2016 Federal Budget
There have been some big changes in to Superannuation in the recent budget. It is important to note that at this stage the changes have not been legislated, however with opposition support in the majority of policy positions, it is likely that most changes will be passed, although it is likely with some amendments.
There are four areas in which Super was impacted.
Contributions, Transition to Retirement Pensions, Taxation of pension investment returns-Lifetime limit & Anti Detriment.
• Reduction in Concessional Caps
○ From 1st of July 2017 everyone will have a maximum of 25K concessional contribution limit.
Comment: this measure makes it even more difficult to get more money into Super than it currently is if they can’t take advantage of the catch up rules. Concessional Catch ups will improve the situation, but it is an overall lowering of the amount of concessional contributions that can be made.
• A Concession Contribution Catch Up
○ Any unused portions of the concessional contributions cap will be able to be kept for 5 years if their member balance is under 500K as at 1st of July 2017.
Comment: This measure is great for women, carers & small business owners with inconsistent or lumpy incomes. It gives people the ability to get more into Super in the above mentioned circumstances. Can help people with windfall gains that have not used their concessional cap in the previous 5 years.
• A lowering of the Division 293 Tax Threshold
○ Additional Contributions tax levied on your contributions to Super if you earn $250K/Annum in Adjustable Taxable Income. ATI is the combination of: Taxable Income + Reportable Fringe Benefits + Total Net Investment Losses + Reportable Superannuation Contributions.
Comment: Increase of Tax for High Income Earners.
• Annual Non Concessional Caps replaced with lifetime Cap
○ Lifetime Limit of 500K on Non Concessional Contributions which will be indexed Annually backdated to 1st of July 2007. No penalty on amounts over 500K already contributed. Freeze on any additional non concessional contributions for people that have already contributed up to 500K from 1st of July 2007.
○ The amount of 500K will increase over time in line with AWOTE (Average Weekly Earnings)
Comment: The most controversial measure by the Government considering the history of non-concessional contributions. No consultation before implementation. Also makes record keeping and proper administration even more difficult.
• Elimination of Self Employed Test
○ Anyone under the age of 75 is able to claim a deduction for personal superannuation contributions regardless of employment arrangement.
Comment: This measure will help people to make contributions to Super if they have a windfall gain in a particular year. For example, if you make some money personally and you want to reduce your personal income in that year, then you are able to contribute to Super and reduce your taxable income by that amount. You can also use the concessional cap catch up to maximise this contribution.
• Elimination of Work Test 65-75
○ Anyone under the age of 75 will be able to contribute to Super regardless of working status.
Comment: Realisation that the previous rules were easy to get around & therefore not effective. No rational reason to stop people from contributing till their 75 as the age of retirement goes up and people need to top up super.
• Tax Offset for Spouse Contributions
○ Increase in the threshold to qualify for the maximum amount of Low Income Spouse Superannuation Tax Offset from $10,800 to $37,000.
○ Individuals can reduce the amount of tax that they pay provided that the individual makes an after tax contribution to Spouses Superannuation Account. Maximum Tax Offset is $540.
Comment: Gives more access to claim a tax offset for spouses that are working part time or on a casual basis.
• Tax Offset for Low Income Earners
○ Low Income earners up to $37,000 can get a Low Income Superannuation Tax Offset. The LISTO is capped at $500.
• Transition to Retirement (TTR)
○ Removal of Tax Free Status of income supporting a Transition to Retirement Income Stream.
Comment: Removes the ability for capital gains to be taxed at Zero whilst the person has not met a full condition of release.
○ No Taxing of Pensions as Lump Sums. No choice to take minimum pension as lump sum using annual limit.
Comment: This grey area has been legislated. The ruling of which this is based was not proven in every case. Closes a loop hole that should not have been open in the first place.
• 1.6 Million Dollar pension commencement balance Cap
○ From 1st of July 2017 only $1.6 Million per member will be allowed to receive tax free income status.
○ All pensions, will be subject to this rule regardless of the establishment date.
○ Amounts over 1.6 Million in each pension must be transferred out of pension phase and into accumulation phase & taxed @ 15%.
○ Any amounts not converted to accumulation will be taxed at the marginal rate of taxation.
○ The Cap will increase in line with indexation in 100K increments.
○ If a pension is under the 1.6 Million cap, then the percentage will be recorded and when the pension amount is raised that member will be able to convert the percentage of the new pension cap to pension phase.
○ Increased valuations or earnings in the pension account will not impact the tax status of the amounts in pension phase
Comment: Effects high net wealth Clients now. Negative market movements will impact heavily on a pension account already commenced with 1.6 Million dollars. If one member has a large balance and the other has a small balance, then a withdrawal of the amount over 1.6 Million can be made and then contributed back as a non-concessional contribution (500K). Increases the worth of evening out Spouse balances in Super.
• Anti-Detriment Payment Gone
○ No ability to claim a deduction on contributions tax when a member dies before reaching pension age.
Comment: This provision removes the deduction and simplifies a complex area of deductible expenses that not many SMSF’s had the ability to claim.
Those that know Super well, understand that totally tax free pensions regardless of size were too good to be true. Unfortunately that is not the real impact of the changes. The enemy of Super is not higher taxes on wealthier Australian’s, it is the perception in the community (usually among Australians that need Super the most) that Government is sneaky or underhanded in how they deal with taxing Super or they can just change the rules any time they like. I wish I had a dollar for every person that has said that over the past 10 years.
This perception can lead to mistrust and dismissal of a system that was designed to benefit them over the longer term. The legislated minimum employer contributions are not going to be enough to get people to their desired retirement. In order to get there, additional contributions are required. Decisions on that sacrifice now will be made based on budgets like the one just handed down. We have to make sure that everyone has the right perception of these changes.
The fact remains despite the changes above that Super is still tax effective. In order to get enough into Super you will need to contribute often and more than your employers contribution over time. Unfortunately, it will be difficult to tell people to move on with confidence because the Government doesn’t make retrospective changes, because clearly that is not true any more.