With the Federal Budget imminent, speculation as to what superannuation measures will or won't be in the Budget increases. It has been clear since late 2015 that the Coalition Government's moratorium on changes to superannuation was not going to hold for the 2016 Budget. While crystal ball gazing is never easy when it comes to forecasting Government tax policy decisions, we have landed on four possible changes to superannuation that the Government may announce in the Federal Budget due on 3 May 2016.
Reducing the Division 293 tax threshold to $180,000
As reported in media this week, the forthcoming Budget may see the Government pare back superannuation tax concessions for higher income earners by reducing the threshold for Division 293 tax from $300,000 per annum to $180,000 per annum. Division 293 tax levies an extra 15% tax on concessional contributions for the taxpayers it applies to. We would expect such a change to apply to the 2016-17 income year going forward.
Strategy tip: Higher income earners, especially those earning between $180,000 and $300,000 should look to maximise the current concessional contribution arrangements for the 2015-16 income year.
Reducing the concessional contribution cap to $20,000
Another possible route to reducing the concessions for superannuation would be for the Government to decrease the general concessional contribution cap from $30,000 per annum to $20,000 per annum. This has been a rumoured approach but may not be pursued if the Division 293 tax option above is followed.
Strategy tip: Again, maximising the $30,000 concessional cap (or the $35,000 cap for those aged 50 and above) in the current income year is key. As we would expect a smaller concessional contribution cap to apply from the 2016-17 income year onwards, this should allow time for SMSF members to maximise contributions for the current year.
Reducing the non-concessional contribution cap
The generosity of the existing $180,000 non-concessional contribution (NCC) cap and $540,000 bring forward rule may be targeted by the Government, especially on the grounds of equity and preventing super being used for estate planning. A reduction in the concessional cap would see a smaller NCC as a consequence (i.e. a $120,000 NCC cap and $360,000 bring forward rule) but the Government may also choose to independently reduce the NCC cap.
Strategy tip: SMSF members planning to make large contributions to superannuation in the coming years may want to bring those contributions forward to the current financial year to use the existing NCC cap and bring forward rule. It is unclear how the Government would treat taxpayers who have triggered the bring forward rule in 2015-16 but not used the entire $540,000 amount if a lower NCC cap was to apply from 2016-17 onwards.
Tightening transition to retirement pension rules
The use of transition to retirement (TTR) pensions as part of recontribution strategies has caught the attention of Government as a "loophole" of the superannuation rules. Policy makers have been concerned that TTRs are not being used for the original policy purpose of transitioning people from work to retirement by allowing them to drawdown on some of the retirement savings while still working. Instead the prevailing view is that TTR pensions are being used for tax planning purposes. This concern may see the TTR rules tightened to achieve their original policy intent (e.g. by applying a change of work hours test or raising the preservation age for TTRs) or at worse repealing the TTR rules.
Strategy tip: Changes to pension rules are generally introduced with extensive grandfathering for existing pensions. Accordingly, the Government may seek to limit a rush into TTR pensions by making any changes effective from Budget night. This means for TTR pensions to have grandfathered treatment (i.e. continue operating under the current rules) they would need to be started before the Budget announcement at 7.30pm on 3 May 2016. Starting a TTR before the Budget may be a prudent move and if it is not needed going forward, the TTR pension can be commuted after the pro-rata minimum benefit payment is made and the amount supporting the pension can be simply rolled back to accumulation phase.
Please do not hesitate to contact me should you wish to discuss anything in greater detail.