What it means for you
On Tuesday 3 May the Treasurer, Scott Morrison, released the Government’s 2016/17 Budget – the Government’s economic plan for Australia’s transition from mining boom to a more diverse economy.
The budget contained a number of important changes to the superannuation system, including retirement income streams and tax changes. The announced changes took everyone by surprise and it is important that you discuss your particular situation with your adviser and how these changes may affect you.
Note: These measures are proposals only and will need passage of legislation to become law.
The key superannuation changes announced include:
- Reducing the concessional contributions cap
- New lifetime non-concessional contributions cap
- $1.6 million cap on the amount that can be transferred into a tax-free retirement income stream
- Increasing flexibility for contributions made after age 65
- Change to the taxation of transition to retirement income streams
Concessional contribution changes
From 1 July 2017:
- The concessional contributions cap will reduce to $25,000 per year (down from $30,000 per year for those under age 50 and $35,000 per year for those aged 50 and above). This will also apply to members of defined benefit schemes. The reduced cap will continue to be subject to indexation by Average Weekly Earnings (AWE).
- Individuals with superannuation balances of $500,000 or less will be able to accrue unused concessional contributions cap amounts (up to 5 years) and carry them forward for use in later years.
- Individuals with income and concessional contributions above $250,000 per year (reduced from $300,000 per year) will have to pay an additional tax of up to 15 percent on concessional contributions, which is in addition to contribution tax of 15 percent paid. Similar measures will apply to high earning members of defined benefit funds.
- All individuals up to the age of 75, regardless of their employment status, will be able to claim an income tax deduction for personal superannuation contributions made in an income year. These amounts will count towards the concessional contributions cap and will be subject to contributions tax.
From 7:30 pm (AEST) on 3 May 2016, non-concessional contributions will be capped at a lifetime amount of $500,000 (indexed by AWE in $50,000 increments). The lifetime cap will replace the existing annual non-concessional contributions caps ($180,000 per annum and the $540,000 ‘bring-forward’ rule) and will include non-concessional contributions made since 1 July 2007.
If the new lifetime cap has been exceeded prior to 7:30 pm (AEST) on 3 May 2016, those amounts can be retained in super however no further non-concessional contributions can be made. Where the lifetime cap is exceeded after this date, any excess will need to be withdrawn, or penalty arrangements will apply.
Similar measures will apply to members of defined benefit and constitutionally protected funds with excess non concessional amounts (plus earnings) being deducted from non-concessional contributions within any accumulation account they have.
For more information, please see our recent article NCC lifetime cap and you.
Retirement income streams
From 1 July 2017:
- The government will limit the amount of superannuation that can be transferred to tax-free retirement income streams to $1.6 million. Individuals with more than $1.6 million in tax-free retirement income streams on 1 July 2017 will be required to either withdraw the excess amount or transfer the excess back to an accumulation account. However, where the retirement income stream exceeds $1.6 million because of future earnings, the excess will not be required to be withdrawn or transferred. The $1.6 million limit will be indexed by the CPI in increments of $100,000.
- Existing and new transition to retirement (TTR) pensions will have investment earnings taxed at up to 15 percent, in line with superannuation in accumulation accounts.
- Remove barriers to innovation in retirement income stream products by extending the tax exemption on earnings to products such as deferred lifetime annuities and group self annuitisation products. This will allow product providers to offer new retirement income products that can help individuals achieve a broader range of retirement goals.
Other superannuation measures
From 1 July 2017:
- Individuals aged 65 to 74 will no longer need to meet a work test to make a personal contribution or to receive a spouse contribution.
- The spouse contribution tax offset of up to $540 will be available to individuals contributing to their spouse’s superannuation fund who can earn up to $37,000 per annum (up from $10,800 per annum).
- A Low Income Superannuation Tax Offset (LISTO) of up to $500 will be available to those with adjusted taxable income below $37,000 per annum.
- Superannuation funds will no longer be able to pay an anti-detriment payment to an eligible dependant after the death of a member.
- The Government will enshrine into legislation the objective of superannuation which is ’to provide income in retirement to substitute or supplement the Age Pension’.
At this stage, remember that none of these measures is law – they are all merely proposed changes. Furthermore, most of the proposals have a commencement date of 1 July 2017, meaning it is business as usual until then.
However, the intended immediate commencement of the lifetime non-concessional contributions cap has caused a great deal of confusion and concern – see our recent blog article NCC lifetime cap and you.
This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice. MGD Wealth Ltd is the holder of Australian Financial Services Licence No. 222600.