Federal Budget 2019-20 T op 5 Budget impacts for SMSFs Doug McBirnie and Melanie Dunn
Agenda Top 5 Budget proposals impacting SMSFs 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 2
Personal taxation changes Changes to LITO, marginal tax rates and tax brackets 3
Tax cuts for low and middle income earners 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 4
Tax cuts for low and middle income earners LMITO 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) $350 + [(taxable income - $37,000) x 7.5 cents x 4.8 cents $48,000 - $89,999 $1,080 $1,080 $90,000 - $126,000 $1,080 – [(taxable income - $90,000) $1,080 – [(taxable income - $90,000) x 3 cents x 3 cents $126,000+ Nil Nil 5
Government’s long term changes to marginal tax rates 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% 6
Government’s long term changes to marginal tax rates 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+ 7
Opposition’s long term changes to marginal tax rates Repeal tax changes from last budget already legislated 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+ 8
Negative gearing and CGT Housing affordability and intergenerational unfairness 9
Negative gearing changes and CGT discount 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 10
Changes to superannuation Contrasting policy intents 11
Government’s superannuation changes Aligning the work test with eligibility for Age Pension 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 12
Opposition’s superannuation changes Focus on low and middle income earners 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 13
Opposition’s superannuation changes Measures previously announced not mentioned in Budget reply 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 14
Franking credit refunds Removing cash refund of excess franking credits 15
Opposition’s changes to franking credits 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 16
Opposition’s changes to franking credits Impact on SMSFs Imputation credits can be used to reduce the SMSFs tax bill to $0 but cannot claim a tax refund on any excess amount not used 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 17
Opposition’s changes to franking credits Example under current rules 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 Scenario Taxable income Tax deduction of franking credits Member 1 and 2 have account- 65,000 – (65,000 x 100%) = No tax payable and franking credits of $8,571 received as cash based pensions $0 refund. Member 1 has an account-based 65,000 – (65,000 x 80%) = Tax payable: $13,000 x 15% = $1,950 pension, Member 2 is in $13,000 Apply franking credits: $1,950 - $8,571 = -$6,621 accumulation No tax payable and receive cash refund of $6,621 Both members in accumulation 65,000 – (65,000 x 0%) = Tax payable: $65,000 x 15% = $9,750 $65,000 Apply franking credits: $9,750 - $8,571= $1,179 tax payable 18
Opposition’s changes to franking credits Example under proposed rules 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 Scenario Taxable income Tax deduction of franking credits Member 1 and 2 have account- 65,000 – (65,000 x 100%) = No tax payable. Franking credits of $8,571 disregarded. based pensions $0 Member 1 has an account-based 65,000 – (65,000 x 80%) = Tax payable: $13,000 x 15% = $1,950 pension, Member 2 is in $13,000 Apply franking credits: $1,950 - $8,571 = -$6,621 accumulation No tax payable. Excess franking credits of $6,621 disregarded. Both members in accumulation 65,000 – (65,000 x 0%) = Tax payable: $65,000 x 15% = $9,750 $65,000 Apply franking credits: $9,750 - $8,571= $1,179 tax payable 19
Reducing red tape around ECPI Actuarial certificate requirements 20
Government reducing red tape for super funds 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 obtain an actuarial certificate to claim ECPI using the proportionate method 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 21
Disregarded small fund assets (DSFA) These rules are not proposed to change 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 22
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