SMSF

2016 Federal Budget Update to Super Reforms

super-changes-update

According to the Federal Government, the main objective of superannuation is “to provide income in retirement to substitute or supplement the age pension”. The proposals to superannuation that were announced by the Government in the 2016 Federal Budget are still to be passed in Parliament.

With the July 2016 election done and dusted, we thought that we would update you with what the Government has further announced so far.

Non-Concessional Contributions

Non-concessional contributions are contributions that are made to super from any after-tax income or savings. The first proposal was to introduce a $500,000 lifetime cap for non-concessional contributions. Now, there will be a lower annual limit of $100,000, currently $180,000, with the current rules for after-tax contributions to remain.

So, from 1 July 2017:

  • the non-concessional contributions will reduce to $100,000 per year, from $180,000 per year
  • under the ‘bring forward rule’, the maximum non-concessional contributions in one year for people aged 64 or less, will be reduced from $540,000 to $300,000
  • if your super balance reaches $1.6 million, no further non-concessional contributions will be allowed

If you trigger the bring forward rules before 1 July 2017 without fully utilising it, you will be subject to transitional arrangements. This means the balance of the bring forward amount will be recalculated on 1 July 2017 to reflect the new annual cap of $100,000.

Contributions for People Aged Between 65 and 74

If you are between 65 and 74 years of age, you currently need to satisfy the ‘work test’ to be eligible to contribute to a superannuation fund. This means that you are required to work 40 hours in 30 days. On budget night, the Government proposed removing the work test however, this will no longer be considered.

So, if you are aged 65 and meet the work test this year but may not meet the work test next year, you could consider making a non-concessional contribution of up to $100,000 in June 2017 and defer the allocation of it until 2017/2018. Give us a call to discuss how this strategy can help you.

Concessional Contributions

From 1 July 2017 the concessional contributions cap will be reduced to $25,000. This will be indexed in line with the average weekly ordinary time earnings (AWOTE) and will increase in increments of $2,500.

For individuals that are eligible to make concessional contributions, the Government has also proposed allowing a tax deduction for personal contributions up to the contributions cap. This proposed change will provide more flexibility in how and when superannuation contributions are made. To see how these personal deductible contributions could benefit your situation, please give us a call.

The Government is also proposing to replace the Low Income Superannuation Contribution (LISC) with the Low Income Superannuation Tax Offset (LISTO). For individuals with taxable income of less than $37,000, this change is designed to ensure that low income earners do not pay a higher tax rate on contributions to super than their other income.

Catch-Up Concessional Contributions

Under the current ‘catch-up rules’, if you have not fully utilised the annual contributions cap in previous years and your balance is $500,000 or less, you are able to contribute more than the annual cap.

This $500,000 limit includes all of an individual’s superannuation, regardless of whether it is an accumulation or pension balance. Unused cap amounts can be carried forward for up to five consecutive years.

The Government will now delay the ability to utilise the catch-up proposal by 12 months to 1 July 2018.

Superannuation Balances Over $1.6 Million

If your superannuation balance is already more than $1.6 million, you will not be able to make any non-concessional contributions after 1 July 2017. The eligibility threshold of $1.6 million will be based on your balance as at 30 June of the previous financial year and will include all of your superannuation and pension entitlements.

Where your balance is close to the threshold, you will only be eligible to bring forward the non-concessional contributions cap for the number of years until your balance reaches the $1.6 million limit.

Are You in Pension Phase?

If you are in pension phase, the proposed $1.6 million ‘transfer balance cap’ also applies from 1 July 2017.

On 1 July 2017, if you have a balance of more than $1.6 million in pension phase, you will need to withdraw the excess or transfer the excess back to accumulation phase. To work out the best strategy for you, please give us a call.

The transfer balance cap will be indexed in line with CPI and will only be increased when the indexation reaches $100,000.

Transition to Retirement Pensions

From 1 July 2017, the income received from investments supporting a pension will no longer be exempt from income tax. This means that if you have a transition to retirement pension and you are not retired, tax paid on earnings will go from 0% to 15%.

If you currently receive a transition to retirement pension from a SMSF, for income tax purposes you can have your fund trustee treat your pension payments as lump sum payments. Generally, most people pay less tax on their lump sum payments as opposed to their pension payments. From 1 July 2017, this will be removed.

How Can We Help?

With all of the proposed changes to superannuation, we encourage you to give us a call about what strategies you should be considering now. We also recommend that you talk to us before you consider making any contributions to your fund.