Key points on superannuation
- Lifetime cap for non-concessional superannuation contributions
- Reduction in threshold for additional 15% tax for high income earners
- Introduction of $1.6 million transfer balance cap
- Earnings on Transition to Retirement Pensions subject to tax
- Work test removed for those aged 65 to 74
- Concessional cap changes
- Restrictions eased on tax deductions for personal contributions
- Low Income Superannuation Tax Offset (LISTO)
- Low income spouse tax offset increased
- Anti-detriment provision in respect of death benefits abolished
- Changes to retirement income products
Lifetime cap for non-concessional superannuation contributions
Effective Date: Budget night (7:30pm AEST on 3 May 2016)
The Government has announced that it will introduce a lifetime cap of $500,000 on the amount of non-concessional contributions that can be made into superannuation.
This limit will look back to count non-concessional contributions made on or after 1 July 2007 (from which time the ATO has reliable contribution records).
If a person has already exceeded the $500,000 lifetime cap, they will not be penalised for any existing excess amount above $500,000. However, they will be penalised if they make any further non-concessional contributions.
The options available to individuals who make non-concessional contributions in excess of the lifetime cap, are the same as per existing arrangements – they will be notified by the ATO to withdraw the excess from their superannuation account. Individuals who choose not to withdraw will be subject to the current penalty arrangements for excess non-concessional contributions.
The lifetime non-concessional contribution cap will replace the existing annual caps, which allow annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals under age 65).
The lifetime non-concessional contribution cap will be indexed to average weekly ordinary time earnings (AWOTE).
What does this mean for you?
The amount of non-concessional contributions you can make in your lifetime islimited to $500,000:
- If you have already made non-concessional contributions in excess of $500,000 from 1 July 2007, you cannot make any further non-concessional contributions without potentially being liable to pay excess contributions tax
- Review any regular non-concessional contribution plan as soon as possible as these may need to be ceased.
Reduction in threshold for additional 15% tax for high income earners
Effective Date: 1 July 2017
Currently high income earners are subject to an additional 15% tax (division 293 tax) on their concessional contributions. Up until 30 June 2017, a high income earner is considered to be someone whose ‘income[1]’ is $300,000 or greater in a financial year.
For the purposes of this measure, income includes concessional contributions that are not excess concessional contributions.
From 1 July 2017, the threshold is proposed to fall to $250,000. As the definition of income for division 293 purposes includes concessional contributions, this measure will potentially impact individuals earning over $225,000 if they are making concessional contributions of $25,000 each year on top of their cash earnings.
Defined benefit members also impacted
The $250,000 Division 293 income threshold will also apply to members of defined benefit schemes and constitutionally protected funds (if they are currently subject to this tax). Existing exemptions will continue to apply (eg. State higher level office holders and Commonwealth judges).
From 1 July 2017, the Government will include notional (estimated) and actual employer contributions within the concessional contributions cap for members of unfunded defined benefit schemes and constitutionally protected funds. Currently actual contributions are excluded from the calculation. For individuals who were members of a funded defined benefit scheme as at 12 May 2009, the existing grandfathering arrangements will continue.
[1] Income includes taxable income, reportable fringe benefits, total net investment loss less any taxable super lump sum upon which the low rate cap tax offset applies to reduce the tax to nil, and concessional contributions which are not excess concessional contributions.
What does this mean for you?
- No impact until the financial year commencing 1 July 2017
- If your ‘income’ including concessional contributions is between $250,000 and $300,000, the ATO will assess your liability for this tax and will provide you with a release authority you can use to withdraw the tax amount from your superannuation.
Introduction of $1.6 million transfer balance cap
Effective Date: 1 July 2017
This measure proposes that, from 1 July 2017, the maximum amount of superannuation that an individual can transfer from the accumulation phase into the retirement phase (i.e. to start an income stream) will be $1.6 million.
Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in the accumulation phase, where earnings will be taxed at the concessional rate of 15%.
If an amount above $1.6 million is transferred into the pension phase, penalty tax (similar to that applied to excess non-concessional contributions) will apply.
Importantly, members already in the retirement phase with balances above $1.6 million will need to reduce their balance to $1.6 million by 1 July 2017. Excess balances may be rolled back into the accumulation phase or removed from the superannuation system as a lump sum payment.
The cap will be indexed in $100,000 increments, in line with the consumer price index.
Consultation will be undertaken by the Government on the implementation of this measure for members of both accumulation and defined benefit schemes.
What does this mean for you?
