New Superannuation Contribution Rules and Pension Changes

This newsletter contains general information about recently legislated changes to Australia’s tax laws applying to superannuation, including contributions, pensions and tax concessions. These changes are substantial and will generally take effect from 1 July 2017.

 

Superannuation Contribution Limits Before and After 30 June 2017

 
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The tables below outline the maximum superannuation contributions that can be made by or in relation to an Australian tax resident individual without triggering adverse tax consequences. This should not be taken as a recommendation that you contribute at these levels – please contact us if you require specific advice about an appropriate level of superannuation contributions for yourself or your family members.

Significant tax penalties can apply if you breach the relevant contribution cap. Particular care is required in relation to non-concessional (ie non-deductible) contributions if you have previously triggered the three year bring forward rule.

A.   Annual Concessional (ie Tax Deductible) Contribution Caps

Age This Year

2016-17 Year

2017-18 Year

Under 50

$30,000

$25,000

50 to 64

$35,000

$25,000

65 to 74 and satisfy work test

$35,000

$25,000

75 and over

Mandated contributions

Mandated contributions

Notes

  1. Eligibility for a higher concessional contribution cap this year may apply if you were age 49 or over at 30 June 2016
  2. Excess concessional contributions are included in your assessable income – you may, but need not, withdraw the tax from your super fund
  3. Work test requires minimum employment of at least 40 hours in not more than 30 consecutive days
  4. Mandated employer contributions for those aged 75 and over comprise Superannuation Guarantee Charge (“SGC”) and industrial Award contributions
  5. Concessional contributions can only be made in relation to a person under 18 if they are an employee or carry on business

Planning Points

  • Employees can only increase concessional contributions this year above the 9.5% employer SGC contributions by entering into a valid salary sacrifice agreement with their employer – this will change next year.
  • Employers might consider making the June 2017 quarter SGC contributions in June 2017 rather than July 2017.

B.    Annual Non-Concessional (ie After Tax) Contribution Caps

Year Ending 30 June 2017

Under age 65

  • General limit                                                                 $180,000
  • With three year bring forward rule                                $540,000

Age 65 to 74 and meet the work test (see above)

  • General limit                                                                 $180,000
  • With three year bring forward rule       Not applicable

Note: the maximum three year bring forward contribution amount will be reduced if concessional contributions exceeded $180,000 in the 2016 tax year or $360,000 in the 2015 tax year.

Year Ending 30 June 2018

Where accrued superannuation entitlements at 30 June 2017 are less than $1.6 million:

Under age 65

  • General limit                                                                $100,000
  • With three year bring forward rule (maximum)           $300,000*

Age 65 to 74 and meet the work test (see above)

  • General limit                                                                  $100,000
  • With three year bring forward rule                                Not applicable

Where accrued superannuation entitlements at 30 June 2017 are more than $1.6 million

  • $Nil, regardless of age

Note: the maximum three year bring forward contribution amount will be reduced if concessional contributions exceeded $180,000 in the 2017 tax year or $360,000 in the 2016 tax year.

Notes

  1. The retention of the previous $180,000/$540,000 caps this year is a change to the May 2016 Federal Budget proposal for a lifetime cap of $500,000
  2. Considerable care is required when making non-concessional contributions as there are significant tax penalties for breaching the relevant cap
  3. Particular care is required to identify whether the three year bring forward rule has been triggered in either of the two previous years (ie 2016 or 2017 income years)  – transitional rules may limit the amount of your non-concessional contributions in the 2018 and, possibly, 2019 years
  4. The maximum three year bring forward contribution amount for the 2018 year will also be reduced if accrued superannuation entitlements at 30 June 2017 are more than $1.4 million (see table below)
  5. Similar rules will apply in subsequent years – the cap, which is measured at the end of the previous income year will be indexed in line with the consumer price index in increments of $100,000
Total superannuation balance on 30 June 2017 Nonconcessional contributions cap for the first year Bring forward period
Less than $1.4 million

$300,000

3 years

$1.4 million to less than $1.5 million

$200,000

2 years

$1.5 million to less than $1.6 million

$100,000

No bring forward period, general nonconcessional contributions cap applies

$1.6 million or more

Nil

Not Applicable

$1.6 Million Pension Transfer Balance Cap

 
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Currently superannuation funds do not pay income tax or capital gains tax on income received from investments allocated to a pension account. The associated pension is normally tax free to recipients over age 60.

