Superannuation reforms 2016 – most significant super reforms in a decade and how to benefit from the opportunities it brings
After months of uncertainty, consultations and amendments, the superannuation reforms announced in the 2016 Budget finally received Royal Assent. These changes are being hailed as the most significant super reforms in a decade since the Simplified Superannuation reforms of 2007. It’s important that you understand the impact of these changes and plan your finances in the best possible way moving forward.
These changes mean that some opportunities are only available to you prior to 30 June 2017. This may be the last opportunity if you are under age 65 to contribute up to $540,000 or $1,080,000 as a couple to your super accounts this financial year. This also creates a chance for some couples where one partner has a lot more in super than the other, to even up your balances before 30 June.
Other reforms introduced such as the Low-Income Superannuation Tax Offset, improving access to concessional contributions, allowing catch-up concessional contributions, extending the spouse tax offset and enhancing the choice in the retirement income products, will provide enhanced opportunities after 30 June 2017.
Some of these changes and related strategies to consider prior to 30 June 2017 have been summarised below:
After-tax / Non-Concessional Contributions
- Contribution Cap and ‘Bring Forward’ rule
Rules which apply this Financial Year (Prior to 30 June 2017)
The contribution cap is $180,000 a year with an option to make 3 years of contributions in one year ($540,000) if you are under 65 years of age. This cap is not impacted by your super balance. The only factor considered is how much you have already contributed and when you triggered the “Bring Forward” rule.
Rules which will apply from next Financial Year (Post 1 July 2017)
From 1 July 2017, the contribution cap will be $100,000 a year with an option to make 3 years of contributions in one year ($300,000) if you are under 65 years of age. There will be transitional arrangements available and the cap will be adjusted based on when you triggered the “Bring Forward” rule. This cap will further be impacted by your super balance and anyone with more than $1.6M in super will not be able to make any contributions.
Strategy for this Financial Year (Prior to 30 June 2017)
This may be the last opportunity if you are under age 65 to contribute up to $540,000 or $1,080,000 as a couple to your super accounts this financial year. This also creates a chance for couples where one partner has a lot more in super than the other, to even up their balances before 30 June.
Speak to your Adviser to work out HOW MUCH capacity you have to contribute!
- Tax Offset for Spouse Contributions
Rules which apply this Financial Year (Prior to 30 June 2017)
There is a tax offset available where the recipient spouse has an assessable income less than $13,800. Age and work tests apply.
Rules which will apply from next Financial Year (Post 1 July 2017)
The tax offset is available where the recipient spouse has an assessable income less than $40,000. Age and work tests will continue to apply. Further, no tax offset will be available if the recipient spouse has exceeded their non-concessional contribution cap or their balance is $1.6M or more.
Strategy for this Financial Year (Prior to 30 June 2017)
While the scope of receiving this offset may be higher next financial year, it is still applicable this year.
Speak to your Adviser to work out if you could benefit from the tax offset by making a super contribution into your spouse’s account.
Pre-tax/ Concessional contributions (included Superannuation Guarantee, Salary Sacrifice and personal tax deductible contributions)
- Contribution Cap
Rules which apply this Financial Year (Prior to 30 June 2017)
$30,000 if you are under the age of 49 and $35,000 if you are over age 49 on 30 June 2016.
Rules which will apply from next Financial Year (Post 1 July 2017)
$25,000 for everyone irrespective of their age.
Strategy for this Financial Year (Prior to 30 June 2017)
From next year, the amount of tax deductible contributions will be reduced by as much as $10,000 for some people.
Speak to your Adviser to work out if maximising your concessional contributions this year will be tax effective.
- Options to Catch-up on Concessional contributions
Rules which apply this Financial Year (Prior to 30 June 2017)
You can only contribute up to your annual cap mentioned above each year. If you do not use the cap, you do not have any catch-up option available.
Rules which will apply from next Financial Year (Post 1 July 2017)
No change for the next financial year (2017-2018). However, if your super balance is less than $500,000 on 30 June 2018, you can make catch-up super contributions on a rolling 5-year basis from 1 July 2018.
Strategy for this Financial Year (Prior to 30 June 2017)
N/A as this change is effective 2018.
- Tax Deduction for Personal Contributions
Rules which apply this Financial Year (Prior to 30 June 2017)
Currently an income tax deduction for personal superannuation contributions is only available to people who earn less than 10% of their income from salary or wages.
Rules which will apply from next Financial Year (Post 1 July 2017)
From 1 July 2017, anyone under 75 who makes a personal super contribution will be able to claim an income tax deduction (subject to the work test for those aged 65 or more).
Strategy for this Financial Year (Prior to 30 June 2017)
While the scope of claiming this deduction will be available to more people next financial year, it is still applicable to those who are substantially self-employed this year.
Speak to your Adviser to ensure you are maximising your contributions and related deductions.
Division 293 Threshold
Rules which apply this Financial Year (Prior to 30 June 2017)
Anyone with an adjusted taxable income of more than $300,000 pays 30% tax on their concessional super contributions.
