Proposed changes to superannuation
The Federal Budget contains a number of proposed changes to superannuation. It is important to note that the budget announcements are only proposals at this stage and will depend on the outcome of the upcoming federal election before they are legislated.
Following are some of the key changes to the superannuation system which have been proposed:
Reducing the concessional contributions cap to $25,000 – effective 1 July 2017.
Concessional contributions are any contributions from a pre-tax source, and include both employer contributions, as well as salary sacrifice contributions, and member contributions where a tax deduction is claimed.
The concessional contributions cap will be reduced from $30,000 to $25,000 per annum from 1 July 2017, regardless of a person’s age. At present, those over age 50 are able to contribute up to $35,000 per annum in the form of concessional contributions, and those under age 50 are able to contribute $30,000 per annum.
The reduction in the concessional contributions cap will have two effects. Firstly, the ability to save tax through salary sacrificing has been reduced. Secondly, people will need to start making additional contributions to their super from an earlier date, to ensure that they can save a sufficient amount to fund a comfortable retirement.
Catch-up concessional contributions
The government is proposing that any unused concessional contribution cap amounts be able to be carried for over 5 consecutive years. The ability to carry forward any unused concessional contributions will be limited to those with a superannuation balance of less than $500,000.
The effect of this change is that it will allow those who have taken a break from the workforce to be able to make catch up payments to superannuation in future years. This change also presents an opportunity for people whose taxable incomes are expected to vary significantly in future years. Planning the timing of concessional contributions can allow you to get the maximum tax benefit for these contributions.
Lifetime cap for non-concessional contributions – effective immediately.
Non-concessional contributions are contributions made to superannuation from after tax monies.
Effective from budget night, a lifetime cap of $500,000 per person will apply to non-concessional contributions. This cap will take account into account any non-concessional contributions made to superannuation on or after the 1st of July 2007, however those who have already exceeded the cap due to contributions made prior to the 3rd May 2016, will be not be penalised.
Once again, this change will result in the need for people to start contributing to superannuation at an earlier date, to ensure that they can save a sufficient amount to fund their retirement. It will be more difficult for people to make large contributions to superannuation just prior to retirement.
The other result of this change is that the ability to execute a re-contribution strategy (a strategy primarily used for estate planning purposes) is significantly reduced.
Removal of contributions eligibility requirements for those age 65 to 74 – effective 1 July 2017.
At present, anybody aged 65 to 74 needs to meet a work test to be eligible to make contributions to superannuation. This requirement will be removed from 1 July 2017. This will make it easier for older Australians to increase their retirement savings, subject to the new caps on concessional and non-concessional contributions.
Introduction of a $1.6 million superannuation transfer balance cap – effective 1 July 2017.
One of the main benefits of our superannuation system is that once a person is aged 60 and over, they have the ability to draw a tax free pension from superannuation savings. Not only is the pension income tax free, but the earnings on all of the investments held within the pension account, are also tax free.
The government is now proposing that a transfer balance cap be introduced. This will restrict the total amount of superannuation that can be transferred from the accumulation phase to the pension phase to $1.6 million per person. Any amount over $1.6 million will need to be retained in the accumulation phase, where any investment earnings are taxed at 15%. Unpreserved amounts can still be withdrawn from an accumulation account balance in the form of a lump sum.
It is important to note that no concessions will be granted to existing pensions. Therefore, any members with pension balances that exceed $1.6 million as at the 1st of July 2017, will need to either transfer the excess amount back into accumulation phase, or withdraw the excess amount from superannuation.
The effect of this change is to limit the amount of superannuation fund earnings on which the superannuation fund is taxed at 0%. No changes have been made to the tax treatment of the payments withdrawn by the member from superannuation.
Additional 15% contributions tax for anyone earning over $250,000 per annum –effective 1 July 2017.
At present, anyone earning over $300,000 per annum, is subject to an additional 15% tax on their concessional contributions, i.e their concessional contributions are taxed at 30%, as opposed to the standard 15%. From the 1st of July 2017, the additional 15% tax on contributions will apply to anyone earning over $250,000 per annum, down from $300,000 at present.
Removal of earnings tax exemption for transition to retirement pensions – effective 1 July 2017.
A transition to retirement pension is a very popular strategy for those people approaching retirement. The strategy involves a person drawing a pension from their superannuation savings whilst they are still working. For those over age 60, a person can draw a tax free pension from their superannuation, and as mentioned previously, all of the earnings within the pension account are tax free.
From the 1st of July 2017, the government is proposing to remove the earnings tax exemption for transition to retirement pensions. This means that the earnings within the pension account will now be taxed at 15%, the same as funds held in the accumulation phase. Note this change only applies to transition to retirement pensions, not account based pensions.
This change reduces the tax effectiveness of the transition to retirement pension strategy. Unfortunately, existing transition to retirement pensions are not grandfathered, so anybody who is currently utilising this strategy will need to review their pensions to determine whether or not the strategy remains appropriate.
Other changes – effective 1 July 2017
Other proposed changes include:
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Abolishing the anti detriment payment paid upon superannuation death benefit payments.
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Increasing the income threshold for the spouse superannuation tax offset from $10,800 to $37,000.
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A low income superannuation tax offset will be introduced. The will provide a tax offset of up to $500 for tax paid on concessional super contributions, for anyone earning up to $37,000 per annum.
As mentioned above, it is important to note that all of the proposed changes are only proposals at this stage, and amendments could well be made before these proposals are legislated. However, should the majority of these changes be legislated, people may need to adjust their superannuation strategy.
Addison Partners has a dedicated team that concentrates on Superannuation lead by superannuation specialist Jane Thomson. Addison Partners provide advice on developing and implementing superannuation strategies to reduce your tax and increase your savings for retirement. To arrange for a review, please contact your usual Addison Partners contact or call 02 4995 7300 to arrange an appointment.