Objective of superannuation
The Government has announced that it will legislate the objective of superannuation as ’to provide income in retirement to substitute or supplement the Age Pension’.
The Government says that this objective has guided the other reforms announced and a legislated objective will enhance stability in the superannuation system.
Reduction in concessional contributions cap
From 1 July 2017, the concessional contributions cap will reduce to $25,000 per year. Currently the concessional contributions cap is $30,000 per year if under age 50 and $35,000 per year if aged 50 and over.
From 1 July 2017, notional (estimated) and actual employer contributions for members of unfunded defined benefit schemes and constitutionally protected funds will be included in the concessional contributions cap.
Tax deductions for personal superannuation contributions
From 1 July 2017, all individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions. In doing so, all individuals will, regardless of their employment circumstances, be able to make superannuation contributions up to the concessional cap. These amounts will count towards the concessional contributions cap and will be subject to contributions tax.
Similar to the current arrangements to claim the tax deduction, individuals will need to lodge a notice of their intention to claim the deduction before they lodge their income tax return for the relevant year.
Certain untaxed and defined benefit superannuation funds will be prescribed, meaning members will not be eligible to claim a deduction for contributions to these funds however, they may choose to make their contribution to another eligible superannuation fund.
Our thoughts: This is great to see as it puts every individual on a more level playing field as previously to claim a deduction for superannuation employees needed to enter salary sacrificing arrangements with their employer.
Allowing catch-up concessional contributions
From 1 July 2017, individuals with superannuation balances of $500,000 or less will be able to accrue unused concessional contribution cap amounts. Unused amounts can be carried forward on a rolling basis for a period of five years. Amounts carried forward that have not been used after ve years will expire.
Carrying forward unused concessional contributions cap will make it easier for individuals with varying capacity to make contributions to superannuation.
Our thoughts: Again, this is a great move as many people’s capacity to contribute to superannuation changes as they enter different periods of life. The ability to accrue concessional contribution caps means that tax planning opportunities present themselves for life events such as disposing of an investment property.
More tax on contributions for more high earners
From 1 July 2017, the ‘Division 293’ threshold will reduce from $300,000 to $250,000 per year meaning individuals earning over this amount will have to pay an additional 15% tax on concessional contributions.
The existing administration process for levying this tax will remain unchanged, but a larger number of people will be drawn into it. Individuals will still have the ability to pay the additional 15% tax liability from their superannuation fund if they choose to.
Similar measures will apply to high earning members of de ned bene t funds.
Lifetime cap for non-concessional superannuation contributions introduced
From 7:30 pm (AEST) on 3 May 2016, a $500,000 lifetime cap on non-concessional contributions will be introduced. The cap will take into consideration all non-concessional contributions made since 1 July 2007. In addition, the cap will apply to individuals aged up to 75, and will be indexed in $50,000 increments in line with average weekly ordinary time earnings.
In cases where the individual exceeded the cap prior to commencement of the new rules, they will be taken to have used up their lifetime cap but will not be required to take the excess out of the superannuation system. Where the excess occurs after commencement, they will be noti ed by the Australian Tax Of ce to withdraw the excess from their superannuation account, or be subject to the penalty arrangements.
The lifetime non-concessional cap will replace the existing non-concessional contributions cap which allows an individual to contribute up to $180,000 per year (or $540,000 under the bring-forward provision for those aged under 65).
Non-concessional contributions made into defined benefit and constitutionally protected funds will also be included in an individual’s lifetime non-concessional cap. If the member of a de ned bene t fund exceeds their lifetime cap, contributions going into the de ned bene t account can continue. However, they will be required to remove an equivalent amount (including earnings) annually, from any accumulation interest they hold where it contains non-concessional contributions made after 1 July 2007. In cases where no post-1 July 2007 non-concessional contributions exist; the Government will consult to determine the appropriate treatment.
Contributions will not be required to be removed from the defined benefit account.
Our thoughts: This is an interesting concept and we will wait for the operational provisions. The introduction of a lifetime cap may impact some individual’s capacity to plan sufficiently for their retirement. We also look forward to seeing if this will impact any of the Small Business CGT concessions that are currently available.
Extending the spouse contributions tax offset
From 1 July 2017, the 18% tax offset of up to $540 will be available for any individual contributing to a recipient spouse’s superannuation whose income is up to $37,000. Currently, the 18% tax offset of up to $540 is available for any individual contributing to a recipient spouse whose income is up to $10,800.
The tax offset will be calculated as 18% of the lesser of: $3,000 reduced by every dollar over $37,000 or the amount of spouse contributions.
