenced prior to 1 January 2015 so as to preserve their entitlements to the age pension and the Commonwealth Seniors Healthcare Card.
  • If withdrawing an excess amount (over the $1.6 million cap) from your SMSF, you need to weigh up the benefit of the $18,200 tax free income threshold compared to the 15% superannuation tax rate.
  • The new reduced non-concessional contributions limit (i.e. $100,000 pa) may make future contributions to your SMSF more difficult.

The transfer balance cap is indexed in increments of $100,000 in line with Consumer Price Index. If an individual has not fully utilised their transfer balance cap and chooses to transfer their funds, after an indexation increase has occurred, then the balance cap amount will be subject to a proportioning formula based on the highest balance of the member’s transfer balance account compared to the member’s personal balance cap.

Income tax rates for 2017/2018 financial year

The tax-free threshold is the first $18,200 of your income. You can earn up to $20,542 before any income tax is payable, when taking into account the Low Income Tax Offset.

For the 2017/2018 year, your top marginal rate of income tax rate can be 0%, 19%, 32.5%, 37% or 45% (plus Medicare levy).

Note 1: For the 2017/2018 and 2016/2017 years (and future years), the 37% marginal tax rate takes effect when your taxable income exceeds $87,000. For previous financial years (before July 2016), the threshold for the 37% tax rate is $80,000.

Note 2: From 1 July 2017, the top marginal rate will drop back to 45%, from the previous rate of 47%. See the 2016/2017 financial year section, later in the article for background on the 47% tax rate.

Income tax rates update for 2017/2018 financial year

Income                   Marginal tax rate       Tax payable

$0-$18,200                   0%                        Nil

$18,201- $37,000          19%                       19 cents for each $1 over $18,200*

$37,001-$87,000          32.5%                    $3,572 plus 32.5 cents for each dollar over $37,000

$87,001-$180,000        37%                       $19,822 plus 37 cents for each dollar over $87,000

$180,001 +                    45%                      $54,232 plus 45 cents for each dollar over $180,000

The government’s plan is, that from 1 July 2017, eligible Australians will be able to make voluntary superannuation contributions of up to $15,000 a year, and a maximum of $30,000 over more than one year, to their superannuation account for the purposes of purchasing a first home. The voluntary super contributions will be concessional (before tax) contributions, which means you will need to arrange with your employer to salary sacrifice super contributions, or claim the super contributions as a tax deduction in your income tax return.

From 1 July 2018, an Australian aged 65 years or over will be able to make non-concessional (after tax) contributions into a super fund account (accumulation account), up to a maximum of $300,000, from the proceeds of selling his or her home. If a couple sells their home, they can contribute up to $300,000 each.

Note: A person is only eligible for this measure if they have owned their principal place of residence for a minimum of 10 years.

SMSF Trustees will face bigger penalties from 2017/18

SMSF trustees can expect harsher fines from the next financial year (2017/2018 year) onwards with administrative penalties of up to $12,600 per trustee (including corporate trustee) for a breach of the super rules. A value of a penalty until will increase to $210 (from the current $180) from 1 July 2017.

Property investors will have some negatives in the proposed budget changes

The 2017 Federal Budget includes proposed changes which will affect residential property investors Australia-wide.

The Australian Tax Office (ATO) allows owners of income producing property to claim depreciation deductions for the wear and tear that occurs to a building’s structure and the plant and equipment assets within.

The proposed changes relate to the depreciation of plant and equipment assets and the eligibility to claim this deduction. Currently, investors are eligible to claim qualifying plant and equipment depreciation on assets found in an investment property they purchase, even if they were installed by a previous owner.

“Under the new rules which are yet to be legislated by Parliament, investors will be able to depreciate new plant and equipment assets and items they add to their property, however subsequent owners will not be able to claim depreciation on existing plant and equipment assets,” said the Chief Executive Officer of BMT Tax Depreciation, Bradley Beer.

“This change will have a major impact on investors, essentially reducing the annual deductions they can claim therefore reducing their cash return each year. This could lead to investors being in a tighter financial position and may discourage future investors from purchasing a second hand residential property.”

“It is our understanding at this stage that if the property is new, they will be able to continue to depreciate plant and equipment as they were previously. We are seeking further clarification on this,” said Mr Beer.

Investors will still be able to claim capital works deductions also known as building write off, including any additional capital works carried out by a previous owner.

The budget notes were clear that existing investments will be grandfathered. This means that anyone who has purchased a property up until the 9th of May 2017 will be able to claim depreciation as per normal.

Questions and updates?

If you have any questions about how the budget will effect you and your situation, or ongoing changes as they happen, do not hesitate to email or call one of the team on (08) 9267 3800.