23rd November 2016 saw Parliament pass the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, along with the Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 which implements many of the changes to superannuation the Government announced in the 2016 Federal Budget.
While the budget announcements initially outlined retrospective or changes effective budget night, the Bills were passed with most of these changes taking effect from 1 July 2017. This time now available until changes are effected, presents an important opportunity for both planning and considered action.
Introduction of $1.6 million transfer balance cap:
From 1 July 2017 the maximum amount that can be transferred into a tax free “retirement account” will be limited to $1.6 million. Any excess over this amount will need to be transferred back into an accumulation superannuation account or withdrawn.
Individuals already in retirement as at 1 July 2017 will need to ensure their balance does not exceed $1.6million as at that date. The cap will index in line with the Consumer Price Index, and the cap will increase in $100,000 increments.
The cap applies to the total amount of superannuation that has been transferred into retirement phase no matter how many accounts these balances are held in.
Where an individual needs to transfer an asset before the 30th June 2017 to comply with the cap, they have the option of resetting the value of the asset to the current market value, this means that any accumulated capital gain that has occurred while the asset has been held in “retirement phase” will not be taxed.
The amount of the cap is determined by the “proportionate method”. For example, if you currently have or intend to transfer $800,000 into a retirement account, you will have remaining 50% of your cap, if in line with Consumer Price Index the cap rises to $1.7million, you will be able to transfer a further $850,000 into your retirement account.
Earnings on the account are NOT included in the cap from 1 July 2017.
Transitional arrangements will apply for accounts that have a balance between $1.6mill and $1.7mill with the ATO issuing a warning letter stating they have 6 months from 1 July 2017 to remedy this. It’s important to note particularly for SMSF’s that the cap is not a combined cap and it is applied at the Individual level. So for couples where one partner may exceed the cap and the other has a lower balance, there is the opportunity to withdraw and contribute to the lower balance account. Given that the reduced contribution limits do not apply until 1 July 2017 the bring-forward rule of $540,000 may be able to be utilised. This will also achieve the result of increasing the overall tax free amount that can be paid on the death of an Individual.
Defined Benefit pensions will be treated slightly differently, if they are valued at over $1.6million they do not need to be rolled back rather defined benefit pension payments over $100,000 per annum will be subject to additional taxation to bring them into line with the transfer balance cap.
Lowering the concessional contributions cap to $25,000 per year for all taxpayers from 1 July 2017.
The higher contribution rates however still apply for this financial year ($30,000 for those under 50, and $35,000 for the over 50’s) so we have a window of opportunity for the higher concessional contributions. Another measure will allow those with a super balance of less than $500, 000 to “carry forward” their unused concessional caps for up to 5 years, commencing 1 July 2018.
Lowering the non-concessional contributions cap to $100,000 per year, or $300,000 using the bring-forward rule from 1 July 2017.
Again the current non-concessional amounts apply for this financial year. Those in small business will still be able to access the additional $1.4 million additional cap for eligible small businesses.
Allowing all individual Australians under 75 who make personal contributions (Including those aged 65 to 74 who meet the work test) to claim an income tax deduction for any personal superannuation contribution into an eligible superannuation fund.
These amounts will count toward the individual’s concessional contributions cap, and be subject to 15 per cent contributions tax. This will address the current anomaly that occurs when, an individual has more than 10% of income from employer supported sources and is unable to claim a tax deduction for personal superannuation contributions. It also will give greater flexibility in choosing to claim a contribution as a tax deduction prior to the end of the tax year.
Reducing the income threshold at which individuals are required to pay an additional 15 per cent contributions tax, from $300,000 per year to $250,000.
Removing the tax-free treatment of assets that support a transition to retirement income stream.
This, along with the ability of all taxpayers being able to now claim a personal tax deduction for Superannuation Contributions will most likely affect the popularity of Transition to Retirement strategies.
Low Income Superannuation Tax Offset
is to replace the Low Income Superannuation Contribution when it expires on 30 June 2017. This will allow individuals with an adjusted taxable income of $37,000 or less to receive an effective refund of the tax paid on their concessional contributions, up to a cap of $500. This refund will be paid into their Superannuation account.
Extending the spouse tax offset. From 1 July 2017
The Government will extend the eligibility rules for claiming the tax offset for superannuation contributions partners make to their low income spouses. The current 18 per cent tax offset of up to $540 will be available for any individual, whether married or de facto, contributing to a recipient spouse whose income is up to $37,000. This is an increase from the current $10,800. The offset reduces between $37,000 and cuts out completely where a partner’s income is $40,000.
Extending the tax exemption on other retirement products
From 1 July 2017, the Government will extend the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products. These products seek to provide individuals with income throughout their retirement regardless of how long they live.
This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs. Call 1800773643 to speak to Michele who can offer more tailored advice.