These amendments and the proposals announced in the 2016 Federal Budget could impact your retirement and how you save for it. But at this stage they are not law and could be refined before they are passed by Parliament.
Underpinning many of these changes is the governments objective to legislate that the primary objective of the superannuation system is “to provide income in retirement to substitute or supplement the age pension”.
The superannuation contribution caps are changing
Non-concessional contributions (NCC) are contributions that are made to super from after-tax income or savings.
The Government has withdrawn its proposal to introduce a $500,000 lifetime cap for non-concessional contributions. Instead, the current rules for after-tax contributions will remain, but with a lower annual limit of $100,000.
Instead from 1 July 2017:
- the NCC cap (currently $180,000) will reduce to $100,000 per year
- the maximum NCCs that can be made in one year under the ‘bring-forward rule’ by people aged 64 or less will be reduced from $540,000 to $300,000
- no further NCCs will be allowed if your superannuation balance is more than $1.6 million.
|Table 1 – NCC cap
||From 1 July 2017
$540,000 over a three year period
if certain conditions are met
$300,000 over a three year period
if certain conditions are met
If these reforms go ahead, most people will still be able to make NCCs.
If you trigger the bring forward rules before 1 July 2017 without fully using it, you will be subject to transitional arrangements. This means the remaining bring forward amount will be recalculated on 1 July 2017 to reflect the new $100,000 annual cap.
||Annual NCC Cap
Consider Jack (56), who makes a non-concessional superannuation contribution of $250,000 in the 2016/2017 financial year, triggering the bring forward rules.
Under the current rules, Jack would be able to contribute up to $290,000 (ie $540,000 minus $250,000) during the following two financial years.
Under the governments proposed transitional rules, Jack would only be able to add a further $130,000 during the following two financial years.
To contribute the full current cap of $540,000, Jack would need to seek advice on his ability to contribute the full amount before 1 July 2017.
Contributions between age 65 and 74
Currently, you need to satisfy the ‘work test’ to contribute to a superannuation fund if you are aged 65 to 74 years. The work test requires that you work 40 hours in 30 days in the relevant financial year, before you are eligible to make a contribution. On budget night, the Government proposed removing the work test, but this will no longer proceed.
What if you are aged 65 and meet the work test this year but won’t meet the work test next year? You could discuss with your adviser making an NCC of up to $100,000 in June 2017 and deferring the allocation of it until 2017/2018.
From 1 July 2017 the concessional contributions cap will be reduced to $25,000 per year. The concessional contributions cap will be indexed in line with AWOTE and will increase in $2,500 increments.
The government has also proposed allowing all individuals that are eligible to make concessional contributions to superannuation to claim a tax deduction for personal contributions up to the concessional contributions cap.
Currently this benefit is only available to individuals that earn less than 10 percent of their income from salary or wages. This proposed change will provide individuals with more flexibility in how and when they make their superannuation contributions. You should talk to your adviser about whether making personal deductible contributions would benefit your situation.
The government has also proposed replacing the Low Income Superannuation Contribution (LISC) with the Low Income Superannuation Tax Offset (LISTO). This measure is intended to help individuals with taxable income of less than $37,000. These measures are intended to ensure low income earners don’t pay a higher rate of tax on contributions to super than their other income.
‘Catch-up’ concessional contributions
The Government will delay the ability to utilise the ‘catch up’ proposal for concessional contributions (CCs) by 12 months to 1 July 2018.
Under the ‘catch-up’ rules, you will be able to contribute more than the annual CC cap if you haven't fully utilised the cap in previous years and your super balance is $500,000 or less. This $500,000 limit includes all of an individual’s superannuation accumulation and pension balances. This is done by allowing unused cap amounts to be carried forward for up to five consecutive years.
|Table 2 – CC cap
||From 1 July 2017
||From 1 July 2018
$30,000 pa if age 48 or under
as at end of previous financial year
$35,000 pa if age 49 and over
as at end of previous financial year.
