PLEASE NOTE: If you have a superannuation strategy in place in relation to contributions of any kind, are in a transition to retirement pension or have more than 1.6 million in your fund and are retired or near retirement please contact us to discuss as the information below is general information and shouldn’t be relied upon as specific advice
The 2016/2017 Federal Budget which was released last Tuesday has made significant changes to superannuation, arguably the largest changes since the 2006/07 Budget.
The super reforms announced will not take effect until July 1 2017, although changes to non-concessional contributions are effective immediately, subject to legislation.
It is important to note that these changes are ALL subject to being legislated. This is further complicated by the upcoming election on the 2nd July.
It will be a while before we know which changes have become law.
Proposed super changes in summary
Annual concessional contribution caps to be reduced to $25,000 per annum but with an ability to carry forward unused caps for up to 5 years.
Ability to make personal before-tax contributions, if your company doesn't offer salary sacrifice or you don't have an employer. Previously this was only available to the self-employed.
Ability for everyone up to age 75 to make contributions to super, without having to meet a work test.
Non-concessional contribution cap lifetime limit of $500,000 to replace the annual caps and bring-forward rules.
Pension phase balances will be limited to $1.6 million per person (for new and existing income streams).
Increased eligibility for the spouse super tax offset.
Removal of earnings tax exemptions for transition to retirement income streams.
Annual concessional contribution caps. Proposed change 1st of July 2017
Current contribution caps are $30,000 for under 50’s and $35,000 for over 50’s.
From the 1st of July 2017 the total concessional contributions you can make, including the superannuation guarantee paid by your employer, will be $25,000.
For people with balances under $500,000, there is the ability to accumulate any unused amount of the cap each year, for up to five years. For example, in year one if you contributed $20,000, in year two your contribution cap would be the set $25,000 plus the unused amount of $5,000 from year one.
You will also be able to make personal before-tax contributions. If your employer doesn't offer salary sacrifice, or you have the opportunity to put in more money than you had originally planned through salary sacrifice, you will now be able to make these additional contributions and claim a tax deduction. Previously this was only available to the self-employed.
Things to consider
This financial year and the next the existing concessional caps apply.
$30,000 for under 50’s and $35,000 for over 50’s.
If it is appropriate for you, make sure to maximise your super contributions for this year to take advantage of these additional limits.
Non-concessional contribution cap lifetime limit of $500,000 to replace the annual caps and bring-forward rules. Proposed effective date 3rd May 2016.
A new lifetime non-concessional cap of $500 000 will replace the existing annual caps, which currently allow annual non-concessional contributions of up to $180,000 per year or $540,000 over three years.
This rule will commence from 3 May 2016 and will take into account all non-concessional contributions made after 1 July 2007. Contributions made before May 3 2016 cannot result in an excess, however any excess contributions made after that date will need to be withdrawn.
This will affect many people, especially those planning to sell an asset when close to retirement and contribute the money to super. It will also effect many plans previously put into place to balance spouse’s superannuation and increase the non-taxable component of the members account balances.
There is suggestion that this may be relaxed, so we will have to wait and see.
For small business people who rely on the sale of their business to provide for their retirement, we are awaiting clear direction as to whether the sale of business contribution of up to $500,000 will be allowed on top of the $500,000 lifetime non concessional cap.
Things to consider:
If you have already made non-concessional contributions in excess of $500,000 since 1 July 2007, you can’t make any more. If you are unsure how much you have contributed, we suggest that you contact your superannuation fund, or you can contact the ATO, who will have a record of previous contributions.
If this cap affects you, options include utilising the concessional caps as they are going to be more flexible from 1st July 2017, looking at other tax effective investments or considering borrowing arrangements to build capital in superannuation
Ability for everyone up to age 75 to make contributions to super. Proposed effective date 1st of July 2017
Currently people between the age of 65 and 74 have to satisfy the “work test” in order to make contributions to superannuation.
