Federal Budget 2019-20 T op 5 Budget impacts for SMSFs Doug - - PowerPoint PPT Presentation
Federal Budget 2019-20 T op 5 Budget impacts for SMSFs Doug McBirnie and Melanie Dunn Agenda Top 5 Budget proposals impacting SMSFs Proposal Whos proposing it? Personal tax rates and thresholds Both Government and Opposition Negative
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Proposal Who’s proposing it? Personal tax rates and thresholds Both Government and Opposition Negative gearing and CGT Opposition Changes to superannuation Both Government and Opposition Franking credit refunds Opposition Remove red tape around ECPI Government
Changes to LITO, marginal tax rates and tax brackets
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Increase in LMITO for 2018-19, 2019-20, 2020-21, 2021-22
Maximum offset increases from $530 to $1,080 for taxable income between $48,000 and
$90,000
Government proposing to increase base offset by $55 Opposition proposing to increase base offset by $150
Supported by both parties, backdated to current financial year
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Taxable income Tax offset – Government Tax offset - Opposition Nil to $37,000 Up to $255 Up to $350 $37,001 - $47,999 $255 + [(taxable income - $37,000) x 7.5 cents $350 + [(taxable income - $37,000) x 4.8 cents $48,000 - $89,999 $1,080 $1,080 $90,000 - $126,000 $1,080 – [(taxable income - $90,000) x 3 cents $1,080 – [(taxable income - $90,000) x 3 cents $126,000+ Nil Nil
From 2022-23:
Raise LITO to $700 Raise the top income threshold for 19% tax bracket from $41,000 to $45,000
From 2024-25:
Lower tax rate in middle bracket from 32.5% to 30.0%
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2022-23 marginal tax rate 2022-23 tax bracket Nil Up to $18,200 19% $18,201 - $45,000 32.5% $45,001 - $120,000 37% $120,001 - $180,000 45% $180,000+ 2024-25 marginal tax rate 2024-25 tax bracket Nil Up to $18,200 19% $18,201 - $45,000 30% $45,001 - $200,000 45% $200,000+
Repeal tax changes from last budget already legislated
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Current marginal tax rates Current tax brackets Nil Up to $18,200 19% $18,201 - $37,000 32.5% $37,001 - $90,000 37% $90,001 - $180,000 47% (incl. 2% deficit repair levy) $180,000+
Housing affordability and intergenerational unfairness
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The Opposition are proposing:
Limit negative gearing to new housing Will apply to all investments entered into from 1 January 2020 (e.g. negatively geared share
portfolio)
Halve the capital gains tax discount for all assets purchased from 1 January 2020, reducing
discount for assets held longer than 12 months from 50% to 25%
CGT change will not affect investments made by super funds and discount will not change for
small business assets
Grandfather all existing investments
Policy intent is to put downward pressure on house prices making them more accessible to younger persons and encourage building of new homes
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Contrasting policy intents
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From 1 July 2020 persons aged 65 and 66 will be able to:
Make voluntary super contributions without meeting the work test Make up to 3 years of non-concessional contributions under the bring forward rule
From 1 July 2020 persons up to and including age 74 will be able to receive spouse contributions
Currently spouse contributions can be made up to age 69
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Aligning the work test with eligibility for Age Pension
New measures to boost superannuation of working women
Remove $450 monthly threshold on super guarantee contributions Ensure parents are paid SG contributions on parental leave, dad and partner pay payments Include a right to superannuation in the National Employment Standards
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Focus on low and middle income earners
Reduce non-concessional contribution cap from $100,000 to $75,000
Reduce the Div 293 income threshold from $250,000 to $200,000
Remove 5-year catch up concessional contribution measure
Remove tax deductibility of personal contributions
Bring forward the increase in rate of SG contributions from 9.5% to 12%
Tax superannuation earnings in retirement phase above $75,000 p.a. at 15%
Remove ability for SMSFs to use limited recourse borrowing arrangements
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Measures previously announced not mentioned in Budget reply
Removing cash refund of excess franking credits
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Remove cash refunds for excess imputation credits
Will not apply to persons subject to the pensioner guarantee
