Sweeping changes were introduced to the superannuation system last night in the 2016 Federal Budget. Some good, some bad. The key takeaway message is that Superannuation still provides a highly tax-advantaged environment for retirement savings. In our short blog today we look at the changes, both good and bad, and outline when the measures take effect.
Tax deductions for personal concessional contributions. From 1 July 2017, you will be able to make additional tax-deductible super contributions directly from your own personal funds. Normally to claim a deduction, contributions would have to be made via ‘salary sacrifice’. The new measure puts employees on the same footing as self-employed people in terms of being able to top up their super with direct tax-deductible contributions. You will need to lodge a notice with your superfund.
Contributions till age 75 with no work test. Previously, after turning 65 you were required to work 40 hours in a 30 day period during the year to be able to make a super contribution. From 1 July 2017 that rule is gone, and you can put money into super whether working or not.
Increased thresholds for Low Income Spouse rebate. From 1 July 2017 you will be able to claim a $540 tax rebate for contributing to super for a spouse, even if his or her income is up to $37,000. The rebate phases out once the spouse income is over $40,000. The maximum rebate is achieved with a contribution of $3,000
Rebates on contributions tax for members earning less than $37,000. This measure takes effect from 1 July 2017 and will provide a tax offset of up to $500 for the member and has the effect of reducing the contributions tax to zero on modest contributions. Given the contributions tax is 15%, the rebate offsets all of the contributions tax on a $3,333 contribution.
Deferred Lifetime Annuities to get tax exempt status. Previously a superfund had to commence paying out a pension to obtain an exemption from tax on the fund earnings. This new measure to take effect from 1 July 2017 will allow the creation of new deferred income products, designed to provide more protection against running out of funds in old age.
Capping pensions at $1.6 million. From 1 July 2017, there will be a new cap on how much can be rolled into the zero taxed pension phase. The amount is $1,600,000. This measure is to apply to current and future accounts, so there is an element of retrospectivity within this that had not been seen previously. Existing accounts will be measured for value as at that date, and amounts in excess will need to be moved back to what is currently called ‘accumulation phase’. Earnings on funds in the accumulation phase will continue to be taxed at 15% on income, with a 33% discount for capital gains when the asset was held for more than 12 months. In the period following 1 July 2017, you will be able to accumulate more than $1,600,000 in a pension account if the increase has come from earnings. So that date is shaping up to be a critical one. Self managed superfunds will be able to make a smooth transition of assets back into the accumulation phase if required since it is merely a ‘book entry’ for them.
Reduction to $25,000 for concessional contributions. Currently $30,000 for people under 50, and $35,000 for those over 50, this new lower limit will apply to all from 1 July 2017. The opportunity still exists to use the old caps this year (before 30 June 2016) and next year while still available. There will be an option to accrue the unused component of your annual cap for up to 5 years, with the aggregating to start being measured from 1 July 2017.
Lifetime limit on non-concessional contributions. This measure took effect from budget night and limits your non-concessional contributions to a lifetime cap of $500,000. The existing annual limits of $180,000 still apply in the current year and the 2017 tax year, but the ‘bring forward’ rule is now limited to a maximum $500,000. Any new non-concessional contributions from today will need to be measured against all non-concessional contributions made since 1 July 2007. If you have already exceeded $500,000 since that date, then you cannot make any further non-concessional contributions. If you have already made contributions in excess of that amount they will be grandfathered, and you will be allowed to retain those amounts in the superannuation system. The lifetime cap will be indexed to earnings in line with the concessional caps. The next change in the cap will be a $50,000 step up when AWOTE has increased by 10% or more above the 1 July 2017 figure.
Lowering the threshold at which you pay 30% contributions tax. The Division 293 tax which levied an extra 15% contributions used to take effect when you had assessable income over $300,000 but from 1 July 2017 it will be levied once your income exceeds $250,000.
Changes to Transition to Retirement Income Streams. Sometimes called TTR pensions, or TRIS pensions, the strategy has been a popular way for advisers to help people salary sacrifice more into super, by simultaneously drawing on a pension from super. The added advantage was that the earnings on the assets supporting the pension payments moved onto a tax-free status. From 1 July 2017, the tax exemption on the earnings of these pensions will be removed, and the fund will be paying 15% tax on income with a 33% discount applying to capital gains over 12 months. Retrospectivity also applies here. So it doesn’t matter that your pension commenced a year ago, last night, or next week. The status remains the same for now, but from 1 July 2017, the tax-exempt status on the income in the fund will change. The planning opportunity here will be around what is called ‘condition of release’. Currently, and in future, it appears that as soon as you have met a condition of release and have unrestricted non-preserved status on the assets, a normal pension, with no cap on the withdrawal amount and no tax on the account earnings can be commenced. It is important to consider the implications of current and proposed funds with your adviser.
Our title says it all. Super is still super, providing many tax benefits to those who make use of the system. Political and budgetary pressures mean that the government has made it a little bit less ‘super’ by reducing and capping contributions and size of pensions. However, even for those with large super balances, the concessional tax rate of 15% will still be lower than their personal marginal rates if the assets were held outside of super. Out of adversity comes innovation and we believe that there will be new retirement products created in the next few years that will help to ensure a comfortable retirement for those who get good advice on their retirement structuring. As always, be sure to keep in touch with your adviser on how the changes affect you, and what new opportunities are available to you.