Application to New Pensions

From 1 July 2017 for new superannuation pensions:

  • The maximum balance that can used to commence a new pension where the investment earnings are tax free in the fund will be $1.6 million (this is known as the transfer balance cap)
  • Accrued entitlements in excess of this amount will remain subject to 15% tax on earnings and 10% on long term capital gains (assets held for more than 12 months)
  • Any pensions must be paid on a pro-rata basis from both accounts
  • If less than 100% of the transfer balance cap is used, the remaining, unused proportion of the cap carries forward and can be used at a later date (indexation applies)
  • The exempt pension assets cannot be topped up if there is an investment loss
  • Assets do not need to be transferred back into accumulation phase if investment income causes the pension account balance to grow above $1.6 million
  • Members of self managed superannuation funds and small APRA funds in the retirement phase who have a total superannuation balance of over $1.6 million will be prevented from using the segregated assets method to calculate earnings tax exemptions (even if the pension itself is paid by another fund)
  • Transition to retirement income streams will not count towards the cap
  • The transfer balance cap will be indexed to CPI
  • The cap “space” will be restored to the extent that assets are transferred back into an accumulation account
  • The cap will also be adjusted for structured settlements, certain Family Law payment splits and certain losses due to fraud

Application to Existing Pensions

For existing pensions at 1 July 2017 where the member’s total assets in pension mode exceed $1.6 million, the member will need to either:

  • Transfer the excess back into an accumulation superannuation account (optional capital gains tax relief may be applied in the 2017 year to mitigate the impact of these changes); or
  • Remove the excess from the superannuation environment
  • Where the total pension balances at 30 June 2017 are between $1.6 million and $1.7 million the Australian Taxation Office will notify the member and give them six months to rectify the breach

Other Changes to Superannuation Contribution Rules etc

 
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The changes to the superannuation system that will commence in July 2017 are wide reaching. Some or all of the following measures may impact you:

A.    Employees Will Be Able to Claim a Tax Deduction for Personal Superannuation Contributions

Currently employees can only claim a tax deduction for personal superannuation contributions where less than 10% of their “income” is from employment sources such as salary and wages, reportable fringe benefits and reportable employer superannuation contributions.

From 1 July 2017 the following individuals will be able to claim a tax deduction for personal superannuation contributions:

  • Aged 18 to 64 – no restriction
  • Aged 65 to 74 and meet the work test
  • Under 18 and an employee or business owner

Planning Points

  • Employees will be able to top up their concessional superannuation contributions without having to enter into a salary sacrifice agreement with their employer
  • Employees will need to be aware of employer superannuation guarantee contributions and other concessional contributions made on their behalf to avoid breaching their concessional contributions cap

B.    Allowing “Catch Up” Concessional (i.e. Tax Deductible) Superannuation Contributions

From 1 July 2018 any unused concessional cap “space” can be carried forward and used to make additional concessional contributions where the member’s combined superannuation account balances are less than $500,000.

Example -2019/20 Income Year
Cassandra has a superannuation balance of $200,000 but did not make any concessional superannuation contributions in 2018/19 as she took time off work to care for her child. In 2019/20 she has the ability to contribute $50,000 in concessional (before-tax) contributions into superannuation ($25,000 under the annual concessional cap and $25,000 from her unused 2018/19 concessional cap which she can carry forward).

The unused cap will be able to be carried forward for a maximum of five years. Unused cap from the 2017/18 and earlier years does not carry forward.

