Concessional Contributions Cap Reduction
Concessional contributions cap reduce to $25,000 per annum for everyone regardless of age from 1 July 2017.
The reduced concessional contributions cap of $25,000 does not apply until 2017-18. Clients should consider taking advantage of the current higher concessional cap of $30,000 (under age 50) and $35,000 (age 50 and over) in the 2015-16 and 2016-17 financial years.
Catch-up Concessional Contributions
Unused concessional contribution cap amounts carry forward on a rolling basis over 5 consecutive years. This applies to unused cap amounts from 1 July 2017. Access to unused cap amounts will be limited to individuals with a superannuation balance less than $500,000. The Government states this measure will allow those who take breaks from the workforce the opportunity to ‘catch-up’ if they have the capacity and choose to do so.
The ability to carry forward unused concessional cap amounts appears to apply to everyone who has contributed less than the concessional cap, not just those who take breaks from the workforce such as women and carers.
For example – a business owner who hasn’t made any contributions into super in the subsequent 5 years, could make a $125,000 concessional contribution to super (and claim a $125,000 tax deduction) to offset the Capital Gain on the sale of an asset.
Lifetime Cap for Non-Concessional Contributions
A lifetime non-concessional contributions cap of $500,000 were introduced effective Budget night (3 May 2016). The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007.
Contributions made before the budget cannot result in an excess of the lifetime cap, however those who have exceeded the cap prior to commencement will be taken to have used up their lifetime cap.
The lifetime non-concessional cap will replace the existing annual non-concessional contributions cap of up to $180,000 per year (or $540,000 every 3-years under the bring-forward rule for individuals aged under 65). Those aged 65 to 74 who are currently limited to $180,000 per year will have access to the $500,000 cap without having to meet a work test.
While the Government states the ATO has reliable contribution records since 1 July 2007, it is not clear whether we will be able to access this information. We may need to contact the relevant superannuation funds. Those who have previously utilised the bring-forward provisions will need to carefully review their situation to determine whether they have exhausted their lifetime cap. The introduction of the lifetime non-concessional cap may limit the ability to implement a re-contribution strategy where by money is taken out of super and then put back in the get better tax outcomes. Strategies such as spouse contributions which count against the spouse’s lifetime non-concessional cap may assist.
Contribution Eligibility Requirements Age 65-74 Removed
The current work test that applies for people making voluntary contributions between age 65 and 74 will be removed. This change will allow individuals to make contributions aged under 75 without requiring to satisfy a work test.
The Government says this will simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including downsizing their home.
When combined with the life-time non-concessional cap this proposal could allow non-working clients aged between 65 and 74 who were previously ineligible to contribute to make non-concessional contributions of up to $500,000 after 1 July 2017 and tax deductible contributions of up the $25,000. The latter item may balance the personal tax ramifications of having to hold more taxable assets outside of superannuation given the new $500,000 lifetime cap.
$1.6 Million Superannuation Transfer Balance Cap
A (another!) cap will be introduced to restrict the total amount of superannuation that can be transferred from accumulation (paying 15% tax) to pension phase (paying no tax) to $1.6 million. Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess in accumulation phase.
Those already in pension phase as at 1 July 2017 with balances in excess of $1.6 million will need to either:
- transfer the excess back into an accumulation; or
- withdraw the excess amount from their superannuation.
Time will tell how this will all play out, but this item alone may bring about another surge in SMSF uptake. The ability to transfer assets in and out of pension/accumulation phase without triggering a capital gains event may be rather enticing. For example – we may choose to leave an investment property in accumulation phase (low taxable rental yield) paying 15% until shortly before you go to sell it and realise a $200,000 capital gain whereby we’d transfer to pension (paying no tax) to eliminate the Capital Gains Tax).
Additional 15% Contributions Tax: Threshold Reduction to $250k
Currently there is an additional 15% contributions tax to super payable by high income earners with income exceeding $300,000, but this will now apply to those with income exceeding $250,000 from 1 July 2017.
Inadvertently exceeding the $250,000 threshold will be a key concern if the proposed changes are legislated. Examples that may cause a client to exceed the $250,000 threshold include taxable capital gains and employer termination payments. Another important implication of this proposal is the increased cost of funding insurance in superannuation using concessional contributions for those subject to additional tax.
Transition to Retirement Pensions: Removal of Earnings Tax Exemption
The tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed from 1 July 2017. Earnings will then be taxed at 15 per cent. This change applies irrespective of when the TTR income stream commenced, i.e. no grandfathering applies.
Taxing earnings on TTR income streams significantly reduces the tax effectiveness of strategies such as TTR and salary sacrifice. For clients aged 60 or over, TTR strategies may still be worthwhile as pension payments are tax free and allow tax effective salary sacrifice contributions. However, for clients under age 60, the tax benefits are minimal. Clients may look at arrangements involving ceasing a gainful employment arrangement over age 60 or ceasing work and declaring permanent retirement to meet the retirement condition of release.
From a superannuation fund perspective, administering the taxation of earnings in pension phase for transition to retirement pensions will add complexity.
Increased Access to Spouse Superannuation Tax Offset
The current spouse superannuation tax offset will be available to more people due to an increase in the spouse income threshold from 1 July 2017. The income threshold for the spouse superannuation tax offset is increasing from $10,800 to $37,000. A contributing spouse will be eligible for an 18 per cent offset worth up to $540 for contributions made to an eligible spouse’s superannuation account.
Currently the spouse superannuation tax offset reduces where the spouse’s income exceeds $10,800 and cuts out altogether when their income reaches $13,800. If the same methodology applies, the tax offset would reduce where the spouse’s income exceeds $37,000 and cut out altogether at $40,000.
Low Income Superannuation Tax Offset
A Low Income Superannuation Tax Offset (LISTO) will be introduced from 1 July 2017 to reduce tax on superannuation contributions for low income earners. The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions up to a cap of $500. The LISTO will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
The LISTO replaces the Low Income Superannuation Contribution (LISC) rules that were due to be abolished on 1 July 2017. Similar to LISC, the LISTO provides a contribution of 15% of the value of a member’s concessional contributions up to a cap of $500 where the member has adjusted taxable income of less than $37,000.
Anti-detriment payments abolished
Anti-detriment provisions will be abolished from 1 July 2017, effectively removing the ability of superannuation funds to increase lump sum superannuation death benefits when paid to eligible beneficiaries.
If this proposal is legislated as announced, eligible beneficiaries will no longer qualify to have a death benefit payment uplifted by 17.65% (under the formula method). This may result in more beneficiaries electing to receive their benefit in the form of a death benefit income stream.
This change will also mean that re-contribution strategies will no longer be adversely impact beneficiaries that would have qualified as eligible beneficiaries for an anti-detriment payment.
Extend Deductions for Personal Contributions
Australians under 75 will be able to claim an income tax deduction for any personal superannuation contributions made to a complying superannuation fund up to their concessional cap. This effectively allows all individuals, regardless of their employment circumstances, to claim a deduction for their personal contributions up to the value of the concessional cap.
This announcement will dramatically simplify the eligibility requirements for a member to qualify to claim a deduction for a personal super contribution.
The announcement also gives employees more flexibility and allows them to make personal deductible contributions in addition to super guarantee and salary sacrifice contributions, to use up any unused concessional cap at the end of the year.
The advice provided is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.
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By Julian Nowland
By Julian Nowland