By Andrew Proebstl, Chief Executive, legalsuper
On 23 November 2016, after months of negotiation and amendment, the Federal Government finally succeeded in having a raft of significant changes to superannuation passed by Parliament.
Federal Treasurer Scott Morrison has said that 96 per cent of individuals with superannuation “will either not be affected by these changes or will be better off.”
That said, it is definitely worthwhile keeping up-to-date with the changes, most of which come into effect on 1 July 2017.
The immediate decision facing many superannuation fund members will be whether or not to take advantage of the current contributions caps by topping up their super before the end of the 2016/17 financial year.
Members considering doing so, but who are unsure of how to do so without exceeding the caps, should contact their super fund(s).
To help ALPMA members make the best decisions regarding their superannuation, here are the main changes to super, and the implications of those changes.
Changes that impact the amount of concessional contributions you can pay
Concessional contributions (or before tax contributions) include employer superannuation guarantee contributions, contributions made under a salary sacrifice arrangement and personal contributions for which a tax deduction has been claimed.
A reduction in the annual cap on concessional contributions you can make
From 1 July 2017, the annual cap on concessional contributions will be lowered to $25,000 per annum, down from its current rate of $30,000 for those aged less than 50 years and $35,000 for those aged 50 and over.
Catch-up concessional superannuation contributions
From 1 July 2018 (not 2017 as previously indicated by government) those with total superannuation balances of $500,000 or less will be able to make catch-up concessional superannuation contributions, subject to unused concessional contribution caps being carried forward on a rolling basis for up to five years.
This change is intended to boost the super savings of those with a lower superannuation balance due to lower contributions in the past, interrupted work patterns or an irregular capacity to make contributions.
For those earning over $250,000, a doubling of the tax on concessional contributions
From 1 July 2017, those with more than $250,000 of income and superannuation contributions (adjusted for other benefits) will pay an additional 15 per cent tax on their concessional contributions on those super contributions that exceed the $250,000 threshold.
The proposed new 30 per cent rate of tax continues to be less than the marginal rate of tax if earning greater than $250,000.
This change extends the existing approach whereby those with more than $300,000 of income and superannuation contributions pay 30 per cent tax on their concessional superannuation contributions.
This change will impact higher income earners, who constitute around 1 per cent of superannuation fund members.
Expanded eligibility to claim tax deductions for superannuation contributions
From 1 July 2017, the Government will improve the flexibility of the superannuation system so that more Australians can utilise their concessional contributions cap, by allowing people under 75 to claim an income tax deduction for personal superannuation contributions to an eligible fund. Personal contributions for which a tax deduction is claimed will count towards the concessional contributions cap.
However, to take advantage of this change, people aged between 65 and 74 will need to first satisfy a work test. (The work test was originally slated for removal but will now be retained)
Changes that impact the amount of non-concessional contributions you can pay
Non-concessional contributions (or after tax contributions) include amounts you pay to your superannuation fund, or your spouse’s superannuation fund, from your after-tax income (that is, from your take home pay or accrued savings outside of super).
$100,000 annual non-concessional contributions cap
From 1 July 2017, the current annual non-concessional contributions cap of $180,000 will be reduced to $100,000 per annum. However, superannuation fund members still have until the end of the current financial year to take advantage of the current $180,000 non-concessional contribution cap. Members under age 65 also have until the end of this financial year (i.e. 2016/17) to consider taking advantage of the ‘bring-forward rule’ which allows up to three years’ of non-concessional contributions to be made in the one year. This means that members who are in the position to do so can potentially make up to $540,000 worth of non-concessional contributions (the $540,000 figure being 3 x $180,000) by 30 June 2017. From 1 July 2017 the ‘bring-forward rule’ effectively reduces to $300,000 the amount of non-concessional contributions that can be ‘brought-forward’ across a three year period. However, the amount that can be brought forward, and the period to do so, will be reduced for those with total superannuation balances of $1.4 million to $1.6 million. From 1 July, 2017, those with total superannuation balances of $1.6 million or more will be ineligible to make non-concessional contributions at all. If the bring-forward provisions were triggered in the 2015/16 or 2016/17 financial years and the full bring forward amount was not utilised, transitional bring forward caps will apply.
The above rules replace the original announcement of a lifetime cap of $500,000 per person for non-concessional contributions which will no longer be proceeding.
Changes that impact retirement products (including superannuation pensions)
Removal of tax exemption for transition to retirement (TTR) pensions
Currently, individuals can commence a TTR pension at their preservation age (between 56 and 65 years of age, depending on their date of birth) even though they have not yet retired. No tax is paid by the super fund on the investment earnings from assets supporting these TTR pensions. Although some income tax may be paid by the individual on receipt of the pension payments up to age 60, once an individual is aged 60 and over, withdrawals are tax-free.
From 1 July 2017, the government will remove the tax exemption on investment earnings of TTR pensions and they will be taxed at 15 per cent (as is the case for investment earnings on superannuation assets). This change will apply regardless of when the TTR commenced. There are no changes to the tax arrangements for individuals upon receipt of these pension payments.
$1.6 million superannuation transfer balance to retirement products cap
From 1 July 2017, the government will introduce a $1.6 million cap on the total amount of superannuation an individual can transfer into retirement products, which includes superannuation pensions.
The cap will be applied to current retirees and those who have yet to enter retirement.
Current retirees with more than $1.6 million in retirement products (including superannuation pensions) have until 1 July 2017 to either remove the excess or return it to an accumulation superannuation account, where 15 per cent earnings tax applies or 10 per cent if capital gains.
The Government expects this change to impact less than one per cent of superannuation fund members. It also believes a $1.6 million retirement product balance could support a retirement income stream of around four times the single Age Pension.
Changes that benefit those with lower incomes
Low income superannuation tax offset
From 1 July 2017, the Government will introduce the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it expires on 30 June 2017.
Individuals with adjusted taxable income of $37,000 or less will receive an effective refund of the 15 per cent contributions tax paid on their concessional contributions, up to a cap of $500.
Superannuation balances of lower income spouses
To help lower income spouses increase the superannuation they accumulate, from 1 July 2017 the income threshold for the receiving spouse (whether married or de-facto) will be increased from $10,800 to $37,000, thereby helping more families to support each other in accumulating superannuation.
A contributing spouse will be eligible for an 18 per cent tax offset worth up to $540 for contributions made to an eligible spouse’s superannuation account.
If you have any questions about these changes to superannuation and how they may affect your retirement savings with legalsuper, please contact us on:
Phone: 1800 060 312 Monday to Friday between 8am and 8pm (AEST)
Fax: 1800 614 431 Email: firstname.lastname@example.org
About our Guest Blogger
Andrew Proebstl is chief executive of legalsuper
, Australia’s super fund for the legal community. Qualifying as a Chartered Accountant while working with Arthur Andersen, Andrew has broad experience across the superannuation industry with fund administrators, investment managers, custodians and other superannuation funds.
Andrew is a member of the Policy Committee and former Director of the Australian Institute of Superannuation Trustees. He is also a former member of the Victorian Executive of the Associations of Superannuation Funds of Australia. He regularly presents at superannuation industry conferences and writes regular superannuation columns for law societies across Australia.
legalsuper is an FY16 ALPMA Australian Corporate Partner