The 2016 Federal Budget has proposed the most significant changes to superannuation in many years. Whilst a range of measures were expected, some of the changes targeted towards those already in retirement have come as a bit of a surprise. The majority of changes have been targeted at reducing the tax benefits of members having large super balances. High income earners will also pay additional tax on concessional contributions going into their accounts.
Some of the most relevant changes affecting most SMSF members are:
A reduction in the concessional contributions cap
From 1 July 2017, the Government will reduce the concessional contribution cap to $25,000. The concessional contribution cap currently sits at $30,000 for those under 49 at 1 July each year, or $35,000 for those above 49 at 1 July (temporary cap). It appears the Government have forgotten their rhetoric when they were in opposition and the caps were reduced by the then Labor Government in 2012/13.
Lowering of Division 293 Threshold
It was one of the worst kept secrets… however political pressure clearly got the better of the Government who have decided on a reduction of the income threshold to $250,000. This level matches the previously announced threshold by the Labor Government should they win the next Federal Election. This will take effect from 1 July 2017.
Lifetime Non-Concessional Contributions cap
The Government will introduce a $500,000 lifetime non-concessional contribution (NCC) cap, taking into account all non-concessional contributions made on or after 1 July 2007, this means members who have contributed more than $500,000 of non-concessional contributions will be unable to make any further non concessional contributions going forward. This measure takes effect from, 7.30pm on 3 May 2016 (Federal Budget night).
No retrospectivity will be applied to individuals who may have made non-concessional contributions in excess of the $500,000 lifetime threshold between 1/7/2007 to 3 May 2016. This effectively removes the annual $180,000 Non concessional contributions cap and replaces it with a total cap of $500,000. This means that should a member receive a large payout from the downsizing of their family home and wish to put $400,000 into their fund as a non-concessional contribution then they would be able to do so. However should they then receive a large inheritance of $300,000 they would only be able to contribute a further $100,000 to superannuation as a non-concessional contribution. The lifetime NCC cap will be indexed to average weekly ordinary time earnings (AWOTE).
$1.6 million transfer balance cap for retirement accounts
It is clear that the Government is resetting the rules for paying pensions as part of their approach to setting an objective for superannuation. They have been quite clear in their messaging that superannuation is not an estate planning tool. In the Budget, they have certainly delivered with this policy. From 1 July 2017, we will see an introduction of a $1.6 million transfer balance cap on amounts moving into pension phase.
Subsequent earnings on these balances will not be restricted (i.e. they can grow or reduce accordingly). As a result of this measure, it significantly limits the extent of exempt current pension income (ECPI) applying to assets supporting the payment of pensions. According to the Government, it better targets the sustainability and fairness of tax concessions within super. Where a member has a balance in excess of $1.6 million, they will be able to maintain this excess within superannuation, however it cannot be transferred into the post-retirement cap. As a result of it remaining in accumulation phase, a 15% tax rate will apply to fund earnings the accumulation benefit generates.
Importantly, this measure does not grandfather existing pensions. For members already in retirement phase whose balance is above $1.6 million, they will be required to reduce their pension balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted back to accumulation.
This measure by far has the biggest impact on those taxpayers that have accumulated large superannuation balances. The benefit though will be that the minimum pension amounts these taxpayers can draw down will be reduced and with some careful planning tax paid by the fund can still be minimised.
Transition to Retirement Pensions
This measure has been talked about for some time with regular discussion in the media taking place prior to the Budget. It appears the Government have followed the opposition on this one. From 1 July 2017 they will remove the tax exemption on fund earnings from assets supporting a transition to retirement income stream (TRIS). In addition to this change, it will also remove the ability for a member to elect under Regulation 995-1.03 of the ITAR to have the payment treated as a lump sum for tax purposes. In reality those with smaller account balances will still be able to benefit from using this strategy. Those who have large balances will wear the brunt of this change.
Allowing catch up concessional contributions
Whilst seemingly trying to prevent taxpayers from building large superannuation balances, the Government has thrown in a few sweeteners to assist those who are unable to fully utilise their superannuation caps in al years. From 1 July 2017, the Government will allow individuals with a super balance of less than $500,000 to utilise a rolling concessional contributions cap for a period of five consecutive years.
The unused portion of the concessional contribution cap can be accrued and carried forward. The basis for these changes is to allow for people with interrupted work patterns to benefit through periods of time where they may have an ability to catch up if they have a capacity to do so.
Removal of the 10% and work tests:
Finally! Long overdue, we finally see a level playing field for everybody to make personal contributions into super and claim a tax deduction. From 1 July 2017, the Government will provide greater flexibility for individuals to claim a tax deduction for personal super contributions. The current 10% rule provides a ridiculous framework that limits an individual’s ability to make additional contributions where their salary represents more than 10% of their assessable income. These new measures will allow all individuals, regardless of their employment circumstances to make concessional contributions up to the concessional contribution cap ($25,000).
From 1 July 2017, the Government will also remove the restriction on people aged between 65 to 74 to be gainfully employed for at least 40 hours within a 30 day consecutive period prior to making a contribution into super. This applies for both concessional and non-contributions, along with extending to spouse contributions for people aged under 75. This decision allows older Australians to consider making additional contributions into superannuation that may result from events such as downsizing the family home. Importantly, it removes the contrived arrangements by individuals needing the find work to make contributions into super up to reaching age 75.
Overall many of the changes will serve to return some equity for lower to middle income earners with regards to their superannuation, however some may feel that these retrospective changes will discourage people from using superannuation to save for their retirement out of fear that the rules may be changed at any point and their savings diminished. Regardless of your view, there are still plenty of opportunities for taxpayers to save tax over their lifetime using their superannuation savings so all is not lost especially for middle income earners and many small business owners, some different structuring may just be called for. But it’s safe to say the days of massive superannuation account balances are numbered…