The changes to superannuation, as announced in the Federal Budget in May 2016, have now received Royal Assent. This approval has now provided some certainty in an area that has been full of speculation and change in recent months. The Treasurer Scott Morrison said in a press conference on Tuesday 8 November: “These Bills summarise the Government’s changes to make superannuation fairer, more sustainable and more flexible for all Australians.”
Perhaps one of the more significant changes outlined is the reduction to the existing annual non-concessional (tax free) contributions cap from $180,000 per year to $100,000 per year. It was also announced that individuals under age 65 would continue to be able to ‘bring forward’ three years’ worth of non-concessional contributions in recognition of the fact that such contributions were often made in lump sums and that the overwhelming bulk of such larger contributions were typically less than $200,000. This allows individuals to exercise these ‘bring forward’ rules, making a maximum of $300,000 in non-concessional contributions over 3 years.
The current non-concessional cap of $180,000 will remain unchanged for the remainder of the 2017 financial year. As a result, members have until 30 June 2017 to maximise their after-tax contributions to their superannuation balances. It is worth noting, however, that these non-concessional contributions will be subject to an additional cap – no non-concessional contributions can be made that will cause the member’s account balance to exceed $1.6 million.
The other major controversial change is the introduction of a pension transfer balance cap of $1.6 million (for the 2017/2018 financial year). This cap is designed to limit the amount of super a member can transfer to pension phase and subsequently enjoy the earnings tax exemption which currently applies in pension phase. The pension transfer balance cap will apply on a taxpayer-by-taxpayer basis in respect of all their super accounts (subject to one exception) which move into pension phase. The exception relates to transition to retirement pensions, which will not be eligible for any tax exemptions.
The introduction of this pension transfer balance cap will bring with it a number of administrative complexities. In particular, there were originally concerns raised around how this $1.6 million cap will interact with reversionary pensions and death benefit pensions. Through a few modifications as a result of the numerous releases of draft legislation, it has been decided that recipients of reversionary pensions or death benefits will have 12 months to adjust their affairs for the new transfer balance cap (such payments do count towards the beneficiary’s cap). There are also capital gains tax relief provisions for those individuals who are required to transition assets from pension phase to accumulation phase to fall within the new transfer balance cap rules.
Despite transition to retirement pensions losing their tax concessions from July 2017, the 2016/2017 financial year could still be a golden opportunity to start one. The most obvious reason is that transition to retirement pensions established in the 2017 financial year would see tax-exempt earnings for at least this financial year (despite this exemption being removed from 1 July 2017). A second advantage worth exploring if you are considering establishing a transition to retirement pension in this financial year is the ability to grandfather some capital gains that have been accumulated on current investments for those in pension phase (and hence be entitled to the capital gains tax relief discussed above). If you think such a strategy may suit you, please discuss this with your trusted adviser.
A further change that could affect a large number of members is the adjustment to the concessional (taxable) contributions cap. The current concessional contribution cap is $30,000 for people aged under 49 on 30 June 2016 and $35,000 for people aged 49 and over on 30 June 2016. This cap expires on 30 June 2017, after which all concessional contributions, regardless of age, will be reduced to $25,000 per annum, per person. There is no change in the current rule of those aged 65 and over having to meet a work test to be eligible to make superannuation contributions, and those aged 75 and older only being able to have mandated employer contributions made on their behalf.
If reserving strategies are adopted (where additional concessional contributions are made in relation to a member in this financial year and placed in a reserve account prior to 30 June to be allocated to a member early in the new financial year), it is important to note the new cap.
There is also the ability for those individuals with superannuation balances less than $500,000 to make ‘catchup’ concessional contributions for up to five years, irrespective of their work situation. This will not be effective until 1 July 2018.
Perhaps the most welcomed change relates to personal deductible contributions. Under current rules you can only claim a personal deduction for contributions made to your superannuation balance if the income generated from employment sources is less than 10% of your overall taxable income. This rule has been removed from 1 July 2017 so that anyone will be entitled to claim a personal deduction for superannuation contributions, regardless of their employment situation.
With just over six months before this new super regime takes hold, it is imperative that self managed superannuation fund trustees, members and individuals make themselves aware of such changes and engage in the necessary discussions with their trusted adviser to ensure the best course of action is adopted prior to the 1 July 2017 deadline.