May 16, 2016
Greater flexibility for some, but severe restrictions for others.
With the surprise announcement of the Federal Government’s Superannuation Reform Package attracting much debate around the Budget last week, we thought it important to join in amongst the conversation. The package overall provides for greater flexibility for accumulation, but also contains severe restrictions that limit large pension balances. These surprise measures are proposed to be implemented from 1 July 2017, provided of course that the current Government remains in control come July 2nd. The proposed changes would limit the amount of concessional contributions that can be made by individuals annually, as well as the introduction of a new retrospective lifetime limit for non-concessional contributions.
First a couple of definitions:
Superannuation contributions can be divided into two types. One is before-tax (concessional contributions) and the other after-tax (non-concessional contributions). Contribution caps are set to limit the amount of contributions of each type you can make to your superannuation fund in any one year.
An accumulation account receives contributions and any rollovers from other superannuation funds. It also includes the earnings on that account minus expenses and tax. When a pension is commenced, the capital supporting the pension is transferred from the accumulation account. The Government’s proposed reform package centres around adjustments to the contribution cap amounts, as well as severe restrictions on the ability of members to make large contributions close to retirement. We investigate these potential changes below.
The annual concessional contributions cap for individuals to be reduced to $25,000.
From 1 July 2017, the annual concessional contributions cap will be reduced to $25,000 a year for all individuals, but individuals wishing to make concessional contributions after age 65, may do so up to age 74 regardless of employment status.
The 15% concessional contribution tax threshold to be reduced to $250,000.
Currently, if your total taxable income, plus concessional contributions, exceeds $300,000 per annum, the portion of concessional contributions which exceed the $300,000 threshold will be taxed at 30% i.e. an additional tax of 15% over the standard rate of 15% will apply. Come 1 July 2017, the $300,000 threshold will be reduced to $250,000 effectively increasing the total tax paid on concessional contributions from high-income individuals.
There will be a new lifetime limit of $500,000 for all non-concessional contributions.
The reform package also offers significant changes to non-concessional contribution caps. With the proposed introduction of a lifetime limit of $500,000 of non-concessional contributions, it would seem that the current annual cap would no longer apply. The lifetime cap will be applied to all individuals up to the age of 74, effective from the 3rd of May 2016. It is particularly important to note that all members that make non-concessional contributions in excess of the lifetime cap after budget night, will be asked to withdraw the excess amount or be subjected to a penalty tax. Members that have already exceeded their lifetime cap on budget night, will not levied with such penalties, however, they will no longer have the opportunity to make further non-concessional contributions to their superannuation. These changes have the potential to significantly impact members, particularly high-income members. The ability to contribute large amounts of money into superannuation before retirement will now be limited.
There will be increased flexibility in making concessional contributions for members with modest fund balances.
Aimed at assisting members with interrupted work patterns save for retirement, this new provision proposed by the reform package would see individuals with lower fund balances have the opportunity to carry forward concessional contributions on a rolling five-year basis. If a superannuation account balance pertains to less than $500,000, and the concessional contributions cap has not been exceeded in a financial year, the unused concessional contributions cap may be carried forward on a rolling basis for five years. However, it is important to keep in mind that any carry forward amounts not utilised within five years would automatically expire.
A relaxation in member concessional contribution eligibility is also on offer in the reform package. The Government will now allow all Australians aged under 75 claim a tax deduction on any concessional contribution made. At this point in time, some members with both employment and investment income are not able to make concessional contributions to their superannuation when their employment income exceeds 10% of their total taxable income. With changes under the new rules, the 10% rule will no longer apply.
The removal of the work test will see all members have the opportunity to make contributions until they reach the age of 74 regardless of employment status.
There will be a new $1.6 million limit on transfers from accumulation to pension accounts.
As it currently stands, there is no limit on the number of assets that can be transferred by members from accumulation accounts into pension accounts. The present tax rate for all earnings in accumulation accounts is 15%, whereas earnings in pension accounts are currently tax exempt. Under The Government’s proposed reform package, there will be limits to this beneficial tax treatment. The intention is to introduce a $1.6 million cap on the total amount of transfers from accumulation accounts to pension accounts, with the overall objective aimed to reduce the ability of superannuation as a tax minimisation and estate planning tool. All members already in retirement with pension balances greater than $1.6 million will be required to reduce them to not exceed the new limit. To avoid the new limit being triggered, it is advisable that all new pensions be reversionary, so that on the death of the primary pensioner, the reversionary beneficiaries will be able to continue with the existing pensions without triggering the transfer cap.
The last few years has seen a substantial rise in popularity of transition to retirement pensions being used in tax planning. It is particularly favoured amongst members over preservation age, but not fully retired, allowing them the ability to reduce tax liability by salary sacrifice, while taking a superannuation income stream at a concessional tax rate. Come introduction of the reform package, all earnings on transition to retirement pensions will now be taxed at the same rate as the accumulation account, that is at 15%. Regardless of the commencement date of these transition to retirement income streams, all will lose the tax exempt status previously available. The rules will also no longer allow members to treat certain superannuation income stream payments as lump sums.
In conclusion:
Overall, the budget was one light on ideology and controversy, with these particular changes to superannuation stimulating the most discussion. As the above measures are mere proposals at this point in time, things could change markedly come election day, July 2nd, 2016. Recent comments of Opposition Leader, Bill Shorten, have flagged Labor’s opposition to these retrospective changes, with the likelihood of the current proposals being up for substantial modification before being enacted.
If you have any cause for concern relating to the Federal Government’s Superannuation Reform Package, do not hesitate to contact any of us here at Morgan Wealth Management, where we have ample experience and knowledge in alternative retirement options. Send us an email, at [email protected], or if you’d prefer, we are simply a phone call away on +61 1300 612 882
_______________________________________________________________________________________________
_______________________________________________________________________________________________
PREVIOUS
