Superannuation changes in the 2016 Federal Budget

Superannuation was always going to be a 2016 Federal Budget hot topic.

In the lead up to 3 May, debate about potential changes reverberated across political and mainstream press, and Virgin Money's Chris Sozou discussed the importance of defining and enshrining the purpose of superannuation before making sweeping changes.

Well, the Budget has landed, and sweeping superannuation changes have been announced. The Government have even confirmed that the objective of superannuation is: ‘to provide income in retirement to substitute or supplement the Age Pension’, which they will seek to enshrine into legislation.

The ‘big-ticket’ wealth creation values are untouched: the tax rate on concessional contributions remains at 15% and pension draw-downs remain tax-free for those aged over 60.

But a lot has changed. Read on to understand the superannuation changes, and how they may impact you.

Superannuation changes announced in the 2016 Federal Budget

Superannuation topic

Pre-Budget

Post-Budget

Cap on transfer of superannuation to retirement phase accounts Unlimited $1,600,000 from 1 July 2017
Non-concessional contribution limits $180,000 per year $500,000 lifetime, effective immediately
Concessional contribution limits $30,000 / $35,000 per year $25,000 per year
Carry over concessional contributions no roll over roll-over up to 5 years
Higher super tax for individuals above income + super thresholds $300,000 per year $250,000 per year, from 1 July 2017
Tax deductions for concessional contributions Available mainly to self-employed Available to everybody
Age restrictions for various contribution types Various 75 years old
Low Income Super Tax Offset (LISTO) $500 per year
(previously called LISC)
unchanged
Spousal concessional co-contribution income threshold $10,800 $37,000
Transfer-to-retirement (TTR) pensions no longer tax free Tax free 15% tax rate

 

$1.6 million cap on super balances that can be transferred to retirement phase accounts

Currently, there is no limit on the amount that can be transferred from your super account into tax-free retirement phase accounts. Now, the amount has been capped at $1.6 million effective 1 July 2017.

Amounts currently above $1.6 million in existing retirement phase accounts will have to be transferred into accumulation phase accounts by 1 July 2017, where the tax rate is a still concessional 15%.

Who is impacted?

Those with super balances at or in retirement above $1.6 million, and those with existing retirement phase account balances above $1.6 million should speak to a financial adviser to determine the most appropriate strategy.

 

$500,000 lifetime cap on non-concessional contributions limit

Previously, superannuation members could contribute $180,000 per year into a super fund using after-tax funds (called non-concessional contributions). There was no upper limit on how much could be contributed over the life of your superannuation account, in fact you could use the bring forward rule and contribute $540,000 in a single year by bringing forward 3 years’ worth of limits.

Effective immediately, a lifetime cap has been set at $500,000.  In calculating the cap, non-concessional contributions from 1 July 2007 onwards, will count towards the cap.  Anyone who had already contributed more than $500,000 in non-concessional contributions since 1 July 2007 up to when the it was announced in the Budget (that is at 7.30 pm (AEST) on 3 May 2016), will not have to withdraw the excess contributions from their super fund.

Note: You read that right, if you exceeded the lifetime cap at 7:29pm on 3 May 2016, then you do not need to withdraw any excess amounts.  If you exceeded the lifetime cap at 7:31pm on 3 May 2016, then you will have to withdraw any excess amounts.

Who is impacted?

Those who have already exceed the cap will not be able to make any more non-concessional contributions.  For the rest of us, the cap has been set at $500,000 so we will need to review our non-concessional contributions and re-evaluate our contributions strategies.

 

$25,000 per annum cap on concessional contributions

Annual limits on before-tax (concessional) contributions will be cut to $25,000 for everyone from 1 July 2017. Currently, the limit is $30,000 for most workers and $35,000 for those aged over 50.  Concessional contributions (such as compulsory Super Guarantee amounts and salary sacrifice) are taxed at 15%.