C.   Division 293 Threshold for 30% Tax on Contributions Drops from $300,000 to $250,000

Division 293 currently imposes an extra 15% on concessional superannuation contributions within the individual’s contribution cap (see above) to the extent that the individual’s concessional; contributions and income for surcharge purposes exceeds $300,000. Income for surcharge purposes normally comprises the sum of:

  • Taxable income
  • Distributions to the individual subject to Family Trust Distribution Tax
  • Reportable (ie salary sacrifice) superannuation contributions – these are excluded from Division 293 calculations to prevent double counting
  • Net investment losses

This includes taxable income after adding back investment losses and including most fringe benefits and concessional superannuation contributions.

This increases the tax rate on affected concessional contributions from 15% to 30%.

From 1 July 2017 the threshold will drop to $250,000. For affected individuals his will provide an extra incentive to ensure end of financial year superannuation concessional contributions are received by the relevant fund in June 2017 rather than July 2017.

D.   Increasing the Spouse Tax Offset Income Tax Limits

Currently, a tax offset of up to $540 is available for individuals who make superannuation contributions on behalf of their spouses with incomes up to $10,800. Income for this purpose means the sum of:

  • Assessable income
  • Reportable fringe benefits
  • Reportable employer superannuation contributions

From 1 July 2017 the maximum offset of $540 will be available where the spouse’s income does not exceed $37,000. The offset starts to phase out at this level and ceases to apply where the spouse’s income exceeds $40,000.

The spouse on whose behalf the contribution is made must be under age 70 and meet a work test if they are aged between 65 and 69.

The offset will not apply if the spouse’s superannuation entitlements exceed $1.6 million or they have excess non-concessional contributions for the income year.

E.    Low Income Superannuation Tax Offset

From 1 July 2017, the Low Income Superannuation Tax Offset (LISTO) will replace the Low Income Superannuation Contribution.

The LISTO effectively refunds the tax paid on concessional contributions made on behalf of individuals with an adjusted taxable income of up to $37,000 – up to a cap of $500.

For the purposes of this offset adjusted taxable income comprises the sum of:

  • Taxable income
  • Adjusted fringe benefits total
  • Target foreign income
  • Total net investment loss
  • Tax free pensions or benefits
  • Reportable superannuation contributions
  • reduced by deductible child maintenance expenditure.

The Australian Taxation Office will calculate the offset entitlement and pay it into the individual’s superannuation account.

F.   Removal of Anti-Detriment Deductions

Currently where a superannuation fund pays a lump sum death benefit to a tax law dependent of the deceased it may be entitled to an anti-detriment tax deduction. This is, effectively, a refund of the 15% tax on the contributions that relate to the payment of the death benefit.

This tax deduction will be removed from 1 July 2017.

This change will provide consistent treatment of death benefits across all superannuation funds. Lump sum death benefits paid to eligible taxation dependants will continue to be tax free.

Investing Outside Superannuation

 
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A.   Introduction

For many years superannuation funds have been a highly tax effective means of saving for retirement.

Notwithstanding the changes that will apply from 1 July 2017 superannuation continues to be a tax effective retirement savings vehicle, at least for balances up to $1.6 million. Depending on your particular circumstances it may or may not be appropriate to accumulate superannuation balances above this level.

Increasingly superannuation will only be a part of a tax effective family wealth investment strategy. Other structures such as family companies and trusts will become increasingly important.

Please contact us if you require advice in these areas.

B.   Removing Barriers to Innovation in Retirement Income Stream Products

From 1 July 2017 the tax exemption on superannuation pension earnings (for transfer balances up to $1.6 million) will be extended to the income of other retirement phase products such as deferred lifetime annuities and group self annuitisation products. These products seek to provide a retirement income for life regardless of how long the individual lives. The tax exemption will apply from the time the relevant incomer stream commences.

The intention behind extending the income tax exemption to deferred or pooled income stream products is to encourage providers to offer a wider range of products. This will provide more flexibility and choice for retirees and help them to manage consumption and risk in retirement better – particularly longevity risk, to avoid people outliving their savings.

These products will count towards the $1.6 million balance transfer cap based on their purchase price (lump sum purchase) or actuarial calculation (purchase by instalments).