- The amount that can be transferred from the accumulation phase to the tax-free retirement phase will be restricted to $1.6 million.
- Members in the retirement phase with balances over $1.6 million will have to either transfer the excess amount back to the accumulation phase (where the earnings will be taxed up to 15%) or remove the money from superannuation altogether.
- Members approaching retirement may have to revisit their retirement plans.
- Earnings on amounts in the accumulation phase of superannuation will continue to be taxed at a maximum rate of 15%.
Earnings on Transition to Retirement Pensions subject to tax
Effective Date: 1 July 2017
Clients with Transition to Retirement income streams (TTRs) currently enjoy the benefit of the earnings within their TTR being subject to a zero rate of tax. From 1 July 2017, the Government plans to remove the tax exemption on earnings of assets supporting TTRs. It will also remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.
This change is in addition to the reduction of the contributions caps from 1 July 2017.
What does this mean for you?
- There is no immediate impact to TTR strategies until 1 July 2017.
- From 1 July 2017, despite the proposed changes reducing the overall benefit, TTR strategies can still help you build higher retirement assets, than would be achieved without these strategies.
- Speak to your financial adviser to ensure your existing TTR strategy will continue to assist you maximise retirement savings.
- Make sure you keep your financial adviser up to date on any changes to your working arrangements or retirement plans
Work test removed for those aged 65 to 74
Effective Date: 1 July 2017
The Government has announced that it will remove the current restrictions on individuals aged 65 to 74 from making superannuation contributions with effect from 1 July 2017.
There are currently minimum work requirements for Australians aged 65 to 74 who want to make voluntary (after-tax) superannuation contributions. To be eligible to make voluntary contributions to superannuation, individuals aged 65 to 74 must have worked for at least 40 hours over 30 consecutive days in the financial year the contributions are made. In addition, spouses aged 70 or more cannot receive spouse contributions.
As part of this measure, the contribution acceptance rules will be amended to:
- remove the requirement that an individual aged 65 to 74 must meet a work test before making voluntary or non-concessional contributions to superannuation; and
- allow individuals to make contributions to a spouse aged under 75 without the need for the spouse to meet a work test.
This measure will simplify the contribution acceptance rules, as the same rules will apply to all individuals aged up to 75 from 1 July 2017. It will also allow older Australians to increase their retirement savings as they will no longer have to satisfy any minimum work requirements before making voluntary contributions to superannuation.
What does this mean for you?
- Older Australians aged 65 to 74 wanting to make voluntary contributions to superannuation will no longer have to satisfy the minimum work requirements.
- All individuals aged under 75 will be able to receive spouse contributions without having to satisfy a work test.
Concessional cap changes
Effective Date: 1 July 2017
There are two major proposed changes:
- A reduction in the concessional cap to $25,000
- For those with account balances of less than $500,000, an ability to make catch-up concessional contributions
Reduction in the concessional cap
From 1 July 2017, the concessional cap will be reduced to $25,000 for all individuals regardless of their age.
Catch up contributions
From 1 July 2017, individuals who do not fully utilise their concessional contributions cap from the 2017/18 financial year onwards will be able to make catch-up concessional contributions. This ability will be limited to those with superannuation balances of less than $500,000, and the unused portion of the cap can only be carried forward for a maximum of five years.
The measure will also apply to members of defined benefit schemes and consultation will be undertaken to minimise additional compliance impacts for these schemes. No detail on how the account balances of defined benefit schemes will be calculated has been provided.
What does this mean for you?
- There has been no change to the concessional contribution cap for this financial year, or for the 2016/17 financial year. This provides an opportunity for you to continue to make up to $30,000 (or $35,000 if you are age 49 or over on 30 June 2016) in concessional contributions in both these years.
- The concessional contributions cap is proposed to reduce from 1 July 2017, which means that you may need to revise the amount of contributions you make into superannuation. You may also need to re-balance salary sacrifice or TTR strategies you have in place from 1 July 2017.
- From 1 July 2017, the removal of the work test and the ability to make catch-up contributions will provide extra flexibility for those aged 65 to 74 who are able to fund additional contributions to superannuation.
Restrictions eased on tax deductions for personal contributions
Effective Date: 1 July 2017
The Government intends to allow all individuals under age 75 to be able to claim an income tax deduction for personal contributions from 1 July 2017.
This effectively allows everyone up to age 75, regardless of their employment circumstances, to make concessional contributions up to the concessional cap. Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements are expected to benefit most from these changed arrangements.
