News from Davidsons
The most far-reaching superannuation changes in 10 years
Some of the most far-reaching superannuation reforms since 2007 were introduced to the House of Representatives on 9 November 2016. On 23 November the Bill was passed by both Houses and now awaits Royal Assent – which should be a mere formality.
The reforms are both good and not-so-good, depending on your personal situation.
With one exception, the measures outlined in this communication will all take effect from 1 July 2017. Let’s consider each issue in turn:
Pension transfer cap
The maximum amount a person will be able to have in a superannuation pension account will be limited to the ‘transfer balance cap’. From 1 July 2017, the cap will be $1.6m and it will be indexed in line with movements in the consumer price index in future years. Increases will be applied in $100,000 increments.
The transfer balance cap will be applied to pensions already in force as at 1 July 2017, and to new pensions that commence from that date. Where an existing pension has an account balance that exceeds $1.6m (as at 30 June 2017) the account balance of the pension will need to be reduced to $1.6m. The excess may be rolled back to a superannuation accumulation account, or be withdrawn from superannuation where allowable.
The transfer balance cap will also be applied to members of defined benefit superannuation funds, constitutionally protected funds, and to members who hold certain non-commutable lifetime and fixed term pensions and annuities.
For clients with large balances held in a self-managed superannuation fund pension account, and transition to retirement pensions, particular attention may be required well before 30 June 2017 in order to take advantage of capital gains tax relief that is available.
Concessional contributions include contributions made by employers on behalf of their employees, and contributions made by individuals who are eligible to claim a tax deduction for their contributions.
For the 2016-17 financial year, concessional contributions are capped at a maximum of $30,000 per annum for individuals under 50, and $35,000 for those aged 50 and over.
The concessional contribution cap will reduce to $25,000 for everyone, from 1 July 2017. The reduced cap will be indexed to increase in line with movements in Average Weekly Ordinary Time Earnings and will increase in $2,500 increments.
A new initiative will commence from 1 July 2018 allowing individuals with less than $500,000 in superannuation benefits to carry forward the unused portion of their $25,000 annual cap, for a period of up to five years.
High income earning individuals who have an income of more than $300,000 per annum, pay an additional 15% tax on their concessional superannuation contributions. This is known as ‘Division 293 tax’. From 1 July 2017, the income threshold at which Division 293 tax becomes payable will be reduced from $300,000 to $250,000.
Non-concessional contributions are personal contributions generally made from ‘after-tax’ income and personal savings. The non-concessional contribution cap for 2016-17 is $180,000, with individuals under 65 years of age having the ability to bring forward up to a further two year’s contributions. This effectively allows someone to make non-concessional contributions of up to $540,000 in the current financial year.
The non-concessional contribution cap is to be reduced to $100,000 from 1 July 2017. The ability to bring forward up to a further two year’s contributions will continue to be available for individuals under 65.
However, from 1 July 2017, non-concessional contributions will be restricted to individuals with less than $1.6m in superannuation.
Low income tax offset
Low income earners – those with a taxable income of less than $37,000 – may currently be eligible to receive a government funded superannuation contribution of up to $500. This is designed to compensate for the 15% contributions tax that applies to concessional contributions. This government initiative is due to cease from 30 June 2017.
However, as part of its Budget measures, the government low income contribution will be replaced by a Low Income Superannuation Tax Offset from 1 July 2017.
Deducting personal contributions
Under current taxation legislation, individuals are only able to claim a tax deduction for their personal superannuation contributions where their income from employment is less than 10% of their total tax assessable income.
Effective from 1 July 2017, the 10% restriction is to be removed.
This means the ability to claim a tax deduction for personal superannuation contributions will be available to anyone under the age of 65, and to individuals aged 65 to 74 where they meet the superannuation work test.
Tax deductible contributions are concessional contributions and will therefore be limited to the $25,000 cap.
Tax offset for spouse contributions
When an individual makes a personal contribution for their low income earning spouse, they may be eligible to receive a tax offset of up to $540. The offset is currently available where the spouse for whom the contribution is made has an adjusted taxable income of less than $10,800. The offset is then phased down and cuts out completely when their spouse’s income exceeds $13,800.
From 1 July 2017, the income threshold for the spouse tax offset will be increased significantly. The offset will be available to the contributing spouse where their spouse’s income is less than $37,000, and will phase out at $40,000.
Transition to retirement pensions
Superannuation pensions paid to people before retirement are often referred to as ‘transition to retirement’ pensions.
One of the advantages of having superannuation benefits paid as a pension is that the superannuation fund pays no tax on its investment earning. This usually translates into a higher investment return for the superannuation fund member.
However, from 1 July 2017, transition to retirement pensions will no longer receive a tax exemption on their investment earnings.
This is not the end of the road for transition to retirement pensions, however, they will generally be less attractive for individuals under 60 years of age.
For transition to retirement pensions already being paid, a review of the current arrangement is recommended.
When a superannuation fund member passes away and their accumulated benefit is paid to certain classes of beneficiaries (including a spouse of the deceased) as a lump sum, the superannuation fund may make an additional payment. This is referred to as an anti-detriment payment.
However, from 1 July 2017, anti-detriment payments will be abolished.
A transitional arrangement will allow an anti-detriment payment to be paid up until 30 June 2019, where a member has passed away before 1 July 2017.
In the general scheme of things, only a handful of Australians will be significantly affected by the changes. However, others might experience some disruption, particularly those under 60 years of age who are receiving a transition to retirement pension.
For those clients adversely affected, some careful planning should be sufficient to mitigate the worst of the undesirable outcomes.
We will be working closely with our clients to ensure that appropriate strategies are identified and where appropriate, changes are implemented.
Despite the constant meddling, superannuation remains a viable retirement savings vehicle. More than ever, we need to take a long-term view of super and to implement strategies that will enable us to maximise contributions at the earliest opportunity.
And just in case you were wondering, individuals will still be able to contribute up to $125,000 to super each year.
For further information on how you will be affected by the changes please contact Kylie McClure on (03) 5244 6890 or firstname.lastname@example.org
The material shown in this article is for general information purposes only. It is not intended to be, nor should it be read as specific personal investment advice.
Whilst all care is taken in the preparation of this material, no warranty is given with respect to the information provided, and accordingly, no responsibility for errors or omissions including responsibility to any person by reason of negligence is accepted by Davidsons Pty Ltd or any member or employee of Davidsons Pty Ltd.
Before acting on any of the information contained in this article you should obtain special advice from a specialist investment professional, which is appropriate to your specific investment needs, objectives and financial situation.