In the lead up to Australian Federal Budget, there was much debate about potential changes which reverberated across political and mainstream press. When the Budget was released in early May it announced sweeping superannuation changes which will affect many of our clients. Here we highlight the key changes to superannuation.
Lowering the concessional contribution cap to $25,000 for all individuals
From 1 July 2017, the Government proposes to lower the concessional contribution cap to $25,000 for all taxpayers. The cap will be indexed in line with wages growth.
The existing contribution caps ($30,000 for those aged under 50, and $35,000 for those aged above 50) will be retained for 2016-17.
This is most unhelpful. I see this measure as discouraging people from saving for their retirement. It is especially heinous for those people approaching retirement, with the need to maximise contributions to superannuation when they are more likely to have the financial resources to do so. While this may be ameliorated somewhat by the carry forward of unused concessional contributions (discussed later), the $500,000 balance limit on this measure (see below) restricts people building truly adequate retirement incomes.
Lowering the threshold of Division 293 tax
The Government is proposing lowering the Division 293 tax threshold from $300,000 to $250,000 from 1 July 2017.
This means that those earning over $250,000 of Adjusted Taxable Income will be slugged with an additional tax of 15% applied to contributions. It was initially rumored this cap may have been reduced to $180,000 so a minor win for those higher income earners however when you consider that the concessional contribution caps have been cut, this is a double slap.
Introducing a lifetime cap for non-concessional contributions
From 7.30pm (3 May 2016) the Government is proposing to introduce a $500,000 lifetime cap on non-concessional contributions (NCCs). The lifetime cap will take into account NCCs made since 1 July 2007. The cap will be indexed in $50,000 amounts in line with wages.
Individuals that have made $500,000 of NCCs will be taken to have used their lifetime cap and will not be able to make further NCCs. NCCs in excess of the new lifetime limit will have to be withdrawn or face a penalty tax, similar to the current treatment of excess NCCs.
The lifetime NCC limit will remove the existing $180,000 annual cap and the “bring forward” rule. This will increase the amount of annual NCCs people aged 65 and over can make if they have net used their lifetime cap.
While it is obvious the existing NCC regime can allow wealthy taxpayers to accrue significant balances inside superannuation this change does not promote fairness and sustainability of the system. While a $500,000 limit is generous enough to meet most taxpayer’s needs, I have concerns about the complexity of a lifetime cap and the fact that the new limit applies to NCCs made since 1 July 2007. This clearly disadvantages those who made NCCs under the existing rules.
Introducing a $1.6 million superannuation transfer balance cap
From 1 July 2017, the Government proposes to introduce a $1.6 million limit on individuals’ superannuation balances that can be “transferred” from accumulation phase to retirement phase. Subsequent earnings on retirement balances will not be restricted. Individuals that have amounts in excess of $1.6 million will be able to maintain those amounts in accumulation phase where earnings will be taxed under the current 15% treatment.
Superannuation fund members already in the retirement phase that have balances in excess of $1.6 million will be required to reduce their retirement balances to $1.6 million by 1 July 2017. They will either be able to retain excess amounts in accumulation phase or withdraw them from superannuation.
Amounts transferred in excess of $1.6 million to retirement will be taxed in a similar way to excess non-concessional contributions. That means both the excess amount and earnings on that excess amount in retirement phase will be taxed.
The $1.6 million cap will be indexed in $100,000 increments in line with the consumer price index. Where a member has previously used up a proportion of their retirement balance limit, they will be able to use the remaining proportion of the indexed cap.
This measure effectively limits the benefits of tax-free earnings on assets supporting retirement. The Government believes that this measure is necessary to make the superannuation system more fiscally sustainable, noting that it will limit attractiveness of superannuation for tax minimisation and estate planning purposes.
Clearly aimed at ensuring superannuation is not an open ended, tax-free retirement savings vehicle. While the $1.6 million amount is reasonable (e.g. assuming a $1.6 million balance earning 5% per annum achieves income of $80,000 per annum without drawing down on capital) and is unlikely to affect most trustees, I have concerns about how this adds complication to an already complicated superannuation system – so much for Simpler Super!! It is also likely to see some remove excess amounts above the $1.6 million limit out of superannuation and seek other tax effective arrangements including using the Low Income Tax Offset and Seniors and Pensioners Tax Offset to minimise tax on earnings outside of super.