This is a significant change as it removes the complexity and inequity that currently exists under the “10% rule” – i.e. under the current rules, a personal deduction is only available where less than 10% of the person’s income is derived from eligible employment activities.
Individuals that are members of certain prescribed funds will not be entitled to deduct contributions to those schemes. Prescribed funds will include all untaxed funds, all Commonwealth defined benefit schemes, and any State, Territory or corporate defined benefit schemes that choose not to be prescribed.
What does this mean for you?
If you are under age 75, you will be able to claim an income tax deduction for personal contributions made on or after 1 July 2017, regardless of your employment status. These contributions will be assessed against your concessional contributions cap.
Low Income Superannuation Tax Offset (LISTO)
Effective Date: 1 July 2017
From 1 July 2017, the Government intends to introduce a Low Income Superannuation Tax Offset (LISTO) to reduce the tax on superannuation contributions for low income earners.
The LISTO will apply to low income earners with adjusted taxable income up to $37,000 p.a. that have had a concessional contribution made on their behalf.
The LISTO will provide a tax offset to the low income earner’s superannuation fund based on the tax paid on concessional contributions made on behalf of low income earners, up to a maximum of $500. The ATO will determine a person’s eligibility for the LISTO and advise their superannuation fund annually. The fund will contribute the LISTO to the member’s account.
The LISTO will replace the current Low Income Superannuation Contribution (LISC) when it ends on 30 June 2017, to effectively reduce the tax rate on superannuation contributions to zero for low income earners.
What does this mean for you?
- For individuals on taxable incomes of less than $37,000 p.a., any concessional contributions you make to superannuation are effectively tax free up to $3,333. Contributions tax of 15% will apply to any contributions you make above this amount.
Low income spouse tax offset increased
Effective Date: 1 July 2017
The Government intends to increase access to the low income spouse tax offset from 1 July 2017 by raising the income threshold for the low income spouse from $10,800 to $37,000 p.a.
The low income spouse tax offset provides up to $540 per annum for the contributing spouse. The offset will continue to be set at 18% of the amount of eligible contributions. The offset will be gradually reduced for income above $37,000 and will completely phase out at income above $40,000.
This Budget measure is aimed at improving the superannuation balances of low income spouses (whether married or de facto).
As a result of the significant increase to the current eligibility threshold announced by the Government (over three times the current amount), this measure is likely to open up the tax offset to more spouses on lower incomes and boost their retirement savings, particularly those of women.
What does this mean for you?
If you make superannuation contributions on behalf of your spouse who is earning a low income, you may now be eligible to claim a tax offset on your income tax return.
Anti-detriment provision in respect of death benefits abolished
Effective Date: 1 July 2017
The Government proposes to abolish the anti-detriment provision in respect of death benefits paid from a superannuation fund from 1 July 2017.
An anti-detriment payment is an additional amount that may be paid from a superannuation fund to an eligible dependant of the deceased member when a lump sum death benefit is paid. An eligible dependant includes:
- a spouse or former spouse; or
- a child or children (including an adult child or children).
- The anti-detriment payment effectively represents a refund of the 15% contributions tax that has been paid by the deceased member over their lifetime.
Currently, there is no legal requirement for superannuation funds to make anti-detriment payments, it is an optional measure. As a result, this provision is at present inconsistently applied across the industry – some funds make the payment while others do not.
By removing the anti-detriment provision from 1 July 2017, the Government aims to better align the treatment of lump sum death benefits across all superannuation funds.
What does this mean for you?
This change represents a loss of advantage currently available through some superannuation funds that make anti-detriment payments (including those operated by BTFG) when a super fund member dies and a lump sum benefit is paid to eligible dependants.
Changes to retirement income products
Effective Date: 1 July 2017
Currently, a tax exemption applies to earnings derived by funds on assets supporting current pension liabilities, however this exemption does not apply to products such as deferred annuities.
From 1 July 2017, the Government intends to remove barriers to the development of retirement income products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products, which seek to provide individuals with income throughout their retirement.
The development of such products will provide more flexibility and choice for retirees, and help them to better manage longevity risk.
This change was recommended by the recent Retirement Income Streams Review.
The Government has said that it will consult on how the new retirement income products will be treated under the Age Pension means test.
What does this mean for you?
This measure will encourage funds to offer new and innovative retirement income products that will provide retirees with greater choice and flexibility on how they deal with the risk of outliving their superannuation savings.
Content courtesy of BT’s ‘Federal Budget – May 2016’.