If you exceed the concessional contributions cap in a given year, extra tax will apply unless you are applying the 5 year carry over rule which was also announced in the budget last night (see next point).

Who is impacted?

All workers make concessional contributions through the compulsory Super Guarantee, but you’ll only be impacted if total concessional contributions approach or exceed $25,000 per annum.

 

5 year carry over concessional contributions

While Budget changes reduce the concessional contributions cap, they also introduce flexibility in the way concessional contributions can be made. From 1 July 2017, unused concessional contribution caps can now be carried forward for up to 5 years, provided your superannuation account balance is less than $500,000.

Who is impacted?

This is intended to assist those with fluctuating income streams, in particular women who leave the workforce to have children. If you’re not in a position to make concessional contributions of up to $25,000 in one year, you may be able to take advantage of the carryover rules when your income is higher.

 

30% tax on concessional contributions for those with combined income and super contributions above $250,000 per annum

People with a total income of over $250,000 (including Super contributions), including any concessional contributions, will pay 30% tax on their concessional contributions from 1 July 2017.

At the moment only those with a total income of more than $300,000 pay the higher rate of 30%.

Who is impacted?

Those with combined income and superannuation contributions of $250,000 per annum. Even at the higher 30% tax rate, super would provide a 17% discount compared to the highest marginal tax rate.

 

Tax deductible contributions more widely available

From 1 July 2017, all super customers can now claim a tax deduction for personal contributions up to the concessional cap of $25,000. This was previously mainly available only to the self-employed.

Who is impacted?

All super members can take advantage of this tax deduction. You will need to tell your super fund that you intend to claim the contribution as a tax deduction.

 

Age restrictions lifted to 75 years for various contributions

The Government is lifting age restrictions for contributions applicable to older Australian’s. Currently, restrictions apply to:

  • Individuals aged between 65 and 74 who want to make voluntary (non-concessional) super contributions and do not meet the “work test”; and
  • Spouses over 70, who cannot receive spousal contributions because they do not meet the work test.

From 1 July 2017, all individuals aged up to 75 years will be able to make voluntary contributions or receive a spousal contribution without having to satisfy the work test.

Who is impacted?

Those in the 65 to 74 age range, who could not previously make voluntary contributions or receive spousal contributions due to the work test are now able to make these contributions.

 

Low Income Superannuation Tax Offset (LISTO) to replace the existing Low Income Super Contribution (LISC)

Individuals with an adjusted taxable income of $37,000 or less will be eligible for a refund of the tax paid on concessional contributions, up to a cap of $500. This is not a new or significantly changed feature, however it will replace the existing Low Income Super Contribution when it expires on 30 June 2017.

Who is impacted?

If you earn less than $37,000 a year, the scheme is designed to ensure you don’t pay more tax on your super contributions than you pay on your income. It is particularly beneficial for women, who make up the majority of low-income and part time workers, to help them save more for retirement.

 

$37,000 spousal concessional contribution limit

More partners will be encouraged to contribute to their spouses (married or defacto) super accounts, when the income threshold for the receiving spouse rises from $10,800 to $37,000 on the 1 July 2017.

This benefit provides an offset of 18%, up to a limit of $540, for the individual who makes this concessional contributions to their spouse.

Who is impacted?

If you’re spouse earns less than $37,000 are eligible, you may want to consider this strategy.

 

Transition to Retirement (TTR) pensions not tax free

Earnings generated by TTR pensions are currently tax free, but that will no longer be the case from 1 July 2017. Earnings will instead be taxed at 15%.

The government will also remove a rule that allows individuals to reduce their tax bills by treating some superannuation income stream payments as lump sums.

Who is impacted?

If you’re aged between 55 and 59 the potential benefits of a TTR strategy are limited. For those over the age of 60 there is still merit in exploring the tax savings of a tax free pension income.

If you have an existing TTR account, you should consider reviewing the effectiveness of your existing strategy as the new rules will apply to existing arrangements.

Will the changes to superannuation benefit or hinder your retirement plans?