The Turnbull Government’s Federal Budget, delivered on 3rd May 2017, included the most significant structural changes to the Australian superannuation system since compulsory superannuation was first introduced. Pre-budget speculation had anticipated many changes, however some have gone much further than anticipated.
New lifetime cap for non-concessional superannuation contributions
The tightening of the super concessions was not unexpected but went further than the pre-budget rumours. Introducing a lifetime $500,000 non-concessional cap with immediate effect from budget night was a major shock and will disrupt the plans of individuals who had strategies in place to top up super with large lump sums as they approach retirement, which is often the only option for many small business owners.
Gareth Atkins, Synectic
The government will introduce a $500,000 lifetime non-concessional contributions cap. The lifetime cap will apply to Australians under the age of 75 and will take into account all non-concessional contributions made on or after 1 July 2007 (being the time from which the ATO has reliable superannuation records). For individuals aged 75 and over the existing rules remain.
The cap will be indexed in $50,000 increments in line with average weekly ordinary times earnings.
If an individual has exceeded the cap prior to commencement date (being 7.30 pm (AEST) on 3 May 2016), they will be taken to have used up their lifetime cap but will not be required to take the excess out of the superannuation system.
However, excess contributions made after commencement will have to be withdraw from the fund. Individuals who do not withdraw excess contributions will be subject to penalty tax.
Importantly, the lifetime non-concessional contributions cap will replace the existing non-concessional contributions cap, which allowed non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65). Individuals with a superannuation balance less than $500,000 will now be allowed to make additional ‘catch-up’ concessional contributions where they have not reached their concessional contributions cap in previous years. The measure intends to offer individuals, for example stay-at-home parents who have a period out of the workforce, more flexibility regarding when they contribute to their superannuation.
Also note that the existing CGT cap ($1.415m for 2016-17) will remain. This means that eligible small business taxpayers can contribute funds from the sale of their business into their superannuation.
Retrospective pension phase limit
Introducing a pension balance limit of $1.6 million per member will impact some clients. While we don’t necessarily disagree with this policy the retrospective application of this measures is a sting in the tail for those who thought their retirement plans were locked in. Any retrospective change is unwelcome and only diminishes confidence in the superannuation system.
Gareth Atkins, Synectic
Effective 1 July 2017, the Government will introduce a $1.6M cap on the amount of accumulated superannuation an individual can transfer into pension phase ‘retirement’ accounts where earnings are tax-free. Currently there is no limit on the amount of accumulated superannuation that a member can transfer into pension phase, where the earnings are tax- free.
The new cap is aimed at high wealth individuals by limiting the amount of tax-free income that can be earned in retirement phase.
Funds accumulated in excess of $1.6M will be able to be maintained in accumulation phase (where investment earnings will be taxed at the concessional rate of 15%), or be taken out of superannuation as a lump sum. Subsequent investment earnings on pension phase balances are not affected by the cap.
The measure is retrospective; people who already have pension phase balances above $1.6M will be required to reduce their balance to $1.6M by 1 July 2017. This is unfortunate for individuals who have made retirement plans based on their current pension phase balance.
Amounts exceeding the cap (including earnings on these excess transferred amounts) will be taxed, similar to the tax treatment that applies to excess non-concessional contributions.
Concessional contributions cap reduced
Reducing the concessional cap from $35,000 to $25,000 is lower than we would have liked. It will require individual employees to increase concessional contributions much earlier in their working life, which is often not possible for those middle Australians already struggling with housing affordability and the costs of raising families.
Gareth Atkins, Synectic
The Government will lower the annual cap on concessional superannuation contributions to $25,000 for everyone.
The existing concessional contributions caps, being $30,000 for those aged under age 50 years, and $35,000 for those aged 50 years and over, will be abolished. Effective from 1 July 2017 there will be one cap for all taxpayers, irrespective of age.
Division 293 threshold reduced
From 1 July 2017, the Government will also make changes to the ‘high income contribution rules’ by lowering the Division 293 threshold (i.e. the point at which high income earners pay an additional 15% contributions tax) from $300,000 to $250,000.
Division 293 applies an additional tax of 15% on certain concessional contributions where an individual’s total ‘income’ plus certain ‘concessionally taxed contributions’ exceeds the threshold. Concessional contributions subject to tax under Division 293 are therefore effectively taxed at 30%.
The measure is designed to limit the effective tax concessions provided to high income individuals.
The lower Division 293 threshold will also apply to members of defined benefit schemes and constitutionally protected funds currently covered by the tax.
Tax deductions for personal superannuation contributions
From 1 July 2017, all individuals under age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.
This will allow individuals to make concessional contributions (up to the concessional cap) regardless of their employment status. Individuals who are, for example, partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from the proposed changes.
Under current law, there is ‘a maximum earnings as an employee’ condition which needs to be met to claim a deduction for personal superannuation contributions. This results in the deduction being broadly limited to self- employed individuals, however many self-employed professionals who work independently but are deemed employees under the superannuation guarantee law cannot make further voluntary deductible contributions to super.
Tax earnings on assets supporting a Transition to Retirement Stream
From 1 July 2017, the Government will remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams (‘TRIS’), being income streams of individuals over preservation age but not retired.
Currently, earnings on superannuation balances that support a TRIS pension are exempt from the income tax of 15% applicable to investment earnings in the accumulation phase. The change will see these earnings from assets supporting a TRIS taxed at 15%.
Importantly, this change is proposed to apply irrespective of when the TRIS commenced.
Read more about the 2016-17 Federal Budget:
- Federal Budget delivers tax relief for middle income earners
- Small and medium business: the big Federal Budget winners
If you have questions please contact our office to speak to one of our SMSF specialists.