$25,000 pa for everyone
‘Catch-up’ contributions exceeding the cap can be made if certain conditions are met within five years.
If you have a superannuation balance above $1.6 million, what should you be thinking about before 1 July 2017?
If you have a superannuation balance of more than $1.6m you won’t be able to make NCCs after 1 July 2017. The $1.6m eligibility threshold will be based on your superannuation balance as at 30 June of the previous financial year and includes all of your superannuation and pension entitlements.
If your balance is close to $1.6m you will only be able to bring forward the NCC cap for the number of years that would take your balance to the $1.6m limit.
Consider Jenny (48), who has a superannuation balance of $1.45m on 30 June 2017. Jenny won’t be able to use the full 3 year bring forward rule as contributing $300,000 would cause her balance to exceed $1.6m.
This means Jenny’s bring forward contributions will be restricted to 2 years’ worth of the annual $100,000 cap ie $200,000.
Jenny should seek advice on making her planned superannuation contributions before the proposed changes commence on 1 July 2017.
Consider Bob (57), who has a superannuation balance of more than $1.6 million already. He won’t be able to make any further NCCs under the latest proposals after 1 July 2017.
If Bob hasn’t yet triggered the bring forward rules, he may be eligible to contribute up to $540,000 before 30 June 2017. Bob should seek advice on what contributions he can make before the new rules commence.
Impact on pensions
The proposed $1.6m ‘transfer balance cap’ also applies to assets in pension phase from 1 July 2017. If you have a balance of $1.6m or more in superannuation, the maximum amount of your assets that you can transfer to pension phase (and thus enjoy tax-free treatment) after 1 July 20107 is $1.6m.
If you have an existing balance in pension phase of more than $1.6 million on 1 July 2017 you will be required to transfer the excess to accumulation phase or withdraw the excess. You may benefit from seeking advice on whether you should to either withdraw or transfer the excess balance back into an accumulation account.
The $1.6 million transfer balance cap will be indexed in line with the consumer price index (CPI) but will only be increased when the indexation reaches $100,000.
- Balances from some sources eg personal injury payouts may be exempt from these limits
- Transitional provisions will be in place to manage the implications of capital gains tax (CGT) for individuals impacted by the new transfer balance cap. There will be strict requirements to access these relief provisions.
- Individuals with funds that use segregated accounting methods for SMSFs and small APRA funds for tax purposes may no longer be eligible to use these methods. Individuals and families that have opted for segregated accounting may should seek advice on whether their existing structures still meet their individual requirements.
The Pension Rules are ChangingTransition to retirement pensions
Two of the more unpopular steps taken in the Federal Budget on 3 May 2016 impact the way transition to retirement superannuation pensions will be taxed after 30 June 2017.
Currently, if you receive a transition to retirement pension, the income from investments supporting the pension is exempt from income tax. From 1 July 2017, this income tax exemption will no longer apply. This means, if you have a transition to retirement pension and have not retired, then the tax paid on earnings on investments supporting the pension will increase from 0% to 15%.
The second change impacts transition to retirement pensions paid from self managed superannuation funds. The ability to ask the fund trustee to tax your benefit payment as a lump sum instead of a pension will be removed.
Currently, if you receive a transition to retirement pension, you can ask your fund trustee to treat your pension payments as lump sum payments for income tax purposes. Most people pay less tax on their lump sums as opposed to a pension. Lump sums are subject to tax at fixed rates which are generally less than the marginal tax rate that may need to be paid with respect to a pension.
What can trustees do before 30 June 2017
Given that the Government is making these changes to the taxation of pensions and the taxation of income on pension assets, the question that arises is; what superannuation strategies should fund members be considering now?
One strategy is that; where you are in receipt of a transition to retirement pension and aged between 56 and 60, you consider electing to have your pension payment taxed as if it were a lump sum.
