Omar´s Outlook - May 2017
End of Year Fun
Here we are, almost at the end of yet another financial year.
From a tax point of view, this is the time when many people tend to panic.
“Have I made all the contributions to super I am entitled to?”
“What else can I do to maximise my refund?”
“Is all our business paperwork in order?”
…and so on and on.
Unlike the recent years though, this time around we have had some substantial changes in multiple relevant areas, so being prepared well in advance of July 1 is very much warranted.
Let’s look at some of the most important changes, which are likely to affect significant numbers of taxpayers.
1) Superannuation Contributions - Concessional
Contributing to super from pre-tax salary, be it via salary sacrifice or self-employed tax deductible (“concessional”) contributions, is one of the most powerful, and arguably the safest, ways to save tax.
Obviously the suitability of this strategy will be dependent on personal circumstances.
In other words, if you are relatively young (under 40), with a mortgage and young children, you will yet have 20 years or more before you can start collecting your super benefits.
This means that the tax benefits you can derive from increasing your superannuation contributions must be weighed against your present obligations. There is no point in saving tax, if it means that you will take so much longer to pay off the mortgage, or be unable to meet an unexpected or emergency expense.
In contrast, those taxpayers who are within a decade or less from age 60, are likely to have the above commitments paid off & children who have left home, so their retirement is now firmly in sight.
It is this group that will be most affected by the pending reduction of annual concessional contribution limits from $35,000 per year to $25,000.
It has to be said here that this particular change makes no sense - i.e. it is likely to result in more people being reliant on Centrelink in retirement.
It’s safe to say that it has solely been motivated by the government’s desire for grabbing still more of our earnings.
I have on the odd occasion observed that dealing with Al Capone’s mafia was a lot cheaper & one got much more in return (protection from competition, illegal booze – you name it), than what is the case these days with modern “democratic” governments.
Regardless though, it is what it is, and while more than 50% of Australians pay no net tax and therefore have no problem with tax increases for “the rich”, it’s not likely to change any time soon.
Hence for those of you, who can afford to make the maximum contribution, it is necessary you do so before the July 1 cut-off.
If you are on the top marginal tax rate (47% plus 2% Medicare levy) but earning below $300,000 “adjusted income” (reducing to $250,000 from July - see Division 293 at the ATO website), then utilising the maximum contribution will save you $3,400 in overall tax in comparison to next year.
For anyone under age 50, the contribution limit is being reduced from the current $30,000 also to $25,000. Therefore, any current year contribution utilising the maximum cap will save half of the above amount in overall tax.
I cannot help but observe here that back in the 2005-2006 financial year, when Peter Costello ushered in the “new simplified” superannuation system, the then “age-based limit” applicable to annual deductible contributions for over 50-year olds was in excess of $117,000!
Costello rounded this down to $100,000, which was to be indexed in future years. Instead of indexing, now here we are, 10 years later, with the limit being down to a quarter of that amount; disregarding inflation at that!
That this tax grab was done by the same Liberal party, whose Treasurer only a couple of years ago proclaimed “We are not touching superannuation” only shows how the Liberals have utterly lost any sense of what they once used to stand for.
2) Superannuation Contributions – Non Concessional
Non-concessional contributions are those made with after tax money.
For example, if you inherit a cash sum, or sell a property where either no capital gain has been made, or the asset had been acquired before 20 September 1985, it may make sense to contribute this money into superannuation in order for it to be invested in a low tax environment (15% while still working & 0% after age 50 if drawing a pension with a balance under $1.6 million).
In such a case, you will not need to claim a tax deduction on the contribution; it will be classed as non-concessional and not taxed on being received by your super fund trustee.
It will also retain the tax-free status when received by your estate on your death and passed to your adult children – as opposed to the “taxable” component of super, which in such a case is taxed at another 15% plus Medicare levy.
The maximum level of non-concessional contributions you can make in this financial year is $180,000 per person; this is being reduced from July to $100,000.
It therefore makes sense, if you are within striking distance from retirement and have a substantial cash lump sum on hand, to utilise the current year’s cap before that opportunity closes on July 1.
3) Pension Caps
This particular change will affect relatively few people, but it is nevertheless significant, because it reintroduces taxation on earnings accrued on superannuation benefits supporting retirement income streams (pensions).
The new cap is $1.6 million per superannuation fund member & beneficiary, and effective July 1, any excess needs to either be moved into accumulation stage within the super fund, or taken out altogether.
Penalties may be imposed if this is not complied with.
Complex rules apply to taxpayers who may hold multiple superannuation benefits, and particularly to those receiving pensions from public sector “defined benefit” programs.