Rules which will apply from next Financial Year (Post 1 July 2017)
This threshold is being reduced and from 1 July 2017, anyone with an adjusted taxable income of more than $250,000 will pay 30% tax on their concessional super contributions.
Strategy for this Financial Year (Prior to 30 June 2017)
N/A
Pension Phase
- Account Based Pension
Rules which apply this Financial Year (Prior to 30 June 2017)
Currently there is no limit on how much you can transfer into the pension phase. The income generated by the assets supporting the Pension account is currently tax free. No CGT is payable on the sale of these assets either.
Rules which will apply from next Financial Year (Post 1 July 2017)
There will be a cap of $1.6M on the amount of superannuation that can be transferred in to a tax-free retirement account. This cap is applicable irrespective on when you started the pension account. Any amount more than this amount can be retained in accumulation super account or withdrawn from super. Fluctuation in retirement accounts due to earnings growth or pension payments will not count towards the cap. The transfer cap will be indexed in line with CPI and will increase in $100K increments. You may have capacity to add funds to the pension account based on the percentage of the cap you still have available. This $1.6M transfer cap is impacted by any Defined Benefit pension you receive as well. Cost base of the assets above $1.6M may be reset to current market value to reduce the tax on gains you accrue in the future.
Strategy for this Financial Year (Prior to 30 June 2017)
Market fluctuations, CGT considerations not just now but in the future, future estate planning, are just a few of the factors which will need to be assessed to ensure you make the most of the changed rules.
Speak to your Adviser to work out what is the best way forward if you have more than $1.6M in pension phase.
- Transition to retirement (TTR) Pension
Rules which apply this Financial Year (Prior to 30 June 2017)
Currently there is no limit on how much you can transfer into the TTR pension phase. You need to withdraw between 4%-10% as a pension payment. The income generated by the assets supporting the Pension account was tax free. You could treat certain super income stream payments as lump sums for tax purposes. No CGT is payable on the sale of these assets either.
Rules which will apply from next Financial Year (Post 1 July 2017)
There will be no limit on how much you can transfer into the TTR pension phase. You need to withdraw between 4%-10% as a pension payment. However, the income generated by the assets supporting the Pension account will now attract a 15% tax (same tax rate as applicable in the accumulation phase). Further, you will not be able to treat certain super income stream payments as lump sums for tax purposes. CGT will also be payable on the sale of these assets. However, you may be able to reset the cost base of the assets supporting the TTR to current market value to reduce the tax on gains you accrue in the future (subject to LCG 2016/D8).
Rules which will apply from next Financial Year (Post 1 July 2017)
Even though there will be tax payable on the income generated, TTR pensions may still be appropriate for some people. You may have reduced your hours at work or may wish to supplement your income with a super pension.
Speak to your Adviser to work out what is the best way forward and if a TTR is still appropriate for your needs going forward.
Miscellaneous
- Defined Benefit Schemes
Rules which apply this Financial Year (Prior to 30 June 2017)
Defined benefit schemes, as compared with accumulation schemes, pay benefits based on length of service and final salary. The tax payable is dependent on if you are part of a funded or unfunded scheme. Funded defined benefit schemes are taxed on contributions and earnings but pay tax-free benefits. Unfunded defined benefit schemes pay pensions that are taxed at the individual’s marginal tax rate less a 10% tax offset. There is no cap on how much income you can receive from these schemes.
Rules which will apply from next Financial Year (Post 1 July 2017)
From 1 July 2017, a defined benefit pension of $100,000 per annum will use up the recipient’s transfer balance cap of $1.6M. If they have any funds invested with another industry fund or SMSF which are in pension phase, they will have to move these funds back into accumulation or withdraw them from super. Further, 50% of the pension over $100,000 per annum paid to a person aged 60 and over from a funded defined benefit will be included in the recipient’s assessable income. Pensions from an unfunded scheme over $100,000 per annum will be taxed at full marginal rates with no offsets available.
Strategy for this Financial Year (Prior to 30 June 2017)
Besides the additional tax payable by some, these changes will impact those who have a defined benefit scheme and have money invested in industry funds or SMSFs.
Speak to your Adviser to assess how your defined benefit pension will impact your other superannuation accounts.
- Anti-Detriment Payment
Rules which apply this Financial Year (Prior to 30 June 2017)
As per current rules, an anti-detriment payment (the refund of contributions tax paid during a fund member’s lifetime, which is then paid as a lump sum to certain dependents of a deceased fund member) is tax deductible.
Rules which will apply from next Financial Year (Post 1 July 2017)
Deductibility of Anti-Detriment Payments will be abolished from 1 July 2017. However, these will be still be available if the member had died prior to 1 July 2017 and if the payment is made by 30 June 2019.
Strategy for this Financial Year (Prior to 30 June 2017)
Ensuring a SMSF can pay out the anti-detriment payment is complex.
Speak to your Adviser to see if you can access this concession.
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