Superannuation Reform Update
Changes to the Australia’s superannuation system, which were announced in the May 2016 Federal Budget have now received Royal Assent. Most of the changes will commence from 1 July 2017. It is important that all Trustees of SMSFs understand how these changes will impact on their funds. TST Partners’ accountants will be publishing a summary of the proposed changes on our website, with this publication being the first of the series.
PROPOSED CHANGES THAT WERE SCRAPED
The controversial proposal of a lifetime non-concessional contributions cap of $500,000 was scrapped. Instead, the non-concessional contribution cap will reduce to $100,000 for those with less than $1.6m in superannuation.
REDUCTION OF (PRE-TAX) “CONCESSIONAL” CONTRIBUTION CAP
Currently, individuals can make concessional contributions up to $30,000 ($35,000 for people aged 50 and over) within a financial year.
From 1 July 2017, concessional contribution cap will reduce to $25,000 for everyone.
REDUCTION OF NON–CONCESSIONAL (AFTER TAX) CONTRIBUTION CAP
From 1 July 2017, the non-concessional contributions cap will reduce from $180,000 to $100,000 per financial year. This will remain available to individuals aged between 65 and 74 if they meet the work test (working 40 hours in a 30-day period during the financial year of the contribution).
Those under 65 will still be able to use the 3 year “bring forward” rules, but transitional rules will apply if the bring- forward was triggered before 1 July 2017. The bring-forward rule is not available for those between 65 and 74.
Individuals with a total super balance above $1.6m at 30 June of the previous year will no longer be eligible to make non-concessional contributions.
INTRODUCTION OF A $1.6 MILLION SUPERANNUATION TRANSFER BALANCE CAP
From 1 July 2017, member pension balances exceeding $1.6m will need to be split between pension balances operating in a tax-free environment and accumulation balance attracting 15% tax.
Individuals with pension balances above $1.6m as at 1 July 2017 will be required to either transfer the excess back to accumulated phase or withdraw the excess from the superannuation system.
The cap will be indexed in $100,000 increments in line with CPI, with defined benefit funds also falling under the transfer balance cap (subject to special valuation rules).
Penalties will apply if the transfer cap balance is exceeded.
PERSONAL SUPERANNUATION CONTRIBUTION DEDUCTION
Removal of the “10% rule” from 1 July 2017, will allow all individuals regardless of their employment circumstances, to make concessional super contributions up to the concessional cap.
The change will favour employees, who will no longer need to salary sacrifice to top up their superannuation, but will be able to manage this themselves.
REDUCTION OF DIVISION 293 INCOME THRESHOLD TO $250,000
Currently, individuals with income and concessional super contributions in excess of $300,000 trigger a Division 293 assessment.
From 1 July 2017, the Division 293 income threshold will be reduced from $300,000 to $250,000. An individual with income exceeding the $250,000 threshold will have an additional 15% tax imposed on the whole amount of their contributions up to their concessional contributions cap.
REMOVAL OF EARNINGS TAX EXEMPTION FOR TRANSITION TO RETIREMENT INCOME STREAMS
From 1 July 2017, income generated from assets supporting the payment of transition to retirement pensions will lose their tax-exempt status and be taxed at 15%. The 15% tax will apply to TRIS regardless of the date the TRIS commenced.
The ability to elect to treat a withdrawal from TRIS account as being a lump sum will also be removed.
LOW INCOME SUPER TAX OFFSET CONTRIBUTION (LISTO)
From 1 July 2017, a new Low Income Superannuation Tax Offset (LISTO) will be introduced to replace the current Low Income Superannuation Contribution (LISC).
Individuals with an adjusted taxable income under $37,000 will receive a LISTO contribution to their super fund. The LISTO contribution will be equal to 15% of their total concessional (pre-tax) super contributions for an income year, capped at $500.
LOW INCOME SPOUSE SUPER TAX OFFSET EXTENDED
The tax offset available to individuals who make contributions on behalf of their spouses is to be extended to spouses earning up to $40,000. The current 18% tax offset of up to the maximum of $540 will remain as is.
From 1 July 2017, the maximum tax offset will be available for a spouse with income up to $37,000. The tax offset will be completely phased out at income above $40,000. (Currently, the threshold is between $10,800 and $13,800).
An individual will not be entitled to the tax offset when the spouse receiving the contribution has exceeded their non-concessional contribution cap for the relevant year or if they exceed their super transfer balance cap in the financial year before the year they made the contributions.
CATCH UP OR CARRY-FORWARD CONCESSIONAL CONTRIBUTIONS
Unused concessional contribution cap ($25,000 from 1 July 2017) amounts will be able to be carried forward on a rolling basis over 5 consecutive years for individuals with a superannuation balance of less than $500,000.
This rule change was originally proposed in the May 2016 Budget to be commenced on 1 July 2017. It has now been delayed and is scheduled to commence from 1 July 2018.
The ATO has announced that it will provide more information regarding the provisions of the above new legislation. TST Partners shall be addressing these in upcoming publications. We aim to provide comprehensive tax planning services to trustees of SMSFs prior to 30 June 2017.
Eddie Li Bcom FCPA RTA | Partners, TST Partners (Accountants) | firstname.lastname@example.org
Francis Gu BCom (Finance) | Managing Director, TST Partners Group | email@example.com
This publication only provides an outline of the superannuation legislative changes. Individuals and trustees of SMSFs should not rely on this document as a substitute for tax advice. This publication is provided on the understanding that TST Partners does not take responsibility for any errors or omissions in this document, for persons acting on the information contained in this document or from any action which might arise from reliance on this publication. TST Partners disclaims any liability that may arise from reliance on the contents of this publication.