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Wednesday, 4 May 2016

Budget 2016: A personal viewpoint

While most commentators seem to feel that the 2016-17 Australian Federal Budget was a fairly 'boring' affair, with not many winners and the only losers being very high income Australians, from my point of view it doesn't appear nearly so harmless. As a wage earner, the cuts to company tax rates will have no impact on me. And despite having a salary package just over $100,000 the raising of the threshold for the 37.5% tax bracket from $80,000 to $87,000 won't be of any benefit as my taxable income is less than $80,000 due to making salary sacrifice contributions into my superannuation, and having a small net tax deduction from my geared share portfolio. On the other hand, the cut in the cap on concessional contributions into superannuation from $35,000 (for over 55s) to only $25,000 will mean paying an extra $1,750 or so in income tax each year (32.5% income tax on the extra $10,000 taxable salary, rather than paying 15% tax on it as a salary sacrifice contribution into my retirement savings). To maintain my current level of taxable income I could increase my portfolio loans substantially (to reduce my taxable income by $10,000 via negative gearing into additional shares, I'd have to borrow around $350,000, as the tax deductible loan interest cost is around 6% pa, but this is partially offset by taxable dividend income). However, post-GFC I'm not keen on increasing my gearing beyond it's current levels, so I'll probably just end up paying the extra $1,750 in income tax.

Fortunately the other major changes to superannuation seem to be targeted more accurately at the 'rich', with a sensible lifetime cap on non-concessional (after tax) contributions into superannuation of $500,000, rather than the previous annual cap of $180,000 (which could allow large sums to be poured into the 15% taxed environment of superannuation over time, for those that amount of spare cash flow or investible funds). So far DW and myself have only contributed a few thousand dollars worth of 'after tax' contributions (in order to get the government co-contribution back in the days when it was still available), and we are never likely to have more than $1m of 'spare' cash to pour into our superannuation accounts.

The $1.6m cap on the amount of superannuation that can be moved from 'accumulation' to 'pension' mode is also quite unlikely to ever become an issue for me, even if my superannuation investments do very well. With a current account balance just under $800,000 I would have to be very lucky to reach $1.6m by the time I retire, especially given the reduction in the amount I can 'salary sacrifice' from now on. And if I did manage to accumulate more than $1.6m in retirement savings, earnings would still only be taxed at 15%, rather than the normal marginal income tax rates.

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