THE BIGGEST CHANGES TO SUPERANNUATION IN A DECADE
Concessional contribution cap is reduced to $25,000regardless of age from July 1, 2017
These are the ones you make before your income tax is taken out. They include the super from your employer, salary sacrificed contributions, and any other contributions where you’ve claimed a tax deduction. They’re taxed at 15% when they enter your super fund, unless your income is over $300,000 (including concessional contributions), in which case some or all are taxed at 30%. Currently the concessional contributions cap is $30,000 for the under 50s and $35,000 for over 50s
- Taking advantage of the current higher concessional caps in the 2015-16 and 2016-17 financial years.
- Reviewing salary sacrifice arrangements and personal deductible super contributions to ensure they comply with the reduced concessional cap.The ability to salary sacrifice will be restricted as superannuation guarantee may take up a large portion of the concessional cap from 1 July 2017.
- Drip-feeding contributions over a longer period in order to meet retirement goals as a result of the reduced concessional cap.
- Removal of work tests for contributions between age 65 and 74
This will extend the eligibility to claim deductions for personal contributions and restrict tax-concessions associated with transition-to-retirement pensions.
- From July 1 2017 you can “catch-up” concessional contributions
For those with balances less than $500,000* in super, unused concessional caps from previous years can be carried forward on a rolling basis over 5 years. For example if you are over 50 and only contributed $10,000 last year you may be able to contribute another $15,000 this year on top of your already allowed $35,000**
= $50,000 contribution.
(*Unclear at this stage if the $500K will include previous withdrawals **until the limit changes to $25K)
- Lifetime cap for non-concessional contributions effective 7.30pm (AEST) May 3 2016
Non-concessional contributions are capped at $180,000 for the current financial year and are not taxed on entry to the super fund because they come from after tax income. However, if you exceed the cap they are taxed at 49%. (The “bring forward rule” under 65’s to contribute $540K every 3 years)
From budget night the lifetime limit on non-concessional contributions is now $500,000 including all made since July 1 2007.
Clients who have previously utilized the bring-forward provisions will need to carefully review their situation to determine whether they have exhausted their lifetime cap. Prior to recommending a non-concessional contribution, advisers should ascertain the amount of lifetime non-concessional cap that a client has available.
- Remove contribution eligibility requirements for those aged 65 to 74
Clients are currently required to work 40 hours within 30 consecutive days in the financial year they make a contribution over the age of 65. This proposal will remove this requirement and make it easier for older clients to contribute to super.
- $1.6 million superannuation transfer balance capeffective 1 July 2017
A transfer balance cap will be introduced to restrict the total amount of superannuation that can be transferred from accumulation to pension phase 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 (where earnings will be taxed at the concessional rate of 15 per cent). In other words only $1.6M at a time will be tax free after 60.
This proposal will allow couples to have a combined pension balance of up to $3.2 million. However, where most of a couple’s superannuation savings are in one spouses name the $500,000 lifetime non-concessional cap will restrict a couple’s ability to equalize their benefits to take full advantage of the transfer balance cap.
People with pension account balances in excess of $1.6 million have not been “grandfathered” from these changes.
- Additional 15% contributions tax applies to incomes over $250,000 from 1 July 2017
Division 293 tax, which is an additional 15% contributions tax payable by high income earners with income exceeding $300,000, will apply to those with income exceeding $250,000 from 1 July 2017, so more people will pay the higher tax rate.
The overall impact of this measure will be to increase the tax burden by up to $3,750 (i.e. 15% of $25,000) on concessional contributions. However concessional contributions still offer a tax concession of 19% for those paying Division 293 tax so it is unlikely to significantly reduce the level of concessional superannuation contributions.
Another important implication of this proposal is the increased cost of funding insurance in superannuation using concessional contributions for those subject to Division 293 tax.
- Transition to retirement pensions: removal of earnings tax exemption from July 1 2017
Under transition to retirement (TTR), you’re able to start accessing your super as an income stream to make up for the difference between your former wage and your new wage as a part time employee. As it is now you can actually work full time, salary sacrifice and access your TTR benefits and take advantage of greater tax benefits. The tax exempt status of income from assets supporting TTR income streams will be removed from July 1 2017. Earnings will be taxed at 15% with no “grandfathering”.
Further, individuals will no longer be able to treat certain superannuation income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000. The effectiveness of TTR strategies may still be worthwhile for the over 60’s, for those under the benefits are now minimal.
- Increased access to spouse superannuation tax offset from July 1 2017
A spouse contribution involves making a contribution to a spouse’s super fund to build their retirement savings. You may receive a tax offset for contributions made on behalf of a low income earning or non-working spouse. The spouse income threshold from 1 July 2017 is increasing from $10,800 to $37,000.
This is simplified account of the proposed changes to superannuation law. It is not meant to provide personal advice. You should seek expert and specific advice for your own situation.