Significant changes to the superannuation system will come into effect from 1 July 2017. These changes will affect more than the 1% of the population initially projected by the Government in their budget address. Advisers should be taking steps now in anticipation of these changes to assist their clients’ transition to the new rules.
Non-concessional contributions are those contributions which are not included in the assessable income of a superannuation fund (ie, no tax deduction is claimed in respect of the contribution), and used to be known as ‘undeducted contributions’.
Until 30 June 2017, the non-concessional contributions cap is $180,000 per annum. People under age 65 are able to “bring forward” three years’ worth of contributions and make a total non-concessional contribution of $540,000 in a single year (or across a 3 year period).
From 1 July 2017, the non-concessional contributions cap reduces to $100,000 per annum and there is a corresponding reduction to the “bring forward” amount ($300,000 in a single year or across a 3 year period). If an individual has started utilising the “bring forward” rule but has not completely exhausted the cap, the unused amount will, therefore, reduce after the current year.
In addition, from 1 July 2017, no additional non-concessional contributions can be made into superannuation by individuals who have a total superannuation member balance of $1,600,000 or more. This includes superannuation held in accumulation and in pension accounts, as well as defined benefit entitlements.
Individuals should consider:
- whether they are able to take advantage of the higher cap that applies until 1 July 2017
- the transitional rules which apply for those who trigger the “bring forward” before 1 July 2017 and
- the ability to contribute to a balance above $1,600,000, by making any non-concessional contributions this financial year under the existing rules.
Until 30 June 2017, an individual can have concessional (deducted) contributions of up to $30,000 per annum (up to age 49) and $35,000 per annum (age 49 and over).
At present, persons whose income and concessional superannuation contributions taken together exceed $300,000 are liable to tax of 30% on any superannuation contributions to the extent they exceed that amount, instead of the standard 15% that otherwise applies. From 1 July 2017, that threshold will be lowered to $250,000. For people affected by this change, concessional contributions made in the 2017 year are therefore more valuable than those made next year.
From 1 July 2017 the concessional contributions cap will reduce to $25,000 per annum for all age groups. Salary sacrifice arrangements currently in place should be reviewed to take account of the reduction in the cap.
Individuals should consider whether they are able to maximise their concessional contributions in the current year, in light of the coming reduction in the cap.
Under current rules, a tax deduction for a person’s contributions to superannuation is available only if they have less than 10% of their income sourced from employment or employment-like activities. From 1 July 2017 that requirement will be abolished. This means that individuals will be able to make additional contributions on a tax deductible basis, to the extent that there is any room within the cap after any employer contributions have been made.
From 1 July 2018, people who have a superannuation balance below $500,000 will be able to “carry forward” any unused part of the concessional cap for a period of 5 years in order to make catch up concessional contributions. The rules regarding this change are still yet to be finalised.
Introduction of the transfer balance cap
From 1 July 2017 a limit of $1,600,000 applies to how much superannuation can be transferred from accumulation into a tax free pension account. The cap applies to all pension accounts, excluding transition to retirement pensions (discussed below). A ‘transfer balance account’ is a running tally maintained by the Australian Taxation Office of where a person sits in relation to the transfer balance cap. The cap will be indexed periodically in line with the CPI, but indexation will apply proportionately to how much of the cap a person has unused each year. Credits to a person’s ‘transfer balance account’ will occur when additional amounts are added to a person’s tax free pension accounts (in all of their superannuation funds). Decreases in the value of a pension account because of commutations will result in a ‘debit’ to a person’s transfer balance account.
Importantly, fluctuations in the value of a pension account because of earnings or losses in the value of assets, above or below the transfer balance cap (ie, currently $1.6 million), will not impact the transfer balance account.
People who have more than $1,600,000 in pension phase at 30 June 2017 are required to commute the excess back into accumulation, or to withdraw it as a lump sum in the case of death benefit pensions.
If a fund has to transfer assets from a pension account into accumulation in order to comply with these new rules, it can access capital gains tax relief to re-set the cost base of those assets. An election to take this relief must be made by the time the fund lodges its tax return for the 2017 year.
Excess transfer balance tax applies on amounts in pension accounts that exceed the transfer balance cap, and compulsory commutation rules apply that will ‘force’ the excess amounts back into accumulation or out of the system.
Transition to retirement pensions
From 1 July 2017, the earnings on assets that support a transition to retirement pension will no longer be tax free.
These earnings will be taxed at 15% on income and 10% on capital gains (assuming the asset has been held for at least 12 months). Further, income stream payments will no longer be able to be treated as lump sums for tax purposes in order to achieve a better tax outcome.
People who are receiving a transition to retirement pension should consider whether this continues to be an effective strategy. They should also consider whether they are able to satisfy a condition of release in order that their transition to retirement pension can convert to an ordinary account based pension.
Loss of segregation
From 1 July 2017, self-managed superannuation funds with a member who has at least $1,600,000 in superannuation and is taking a pension (in any fund) will no longer be able to use the segregation method to hold specific assets to support the pension accounts.
The superannuation reforms will have an impact on estate planning, and current plans should be reviewed to determine whether any changes should be made.
In particular, death benefit pensions will add to a recipient’s transfer balance account. This means that receipt of a death benefit pension may cause the transfer balance cap to be exceeded. It may be possible to ‘make room’ within the cap by commuting back to accumulation a pension that the recipient is already receiving. However, to the extent that there is no room within the cap, it will be necessary to commute a death benefit pension and to pay the proceeds out of the superannuation system by way of a lump sum. This is because death benefits must be ‘cashed’, which means that they must be paid either as a pension or as a lump sum; there is no option to retain death benefits in accumulation within the superannuation system.
Different timing considerations apply to reversionary death benefit pensions and those pensions that are commenced on the death of a member. Special rules apply to the provision of death benefit pensions to children.