Lifting this restriction will simplify superannuation for older Australians and allow them to increase their retirement savings, especially from sources that may not have previously been available to them.
Pension balances in superannuation will be limited to $1.6 million per person (for new and existing income streams). Effective date 1st of July 2016.
The government has proposed a ‘transfer balance cap’ of $1.6 million on the total amount of accumulated superannuation an individual can transfer into the retirement phase. The aim behind this measure appears to be to limit the extent to which the tax-free benefits of retirement phase accounts can be used by high wealth individuals.
If an individual accumulates amounts in excess of $1.6 million in superannuation, they will be able to transfer up to $1.6 million to pension phase and can maintain the excess amount in an accumulation phase account (where earnings will be taxed at the concessional rate of 15 per cent).
Individuals already in the pension phase with balances above $1.6 million will be required to reduce their pension balance to $1.6 million by 1 July 2017. Excess balances for these members may be transferred into accumulation phase accounts.
Subsequent growth on these pension balances will not be restricted. This means that as at 1 July 2016, or at the time when you transfer to pension phase, your balance in pension phase must be no more than $1.6million, however if the balance of that account subsequently grows due to earnings, this excess amount can remain in your pension account.
Things to consider:
If you are already in pension phase with an account balance of more than $1.6 million, you will need to get some advice as to whether you should pro-rata the income between accumulation and pension phase, or otherwise segregate the fund by deciding which assets should remain in pension phase and which should be transferred to your accumulation account.
Various options being discussed are;
to keep in pension phase those assets that are expected to grow strongly
increase pension payments up until 1 July 2016 to reduce the pension account balance
reduce pension payments to the minimum and withdraw excess cash requirements from accumulation account as lump sum withdrawals?
As there are many things to take into consideration please, seek advice to plan for this possibility.
Transition to retirement pensions. Removal of earnings tax exemptions. Proposed effective date 1st of July 2017
Currently the transition to retirement strategy has allowed individuals who have reached preservation age and are still working to benefit from reducing their marginal income tax rate with the lower superannuation tax rates.
The strategy is to draw income from your superannuation fund (by starting a pension) while also contributing pre-tax income into super. The marginal income tax rate that would have been paid on the pre-tax income is replaced by the lower superannuation contributions tax rate.
Currently there is no tax on earnings for a pension account for the superannuation fund, and, for over 60s there is no tax payable on the pension income in your personal name. But the budget changes that. Transition to retirement pension accounts will no longer be exempt from tax on earnings and will attract 15% tax, the same as on an accumulation account.
The measure is designed to restrict use of the strategy to only those who are genuinely transitioning in retirement; that is, those who are moving from full-time work to part-time work.
Things to consider
If you currently have a TTR in place you will need get advice as to whether it remains an effective strategy for you. Not only will the removal of the tax exemption on earnings effect the attractiveness of this strategy, but the reduction of the concessional contribution caps will also have an impact.
High Income earners will have to pay more super contributions tax.
Currently individuals with incomes over $300,000 pay an additional 15% tax, on top of the standard 15% for a total of 30%, on superannuation contributions. From 1 July 2017, the income threshold for this additional contributions tax is dropping from $300,000 to $250,000.
Low income superannuation contribution scheme
The government will continue Labor's low income superannuation contribution scheme but have renamed it as the low income superannuation tax offset (LITSO).
Workers earning less than $37,000 a year who pay an average marginal tax rate of less than 15 per cent on their income, but pay 15 per cent contributions tax on their compulsory superannuation contributions will continue to receive an automatic rebate up to $500 annually, paid directly into their super accounts.
The co-contribution scheme has been left unchanged in the budget.
The Government plans to increase access to the low income spouse superannuation tax offset by increasing the income threshold for the low income spouse from $10,800 to $37,000.
The low income spouse tax offset provides up to $540 per annum for the contributing spouse.
If you would like more information about any of the proposed changes to super call Michael on (02) 4940 9400.