There has been so much speculation and rumours surrounding superannuation leading into last night’s budget.
And indeed superannuation was the hot topic particularly for wealthy superannuants, whereby they have been hit the hardest to fund the generous tax concessions for small businesses and individuals.
The overarching objective of superannuation is to be enshrined in the law, which is “to provide income in retirement to substitute or supplement the Age Pension”.
With financial independence in retirement and not being reliant on the public purse being a dream of many Australians alongside owning their own home, some of the measures introduced are contrary to this dream, limiting the ability to make anything more than slightly reasonable contributions.
The Government’s proposed changes are dramatic, and will require most superannuants to review their existing superannuation arrangements to ensure that their position is optimised, as well as revisiting any estate planning implications and overall investment structures
Read below and be the first to gain insight and strategies on how it impacts your super or SMSF:
- Reducing concessional contribution caps to limit how much you can put into superannuation; read more
- Restricting re-contribution strategies by introducing a life time non concessional cap of $500,000; read more
- Reducing the income threshold where contributions are subject to additional tax for high income earners; read more
- Changing the transition to retirement pension effectively making it harder for people still working to access superannuation benefits; read more
- The BIG KAHUNA – imposing a $1.6M limit on the assets eligible for a tax exemption in pension phase; read more
- Providing a concessional contribution catch up for account balances less than $500,000; read more
- Removal of the work test for taxpayers under age 75; read more
- Removal of the 10% test for deductibility of personal contributions; read more
- Removal of anti-detriment payments; read more
- Extension of tax exemption to particular retirement income stream products; read more
1. Concessional Contributions Cap Reduced
From 1 July 2017, the concessional contribution limit will be reduced to $25,000 for all taxpayers, regardless of their age. This will be indexed in line with wages growth.
This is a substantial reduction to the deductible contribution limit that applied prior to 1 July 2007, which was $105,113 for taxpayers over age 50.
The current provisions that are in place with respect to refunding excess contributions will remain, whereby any excess is added back to the individual’s assessable income and taxed at their marginal tax rate.
Further, members of unfunded defined benefit schemes and constitutionally protected funds, such as GESB WestState and GoldState, will also be subject to the above cap.
2. Non-Concessional Contributions Lifetime Cap
The current system of annual non-concessional contributions of up to $180,000 per year (or $540,000 every 3 years) will be replaced with a new lifetime concessional contribution limit of $500,000 (indexed each year at AWOTE). This is a substantial change and is effectively a retrospective amendment. This limit will apply from 1 July 2007, however any contributions made between 1 July 2007 and Budget night that are greater than $500,000 will not be classified as being excessive.
Therefore, if you made substantial non-concessional (after tax) contributions prior to Budget night, those will not be affected. However, you will not be able to make any further non-concessional contributions to superannuation. If you do exceed your limit, the excess will be subject to the same refunding provisions that currently apply, or be subject to tax at the highest marginal tax rate.
This change effectively removes the ability to undertake a withdrawal and recontribution strategy, as many people may have already used up their lifetime cap and won’t be able to re-contribute.
3. 30% Tax on Deductible Contribution for High Income Earners
From 1 July 2017 the threshold for the imposition of an additional 15% tax on concessional superannuation contributions will be reduced from $300,000 to $250,000.
What this means is that the current mechanism for the additional 15% tax payable on contributions will now apply to a wider group of taxpayers.
Although this may result in an additional 15% tax applying to superannuation contributions, this is still a tax effective strategy where the effective tax rate of 30% is lower than the highest marginal tax rate of 49%.
4. Changes to Transition to Retirement Pensions
From 1 July 2017, Transition to Retirement Pensions (TRP) will be ineligible to receive a tax exemption with respect to the assets supporting such pensions. Accordingly, earnings will be taxed at the standard accumulation rate of 15% (an effective 10% tax rate on long term capital gains). Such a change will apply irrespective of when the TRP commenced.
A change to TRPs was not unexpected.
Further, the Government has announced that from 1 July 2017 they will no longer allow individuals to make an election that a payment from a TRP is taxed as a lump-sum, rather than a pension payment.
5. A Tax Free Pension Balance Capped at $1.6M
Several of the above reductions in limits fit into the context of the introduction of a new $1.6M cap on how much can be transferred into a pension phase superannuation balance. This will apply from 1 July 2017, and will apply regardless of when a pension commenced.
Where you have accumulation benefits in excess of the $1.6M cap and have reached retirement age:
- You can convert $1.6M to a pension account and receive the tax exemption with respect to those assets, plus any earnings on those assets;
- Your balance in superannuation above the $1.6M would remain in the accumulation phase with the assets taxed at 15% on income, 10% on realised long term capital gains.
