Federal Budget 2019-20 Top 5 Budget impacts for SMSFs

Doug McBirnie and Melanie Dunn

Agenda Top 5 Budget proposals impacting SMSFs

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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

Personal taxation changes

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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Tax cuts for low and middle income earners

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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)

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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Government’s long term changes to marginal tax rates

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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+

Repeal tax changes from last budget already legislated

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Opposition’s long term changes to marginal tax rates

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+

Negative gearing and CGT

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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Negative gearing changes and CGT discount

Changes to superannuation

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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Government’s superannuation changes 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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Opposition’s superannuation changes 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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Opposition’s superannuation changes Measures previously announced not mentioned in Budget reply

Franking credit refunds

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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Opposition’s changes to franking credits

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

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Opposition’s changes to franking credits 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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Opposition’s changes to franking credits 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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Opposition’s changes to franking credits Example under proposed 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. 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

Reducing red tape around ECPI

Actuarial certificate requirements

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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

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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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Disregarded small fund assets (DSFA) 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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Disregarded small fund assets (DSFA) 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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Disregarded small fund assets (DSFA) Example

Exempt income proportion 100%

Government reducing red tape for super funds 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

Calculating ECPI Example: current methodology for 2017-18 onwards

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Calculating ECPI 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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Calculating ECPI 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

Calculating ECPI Example: current methodology for 2017-18 onwards

Calculating ECPI Example: proposed methodology for 2020-21 onwards

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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.

Calculating ECPI 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

Calculating ECPI Example: proposed methodology for 2020-21 onwards

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