When passed, the new superannuation reforms will represent the most significant change to superannuation since its introduction. While there has been a softening of the initial Budget announcements, there are still some very large changes to come.
Reduction in non-concessional contribution caps
If you are close to retirement age and looking to grow your super balance, this change is incredibly important. From 1 July 2017, the annual non-concessional contributions cap will be reduced from $180,000 to $100,000 per annum.
If you are nearing retirement age you have until 30 June 2017 to use the current caps and contribute up to $540,000 this financial year. This can be done using the ‘bring forward’ rule which effectively allows you to bring forward up to three years’ worth of non-concessional contributions in one year to take advantage of currents caps.
The bring forward rule can still be activated if you contribute more than $180,000 but less than $540,000, however any additional contributions from 1 July 2017 are subject to the new $100,000 cap. Therefore, instead of your cap being $540,000 over three years, it might be $460,000 or $380,000. After 1 July 2017 to trigger the bring forward rule, you will only be able to contribute up to $300,000.
If you want to make in-specie contributions – that is, additions to super that are not cash such as listed shares, etc., then you should review whether the cap reduction alters your capacity to do this.
High Income Earners & Individuals With Large Super Balances
The Government believes that individuals are not using superannuation for its planned purpose which is to fund retirement. As a consequence, the reforms present a whole series of measures that pare back the tax benefits for individuals with large super balances:
Non-concessional contributions capped at $1.6 million
Once your super balance has reached $1.6m, from 1 July 2017 you will not be able to make non-concessional contributions to super. So, you have until then to take full advantage of contributing. 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 all individuals. Annual concessional contribution caps are 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 those Transitioning to Retirement
Tax concessions limited to pension balances up to $1.6 million
This change introduces a cap of $1.6 million on the amount of super that can be transferred into pension phase. If this is not done, from 1 July 2017 the Tax Commissioner will direct your fund to reduce your retirement phase interests back to $1.6m and you will be liable to an excess transfer balance tax. Your overall super balance can be more than $1.6m but only $1.6m can be transferred into a tax-free pension. Keeping the excess balance in super may still be valuable because of the low 15% tax rate.
If your spouse has a low superannuation balance, it might be worth thinking about how you can take full advantage of 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 loophole 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.
Over 65 and Still Working
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 change is not progressing and the work test will stay.
Contractors & Self-Employed
For those who are partially self-employed or partially a wage earner there is good news. 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.
Contractors who hold their insurance through super will benefit greatly as they will be able to claim a personal tax deduction for these insurance premium contributions. Caution needs to be taken here as these contributions must remain within the reduced $25,000 concessional cap.
People with Low Super Balances and Broken Employment
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
Previously, annual caps limit what you can contribute to superannuation. The reforms allow people with broken work patterns to ‘catch up’ their concessional super contributions. Individuals with superannuation balances of $500,000 or less will be able to access their unused concessional cap space to make additional concessional (before-tax) contributions. 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 low income super contribution offset helps low-income earners save for retirement and can be an offset payment of up to $500. Individuals are not required to do anything to be eligible for this offset, nevertheless you need to ensure your superfund has you tax file number as without this your super fund cannot accept a LISC payment.
Tax offset for topping up your spouse’s super
Currently, if your spouse earns less than $10,800, you may be entitled to 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. Note, this tax offset cannot be claimed for super contributions that have been made to an individual’s own fund and following this have then been split to the spouse.