On Wednesday 23 November 2016 the Government’s superannuation legislation was passed by the Parliament making the superannuation changes it originally announced in the 2016 Federal Budget law.
Changes in the legislation that need to be considered include; lower contribution limits, the new $1.6 million balance transfer cap, a lower income threshold for increased contributions tax and changes to transition to retirement pensions.
Most of these changes will apply from 1 July 2017 so now is a good time to start thinking about how your superannuation will be impacted by the new rules and whether you might need to alter any of your SMSF’s arrangements. Some of these changes may require you to adjust your investment, contribution, pension and estate planning strategies going forward.
This will most likely be the case if you have a superannuation balance of over or close to $1.6 million, were planning on making significant contributions to superannuation in the next few years, are a high income earner or have a transition to retirement pension in place now.
- The Government will allow individuals with a superannuation balance of less than $500,000 to make catch-up concessional contributions to their superannuation from 1 July 2018 where they have not used up all of their previous annual concessional contribution caps.
- Removing the “10% rule” for deductible contributions to superannuation from 1 July 2017. The 10% rule stops most employees from making a contribution to superannuation and then claiming a tax deduction for it. This change will allow taxpayers to make a contribution from their after-tax income during an income year and then claim a tax deduction for the contribution.
Changes to contribution limits
- The limit on concessional contributions (pre-tax contributions) cap will reduce to $25,000 per year for all taxpayers from 1 July 2017.
- If appropriate, make the most of the current concessional contribution caps for 2016-17 which are:
- $30,000 for people aged under 49 on 30 June 2016, and
- $35,000 for people aged 49 and over on 30 June 2016.
- The limit on non-concessional contributions (post-tax contributions) will be reduced to $100,000 per year from 1 July 2017. Taxpayers will still have the ability to “bring forward” three years’ worth of contributions to a single year (allowing you to contribute up to $300,000 in one year).
- Members with superannuation balances over $1.6 million will no longer be able to make non-concessional contributions.
- This means that for the 2016-17 financial year people can still make non-concessional contributions of up to $180,000 or bring forward $540,000 of contributions to 2016-17.
The new $1.6 million balance transfer cap
- From 1 July 2017 there will be a new lifetime $1.6 million transfer balance cap which places a limit on the amount an individual can hold in the tax-free retirement phase.
- Amounts above the $1.6 million cap can be held in the “accumulation phase” of superannuation where earnings on assets are taxed at up to 15%.
- The cap will function based on a series of credits and debits that add to or take away from the cap. Credits arise where a superannuation pension is started and debits where a pension is ceased and the capital returned to accumulation phase.
- If too much money is used to start a pension causing you to exceed the $1.6 million cap, then extra tax will be payable and the money will need to be taken out of the retirement phase.
- There is also capital gains tax relief for SMSFs that are required to alter their asset holdings to meet the new requirements.
Lower threshold for increased contributions tax
- From 1 July 2017, people who have income of $250,000 and over will need to pay an extra 15% tax on their concessional contributions. The previous income threshold for this tax was $300,000.
- This tax is known as “Division 293 tax” and the Australian Taxation Office will send you a tax determination if you are liable to pay it.
Changes to transition to retirement pensions
- This change will see that tax-exempt treatment of earnings on assets supporting a transition to retirement pension cease as of 30 June 2017.
- From 1 July 2017, you can still start or maintain an existing transition to retirement pension but without the tax-exempt treatment for earnings.
How can we help?
If you are concerned that the Government’s changes to superannuation are going to affect you, please contact us to discuss in more detail.