Kayser Wealth Strategies

Budget night – but what does it mean this year given that it is effectively an election pitch – because it appears that most (all?) of the budget promises will not be legislated before we go to an election, and then are all bets are off anyway?

Let’s however assume that the changes proposed make it into law. Then this is how I read today’s news (split out as positives & negatives):

Positive No. 1 – Reduce the impact of ‘bracket creep’
I’m not going to comment on whether the ‘right’ people are being relieved of some of the effects of bracket creep (where you pay more tax on your income primarily as a result of inflation pushing your income up), but it is good to see that the 37% personal tax bracket will only start to kick in from an income of $87,000 (instead of $80,000) from 1/7/16.

Positive No. 2 – Tax Reduction for small business
With small business being the driver of the Australian economy, any tax relief provided to small business owners can only be a good thing for us all.

With that in mind, reducing the company tax rate for small businesses from 28.5% to 27.5% from 1/7/16 will be good for economic development in the country and to reward those who take risks to build their own businesses.

Added to this, by extending the definition of a ‘small business’ from one that has a turnover of <$2m to those with a turnover of <$10m will bring more businesses into this reduced tax position. Similar rules will enable those small business owners who operate their business through an unincorporated structure to reduce their tax payable also. Positive No. 3 – “Google Tax”
Starting from 1/7/17 multinational companies will need to pay more tax (i.e. their fair share) on their Australian earnings – as they should.

My question is, why do we need to wait a year for this to come into effect???

Negative No’s 1 – 100 – “Grandfathering”
I’m being deadly serious here – the biggest negative I’ve seen so far is the giving up of the long held standard of “those who already have something in place get to keep those rules” (commonly referred to as “grandfathering” the existing arrangements).

I’ll go into some specifics below but it is extremely disappointing to see that there are not some greater ‘carve-outs’ for people who have had long term strategies in place!

I don’t normally subscribe to the ‘lets bash a politicians superannuation entitlements’ line of attack, but you may remember how the politicians who have been in government for a long time get a lifetime pension, but the new ones get a ‘normal’ accumulation style of superannuation benefit structure. Well those long standing politicians’ system was ‘grandfathered’! Can anyone spot the difference?

There are many many proposed changes to Superannuation. In the interests of keeping this email to a reasonable length, I’ll just discuss the big ones here.

1. Reducing the limit on concessional (pre-tax) contributions to $25,000 pa – Bad
From 1/7/17 the annual limit on pre-tax contributions to super will be reduced to $25,000 (currently $30,000 or $35,000 depending on your age). Given that ‘most’ people are focusing on paying off their homes and paying for their children’s education for the start and middle of their working life, it is only when it comes to the tail end of employment that many people start to really focus on building up their superannuation. This reduction will reduce their ability to do this.

2. Allowing catch up concessional (pre-tax) contributions – Good
From 1/7/17, providing your superannuation balance is under $500,000, you will be able to make additional pre tax contributions to super over your annual limit ($25,000 as shown above), and up to the shortfall amount that you have had over the previous four years. I.e. if you contributed $10k for each of 4 years, in the fifth year you could contribute up to $85,000 ($25,000 + 4 x $15,000). Great for people in & out of the workforce for instance, or people returning from maternity leave.

3. Lowering the threshold at which the doubling of the tax on super contributions kicks in – Bad
From 1/7/17, the limit from which high income earners pay an extra 15% tax on their superannuation contributions will fall from $300,000 to $250,000.

I’m calling this one bad (which I’m sure some people will disagree with), but I think it is important to remember that people in the top tax bracket are already paying a big chunk of their earnings in tax, and I don’t think we can keep on taking more and more. Perhaps we need to prioritise better – maybe increase the “Google tax” more, or stay out of other people’s overseas wars? Also, isn’t the government trying to encourage the ‘ideas boom’ – i.e. people building the next Apple or Google or finding a cure for Cancer – will taxing them more mean they stay here or head overseas?

4. Maximum Pension limits of $1.6million – Bad
As at 1/7/17, you can only have $1.6million in a pension fund. Any excess must be withdrawn or held in a superannuation accumulation account (where it pays tax of 15% on it’s earnings, instead of 0%).

Depending on your income or existing assets you may think that $1.6m is or is not a reasonable sum to have inside a pension account – I’m not going to get into that here, other than to bring it back to the whole ‘grandfathering’ situation. By this I mean, what about if you are currently 50 years old & your balance is $1m, this will most likely grow to be over $1.6m by retirement – where is the grandfathering?

Similarly, what if you are in retirement already with a balance of $2m – this will mean $400k (on current balances) is ‘kicked out of pension’ – an administrative nightmare to say the least. It’s also worth noting that virtually no super fund can determine your actual balance on a given date (i.e. allowing for tax adjustments) – only once a number of calculations have been made after the event – hence, is $400k ‘kicked out’ or is it ‘$403k’…..

5. Lifetime cap on non-concessional (after tax) contributions of $500,000 – (reluctantly) Good
Effective 3/5/16 (i.e. now), everyone has a $500k lifetime limit on their after tax contributions. The only ‘grandfathering’ applied here is that any contributions made before now (between 1/7/07 & 3/5/16) will not result in any penalty (i.e. if you’ve contributed $600k to date, then you just can’t do any more). If you have contributed $400k to date, you have another $100k limit to use from now onwards.

I’ve rated this one as ‘reluctantly good’ as realistically I think we’ve had too good a system for too long. As such, this is probably a relatively fair way to ‘fix it’ (at least on initial reading of the proposal).

It will however be an administrative nightmare as well. Anyone fancy keeping track of their after tax contributions for their entire working life – i.e. from when you made a $1000 contribution in your 30’s to access the government co-contribution, all the way through to retirement…..

6. Changing the rules on Pre-Retirement Pensions – Bad
As at 1/7/17, all (including existing) Pre-Retirement Pensions will no longer be entitled to tax free earnings on the assets supporting their pensions.

This is extremely bad. No only does it go against the ‘grandfathering’ issues mentioned earlier, it could potentially drive people out of the workplace (= bad for the economy). Whilst we obviously need to see the final rules, at this stage, the budget papers only mention ‘preservation age’, not 65, not the aged pension age. So this may mean that anyone with a pension who is not fully retired – say a doctor working part time at age 63 – or a person who has nearly retired but is using their years of knowledge to contribute to a board position (say for a nominal fee) to grow a not for profit business (maybe a nursing home)? These people may well do the numbers and decide it is simply not worth losing the tax free benefits on their pension, and hence not be available to provide that useful contribution to society.

Bad policy I’d say.

So, from where I sit, that seems to be the main points (there may be more to follow as I read it all in more detail).

There are of course many other announcements, most of which are minor in detail, and as such I won’t go into them here.

So with that said, thanks for reading, and if you have any queries please feel free to call or email.


David Kayser