Hot Topic, SMSF

Federal Budget 2016 – Proposed Changes to Superannuation

Basic RGBOne of the ways of being financially independent in retirement is through a long term savings plan into superannuation. Several changes to superannuation were announced by the Treasurer on Budget night and in this article we focus on the capping of pension account balances, the reduction in concessional contribution caps, restrictions in accessing transition to retirement income streams (TRIS), catch-up concessional contributions and the lifetime cap for non-concessional contributions.

1.  Transfer Balance Cap of $1.6 Million

Effective from 1 July 2017 a transfer balance cap of $1.6 million will be introduced. This means that all individuals will have a maximum amount of funds that can be held in any pension account and receive concessional income tax benefits on. Any increases in the pension account as a result of net investment earnings that exceed pension withdrawals will not be restricted and can remain in the pension account.

If a member’s funds exceed $1.6 million in pension mode, then any amount over this will be treated in a similar way to excess non-concessional contributions, with tax charges being applied. The transfer balance cap will also be indexed in accordance with CPI. This means that the cap will move in line with inflation, but will only increase in $100,000 increments.

Where individuals have an existing pension account balance that exceeds $1.6 million, there are two options available for the treatment of the excess funds. They are:

  • transfer the excess amount to an accumulation account, or
  • withdraw the excess amount from super, where benefits are eligible to be withdrawn in full

Amounts in excess of $1.6 million can be maintained in an accumulation account with the investment earnings being taxed at 15%.

2.  Concessional Contribution Caps Reduced

The Government announced that it will reduce the contribution cap to $25,000 regardless of age, from 1 July 2017. The current cap is $30,000 for clients under 50 years of age and $35,000 for clients over 50 years of age. As these proposed changes do not come into effect until 2017-18, where possible, clients should consider taking advantage of the current higher concessional caps.

These contributions include the employer super guarantee contributions, salary sacrifice amounts and contributions claimed as deductions in personal income tax returns. Clients who have salary sacrifice arrangements in place should review these arrangements to ensure that they will comply with the reduced concessional cap.

Division 293 Tax

Effective 1 July 2017, the Division 293 Tax threshold will reduce from $300,000 down to $250,000. Any contributions that fall into Division 293 Tax will be taxed at 30%, up to a maximum additional tax of $3,750.

Contributions Eligibility

From 1 July 2017, the Government will increase the eligibility of individuals up to the age of 75 to allow personal deductions for contributions made to super. Clients will no longer be required to show that less than 10% of their income has come from employment.

The “work test” will also be abolished for clients aged 65 to 74. This means concessional contributions can be made to super regardless of age, up to 74 years of age.

3.  Restrictions to Accessing Transition to Retirement Income Streams

Current legislation allows for clients who have reached the preservation age of 56 to commence a Transition to Retirement Income Stream (TRIS) whilst still working. The intention of a TRIS when first introduced was to assist those wishing to ‘transition’ to retirement to access their super, before completely giving up full time work.

The Government now sees that commencing a TRIS whilst continuing to work in a full time capacity can have an unfair tax advantage. So, from 1 July 2017, any income earned by assets that support a TRIS will no longer be tax free in the super environment. This proposed change will apply to all TRIS accounts regardless of when they commenced.

4.  Catch Up Concessional Contributions

From 1 July 2017, where a superannuation fund has a balance of less than $500,000, the Government has announced that catch up concessional contributions, up to the total of any unused cap amounts, can be made.

Unused concessional contribution cap amounts will be carried forward on a rolling basis for five consecutive years. This means contributions can be made to super by anyone who takes a break from the workforce and wants to catch up on their super contributions when they return.

5.  Lifetime Cap of $500,000 for Non-Concessional Contributions

Effective from Budget night, 7:30pm on 3 May 2016, the Government has introduced a lifetime non-concessional contributions cap of $500,000. This proposed change will replace the existing non-concessional contribution cap of $180,000 per year or $540,000 if the 2 year bring forward rule was applied.

Where a lifetime cap of $500,000 has already been exceeded, individuals will not be penalised or required to move the excess component from their super savings, as illustrated in the following table:

2007/8 $450,000 using the bring forward rule
2011/12 $450,000 using the bring forward rule
2014/15 $450,000 using the bring forward rule
Total $1,350,000 of non-concessional contributions

In the above example, as the lifetime cap has been exceeded, no further non-concessional contributions can be made. It also means that excess non-concessional contributions can remain in the super environment.

The lifetime cap will take into account all contributions made since 1 July 2007 and after Budget night 2016.

These proposed changes will result in reduced contributions that can be made to super. Clients will need to check how much has already been contributed to super through non-concessional contributions, as this will determine how much more can be contributed before the lifetime non-concessional cap is reached.

To understand how these proposed changes may affect you or for more information, please give us a call.