The Government has introduced the most significant changes to superannuation since 2007. The reforms will change many of the planned and partially implemented strategies to maximise benefits for clients.

Superannuation was a key focus of the Budget with the Government’s superannuation package being the most significant changes to superannuation since Peter Costello’s Simpler Super package was announced in the 2006-07 Budget, netting it approximately $2.9 billion over the forward estimate period. Substantial changes were made to contributions, transition to retirement and the retirement phase.

The Government’s superannuation package offers a mixed bag for SMSFs with significant (and somewhat complex) changes targeting higher income earners and high balance superannuation accounts while significant red-tape improvements have been made to the super system. The key measures are:

  • A reduction in concessional contribution caps for all taxpayers to $25,000.
  • Lowering the Division 293 tax threshold to $250,000.
  • A $500,000 lifetime limit for non-concessional contributions
  • A $1.6 million limit on assets in retirement phase that will have tax-free earnings.
  • Allowing carry-forward of unused concessional caps over a 5 year period for people with balances under $500,000.
  • Removing the tax-exempt treatment of assets that support Transition to retirement income streams.
  • Removing the 10% rule for deductible superannuation contributions.
  • Introducing a Low Income Superannuation Tax Offset (LISTO) to replace the Low Income Superannuation Contribution.
  • Removing the work test for contributions made between 65 and 75.

Lifetime cap on non-concessional contributions

Date of effect 7.30 pm (AEST) on 3 May 2016

Applies to all non-concessional contributions

made on or after 1 July 2007

A lifetime $500,000 non-concessional contributions cap will be introduced from Budget night.

The current system of annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65), will be replaced with this new lifetime cap.

The lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007 and will commence at 7.30 pm (AEST) on 3 May 2016. Contributions made before commencement will not result in an excess. However, excess contributions made after commencement will need to be removed or will be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings.

After-tax contributions made into defined benefit accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional cap. The lifetime cap is available up to age 74.


Concessional contributions cap reduced

Date of effect 1 July 2017

The current concessional contributions cap will reduce to $25,000 from 1 July 2017.

Current concessional cap From 1 July 2017
Under age 50 $30,000 $25,000
50 and over $35,000 $25,000

From 1 July 2017, the Government will include notional (estimated) and actual employer contributions in the concessional contributions cap for members of unfunded defined benefit schemes and constitutionally protected funds.


Tax Exemption on Transition to Retirement Income Stream Earnings removed

Date of effect 1 July 2017

The tax exemption on the earnings of assets supporting Transition to Retirement Income Streams will be removed from 1 July 2017. The rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.


30% tax on super for high income earners

 

Date of effect 1 July 2017

At present, individuals with combined income and superannuation contributions of more than $300,000 pay an additional contributions tax (Div 293) of 15% on concessional contributions. From 1 July 2017, this  ncome threshold will reduce to $250,000.

The lower Division 293 income threshold will also apply to members of defined benefit schemes and constitutionally protected funds currently covered by the tax.


Tax free super balances capped at $1.6m

Date of effect 1 July 2017

A new $1.6 million cap will apply to how much can be transferred into a retirement phase account. Earnings on amounts within the account will continue to be tax-free. Transfers in excess of this $1.6 million cap (including earnings on these excess transferred amounts) will be taxed in a similar way to the tax treatment that applies to excess non-concessional contributions.

Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in an accumulation phase account (where earnings will be taxed at the concessional rate of 15%).

Members already in the retirement phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts.

The amount of cap space remaining for a member seeking to make more than one transfer into a retirement phase account will be determined by apportionment.

Commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000 from 1 July 2017.


Anti-detriment provisions removed

Date of effect 1 July 2017

The anti-detriment provision will be removed from 1 July 2017. The rules can currently allow a refund of a member’s lifetime superannuation contributions tax payments into an estate where the beneficiary is a dependant of the member.


Tax deductions on super contributions expanded

Date of effect 1 July 2017

All individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions from 1 July 2017. This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap – partially self employed, employees whose employers don’t offer salary sacrifice arrangements, etc.

This is a sensible move which means that it will no longer be necessary for individuals to pass a 10% test in order to be able to claim a deduction for personal superannuation contributions. Currently, an individual can only claim a deduction for personal contributions where less than 10% of their adjusted income for the year relates to employment activities. The 10% test can make it difficult for people who have started their own business to make deductible superannuation contributions where they also have part-time work.


Tax back for low income earners contributing to super

Date of effect 1 July 2017

A Low Income Superannuation Tax Offset (LISTO) will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low-income earners, up to a cap of $500. The LISTO applies to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.


‘Catch-up’ concessional contributions

Date of effect 1 July 2017

If your superannuation balance is less than $500,000, you will be able to make additional concessional contributions if you have not reached your concessional contributions cap in previous years. Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward.

The measure will also apply to members of defined benefit schemes.


Removing contribution restrictions for those 65 to 74

Date of effect 1 July 2017

Currently, people aged 65 to 74 have a number of restrictions inhibiting their capacity to contribute to superannuation, including a work test. The Government is changing all that so that people under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.

 


Boosting the super balance of your spouse

Date of effect 1 July 2017

The low-income spouse superannuation tax offset income threshold will increase to $37,000 (from $10,800) from 1 July 2017.

The offset provides up to $540 per annum for the contributing spouse.


Choice in retirement income products

Date of effect 1 July 2017

The tax exemption on earnings in the retirement phase will be extended to products such as deferred lifetime annuities and group self-annuitisation products. These products seek to provide individuals with income throughout their retirement regardless of how long they live. This will allow providers to offer  wider range of retirement income products which will provide more flexibility and choice for Australian retirees, and help them to better manage consumption and risk in retirement, particularly longevity risk, wherein people outlive their savings.


For any queries regarding the Superannuation aspects of the Budget please contact our office on +61 2 9232 5111.