Tax law developments that will impact your end of year tax planning
With 30 June quickly approaching, now is a good time to assess your current position and ensure your year-end strategies are in place.
This article highlights some of the key tax law changes that have taken effect thus far in the 2016/17 income year, and the changes that will shortly take effect that may impact on your year-end tax planning decisions.
It is worth keeping in mind that further tax changes are expected to be announced in the May 2017 Federal Budget. Should you have any concerns or queries, be sure to speak to your adviser.
Individual Tax Changes
1. Minor change in individual tax rates
- A minor change to individual tax rates took effect this year. From 1 July 2016, the marginal tax rate of 37% starts on taxable income of $87,000 per annum instead of previously $80,000 per annum.
- The rate change will offer minor tax relief to people earning between $80,000 and $87,000 per annum. The maximum tax saving for people in this band is $315.
2. Removal of the Temporary Budget Repair Levy
- The 2% “Temporary Budget Repair Levy” is set to be removed from 1 July 2017.
- The levy imposed an additional 2% tax on an individual’s earnings over $180,000 per annum. It applied for the 2014/15, 2015/16 and 2016/17 income years. It effectively made the highest marginal rate of tax in Australia 49% for those years.
- High earning individuals might explore opportunities to defer income receipt until after 1 July 2017 to take advantage of the removal of this levy.
3. Introduction of the “Backpacker” tax
- The “Backpacker” tax regime now applies.
- From 1 January 2017, foreign working holiday makers are taxed at a 15% rate on assessable income from Australian sources on amounts up to $37,000.
- Employers of these persons must register with the ATO. If they fail to register, penalties may apply and tax must be withheld on payments at a rate of 32.5%.
4. Individuals living overseas with HELP and TSL debts
- From 1 July 2017, Higher Education Loan Program (HELP) and Trade Support Loan (TSL) repayments will be based on worldwide income.
- Individuals with such repayment commitments must now inform the ATO if they intend to depart Australia for more than 183 days in a 12 month period, or are already living overseas. Going forward they must report their worldwide income to the ATO.
Fringe Benefits Tax and Salary Packaging
1. Fringe Benefits Tax (FBT) rate reduction
- From 1 April 2017, the FBT tax rate reduces to 47% to align the FBT rate with the top effective marginal tax rate of 47% from 1 July 2017 after the removal of the Temporary Budget Repair Levy.
2. Changes to the way “Adjusted Taxable Income” is calculated
- From 1 January 2017, the way “Adjusted Taxable Income” is calculated has changed. Individuals who receive taxable fringe benefits will be required to include a higher “grossed up amount” in respect of those fringe benefits.
- Adjusted Taxable Income is relevant to determining entitlements to a number of government assistance payments, such as the Family Tax Benefit.
There have been significant changes to the rules relating to the making of superannuation contributions, and the taxation of superannuation earnings. Some of the more significant changes are summarised below.
1. Reduction in the annual Non-Concessional Contribution Cap
- From 1 July 2017, the amount individuals can contribute into super on a non-tax deductible basis (referred to a Non-Concessional Contribution) reduces from $180,000 to $100,000.
- As such, individuals can contribute $80,000 more into superannuation on this basis in the 2016/17 income year than they will be able to in future years.
- For people aged under 65 there is also an ability to bring forward three years of Non-Concessional Contributions. Making use of this rule, individuals could make $240,000 more Non-Concessional Contributions in the 2016/17 income year than they will be able to in any one income year going forward, provided that they have not accessed the bring forward rule in the previous two income years.
2. Reduction in the annual Concessional Contributions Cap
- From 1 July 2017, the annual amount individuals can contribute into superannuation on a tax deductible basis (referred to a Concessional Contribution) reduces to $25,000 for everyone.
- Currently, the annual Concessional Contribution Cap amount is $30,000 for those under 50 years of age, and $35,000 for those who are 50 years or older.
3. High income earnings threshold reduced for additional tax on Concessional Contributions
- An additional 15% tax on Concessional Contributions currently applies to individuals who earn more than $300,000 p.a.
- From 1 July 2017, this additional tax will apply to people earning more than $250,000 p.a.
4. New limit on tax free retirement accounts
- From 1 July 2017, individual retirees can only have up to $1.6 million in a tax free superannuation retirement account.
- Individuals who currently have more in such accounts must transfer the excess to an accumulation account by 1 July 2017 or withdraw it.
- There will be Capital Gains Tax (CGT) implications on assets transferred to comply with this change. The rules provide for transitional CGT relief. Elections must be made and ATO notifications must occur.
5. Other Superannuation Developments
A broad suite of other superannuation changes will take place to give effect to the Government’s Superannuation Reform Package. These changes include:
- Individuals with superannuation balances of $500,000 or less will be allowed to make “catch-up” superannuation payments from 1 July 2018 by way of utilising unused annual Concessional Contribution Caps going back up to five years.
- From 1 July 2017, all individuals under 65 and individuals aged between 65 and 74 who meet a prescribed “work test” can claim a tax deduction for personal superannuation contributions. Previously this was only available to individuals whose salary and wage type income was less than 10% of the sum of their entire assessable income, reportable employer super contributions and reportable fringe benefits amount.
- From 1 July 2017, the tax exemption for income supporting a Transition to Retirement Income Stream (TRIS) will be removed.
These superannuation reforms will impact on the retirement planning for many Australian individuals. As previously mentioned, if you are planning to self-fund your retirement through the Australian superannuation system it is recommended you speak with your local adviser to discuss the specific implications of these reforms.