Superannuation was the watchword of the federal election campaign, with the Liberal government proposing sweeping reforms. At the time the so-called ‘super stoush’ was being held up as an issue that could lose the Coalition the election.
There was much uncertainty last year about the future of superannuation – if the Coalition Government would get in, and if they did, what changes they would make law. Now we know.
On 23 November the Australian parliament made substantial changes to superannuation legislation. Proposed to improve the sustainability, flexibility and integrity of Australia’s superannuation system, the laws are set to come into play on 1 July 2017.
Reform to both before and after-tax contributions, pension transfer caps and transition to retirement (TTR) tax exemptions are all on the horizon this year, which means you should understand how it affects you personally.
$1.6 million Pension Transfer Cap
This is a big one and the rules are complicated to boot.
For the first time, the Government have introduced a cap on the amount that can be held in a super fund pension.
From 1 July 2017, there will be a $1.6 million cap on the total amount that can be transferred into the tax-free retirement phase for account-based pensions. This applies whether you have a pension in a self-managed super fund or in a public super fund.
People who are retired and have a superannuation balance of $1.6 million or more will be primarily affected by this new legislation. The amount of tax that is being paid on your superannuation balance will differ, which will change your taxable and non-taxable components of your superannuation balance.
If your pension or super balance is nearing a $1.6 million balance then it’s really important to review how the changes may affect you prior to 30 June, 2017. These rules can also extend to limiting the amount of non-concessional (tax-free) contributions that you can make in your super fund for the next three years so planning in advance is the key here!
As a result of these changes we expect that it will be important to have your super fund accounting and tax up to date and done early in each new financial year so that you always know where you stand with the new limits.
Transition to Retirement
The government will be removing the tax-exempt status of earnings from assets that support a Transition to Retirement Income Stream (TRIS). Earnings from assets supporting a TRIS will be taxed at 15% regardless of the date the TRIS commenced, and members can no longer use the super income stream payments as lump sums for taxation purposes.
This change is supposed to ensure the TRIS is not being used for tax avoidance purposes, and performs its intended function of supporting individuals who are in the workforce. Individual tax payers will still be eligible for tax offset of up to 15% on their pension earnings.
Before and After Tax Contribution Caps
|Concessional Contributions Cap (less than 49 years old at 30/6/16)||Concessional Contributions Cap (49 or older at 30/6/16)||Non-concessional contributions cap||3 year bring forward cap|
|Current rules||$30,000 p.a.||$35,000 p.a.||$180,000 p.a||$540,000|
|New rules from 1 July 2017||$25,000 p.a.||$25,000 p.a.||$100,000 p.a||$300,000|
The before-tax (concessional) contributions cap is set to be lowered from $30,000 to $25,000 per year for everyone, regardless of your age.
The government will also reduce the annual non-concessional (after tax) contributions cap from $180,000 to $100,000 per year. As noted above, super members with a total superannuation balance greater than $1.6m may not be able to make any additional non-concessional contributions.
Many of our clients may be familiar with the three-year bring forward rule as it’s been a great way to boost super balances leading up to retirement. This is still available, however the cap has been reduced from $540,000 to $300,000 from 1 July 2017. There are continuing restrictions on who is eligible to use the bring forward rule so it’s important to speak to us or your financial planner to check you’re eligible and that you will not exceed your non-concessional caps, which has significant consequences.
What you should do
There’s no arguing that super changes have been controversial and have created a great deal of uncertainty within the super community, particularly in relation to the now-scrapped lifetime limit on non-concessional contributions of $500,000.
In particular the reduction in the annual contribution caps and the $1.6 million pension cap will be disappointing to people who were wanting to build their super for retirement.
However, there are still a few opportunities you can take advantage of before the new legislation is introduced:
- With before-tax contributions being lowered to $25,000, individuals should consider taking advantage of the higher maximum in the 2016 year.
- As after-tax contributions are also being lowered from $100,000, those with the capacity should consider contributing additional funds before 1 July 2017.
- Those under the age of 65 may be able to benefit from the 3-year bring forward cap of $540,000, which is close to double the new limit.
As always, if you’re unsure about how these reforms could affect you or your business then make sure you speak to us today. For more information and further details about all of the upcoming changes, you can visit the ATO website.