If you have a self managed super fund, fall into this category and have not yet addressed the changes introduced by the relevant legislation, do make sure to talk to your accountant or another appropriately qualified superannuation adviser without delay, in order to assess what may be the best way forward for you.
Those taxpayers, who are in their second or subsequent marriage, should also review their estate planning arrangements in order to work out whether it may be appropriate to withdraw some cash from their super and potentially invest in either joint or even just the current spouse’s name - assuming he/she has no significant personal income already – so as to fully utilise both spouses’ personal tax-free thresholds.
4) Company Tax
This one applies only to those people who are still in the workforce and operate their own small business via a company structure.
The government has been making a lot of noise about its reduction of small companies’ (with a turnover of up to $50 million) tax rate from 30% to 27.5%. (Never mind this has been “achieved” at the cost of blowing a few more hundreds of millions of dollars on “green” & “renewable” energy boondoggles.)
While the cut will apparently already apply in the current financial year, I wanted to mention it here because for all the practical purposes, it will make hardly any difference whatsoever.
The reason for that is obvious: Companies are not people. They do not have to worry about health costs in their old age, nor do they go on holidays or have to fund their retirement.
In other words, behind every company, there are live, real people, who ultimately have a claim at the company’s profits.
In Australia, dividend imputation means that if a company gets a tax cut of 2.5%, the franking credit received by each individual shareholder will consequently be reduced by the same amount. Ultimately though, the final amount of tax paid will be exactly the same.
As an example, let’s say an individual pays a personal marginal tax rate of 35%.
If that same individual receives a franked dividend with a 30% franking credit, s/he will have to pay an additional 5% income tax.
If that same individual receives a franking credit of 27.5%, s/he will have to pay an additional 7.5% in income tax.
This reduction is the same kind of con as that of “the world’s greatest Treasurer”, Labor’s Wayne Swan and his “increase in income tax free threshold”.
Swan did increase the threshold from $6,000 to $18,200, but at the same time he abolished the various low income offsets and increased the marginal tax thresholds above that level.
The result was that a few people were marginally better off, most were unchanged and some were worse off. Overall though, the change was hardly significant for almost everyone.
Swan of course crowed about his “massive” help to the poor; the truth was nothing of the sort and in fact, due to the interaction of how Medicare levy for low income earners interacts with the low income tax offsets, many truly poor people ended up worse off then before.
The current government’s corporate tax cuts fall into the same category.
If the government was actually serious about this, they would reduce company tax to no more than 10%.
This would be a huge boost to employers and would allow them to reinvest those funds in their businesses, creating new employment in sectors that are actually producing real wealth, rather than in the non-productive bureaucracies run by the Federal and State governments.
It would also bring taxation of foreign shareholders, who are not entitled to claiming franking credits, in line with the rate of withholding tax currently applicable to interest-bearing securities – i.e. bonds, term deposits and the like.
Lastly, it would hugely increase Australia’s attractiveness as an investment destination; not dissimilar to the feat accomplished by Ireland by using the same approach.
Doing so though would require a political leader with a vision for the future, and sadly, those seem to be in extremely short supply everywhere these days.
Conclusion
Scott Morrison, the current Treasurer, exhibited a rare moment of truth when he said, upon becoming Treasurer, that Australia did not have a revenue problem; rather it had a spending problem.
Alas, his honesty was short lived and he has since become a strong candidate to become “Wayne” Morrison, in loving memory of the ALP Treasurer who until now has provided a living example that in Australia, the country of opportunity and fairness, one does not require a triple-digit IQ to make it to the top job!
Morrison’s most recent waffle about “good debt and bad debt” is a case in point – a good analysis as well as discussion of that particular topic can be found here.
Our Federal government has gone from being strongly in the black in 2006-2007 to now closing on to $500 billion of debt.
Its credit rating is not far off being downgraded, and with the exception of a few small party Senators (for example the Liberal Democrats’ David Leyonhjelm being the most outspoken), there seems to be absolutely no interest anywhere in getting this situation under control.
The annual interest payments on the Federal debt alone are now over $16 billion ($16,000,000,000), and represent the 5th largest expenditure in the budget.
Some sober assessments of what we have got for all those expenditures can be found for example here.
It’s worth mentioning that the Queensland ALP government has its very own $80 billion in debt.
Its preferred response to that has been to raid state-owned enterprises as well as the surplus accrued over the years at Q-Super, the State public servants’ superannuation scheme – all the while reemploying more of those same paper pushers into various make-believe jobs.
Ironically, a number of my clients have told me over the years that one of the things they would like to do in retirement is to visit Greece and its islands.
I suspect that the way we are going as a country, it won’t be long and there won’t be any need to travel anywhere – we will have our very own Greece (at least as far as the economy is concerned) right here in Australia!
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