The legislation implementing the substantive changes to superannuation announced in the 2016 Budget has now passed through Parliament. This means we now need to get on top of the changes and make sure we are planning for their implementation as most of them are effective from 1 July 2017.
Some of the changes are quite fundamental. A summary of the main points are:
1. The concessional contributions cap drops from 1 July 2017 to $25,000 per annum for everybody. This will be indexed with AWOTE in $2,500 increments.
2. Starting from 1 July 2019, unused concessional contributions caps can be carried forward and used in the next five years. The first year that an unused concessional contribution cap can be carried forward is the 2018/19 year. This is only available if your total superannuation balances in all funds combined is $500,000 or less just before the beginning of the year you are using a prior year cap.
3. From 1 July 2017 the non-concessional contributions cap reduces to $100,000 per annum (4 times the concessional contributions cap), and can only be used if your total superannuation balances in all funds combined is under $1.6 million just before the beginning of the financial year.
4. The bring forward rules for non-concessional contributions caps remain, but become vastly more complex. Transitional rules apply if the bring forward rules have been triggered before 1 July 2017.
5. A transition to retirement pension (TRIS or TTR) ceases to qualify as a pension from 1 July 2017, so income from assets supporting a TRIS or TTR will no longer be free from tax in the fund.
6. The income threshold at which Division 293 tax applies drops from 1 July 2017 to $250,000 (down from $300,000).
7. From 1 July 2017, SMSFs will not be able to use the segregated method for calculating ECPI if any member has total superannuation balances in all funds over $1.6 million and is drawing a pension from any fund.
8. A partial commutation of a pension from 1 July 2017 does not count to the minimum pension payment.
9. The 10% test for deducting personal contributions is removed from 1 July 2017. This means more people can claim tax deductions for personal contributions to superannuation from 1 July 2017.
10. Anti-detriment payments are abolished for someone who dies after 30 June 2017, and for a payment made after 30 June 2019.
11. CGT relief is available for assets supporting a pension at 1 July 2017. This is a cost base reset where the asset ceases to support the income stream. The trustee of the fund must elect for the relief to apply in the prescribed form before lodging the fund’s tax return for the 2016/17 year.
12. And the biggest and most complex of all – the changes implement a ‘transfer balance cap’ and ‘transfer balance account’ for every member with a pension. Effectively, this limits the starting amount that can be in pension phase for a member to $1.6 million. This applies from 1 July 2017 and will require a review of all clients with pensions.
Immediate action is required to be ready for this new world of superannuation, including:
- If a member’s pension accounts in total across all superannuation funds are not reduced to $1.6 million by 1 July 2017, there will be a number of adverse tax consequences.
- One of the many consequences of the $1.6 million limit on pensions is that estate planning for all clients must be reviewed, both to see that existing strategies will still stand up, and whether new strategies are required going forward. In particular, reversionary pensions, binding nominations and child pensions should be investigated.
- Every TRIS and TTR should be reviewed to check whether it is still a TRIS or TTR (no tax exemption for income in the fund for assets supporting the pension) or has been or can be converted into a normal account based pension (tax exemption available). Terms for every TRIS or TTR should also be looked at to ensure it automatically converts when the pensioner satisfies a full cashing condition (otherwise the tax exemption may never become available).
- Should a fund elect to use the CGT relief? Ensure the election is made if required.
- Pension drawdown strategies should be re-considered. If a pensioner is drawing more than their minimum payment, it may be advantageous for transfer balance caps for the amount above the minimum to be a partial commutation rather than a pension payment.
- Consider whether spouse contributions and contributions splitting will assist, and whether evening up balances between spouses will be useful.
- Be aware of the transitional rules for bringing forward future years’ non-concessional contributions cap, and whether non-concessional contributions should be maximised before 1 July 2017.
- Consider whether deductions for personal contributions will be of benefit, and ensuring the notice is given and acknowledged in time.
- Can we use the CGT cap for further contributions?