By Richard Livingston 4 May 2016

Budget 2016: A quick snapshot

In last night’s budget sweeping changes were announced for the superannuation system, leaving few unaffected.

Snapshot

  • Introduction of account based pension and non-concessional contribution limits
  • Elimination of ‘work test’ and restrictions on deductible super contributions
  • A range of changes to concessional contribution limits and rules

Last night’s Federal Budget showed why there’s little point trying to analyse pre-budget rumours. The Treasurer Scott Morrison announced an extensive list of measures, many of which were completely unexpected.

Let’s take a quick look at what was announced last night (note that some of these new measures didn’t make his budget speech). In the coming weeks and months we’ll look at how these changes will affect your super and potential strategies to make sure you’re still getting the most out of the super system.

The big changes

A number of new measures were announced that drastically change the system we’ve been operating under for the last decade. These changes are:

  1. $1.6 million ‘transfer balance cap’. From 1 July 2017, the Government intends to introduce a transfer balance cap on the amount of super that can be moved into pension phase - $1.6 million plus earnings post transfer. Importantly, this change will be retrospective, so those who have previously transferred more than $1.6 million will be required to withdraw the excess or shift it back to accumulation (which, remember, still has an attractive 15 per cent ordinary tax rate). Note that this limit is for individuals, meaning couples (with even balances) should be able to shift $3.2 million into pension phase.
  2. Lifetime cap for non-concessional contributionsVoluntary contributions made to your super account out of after-tax income (savings). Non-concessional contributions are not tax deductible and can't be salary packaged. See the ATO website for more information.. Another radical shift is that a lifetime cap of $500,000 will be applied to all non-concessional contributionsVoluntary contributions made to your super account out of after-tax income (savings). Non-concessional contributions are not tax deductible and can't be salary packaged. See the ATO website for more information. made after 1 July 2007. Fortunately, these changes will only apply from 3 May 2016, so those who have already contributed in excess of $500,000 won’t be required to remove the excess.
  3. Removal of the work testIf you are aged 65, but less than 70, you can make super contributions but only if you meet a 'work test'. To satisfy this test you must work at least 40 hours during a 30 day period (in the financial year the contribution is made). See the ATO website for more information.. In a welcome move, the Government will scrap the ‘work test’ that currently applies to those aged 65 to 74. Instead, it will allow everyone to make superannuation contributions up to age 75.
  4. Transition to retirement (TTR) pensions. It was widely expected the Government would act on TTR pensions and it has, removing the tax exemption on fund earnings supporting a TTR pension, with effect from 1 July 2017. The ability to elect to treat payments as lump sums for tax purposes will also be removed (see Super Snippets: January 2016).

These changes will have an impact on many existing superannuation strategies. They might also cause a radical shift in how people approach super. In future articles we’ll look in more detail at each of the changes, the potential impact and strategies to minimise their impact.

Changes to super contributions rules

That’s the radical shifts in the super landscape, but there were also some other important (and more anticipated) changes:

  1. Reduced concessional contributions capThe annual cap (for each year ended 30 June) on the amount of concessional (pre-tax or tax deductible) contributions a person is allowed to contribute to super. For more information on cap amounts see the ATO website.. From 1 July 2017, the concessional contributions capThe annual cap (for each year ended 30 June) on the amount of concessional (pre-tax or tax deductible) contributions a person is allowed to contribute to super. For more information on cap amounts see the ATO website. will revert back to $25,000 (it’s currently $30,000, or $35,000 for those over 49). This change was widely expected.
  2. ‘Catch up’ of concessional contributionsThe 'normal' contributions made to your super account. Concessional contributions include compulsory contributions made on your behalf by your employer, voluntary contributions made out of your salary package and cash contributions by self-employed people (who are entitled to a tax deduction for it). Concessional contributions are either made from 'pre-tax' income or are tax deductible. See the ATO website for more information.. In a welcome move, those with a super balance less than $500,000 will be able to carry forward any unused concessional contributions capThe annual cap (for each year ended 30 June) on the amount of concessional (pre-tax or tax deductible) contributions a person is allowed to contribute to super. For more information on cap amounts see the ATO website. (for a period of up to five years) and use it in future years. This will help those with uneven earnings patterns and those who take a break from work.
  3. Reduction in Division 293 threshold. One of the most widely anticipated changes was that the income threshold for the additional 15 per cent ‘surcharge’ on high income earners would be reduced. From 1 July 2017, the higher 30 per cent tax on contributions will apply to those with an ‘income’ over $250,000 (down from $300,000).
  4. Tax deduction for personal super contributions. The current 10 per cent rule limits the ability of individuals to make tax deductible super contributions where salary is more than 10 per cent of their assessable income. From 1 July 2017, the Government will change this rule to provide greater flexibility for all taxpayers to make deductible personal super contributions.
  5. Low income super tax offset. The existing low income tax offset (due to expire 30 June 2017) will be replaced with a tax offset of up to $500 on concessional contributionsThe 'normal' contributions made to your super account. Concessional contributions include compulsory contributions made on your behalf by your employer, voluntary contributions made out of your salary package and cash contributions by self-employed people (who are entitled to a tax deduction for it). Concessional contributions are either made from 'pre-tax' income or are tax deductible. See the ATO website for more information., where the contributor has adjusted taxable income of less than $37,000.
  6. Low income spouse contribution tax offset. From 1 July 2017, the income threshold for this offset will increase from $10,800 to $37,000. This measure provides the contributing spouse with a tax offset of up to $540 for the first $3,000 of non-concessional contributionsVoluntary contributions made to your super account out of after-tax income (savings). Non-concessional contributions are not tax deductible and can't be salary packaged. See the ATO website for more information. made to a complying fund.

A final super measure that is unlikely to affect many is the removal (again, from 1 July 2017) of the anti-detriment rules. Anti-detriment strategies weren’t commonly used by SMSFs.

Finally, a welcome change that isn’t specifically super related but is likely to be relevant to many looking to create a retirement income stream, is the announcement that the Government intends to extend the tax exemption on earnings in the retirement phase to deferred start annuities (DSAs) and group self-annuitisation products (again, from 1 July 2017). It’s hoped that this will allow a DSA market to develop in Australia, providing a more effective option than current products for retirees to insure against longevity risk (the risk of outliving your retirement savings).

There’s a lot of water to pass under the bridge and we’ll be interested to see how the legislation implementing some of these changes – especially the $1.6 million transfer balance cap – develops in coming months. Once the details have been fleshed out we’ll look at strategies to counter the problems likely to arise and to maximise super benefits going forward.

 

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