If you convert more than the $1.6M to a pension account, the amount above $1.6M may be subject to tax similar to the excess non-concessional contribution provisions. However, there are two different means that excess non-concessional contributions are subject to tax, and therefore it is unclear how this may apply. In most circumstances the separation of the $1.6M and the accumulation account will likely be preferable to the tax outcome.
For those who are already in pension phase prior to Budget night, where your pension benefits are greater than $1.6M, by 1 July 2017 you will have to rollback the amount that is in excess of the $1.6M threshold back to the accumulation phase of superannuation, to be subject to tax at the accumulation rates above.
Once the $1.6M transfer balance cap has been triggered, any earnings and capital growth with respect to the assets within that account will not be subject to a new cap each year and will remain exempt.
The $1.6M threshold will be indexed each year in $100,000 increments in line with CPI.
With the above, it is also unclear how this might impact several areas:
- Those members who have legacy pensions such as market linked pensions or complying pensions (in SMSFs) with more than $1.6M in those accounts. Such pensions are unable to be commuted or rolled back to accumulation phase, so anyone in this situation may be required to pay the additional tax as outlined by the Government in the Budget paper;
- Members of a couple when one spouse passes away – whether the $1.6M cap would continue to apply to the deceased’s account with a reversionary pension, or whether the survivor will be able to roll the benefit back to accumulation phase to remain in the superannuation environment. The Government is intent on ensuring that superannuation is not used as a vehicle for estate planning purposes, and therefore reversionary pensions may also become defunct as part of these new measures.
As always, the devil will be in the detail, including any exemptions that may apply.
6. Catch Up Concessional Contributions for Super Balances <$500,000
If your super balance is less than $500,000, from 1 July 2017 you will have the opportunity to boost your superannuation savings by carrying forward unused concessional contribution limits over a rolling five-year period. This will enable additional concessional contributions to be made where the cap was not fully utilised in previous years (from 1 July 2017).
It is unclear at present the timing of when the $500,000 balance will be measured, which has been an issue in the past with previous proposals with such criteria imposed.
7. Removal of the Work Test for Superannuation Contributions.
From 1 July 2017, individuals aged between 65 and 75 will no longer be required to satisfy a work test for superannuation funds to accept contributions. Further, they will be able to receive contributions from their spouse.
This is a positive move. It may provide opportunities to boost your super from other non-work sources such as proceeds from downsizing the family home, an inheritance received, or from the sale of a business or other assets, subject to the contribution caps in place.
Once an individual reaches age 75 however, they will remain ineligible to make further contributions to superannuation unless they are mandated employer contributions.
8. Removal of the 10% Rule for Personal Deductible Contributions
An area of much lobbying to the Government and Treasury since 2007 has been the removal of the 10% test. Finally the Government has listened and announced this change, which will apply from 1 July 2017.
Accordingly, from 1 July 2017 all individuals up to age 75 will be able to claim a tax deduction for personal contributions up to the limit of $25,000 p.a, regardless of their employment status. The current 10% rule prohibits many people from optimising their superannuation contributions where their income from a small amount of employment would preclude them from being able to claim a personal tax deduction.
Given the concessional contribution limit is to be reduced to $25,000 per person per annum, the source of the contributions will be irrelevant, which is a good outcome.
9. Anti-Detriment Deductions to be Removed
The ability for a superannuation fund to claim a tax deduction for the payment of member’s death benefits (with certain criteria attached) will be removed from 1 July 2017. Although not a widely utilised strategy by SMSFs (mainly by public offer funds), it is expected that this will gain approximately $350M in revenue over the forward estimates period.
10. Tax Exemption to Remain Available to Certain Retirement Income Stream Products
As outlined above, the Government has announced that any amounts in pension phase greater than $1.6M will be ineligible for the pension exemption. However, they have stated that where retirement income stream products such as deferred lifetime annuities and self-annuitisation products are in place, they will remain eligible for the exemption.
Such products generally provide very little control and investment flexibility for retirees, and are put in place to address longevity risk issues.
We haven’t seen so many changes in super since Howard and Costello’s Simpler Super back in 2006.
As the law on these announcements are released, we will keep your abreast of these changes. There are a number of conversations that we will need to held with you as to how you are impacted. These discussions may include:
- High balance pension funds – revisit and make necessary adjustments
- For those aged between 65 and 75 – revisit your superannuation contribution strategy
- For those with high account balances – consider spouse contributions
- For those with super balances less than $500,000 – consider whether you could take advantage of catch-ups in concessional contributions
- Review all TRP –revisit the tax effectiveness of these
- Review superannuation contributions strategies splitting for those with greater than $250,000 income
In the meantime we will be holding a breakfast session next Wednesday, 11 May 2016, to discuss in more detail the above changes and potential strategies. We will be sending you an invite shortly.
If you would like to speak to us about how these changes may impact you, please call us on 08 6311 6900.