Federal Budget Report for 2016 – Australian Expat Edition
Welcome to the Federal Budget Report for 2016 – Australian Expat Edition. This year’s 2016 Federal Budget has been called a “Super” budget and it’s not because of the great handouts and incentives being offered. The government has unashamedly targeted superannuation and the various tax benefits that apply to contributions and on the ongoing management of these accounts.
Apart from that there were minor changes that didn’t come as a surprise but nothing that was too outlandish given the high probability that we may be going to an early election in July. Our take on the budget is that it was tailored for the majority of the voting populous and it is very benign in nature. They tried to score a few points by targeting the big end of town, namely international corporations, with the introduction of a Diverted Profits Tax (DPT) as well as High Net Worth individuals who use superannuation as tax free funding vehicle
There were a number of announcements that will affect Australian expatriates and we have pointed out in our video, as well as in our report, those topics that expats will need to pay attention to.
Topics Relating to Tax
Personal income tax relief
Effective Date: 1 July 2016
The Government has proposed to raise the 32.5% tax threshold from $80,000 to $87,000. It was previously reported in the press that this may be raised to $85,000 so this was a minor surprise.
This will only affect Australian residents and those offshore residents who are still residents for taxation purposes.
Pausing indexation of the Medicare Levy Surcharge and Private Health Insurance Rebate thresholds
Effective Date: paused until 30 June 2021
The Government has announced that it intends to continue pausing the indexation of income thresholds for the Medicare Levy and Private Health Insurance rebate for a further 3 years.
This will only affect Australian residents and those offshore residents who are still residents for taxation purposes.
Topics Relating to Superannuation
Lifetime cap for non-concessional superannuation contributions
Effective Date: Budget night (7:30pm AEST on 3 May 2016)
The focus on super was probably the biggest surprise for the night with the announcement that there will be an introduction of a lifetime cap of AUD$500,000 on the amount of non-concessional (after-tax) contributions that you can make into your super fund. This new measure will be retrospective and will look back to non-concessional contributions made on or after 1 July 2007. If a person has already exceeded the $500,000 lifetime cap, they will not be penalised for any existing excess amount above $500,000. However, they will be penalised if they make any further non-concessional contributions. The lifetime non-concessional contribution cap will replace the existing annual caps, which allow annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals under age 65). The lifetime non-concessional contribution cap will be indexed to average weekly ordinary time earnings (AWOTE).
This will affect Australian residents, those offshore residents who are still residents for taxation purposes as well as offshore residents who are non-residents for tax purposes.
Reduction in threshold for additional 15% tax for high income earners
Effective Date: 1 July 2017
At the moment those who earn greater than $300,000 are subject to an additional 15% tax (division 293 tax) on their concessional contributions. From the 1st of July 2017, the threshold is proposed to be reduced from $300,000 to $250,000. As the definition of income for division 293 purposes includes concessional contributions, this measure will potentially impact individuals earning over $225,000 if they are making concessional contributions of $25,000 each year on top of their cash earnings.
This will only affect Australian residents and those offshore residents who are still residents for taxation purposes.
Introduction of $1.6 million transfer balance cap
Effective Date: 1 July 2017
Given the governments focus over the last 10 years of trying to encourage Australians to contribute more to super this proposed change also took a lot of people by surprise. From 1 July 2017, the maximum amount of superannuation that an individual can transfer from their superannuation account that is in accumulation phase into a superannuation account that is in pension phase (i.e. to start an allocated pension stream) will be $1.6 million. Where the superannuant accumulates amounts that are greater than $1.6 million, then they will be required to keep those funds in excess of this amount in the superannuation account that is still in accumulation phase, where earnings will be taxed at the concessional rate of 15%. The cap will be indexed in $100,000 increments, in line with the consumer price index.
This will affect Australian residents, those offshore residents who are still residents for taxation purposes as well as offshore residents who are non-residents for tax purposes.
Earnings on Transition to Retirement Pensions subject to tax
Effective Date: 1 July 2017
Those clients with Transition to Retirement income streams (TTRs) have enjoyed the benefit of the earnings within their TTR being subject to a zero rate of tax. From 1 July 2017, the Government plans to remove the tax exemption on earnings of assets supporting TTRs. It will also remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes. This change is in addition to the reduction of the contributions caps from 1 July 2017 and is only applicable to individuals over the preservation age but not retirement.
This will only affect Australian residents and those offshore residents who are still residents for taxation purposes.
Work test removed for those aged 65 to 74
Effective Date: 1 July 2017
The Government has announced that it will remove the current restrictions on individuals aged 65 to 74 from making superannuation contributions with effect from 1 July 2017. There are currently minimum work requirements for Australians aged 65 to 74 who want to make voluntary (after-tax) superannuation contributions. To be eligible to make voluntary contributions to superannuation, individuals aged 65 to 74 must have worked for at least 40 hours over 30 consecutive days in the financial year the contributions are made. In addition, spouses aged 70 or more cannot receive spouse contributions. This measure will simplify the contribution acceptance rules, as the same rules will apply to all individuals aged up to 75 from 1 July 2017. It will also allow older Australians to increase their retirement savings as they will no longer have to satisfy any minimum work requirements before making voluntary contributions to superannuation.
This will affect Australian residents, those offshore residents who are still residents for taxation purposes as well as offshore residents who are non-residents for tax purposes.
Concessional cap changes
Effective Date: 1 July 2017
There are two major proposed changes:
- Reduction in the concessional cap – From 1 July 2017, the concessional cap will be reduced to $25,000 for all individuals regardless of their age.
- Catch up contributions -From 1 July 2017, individuals who do not fully utilise their concessional contributions cap from the 2017/18 financial year onwards will be able to make catch-up concessional contributions. This ability will be limited to those with superannuation balances of less than $500,000, and the unused portion of the cap can only be carried forward for a maximum of five years.
This will only affect Australian residents and those offshore residents who are still residents for taxation purposes.
Restrictions eased on tax deductions for personal contributions
Effective Date: 1 July 2017
The Government intends to allow all individuals under age 75 to be able to claim an income tax deduction for personal contributions from 1 July 2017. This effectively allows everyone up to age 75, regardless of their employment circumstances, to make concessional contributions up to the concessional cap.
This will only affect Australian residents and those offshore residents who are still residents for taxation purposes.
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