Consider Vicky; in the past, if she commenced a transition to retirement pension before age 60, that pension would be subject to income tax if it was sourced from a taxable component. In this case, the pension would be taxed at marginal income tax rates, less a 15% tax offset.
If Vicky is aged between 56 and 60, has a marginal tax rate of 47% and commences a taxable account based pension with a balance of $1,000,000, then the minimum pension payable is 4% or $40,000. Vicky’s pension is taxable at marginal income tax rates, less a 15% tax offset. As her marginal tax rate is 47% the tax payable is $12,800 (ie 40,000 x 32% (47%-15%)).
Vicky could elect to receive the pension income stream as a lump sum benefit. In this case, the lump sum is received tax free, provided the total amount of taxable lump sum benefits do not exceed $195,000 for the year ended 30 June 2017. If the amount exceeds this threshold, it is taxed at 15%.
In the past it was assumed this option was not generally available for members between the ages of 56 and 60 because, in most cases, they would not have retired meaning that their accumulated superannuation benefit could not be withdrawn from the fund as a lump sum. It was assumed that if a member could not withdraw a benefit as a lump sum, then they could not elect to have that pension taxed as if it were a lump sum.
However; recent private rulings and other announcements from the Australian Taxation Office (ATO) indicate that although a fund can’t pay a lump sum to a member where the benefit is preserved, this does not mean the member can’t elect to have a superannuation pension payment taxed as if it were a lump sum.
So, if Vicky in the example above elected to have her pension payment taxed as a lump sum under the Income Tax Regulations then the benefit is received as a tax free lump sum, and Vicky saves $12,800 income tax. Additionally, once the pension commences, the earnings attributed to her pension account in the fund are also tax free.
This sounds too good to be true; however, the issues were recently dealt with in a Private Binding Ruling (PBR), Number 1012925066548. In that PBR, the member asked the ATO the question; “if my super fund pays me a pension, can I elect to have that payment taxed as a lump sum?”
The ATO response is that; yes, it is possible to make an election of this nature and have the pension payment taxed as a lump sum.
While PBRs are only binding on the ATO for the benefit of the taxpayer that applied for the ruling, it does provide an indication of the ATO’s thinking on this matter.
In our view, the facts that:
- The ATO has now released a number of Private Binding Rulings on this issue, all coming to the same conclusion, indicates the ATO’s position and reduces the risk of adverse consequences in the future.
- The Government has announced in the 2016 budget that it will remove the ability to elect to have pension payment taxed as a lump sum when the member is receiving a transition to retirement pension, is a strong indication that an election is currently permitted.
So what do you need to do if you are considering electing to receive your transition to retirement pension as a lump sum? We recommend that you talk to your adviser, so that they may determine whether the strategy is applicable and effective for you and what steps are needed to ensure the strategy can be implemented with minimum personal or legislative risk.
Removal of the exempt current pension income exemption for those receiving a transition to retirement pension
Income and capital gains derived by a fund and used to pay a transition to retirement pension will cease to be tax exempt from 1 July 2017.
This income will remain assessable to the fund, until the member is eligible to commence an account based pension that is not a transition to retirement pension.
These changes mean superannuation trustees will need to consider the same tax planning issues as other taxpayers as they approach the financial year end.
Two examples of the types of planning that may be considered are:
- Whether rent on a commercial property owned by the fund could be prepaid, and received before 30 June 2017.
- If the trustee is considering disposing of an asset, whether that disposal takes place in the year ended 30 June 2017 or 30 June 2018.
If you have any questions with regard to the taxation of the assets of your fund, please consult your advisor.
How can we help?
Before undertaking any decision regarding your Superannuation Benefits we recommend that you talk to your BDO Adviser.
This document has been prepared by Kris Robertson Authorised Rep No. 1003332 and Credit Rep No. 486270 of FYG Planners Pty Ltd AFSL 224543 published by BDO Private Wealth (NTH QLD) Pty
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