Pensioner and allowance recipients SMSFs with at least one pensioner or allowance recipient at 28 March 2018
Proposed to apply from 1 July 2019
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Imputation credits can be used to reduce the SMSFs tax bill to $0 but cannot claim a tax refund
Imputation credits will not longer be a refundable tax offset A fund solely in retirement phase producing no taxable income will not be able to utilise
franking credits as there is no tax to reduce
A fund solely in non-retirement phase producing only taxable income may not be affected by
these changes
A fund with a mix of retirement phase and non-retirement phase assets may now only be able
to partly utilise imputation credit refunds
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Impact on SMSFs
SMSF has two members at 1 July 2018
Member 1 has $900,000 and Member 2 has $300,000 Fund has assessable income of $65,000 including $20,000 in fully franked dividends which received
$8,571 in franking credits
In 2018-19 SMSF annual return
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Example under current rules
Scenario Taxable income Tax deduction of franking credits Member 1 and 2 have account- based pensions 65,000 – (65,000 x 100%) = $0 No tax payable and franking credits of $8,571 received as cash refund. Member 1 has an account-based pension, Member 2 is in accumulation 65,000 – (65,000 x 80%) = $13,000 Tax payable: $13,000 x 15% = $1,950 Apply franking credits: $1,950 - $8,571 = -$6,621 No tax payable and receive cash refund of $6,621 Both members in accumulation 65,000 – (65,000 x 0%) = $65,000 Tax payable: $65,000 x 15% = $9,750 Apply franking credits: $9,750 - $8,571= $1,179 tax payable
SMSF has two members at 1 July 2019
Member 1 has $900,000 and Member 2 has $300,000 Fund has assessable income of $65,000 including $20,000 in fully franked dividends which received
$8,571 in franking credits
In 2019-20 SMSF annual return
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Scenario Taxable income Tax deduction of franking credits
Member 1 and 2 have account- based pensions 65,000 – (65,000 x 100%) = $0 No tax payable. Franking credits of $8,571 disregarded. Member 1 has an account-based pension, Member 2 is in accumulation 65,000 – (65,000 x 80%) = $13,000 Tax payable: $13,000 x 15% = $1,950 Apply franking credits: $1,950 - $8,571 = -$6,621 No tax payable. Excess franking credits of $6,621 disregarded. Both members in accumulation 65,000 – (65,000 x 0%) = $65,000 Tax payable: $65,000 x 15% = $9,750 Apply franking credits: $9,750 - $8,571= $1,179 tax payable
Actuarial certificate requirements
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Requirement for an actuarial certificate
From 1 July 2020 SMSFs with all members in retirement phase over a full financial year will not be required to
This fixes a quirk of the disregarded small fund asset (DSFA) rules which came in at 1 July 2017:
A fund with DSFA that is solely in retirement phase has an exempt income proportion of 100% but must use
the proportionate method rand so requires an actuarial certificate
SMSFs impacted by the disregarded small fund asset rules will under this change be able to claim their tax
exemption without obtaining an actuarial certificate
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Annual assessment each 30 June for how must claim ECPI in the next year
If have DSFA cannot have elected or deemed segregation for tax purposes, must use
proportionate method to claim ECPI
SMSF will have disregarded small fund assets for the next financial year if:
At 30 June a member had a retirement phase interest (in any fund), and a TSB over $1.6m In next financial year the SMSF has a member in retirement phase at any time
A fund solely in retirement phase could have DSFA and not be allowed to use the segregated method to claim ECPI
The Budget did not propose a change to these rules
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These rules are not proposed to change
Where an SMSF only has retirement phase income streams a member’s TSB grows above $1.6m
Fund will have DSFA and need an actuarial certificate to claim ECPI using the proportionate method Budget did not propose a change to the DSFA rules but proposes to removes the requirement for an
actuarial certificate under the proportionate method if a fund is solely in retirement phase
Example: 1 July 2017 two member SMSF had following accounts
Member 1: $406,070 in retirement phase TRIS and Member 2: $1,635,900 in ABP Does have disregarded small fund assets for 2017-18 Assessable income of $55,000 + $110,000 capital gain
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Requirement for an actuarial certificate
