The Australian Government finally had most of its 2016 budget measures on superannuation pass through Parliament on 23 November, following a tortuous process of negotiation with the cross-benches. Most of these changes to Australia’s superannuation system will take effect from 1 July 2017.
WILL YOU BE AFFECTED BY THE SUPER REFORMS?
You will most likely be impacted by these changes if you:
- Have existing pension balances in excess of $1.6m
- Have an existing Transition to Retirement Income Stream (TRIS)
- Are intending to make deductible super contributions exceeding $25,000, or would like to make contributions on behalf of your spouse
- Are intending to make personal (non-concessional) super contributions of more than $100,000, or have activated the bring-forward rule since 2015-16
- Have taxable income of less than $37,000, or between $250,000 and $300,000
WHAT ARE THE KEY CHANGES TO SUPERANNUATION?
$1.6 million cap on tax-free pension accounts
You will be able to transfer a total of $1.6 million to a tax-free “retirement phase” account. Superannuation balances in excess of this will need to either go into an accumulation account (to be taxed at the normal superannuation rate – 15%) or be left outside the superannuation system.
TREASURY EXAMPLE: Agnes, 62, retires on 1 November 2017. Her accumulated superannuation balance is $2 million. Agnes can transfer $1.6 million into a retirement phase account. The remaining $400,000 can remain in an accumulation account where earnings will be taxed at 15 per cent. Alternatively, Agnes may choose to remove all or part of the extra $400,000 from superannuation. Subsequent earnings on balances in the retirement phase will not be capped or restricted. The minimum drawdown will apply.
Removal of tax exemption for Transition to Retirement pension accounts
Earnings from investments from which transition to retirement income streams (TRIS) are paid will be taxed at the normal superannuation rate – 15%.
TREASURY EXAMPLE: Sebastian is 57 years old and has reduced his working hours. As a result, his earnings fall from $80,000 to $60,000. Sebastian commences a TRIS that pays him $20,000 per year. Currently, Sebastian pays tax on his income ($60,000) but his superannuation fund pays no tax on the earnings on assets supporting his TRIS. Under the Government’s changes, the earnings on Sebastian’s superannuation assets supporting TRIS will be taxed at 15 per cent.
Income threshold for extra tax on super contributions to be reduced to $250,000
The threshold has been reduced from $300,000. This will effectively double the tax rate on these super contributions from 15% to 30%.
Reduced annual limit of $25,000 on concessional contributions
The annual cap on concessional (tax-deductible) superannuation contributions has been reduced from $35,000 for those aged 50 and over, or $30,000 for under 50’s.
TREASURY EXAMPLE: In 2017–18, Madeline earns $260,000 in salary and wages. In the same year she has concessional superannuation contributions of $30,000. Madeline’s fund will pay 15 per cent tax on these contributions. Madeline will pay an additional 15 per cent tax on $25,000 of the concessional contributions, resulting in these amounts effectively being taxed at 30 per cent.
The $5,000 of contributions in excess of the cap will be treated as income taxed at her marginal rate. Madeline pays $1,600 income tax on her excess contribution. Madeline can choose to leave this excess in her superannuation (as a non–concessional contribution) or remove it from super.
New “catch-up” rules
New rules will allow people with less than $500,000 in super to use their previous 5 years’ (from July 2018) unused concessional contributions to “catch up” their superannuation contributions.
TREASURY EXAMPLE: Cassandra has a superannuation balance of $200,000 but did not make any concessional superannuation contributions in 2018–19 as she took time off work to care for her child. In 2019–20 she has the ability to contribute $50,000 in concessional (before-tax) contributions into superannuation ($25,000 under the annual concessional cap and $25,000 from her unused 2018–19 concessional cap which she can carry forward).
Removal of restrictions on tax deductibility for personal super contributions
Wage and salary earners aged under 65 (and some ‘workers’ aged 65-74) will be able to claim a tax deduction for personal contributions up to the concessional contributions cap.
TREASURY EXAMPLE: Chris has started his own online merchandise business but continue to work part-time at an accounting firm earning $10,000 as his business is growing. His business earns $80,000 in his first year and he would like to contribute $15,000 of his $90,000 income to his superannuation. He currently could not claim a tax deduction for any personal contributions. (Currently, an income tax deduction for personal superannuation contributions is only available to people who earn less than 10 per cent of their income from salary or wages.) Under the changes, Chris could claim a tax deduction for his $15,000 of superannuation contributions.
$100,000 annual cap on non-concessional (after tax) personal contributions
The cap has bee reduced from from $180,000 for individuals with a superannuation balance of no more than $1.6 million. However, the 3-year bring-forward rule can still be utilized by individuals provided they meet the other contribution rules.
Increased access to tax offsets
The Government have taken measures to increase access to tax offsets for super contributions by low income earners and for spouse contributions.
WHERE CAN YOU GET MORE INFORMATION?
The government has published some fact sheets on the changes, including more practical examples. These can be accessed at: SUPERANNUATION REFORMS
We welcome you to contact one of Synectic’s superannuation experts in Devonport, Hobart or Launceston to discuss how these changes impact your personal situation.