Last night the Federal Government handed down the Budget for the 2016-17 year that includes some of the biggest changes to the superannuation system since 1 July 2007.
As expected, superannuation tax concessions have been heavily tightened, however we are surprised and disappointed by the extent and retrospective nature of some of these measures and believe them to be a backward step in enabling people to adequately save for their retirement.
Some of the major announcements that may affect clients include:
- the lowering of the concessional contributions caps
- the introduction of a lifetime non-concessional cap
- changes to the taxation of concessional contributions for high income earners
- limits to how much can be transferred into pension phase
- restricting tax-concessions associated with transition-to-retirement pensions
- removal of work tests for contributions between age 65 and 74
- extending eligibility to claim deductions for personal contributions
We briefly examine each of the above proposals:
The lowering of the concessional contributions caps.
The Government will reduce the annual cap on concessional superannuation contributions to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).
Comment: For a nation facing a major problem of how to fund a growing generation of retirees we find a measure that inhibits the ability of people to fund their own retirement particularly puzzling.
Strategy: The reduced concessional contributions cap does not apply until 2017/18. Clients should consider taking advantage of the current higher concessional caps in the current and 2016/2017 financial years.
Clients will need to review existing salary sacrifice arrangements and personal deductible super contributions to ensure they comply with the reduced concessional cap.
The introduction of a lifetime non-concessional cap
A lifetime non-concessional contributions cap of $500,000 will be introduced effective 7.30 pm (AEST) on 3 May 2016. The lifetime non-concessional cap will replace the existing annual non-concessional contributions cap of up to $180,000 per year (or $540,000 every 3-years under the bring-forward rule for individuals aged under 65). The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007. Contributions made before commencement (ie 7.30 pm AEST on 3 May 2016) cannot result in an excess of the lifetime cap
Comment: We are disappointed with the retrospective nature of this measure and believe it unfair on people who in good faith made contributions under the existing rules.
Strategy: To determine how much of the lifetime non-concessional cap has been utilised with prior non-concessional contributions clients will need to add their non-concessional contributions since 1 July 2007 from all funds to determine how much counts towards their lifetime non-concessional cap. Clients will need to carefully review their situation to determine whether they have exhausted their lifetime cap.
Changes to the taxation of concessional contributions for high income earners
Currently those who earn over $300,000 (taxable income plus superannuation contribution) are required to pay an additional 15% contribution tax on their concessional super contributions (i.e. total of 30% contribution tax).
From 1 July 2017, this threshold will reduce to $250,000.
Strategy: The overall impact of this measure will be to increase the tax burden by up to $3,750 (i.e. 15% of $25,000) on concessional contributions. However concessional contributions still offer a tax concession of 19% for those paying Division 293 tax so it is unlikely to significantly reduce the level of concessional superannuation contributions.
Limits to how much can be transferred into pension phase
From 1 July 2017, the Government proposes to introduce a $1.6 million limit on individuals' superannuation balances that can be "transferred" from accumulation phase to retirement phase. Subsequent earnings on retirement balances will not be restricted. Individuals that have amounts in excess of $1.6 million will be able to maintain those amounts in accumulation phase where earnings will be taxed under the current 15% treatment. Superannuation fund members already in the retirement phase that have balances in excess of $1.6 million will be required to reduce their retirement balances to $1.6 million by 1 July 2017. They will either be able to retain excess amounts in accumulation phase or withdraw them from superannuation.
Strategy: This proposal will allow couples to have a combined pension balance of up to $3.2 million. However, where most of a couple’s superannuation savings are in one spouses name the $500,000 lifetime non-concessional cap will restrict a couple’s ability to equalise their benefits to take full advantage of the transfer balance cap. The requirement for member’s with balances already in excess of $1.6 million to either withdraw or transfer the amount in excess of the cap back to superannuation means that people with pension account balances in excess of $1.6 million have not been grandfathered from these changes.
Restricting tax-concessions associated with transition-to-retirement pensions
From 1 July 2017, the tax exemption for earnings on assets supporting ‘transition to retirement’ income streams will be removed. These are income streams where the member has reached preservation age but not yet retired.
Earnings will then be taxed at 15 per cent. This change applies irrespective of when the TTR income stream commenced, ie. no grandfathering applies.
Strategy: Taxing earnings on TTR income streams significantly reduces the tax effectiveness of strategies such as TTR and salary sacrifice. For clients aged 60 or over, TTR strategies may still be worthwhile as pension payments are tax free and allow tax effective salary sacrifice contributions. However for clients under age 60, the tax benefits are minimal.
Removal of work tests for contributions between age 65 and 74
From 1 July 2017, individuals under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.
Strategy: Clients are currently required to work 40 hours within 30 consecutive days in the financial year they make a contribution over the age of 65. This proposal will remove this requirement and make it easier for older clients to contribute to super.
When combined with the life-time non-concessional cap this proposal could allow non-working clients aged between 65 and 74 who were previously ineligible to contribute to make non-concessional contributions of up to $500,000 after 1 July 2017.
Extending eligibility to claim deductions for personal contributions
From 1 July 2017, individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions. This will apply regardless of employment status (i.e., wholly employed, self-employed or a partially employed/self-employed).
Strategy: This announcement will dramatically simplify the eligibility requirements for a member to qualify to claim a deduction for a personal super contribution. The requirement to not be an employee during the financial year or to satisfy the 10% test will be replaced with a simple requirement to be under age 75.
We wil be in contact with clients in the coming days/weeks to discuss how these changes will impact them and any required changes to existing strategies. In the meantime please do not hesitate to contact us if you have any queries or wish to discuss your individual circumstances.