Since the federal Budget, the Government updated their policy regarding several of the proposed changes, most of which were positive.
Now that the legislation has been passed, we are in a position to provide you with an update, as well as undertake any appropriate planning to ensure that you are optimising your superannuation in 2016/2017 and are ready for the changes that will come into effect on 1 July 2017.
Outlined below is a summary of the final changes to superannuation that were legislated, and how those changes will impact your super or SMSF:
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, changes to the treatment of contributions to constitutionally protected funds have been introduced (such as GESB WestState and GoldState), such that the notional contributions to such funds impact concessional contributions to other superannuation accounts.
2. Non-Concessional Contributions
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 non-concessional cap of $100,000 per annum (or $300,000 every 3 years). However, in addition to the reduced cap, those members who have more than $1.6M in superannuation will be unable to make any further non-concessional contributions to superannuation.
This will apply from 1 July 2017, and transitional rules will be in place for those who triggered the three year period in either 2015/2016 or 2016/2017 but who didn’t fully utilise their relevant three year cap by 30 June 2017.
This new provision does not affect contributions made in 2016/2017. Accordingly, it will be important to review contribution histories and ascertain whether any further contributions can be made to superannuation prior to 30 June 2017. From that time, the ability to make non-concessional contributions will depend upon the individual’s total superannuation as at 30 June of the previous financial year.
This may create some timing issues, particularly for SMSFs where the annual balances are often unknown until well into the following financial year.
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.
5. A Tax Exempt Pension Balance Capped at $1.6M
Several of the above reductions in limits fit into the context of the introduction of a $1.6M cap on how much can be held within the retirement phase of superannuation for members. 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 will be subject to tax on the deemed earnings on the excess. In most circumstances the separation of the $1.6M and the accumulation account will be preferable to the tax outcome where there is an excess.
For those who are already in pension phase, where your pension benefits are greater than $1.6M, by 1 July 2017 you will have to review your pension accounts and either 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, or take it out of the superannuation environment as a lump sum.
Once the $1.6M transfer balance cap has been triggered, any earnings and capital growth with respect to 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, certain modifications will be in place:
- Those members who have legacy pensions such as market linked pensions or complying pensions (in SMSFs) with more than $1.6M in those accounts. As such pensions are unable to be commuted or rolled back to accumulation phase, different rules apply. The cap for members in this scenario depends on the annual pension amount and the term of the pension – some members may be in an advantageous position, and others detrimentally impacted. The deemed value of these pensions will also impact the amount of other pension accounts the individual can have in the retirement phase.
Further, such pensions will be subject to a pension income cap. This will operate so that if such a pension payable each year exceeds $100,000, the 50% of the excess to that will be included in the individual’s assessable income.
Accordingly it will be important that such pensions are reviewed in detail.
- Where one member of a couple passes away, the $1.6M cap of the deceased will not be able to continue to apply to the beneficiary. Also, the beneficiary will be unable to rollback the deceased’s pension account to accumulation. A 12 month grace period will apply to enable reversionary pensioners to put their affairs in order to address any cap excess.
Further, where a deceased member has accumulation accounts, where the spouse has already used their own $1.6M cap the accumulation account will need to be paid out of superannuation.
The Government is intent on ensuring that superannuation is not used as a vehicle for estate planning purposes. Accordingly, it will be important to review any estate planning arrangements within superannuation to achieve the optimal outcome upon your passing, particularly when considering that a deceased member’s benefits will be required to all be paid out
of superannuation (unless the spouse hasn’t used their own $1.6M cap.
6. CGT Relief
Following on from the new $1.6M cap on the tax exemption on assets supporting pensions, to ensure that there is no disadvantage for existing pension accounts that will need to be rolled back to accumulation, capital gains tax (CGT) relief will be available. This relief will operate such that funds will be able to make an irrevocable election that there is a deemed disposal with respect to particular assets in the 2016/2017 financial year.
These arrangements will replicate the consequences for a fund as if they had triggered a CGT event on these assets prior to 1 July 2017, and ensure that, when these assets are sold after 1 July 2017, tax is only paid on capital gains accrued after this date.
It is important to note that for this relief to apply, elections need to be made, with different treatment for segregated and unsegregated assets. Further, funds where a member has more than $1.6M in total superannuation will no longer be able to segregate assets within that fund.
7. Catch Up Concessional Contributions for Super Balances <$500,000
If your super balance is less than $500,000, from 1 July 2018 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 2018).
The $500,000 balance will be measured as at 30 June of the year prior to the contribution. As with non-concessional contributions, this may create some timing issues, particularly for SMSFs where the annual balances are often unknown until well into the following financial year.
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, 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 is irrelevant, which is a good outcome.
9. Anti-Detriment Deductions Removed
The ability for a superannuation fund to claim a tax deduction for the payment of member’s death benefits (with certain criteria attached) has been removed from 1 July 2017.
We haven’t seen so many changes in super since Howard and Costello’s Simpler Super back in 2006.
As the law has now been released and passed, anyone who has superannuation in pension phase, or looking to make contributions to superannuation needs to review their position and ensure that the new rules have been considered. 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
If you would like to speak to us about how these changes may impact you, please call us on 08 6311 6900.