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Superannuation Technical Update: Federal Budget 2016

After a number of years of “quiet” budgets, superannuation was firmly in the spotlight for the Turnbull Government on Tuesday night.

While an election looms large over these announcements, advisers should be aware of the following impacts:

Superannuation “objectives” to be enshrined as law

The purpose of the changes to the superannuation provisions is to “provide income in retirement to substitute or supplement the Aged Pension”. As a result, the Federal Government will look to enshrine this objective as a stand alone Act, to ensure Governments consider this objective when formulating future policy.

What Strategies are going to be Impacted Immediately?

Non-Concessional Contribution (NCC) limit from 7.30pm Budget Night (3rd May 2016)
For a number of years, there had been rumours circulating that a lifetime limit for contributions would be introduced. Like the Reasonable Benefit Limit (RBL) of previous days, Governments have been keen to put a cap on the total amount that could be contributed to a fund, so as to ensure that members were not accumulating too much wealth in what is seen as the most tax effective vehicle available for wealth accumulation.

Effective from Budget Night, a lifetime limit of $500,000 per person will now apply. It will take into account all NCC’s made since 1 July 2007, with no grandfathering of contributions already made. Any contribution made after 7.30pm on 3rd May 2016 that brings this limit above $500,000 will need to be removed from the fund or be subject to current penalty tax arrangements that apply to excess non-concessional contributions. The lifetime cap will be indexed in line with AWOTE (in $50,000 increments).

Individuals who had made more than $500,000 in non-concessional contributions between 1 July 2007 and Budget night will be exempted from the “excess” penalties, and deemed to have already reached their lifetime cap.

Advisers should also be aware of the impact excess concessional contributions (where members elect to retain in super) will have on being counted towards the non-concessional cap lifetime limit.

What Strategies will we have some more time to Implement?

Contribution changes
There were a suite of changes around contributions, some of which are more generous than was previously the case. The Government is trying to reduce the inequity in superannuation balances for those who have been out of the workforce for periods of time, by the use of some of the proposed measures. All of the following measures are to take effect from 1 July 2017.

Concessional limit – the concessional contribution limit will be reduced to $25,000pa per person, regardless of age, up to age 75.

Work test – Currently, members aged between 65 and 75 years of age, are required to satisfy a work test in order to make contributions to a superannuation fund. The test is that they must be gainfully employed for 40 hours in a continuous 30 day period. It is proposed that the work test is to be abolished, therefore simplifying contributions for those aged between 65 and 75.

Catch up concessional contributions – Any amounts unused on an individual’s annual concessional contribution cap, starting from 1 July 2017, can be carried forward for a period of 5 years. This allows greater contribution flexibility and better caters for changes in work patterns or income levels (i.e. realised capital gains). The “catch up” is only available to individuals whose superannuation balance is less than $500,000 (clarity is needed on how this will be calculated – i.e. if it adds back any previous pension/lump sums).

Spousal Contributions – Currently a spouse contribution can be made, which entitles the contributing spouse to a tax offset. It is proposed that in relation to a spouse contribution, the income threshold will be raised from $10,800 to $37,000. This will mean that the contributing spouse will be eligible for 18% offset worth up to $540, which will phase out once a spouse’s income reaches $40,000.

Low Income Superannuation Tax Offset (LISTO) – Replaces LISC, a non-refundable tax offset up to $500, applying to members with adjustable taxable income up to $37,000 who have had a contribution made on their behalf.

Anti-detriment payments – Whilst not as commonly used in self managed superannuation funds, anti detriment payments were used to “claw back” the contribution tax paid by members of superannuation funds who are now deceased. In most instances, reserves had to be established in the fund in order to be able to make the extra payments required under the anti-detriment provisions. The major advantage of these provisions, is that it provides a large tax loss which could be carried forward in the superannuation fund. It is proposed that anti-detriment payments will be abolished from 1 July 2017.

Deductions for personal contributions – Under current provisions, for those that meet the substantially self employed (10%) test, they are able to claim a tax deduction for concessional contributions made to their superannuation fund. It is proposed that from 1 July 2017, all individuals under age 75 will be eligible to claim a tax deduction on contributions, regardless of employment status. This would effectively create similar results to the current salary sacrifice regime and would be subject to the concessional contribution cap.

Division 293 Levy reduced to $250,000 – In a way of generating more revenue from high income earners, Division 293 tax was introduced, which saw individuals earning more than $300,000 per annum (which was based on adjusted taxable income and included superannuation contributions) taxed at 30% on their contributions, as opposed to 15%. It is proposed that from 1 July 2017, the Division 293 tax will apply to high income earners who earn income in excess of $250,000, thereby impacting a greater number of taxpayers.

Pension changes
The proposed pension changes are similar to the changes that were proposed a couple of years ago in relation to the removal of the 0% tax rate on income over $100,000 per pension member, but that were removed before ever passing through Legislation. The Treasurer announced on Budget Night that those members who had a pension balance of $1,600,000 and earnt 5% on this balance, then they would be receiving approximately 3 times the amount that someone on the Aged Pension would receive. Accordingly, it is proposed that the exemption on pension income above the balance cap, be removed, as follows:

Transfer balance cap
If a member’s pension balance at 30 June 2017 is over $1,600,000, the member will need to either:

If the transfer balance cap is breached, the amount in excess of the cap, and the earnings amount will be subject to tax – similar to the tax treatment applied currently to excess non-concessional contributions.

This cap will be indexed in $100,000 increments (in line with CPI). The amount applicable to the cap is measured at the time the pension commences – subsequent fluctuation up (due to investment performance) will not result in a breach. Conversely, fluctuations down due to poor investment performance and/or pension withdrawals will not create additional available room in the cap.

Care should therefore be taken to ensure clients annually satisfy their pension minimums (i.e. do not trigger an event which ceases the pension).

Transition to Retirement Income Streams (TRIS)
TRIS’s will lose their tax exempt status, i.e the SMSF will pay 15% tax on earnings supporting a TRIS. No grandfathering will exist for this. As this applies to only TRIS’s, clients who trigger a condition of release (such as change employers after age 60, or attain age 65) will cease to have a TRIS as their pension would become an Account Based Pension and the tax exemption will be re-instated (subject to the Transfer Balance Cap).

Individuals will be unable to elect to treat this pension as a lump sum, and therefore will cease to be able to apply the $195,000 low rate cap for income tax purposes.

From a personal tax perspective, the tax treatment of pension payments and lump sum payments remains unchanged.

Impact on Defined Benefit (DB) schemes
For unfunded DB members, pension payments above $100,000 pa will be taxed at full marginal tax rates (net of a 10% offset capped at $10,000).

For members of a funded DB scheme – 50% of the pension over $100,000pa will be taxed at the individual’s marginal tax rate.

All of Tuesday’s announcements are subject to passage through Parliament, and there will remain a level of uncertainty with the upcoming federal election. As with most announcements we await with baited breath legislation to more accurately determine what the practical implications of the above are for our clients..

Superannuation Update & Strategies Seminar
Our annual Superannuation Update and Strategies Seminar is designed to help Accounting and Profession Advisers keep up to date with all the changes and proposed changes to superannuation legislation. For more information click here

More Information
For further information, contact Brenda Hutchinson or Jason Roccasalvo.

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