Making sense of the super reforms
If you are waiting for the superannuation reforms announced in the Budget to pass Parliament before working out what they mean to you, you might miss out on any opportunities available.
When the Federal Government announced a raft of superannuation changes in the 2016 Federal Budget, it represented the single biggest change to superannuation since its inception. There may have been some softening of the original announcements, however there are still big changes coming.
So how does it affect you?
If you are getting close to your retirement and looking to build up your super balance, then pay attention: this change is very important. From 1 July 2017, the annual non-concessional contributions cap will be reduced to $100,000 from the current $180,000.
You have until 30 June 2017 to use the current caps and contributed up to $540,000 this financial year, which can be done using the 'bring forward' rule: This allows you to bring forward up to three years' worth of non-concessional contributions inho one year (and make no or limited contributions for the next two years until you reach the three-year cap.
There are advantages to acting now, namely that you will be able to add your contributions using the curreny caps. If you contributed more than $180,000 but not the full $540,000, the bring forward rule can still be triggered but any further contributions post-1 July 2017 will be subject to the new cap of $100,000. Instead of your cap being $540,000 across three years, it might be $460,000 or $380,000. And, if you wait until after 1 July 2017 to trigger the bring forward rule, you will only be able to contribute up to $300,000.
For people with large super balances and high income earners, the Government is paring back the tax advantages because it believes that super isn't being used for the intended purpose of funding retirement. What does this mean for you?
Non-concessional contributions capped at $1.6 million
From 1 July 2017, once your super balance has reached $1.6m, you will no longer be able to make non-concessional contributions to super. Until then, you can maximise your contributions (see Reduction in non-concessional contribution caps). Going forward, your super balance will be assessed at 30 June each year
Concessional contributions cap reduced
From 1 July 2017, the annual concessional contribution cap will be reduced to $25,000 for everyone (currently $30,000 for those aged under 50 and $35,000 for those aged 50 and over).
30% tax on super extended to more taxpayers
High income earners with incomes of $300,000 or more pay 30% tax on contributions they make. From 1 July 2017, this threshold will reduce to $250,000.
Retirees and transitioning to retirement
The reforms likely to impact on you are:
Tax concessions limited to pension balances up to $1.6 million
The Government's reforms will introduce a $1.6m 'transfer cap' on the amount you can hold in superannuation pension, which means that if you're in a pension phase, the balance of your pension needs to be no more than $1.6m. If it is more than that, then from 1 July 2017, the Tax commissioner will direct your fund to reduce your retirement phase interests back to $1.6m and you'll be subject to an excess transfer balance tax.
Your overall super balance can be more than $1.6m, but only that amount can be transferred into a tax free pension. Holding the remaining balance in super may still be worthwhile, however, because of the low 15% tax rate. q
If your spouse has a low superannuation balance, it might be worth thinking about how you can maximise your returns as a couple.
Earnings on fund income no longer tax-free
From 1 July 2017, the income from assets supporting transition to retirement income streams will no longer be exempt from tax but included in the fund's assessable income.
For example, if your super fund earns interest from a term deposit, that interest is currently tax-free in a transition to retirement pension. From 1 July, that interest will be included in the fund's assessable income.
Lump sum withdrawals no longer meet minimum pension requirements
The Government has closed a quirk in the superannuation system that allowed people under 60 to withdraw from their pension and in certain circumstances have that withdrawal treated as a tax-free lump sum. From 1 July 2017, the ability to take a lump sum from an account based pension will be removed. Generally, from age 60 these pension payments become tax-free.
Currently, if you are 65 or over, your superannuation fund can only accept contributions from you if you work at least 40 hours in a 30 consecutive day period in the financial year. The original Budget announcements abolished this work test. Unfortunately, this reform is not progressing and the work test will remain.
There is good news if you are partially self-employed and partially a wage earner. Currently, to claim a tax deduction for your super contributions you need to earn less than 10% of your income from salary or wages. From 1 July 2017, the 10% rule will be abolished.
This change will be useful for contractors who hold their insurance through super as they will be able to claim a personal tax deduction for these insurance premium contributions. The caveat here is that these contributions must remain within the reduced $25,000 concessional cap.
There is a lot in the reforms for people who have not had the opportunity to build their super balances. The reforms likely to impact on you are:
'Catch up' super contributions
Normally, annual caps limit what you can contribute to superannuation. The reforms allow people with broken work patterns to 'catch up' their concessional super contributions.
From 1 July 2018, people with super balances below $500,000 will be able to rollover their unused concessional caps for up to 5 years. Unused cap amounts can be carried forward from the 2018-19 financial year; which means the first opportunity to use these new rules will be 2019-20.
Tax offset for low income earners
A new tax offset will be available for people earning less than $37,000. The offset refunds any tax paid on super contributions.
Tax offset for topping up your spouse's super
Currently, if your spouse earns less than $10,800, you can claim a tax offset of up to $540 if you make super contributions on their behalf. This offset is being extended to spouses who earn up to $40,000.
To find out more about how the reforms affect your super, please contact our Accounting team on 02 9957 4033. If you are looking for guidance on how to make the most of your super, please contact our Wealth team for more information.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.