The Budget made some significant changes to Superannuation. This month saw the Government announce further changes. We have provided some clarification on the implications
- The $1.6 million pension cap
- Lifetime non-concessional contributions cap of $500,000 Replaced with a reduced Non Concessional Contribution Limit
- Reduction in Concessional Contributions cap to $25,000
- Catch up concessional contributions
- Tax deductible personal contributions
- $300,000 threshold for higher contributions tax reduced
- Spouse contributions threshold increased
- Abolition of anti-detriment
- Removal of tax exemption on TTR pension fund earnings and abolition of lump sums
Note: legislation and implementation of these proposed measures are expected to be introduced to Parliament by the end of 2016.
Superannuation offers exceptionally generous tax breaks where earnings are taxed at either 15% (with a discounted rate of 10% on capital gains for investments held for more than 12 months) in Accumulation phase (pre-retirement) or 0% when moved into pension phase (post retirement/Transition To Retirement (TTR)).
With generous caps of $30k pa (< age 49), $35k pa (age 49+) concessional (pre-tax) contributions and $180k pa non-concessional (post-tax) contributions, investors were able to filter large amounts into superannuation, sheltering investment returns in a tax effective environment.
With over $2 Trillion sheltered in Superannuation, it seemed only a matter of time before the benefits were reduced.
That being said, Superannuation still remains one of the most tax effective savings vehicles but investors would do well to consider the impact of those changes and how they may be able to funnel additional funds into Super prior to 30th June 2017. We have compiled a list of the key changes for investors below;
The amount transferred into a superannuation pension account will be subject to a $1.6 million cap from 1 July 2017 (indexed with CPI) and can continue to grow without penalty.
Individuals with pensions already in excess of $1.6 million on 1 July 2017 have two options:
1. Roll the excess into an accumulation account, where earnings will be taxed at the standard rate up to 15%.
2. Withdraw the excess.
The amount of cap an individual has left will be determined proportionally. E.g. If you have previously drawn 75% of your cap (at that time), you will have 25% of the cap available (indexed to today’s cap).
A suitable strategy may be to segregate assets, holding investments with the greater potential for growth within the pension account and lower risk/returning investments in accumulation phase.
2. Lifetime Non-Concessional Contributions (NCC) cap of $500,000 SCRAPPED
Arguably the most resented change is the Lifetime $500,000 Non-Concessional Contribution (NCC) cap backdated to 1 July 2007 will apply from 3 May 2016.
Pre- Sep 16 Announcement – Those who have made contributions above the cap before Budget night will be able to retain those amounts within superannuation without penalty. Excess contributions made after the 3rd May will be taxed at 49% (unless refunded).
It was always our view that this was a furphy, thrown in to make the other changes more palatable to the electorate, although admittedly, we expected this to be subsequently dropped without a fight. The ensuing political jousting of this hot potato was a surprise.
Post Sep 16 Announcement – The Government finally rolled over and dropped the Lifetime Concessional Cap of $500,000 but opted to reduce the Non Concessional Contribution limits.
2a. Reduced Non Concessional Contribution (NCC) limit of $100,000
From 1st July 17, the NCC cap will be lowered from the current cap of $180,000 to $100,000pa.
A further constraint for making non-concessional contributions is that individuals with a balance of more than $1.6m (as of previous 30th June) will not be able to make a non-concessional contribution.
2b. Three year Bring Forward Rule
The ability to Bring Forward a further 2 years of contributions will be retained, with the maximum Bring Forward now being reduced from $540,000 to $300,000 (reflecting the lower annual NCC).
Transitional rules apply for those that have activated the Bring Forward rule in 15/16 or 16/17 (more details from us next week)
The Concessional Contributions (CCs) cap will be reduced from $30,000 ($35,000 if over age 49) to $25,000 from 1 July 2017 for all individuals.
Notional and actual employer contributions for members of unfunded defined benefit schemes and constitutionally protected funds from 1 July 2017 will count towards the CC cap.
From 1 July 2018, individuals under age 75 with a super account balance under $500,000 can catch up unutilised Concessional Contributions from previous financial years. Amounts are carried over on a 5-year rolling basis (accrued from 1 July 2018).
A welcome measure that encourages those approaching retirement with lower balances, to top up their superannuation savings.
From 1 July 2017, the Government will allow all individuals under the age of 65, and those aged 65 to 74 who meet the work test, to claim a tax deduction for personal contributions.
Current rules did not allow self employed individuals who also earned more than 10% of their income from a salaried employment to make Concessional Contributions from their self employed income. The new rules, simplify and encourage self employed individuals to save towards their retirement.
From 1 July 2017 individuals with adjusted taxable income of $250,000 (currently $300,000) will pay 30% tax on concessional super contributions.
Pre-Sep 16 announcement – The spouse contributions work test was to be removed.
Post Sep 16 announcement – A tax offset up to $540 will apply to spouse contributions where the receiving spouse earns below $37,000 (currently $10,800) from 1 July 2017.
Anti-detriment will be removed from 1 July 2017.
Anti-detriment payments were introduced by the Government after the implementation of the 15% super contributions tax in 1988. This was a way to refund the 15% contributions tax paid by deceased members, so they were not “worse off” than under the old rules. The increase in SMSF take up, and the need to have Reserves in place prior to death has resulted in Anti-Detriment rules often being overlooked and ignored.
Current rules allow funds in Transition To Retirement to benefit from tax free earnings. The exemption on TTR pension earnings will be removed from 1 July 2017 and taxed at the standard rate of up to 15%.
The opportunity to elect to take a lump sum will also be removed.
This is to ensure that TTR strategies are being used to supplement income rather than a tax minimisation strategy. Current rules have a great degree of flexibility, allowing individuals to draw large tax free lump sums from their super funds. In some cases, it is possible to draw a lump sum and use towards your minimum TTR payment, in effect, allowing individuals to benefit from tax free income and tax free growth.
It is important to be aware these proposed changes are not yet law but are expected to be introduced into Parliament by the end of 2016. There is likely to be a consultation draft released prior to that which is expected to have more detail on the changes.