Allowing catch-up concessional contributions
From 1 July 2017, the Government proposes to allow people with superannuation balances under $500,000 to carry forward unused concessional cap space on a rolling 5-year basis. The Government is introducing this measure to improve flexibility of the concessional contribution regime, making saving for retirement easier for people with broken work patterns.
Whilst the idea is a positive step, limiting it to those with balances below $500,000 seems counterproductive. A $500,000 superannuation balance is hardly excessive when funding retirement especially when considering the financial risks in retirement created by health, aging and longevity. For example, a $500,000 balance with earnings of 5% per annum will generate income of $25,000 per annum (without capital drawdown) – an amount unable to sustain a dignified and secure retirement.
Tax deductions for personal superannuation contributions
From 1 July 2017, the Government will allow all Australians aged under 75 to claim an income tax deduction for personal contributions made to superannuation funds. This effectively removes the “10% rule”, allowing all members to make personal deductible contributions to super.
This will reduce significant red-tape and complexity from the superannuation system and benefit employers, especially small businesses. Those looking for some additional tax relief post retirement may find this useful as well.
Introducing a Low Income Superannuation Tax Offset (LISTO)
From 1 July 2017, the Government proposes to introduce the Low Income Superannuation Tax Offset (LISTO) which will replace the existing Low Income Superannuation Contribution (LISC). A non-refundable tax offset will be provided to superannuation funds based on the tax paid on concessional contributions by people with adjusted taxable income up to $37,000.
Removing the tax-free treatment of assets supporting transition to retirement income streams
From 1 July 2017, the Government proposes to remove the tax exempt status of assets supporting transition to retirement income streams (TRIS). Instead these assets will be taxed at the 15% rate. This new tax treatment will apply to all TRIS, irrespective of when they were commenced. Additionally, taxpayers will no longer be able to elect to treat TRIS payments as lump sums for tax purposes, which makes them tax-free under the low rate cap.
Changes to the TRIS rules had been telegraphed by the Government, so these changes are not surprising and more positive than other possible changes such as banning TRIS all together. However this clearly makes TRIS far less attractive to super fund members.
Harmonising contribution rules for those aged 65 to 74
From 1 July 2017, the Government proposes to improve the ability of older Australians to contribute to superannuation by:
Removing the requirement that a person aged from 65 to 74 meets a work test before making concessional or non-concessional contributions to superannuation, and
Allowing people to make contributions to a spouse aged under 75 without the need for the spouse to meet the work test.
I expect the removal of the work test for people aged 65 to 74 will have benefits for those aged over 65 who want to and can use superannuation. I expect it to have some additional compliance savings for SMSF members. It would also seem to be contrary to their plan to reduce the amount of tax exempt capital inside superannuation. For example, often people wait until post retirement to sell capital gains tax liable investments such as property in order to minimise the impact of CGT. Now those over 65 can consider use of superannuation to minimise tax and boost tax efficient savings once more.
Legislating the objective of super
The Government will be legislating the objective of superannuation as ‘to provide income in retirement to substitute or supplement the Age Pension’ which was the objective recommended by the Financial System Inquiry. Perhaps this measure should have been done prior to making the proposed tax changes.
Remove the “anti-detriment” provision
From 1 July 2017, the Government proposes to remove the anti-detriment provision on the basis that it is outdated and applies unevenly to superannuation funds.
Anti-detriment provisions entitled deceased members families to obtain access to a lump sum refund of contributions tax paid, where the fund offered this benefit which was not always the case as it was not compulsory. The abolition of this piece of legislation was not unexpected due to the relatively small take up, lack of understanding as to how it worked, and that not all funds offered it.
Enhancing choice in retirement products
From 1 July 2017, the Government proposes to extend the tax-exemption on earnings in the retirement phase to retirement products such as deferred lifetime annuities and group self-annuitisation products.
I do not expect this to have any significant impact on either the budget outcome, or most retirees.
Improve superannuation balances of low income spouses
From 1 July 2017, the Government proposes to extend the eligibility rules for the low income spouse superannuation tax offset by raising the threshold for a low income spouse to $37,000 up from $10,800
This is a small, albeit positive change which can assist in topping up super contributions for people with broken work patterns.
Overall there is little to like about this budget from a superannuation standpoint. Cap limitations, greater complexity, and mixed messages about whether the government sees superannuation as a pure tax dodge or a legitimate means of funding retirement income needs, offset some of the positive measures such as the abolition of the work test for those aged over 65, more user friendly contribution measures including employees being able to top up superannuation savings using personal contributions (deductible).