New Superannuation Reforms – Things You Might Have Missed

The changes to superannuation announced in the 2016 Federal Budget have been passed by Parliament. Amongst the changes was a raft of legislation which may have been overlooked given a few of the substantial changes taking the headlines but these measures are just as important in your planning for 1 July 2017.

The main issues that you need to consider because of the changes include:

  • Lower threshold for increased contributions tax
    • Reviewing if your income will be more than $250,000 from 1 July 2017.
    • If so, concessional contributions you make may be assessable for an additional 15%
  • Personal contribution deductions – 10% rule repealed
    • Reviewing if you have income available to contribute to your SMSF.
    • Determining if and when you would be able to claim a personal deduction for these contributions up the annual cap of $25,000.
    • Reviewing any current salary sacrifice arrangement you may have for its necessity and benefits.
  • Spousal contribution threshold increased
    • Reviewing if your spouse’s salary is below the new threshold of $37,000.
    • Reviewing if your spouse’s and your own SMSF balance may need to be rebalanced.
    • Determining if you have any available after tax income to contribute to your spouse’s superannuation and be eligible for an offset.
  • Catch up concessional contributions (First available from 1 July 2019)
    • Reviewing your work patterns to determine your future likely income streams
    • Reviewing if your total superannuation balance is under $500,000 to determine your eligibility to make catch up contribution payments in the future.
  • Anti-detriment reduction repealed from 1 July 2017
    • Determining if your SMSF was intending to or currently funding a future anti-detriment payment.
    • If an SMSF member dies before 1 July 2017, anti-detriment payments will still be possible up until 30 June 2019

The changes mentioned above are all diverse and need specific discussion and review of your circumstances to determine their impact so discussions with your specialist advisor are recommend.

The $1.6 Million Transfer Balance Cap – What Does it Mean For You?

The changes to superannuation announced in the 2016 Federal Budget have been passed by Parliament. Amongst those changes was the introduction of a $1.6 million transfer balance cap which limits the tax exemption for assets funding superannuation pensions.

This new limit on superannuation will apply from 1 July 2017 and creates additional responsibilities for SMSF trustees. The main issues you need to be aware of are:

  • All super fund members who are receiving a pension on 1 July 2017 will have a transfer balance cap of $1.6 million created at that time.
  • Those not receiving a superannuation pension on 1 July 2017, but will in the near future, their transfer balance cap will be created when they first receive a superannuation pension.
  • The amount of tax-exempt assets available to fund a super pension under the cap is determined by a system of debits and credits which are recorded in a transfer balance account.
  • Credits are created by:
    • The value of super assets supporting income streams on 30 June 2017;
    • Starting new superannuation income streams from 1 July 2017 onwards;
    • The value of reversionary income streams where an individual becomes entitled to them; and
    • Notional earnings accruing to excess transfer balance amounts.
  • Debits are created by:
    • Commutations of superannuation pensions;
    • Structured settle payments contributed to superannuation; and
    • Certain payments arising from family law splits, fraudulent or void transactions.
  • Reversionary pensions will count towards the cap, but members will have a 12 month period from the date of death to deal with the reversionary pension before a credit arises and counts towards their cap.

Going over the $1.6 million transfer balance cap will require the excess amounts to be removed from the retirement phase which will likely require the commutation of the relevant pension which has exceeded the cap.

Defined benefit pensions and certain pre-2007 superannuation pensions have special rules for the transfer balance cap recognising their non-commutable nature.

Any amounts in excess of a member’s personal transfer balance cap can continue to be maintained in their accumulation account in their fund. This means if you have more than $1.6 million in super you can maintain up to $1.6 million in pension phase and retain any additional balance in accumulation phase.

Approaching 1 July 2017 people may wish to structure their asset holdings to be in a position to optimise the $1.6 million transfer balance cap, especially between spouses.

It is also important to know that there is transitional capital gains tax relief for superannuation assets that are affected by any changes you might need to make by 1 July 2017 to comply with the new rules. This capital gains relief will ensure that any capital gain accumulated on affected superannuation assets will be deferred to a later time when the asset is sold.

Contributions – What the Changed Concessional and Non-Concessional Caps May Mean for You

With many of the changes announced in the 2016 Federal Budget now passed by Parliament, there is an amount of certainty that you can have when approaching your SMSF planning and the contributions you might wish to make to your SMSF.

The Government is lowering both the concessional (pre-tax) and non-concessional (after-tax) contribution limits from 1 July 2017.

One of the original proposed measures which received a lot of comment and caused concern was the $500,000 lifetime non- concessional contributions (after-tax contributions) limit. This proposed measure was dropped and replaced with a $100,000 annual limit on after-tax contributions.

Pre-tax contributions will be limited to $25,000 for all taxpayers from 1 July 2017.

Below is a summary of the changes for both concessional and non-concessional contributions.

After- tax contributions

  • The $500,000 lifetime limit has been dropped in favour of a $100,000 annual cap. The rules allow the opportunity to bring forward three years of contributions – making it possible to contribute $300,000 in one year.
  • For the 2016/17 year, it is still possible to make a contribution of up to $180,000 for one year, or to bring forward three years’ contributions – so you are able to make a contribution of up to $540,000. If you do not use this full limit of $180,000 or $540,000 in the 2016/17 year, then you will be limited to the $100,000 annual and $300,000 bring forward caps for future years.
  • Where the bring forward of contributions has been triggered before 1 July 2017, transitional contribution caps may apply.
  • If you have a balance of $1.6m or more in your SMSF at 1/7/2017 then you will not be able to make further after-tax contributions.
  • When approaching the $1.6m cap care will need to be taken with the bring forward rules as these are restricted by the new $1.6 million balance restriction.

Pre-tax contributions:

  • The concessional contributions cap is lowered to $25,000 per year for all taxpayers from 1 July 2017.
  • Taxpayers who were aged 49 or over on 30 June 2016 can make up to $35,000 in pre-tax contributions in 2016/17.
  • Those aged under 49 on 30 June 2016 can make up to 30,000 in pre-tax contributions in 2016/17.

Some of these changes may require you to adjust your contribution strategies going forward.

This will most likely be the case if you have a superannuation balance of over or close to $1.6 million or were planning on making significant contributions to superannuation in the next few years.

Government Releases More Superannuation Legislation

On 27 September 2016 the Government released another round of draft legislation implementing a number of the changes to superannuation it announced in the 2016 Federal Budget.

Many of these changes will apply from 1 July 2017 so it might be sensible to for you to start thinking of how your superannuation will be impacted by the changes now and whether you might need to change any of your SMSF’s arrangements.

Included in the latest legislation were amendments relating to:

  • Implementing the Government’s $1.6 million transfer balance cap, which places a limit on the amount an individual can hold in the tax-free retirement phase from 1 July 2017.
  • Lowering the concessional contributions cap to $25,000 per year for all taxpayers from 1 July 2017.
  • 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.
  • Providing greater flexibility for those with broken work patterns by allowing individuals with balances of less than $500,000 to ‘carry forward’ unused concessional cap space for up to five years.
  • Removing the tax-free treatment of assets that support a transition to retirement income stream.

Some of these changes may require you to adjust your investment, contribution, pension and estate planning strategies going forward.

This will most likely be the case if you have a superannuation balance of over or close to $1.6 million, were planning on making significant contributions to superannuation in the next few years, are a high income earner or have a transition to retirement pension in place now.