Actuarial exempt income proportion 100% as fund solely in retirement phase
$110,000 capital gain disregarded and ECPI = $55,000
Currently from 2017-18: Obtain an actuarial certificate under the proportionate method
Proposed from 2020-21: Actuarial certificate not required
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Example
Exempt income proportion 100%
Admin requirements for calculation of ECPI
From 1 July 2020 super funds with interests in non-retirement phase and retirement phase during a financial year will be able to choose their preferred method of calculating ECPI
Removes the compulsory use of deemed segregation which applied from 2017-18
In practice this may take us back to the methodology from 2016-17 and prior income years
An SMSF could choose to employ a segregation strategy to claim ECPI on assets solely supporting
retirement phase
Where a fund has no documented segregation the proportionate method would be used to claim ECPI Unlikely to allow trustees to choose the most tax effective option after the event
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John aged 64 with $620,000 in a non-retirement phase TRIS at 1 July
Turned 65 on 14 September but continued working and received quarterly employer contributions
Made a $100,000 NCC and commenced new ABP with accumulation balance 17 October
Chantelle aged 62 had an ABP worth $130,000 at 1 July
Planned to go on a holiday and withdrew $15,000 on 12 December
A total of $60,000 in payments taken uniformly over the year
Min pensions of $25,000 for John, $5,000 for Chantelle
Another $30,000 in payments taken as lump sums from pension
Does not have disregarded small fund assets and no elected segregation
Example: current methodology for 2017-18 onwards
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Example: current methodology for 2017-18 onwards
John turns 65. Period of deemed segregation for 6 days (ABP and retirement phase TRIS) Non- retirement phase TRIS ABP ABPs + Retirement phase TRIS Accumulating SG contributions John makes NCC and commences ABP with accumulation balance. Deemed segregation for two months (Two ABPs + retirement phase TRIS)
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Example: current methodology for 2017-18 onwards
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If the fund earned $60,000 in income over the year then the fund would claim ECPI as…
Segregated method
$500 income in first deemed period $10,000 income in second deemed period
Proportionate method
Exempt income proportion x income in the 3 unsegregated periods 79.271% x ($12,500 + $2,000 + $35,000) = 79.271% x $49,500 = $39,239
ECPI = $10,500 + $39,239 = $49,739
Example: current methodology for 2017-18 onwards
Example: proposed methodology for 2020-21 onwards
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John turns 65 and TRIS converts to retirement phase Non- retirement phase TRIS ABP ABPs + Retirement phase TRIS Accumulating SG contributions John makes NCC and commences ABP with accumulation balance. Now have two ABPs + retirement phase TRIS.
Example: proposed methodology for 2020-21 onwards
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1 accounting period Did not choose to segregate assets when they were solely in retirement phase
If fund earned $60,000 in income over the year the fund would claim ECPI as…
Proportionate method
ECPI = 83.394% x $60,000 = $50,036 Same fund with deemed periods in 2017-18 claimed ECPI = $49,739 About the same amount of ECPI without the administration complications of deemed
segregation
Trustees will have a ‘choice’ to use segregated method from 1 July 2020
Document in advance as part of fund’s investment strategy Periods solely in retirement phase will not be ‘deemed’ as segregated
Example: proposed methodology for 2020-21 onwards
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The information in this presentation has been prepared by Accurium Pty Ltd ABN 13 009 492 219 (Accurium) and Hewison & Associates Pty Ltd ABN 51 006 082 257 (Hewison Private Wealth). It is general information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. Whilst all care is taken in the preparation of this presentation, no warranty is given with respect to the information provided and Accurium is not liable for any loss arising from reliance on this information. Scenarios, examples and comparisons are shown for illustrative purposes only and should not be relied on by individuals when they make investment decisions. We recommend that individuals seek professional advice before making any financial decisions. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.
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