Low Income Superannuation Tax Offset (LISTO)
From 1 July 2017, a Low Income Superannuation Tax Offset (LISTO) will be introduced to replace the Low Income Superannuation Contribution (LISC). The 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 will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
Our Thoughts: This looks very similar to an opposition policy that was previously scrapped by the current government.
Contribution rules for those aged 65 to 74
Currently, individuals aged 65 to 74 must meet a work test to be eligible to make contributions to superannuation. From 1 July 2017 this requirement will be removed, increasing the ability of older Australians to contribute to their superannuation.
From 1 July 2017, individuals will also be able to make contributions to a spouse up to age 74. Currently, individuals can make contributions to a spouse up to age 69. From 1 July 2017, individuals will no longer have to satisfy a work test to receive contributions from their spouse.
Our Thoughts: Another great change further enhancing older Australian’s ability to move assets into superannuation
Removal of anti-detriment payments
From 1 July 2017, superannuation funds will no longer be able to make anti-detriment payments.
The anti-detriment provision allows superannuation funds to refund a lump sum to a member’s estate on death, in compensation for the 15% contributions tax deducted from contributions over that member’s working life. This ‘anti detriment payment’ is paid as a top-up to the member’s superannuation death bene t, applying only when eligible dependants exist.
Government response to retirement income streams review
The Government has announced that it will remove barriers to innovation in retirement income stream products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self annuitisation products.
This change will enhance both choice and exibility for Australian retirees and help provide clients with retirement income throughout their lives, regardless of how long they live.
These products will help Australians better manage consumption and risk in retirement, including longevity risk.
In conjunction with the Federal Budget, the Government also released the nal report of the review of retirement income stream regulation.
The Report recommends that current annual minimum drawdown requirements are consistent with the objective of the superannuation system to provide income in retirement.
However, the Australian Government Actuary should review the annual minimum drawdown rates every year to ensure they remain appropriate in light of increasing life expectancies. Any other changes to the minimum drawdown rates should only be considered in the event of significant economic shocks.
The Report also recommended that an additional set of income stream rules should be developed which would allow lifetime products to qualify for the earnings tax exemption provided they meet a declining capital access schedule.
Transition to retirement income streams
From 1 July 2017, the tax-exempt status of income from assets supporting transition to retirement (TTR) pensions will be removed.
Transition to retirement pensions allow individuals to access their superannuation whilst still working between preservation age (currently 56) and age 65. Under the new rules, people can continue existing TTR pensions and start new ones; however, the earnings on these assets will be taxed at 15% in line with accumulation assets.
The ATO has recently clarified that a member can elect to make a lump sum payment from a TTR pension and it will be treated as such for tax purposes allowing tax-free withdrawals for the under 60s up to the low rate cap (currently $195,000). The Government will also move to close this loophole.
Our Thoughts: The change to tax status will greatly remove the appeal of TRIS and impact anyone currently utilising a recontribution strategy. We are seeing the gradual increase in preservation age from 55 to 60 (currently 56) so the change will have little impact on younger Australians. However, with people now working longer it will be interesting to see if this change impacts workforce participation rates of older Australians who can fund their own retirement – as if they retire earlier than 65 (having reached preservation age) they can commence a full account based pension.
Transfers to pension accounts capped at $1.6 million
From 1 July 2017, a $1.6 million cap on the total amount of superannuation that can be used to commence a pension will be introduced. New rules will limit the amount that individuals can transfer into a tax-free retirement account.
For those entering retirement after 1 July 2017, any superannuation in excess of the cap can remain in accumulation, where earnings are taxed at 15%. Subsequent earnings on these balances will not be restricted. A proportionate method which crystallises a percentage of the cap each time a pension is commenced will be used to keep track of unutilised caps.
For those with existing pensions on 1 July 2017, amounts in excess of the cap on this date will need to be rolled back into an accumulation account or withdrawn.
Punitive taxes will be applied to pension commencements in excess of the cap including the earnings on the excess. The $1.6 million cap will increase in $100,000 increments in line with the Consumer Price Index (CPI). Similar measures will be applied to defined pension schemes by changing the tax treatment of pension amounts over $100,000. The Government will undertake a consultation on the implementation of these changes for both accumulation and de ned bene t funds.
Our Thoughts: This is also similar to a previous opposition policy that was subsequently scrapped due to the difficulty and cost of administration. With the reduction of concessional contributions and the introduction of a non-concessional lifetime cap many younger Australians will find it difficult to even accumulate a balance of $1.6m. For individuals who have so far utilised the superannuation environment and have high balances it will be interesting to see whether they leave their excess pension balances in super (rolled back into accumulation) or withdraw the balance on 1 July 2017. It will also be interesting to see how people access their accumulated benefits into the future and whether there will be a shift to withdrawing lump sums from accumulation accounts with only minimum withdrawals from pension accounts.