Summary of Proposed changes to Supperannuation

Super

We have detailed below the current proposals to change Super, which are due to come into force on 1st July 2017. This information, which is valid as at 15th September 2016, is subject to consultation and could be amended before enactment.

What is it?

  • To enhance stability in the Superannuation system, the Government will legislate that the primary objective of the Superannuation system is “to provide income in retirement to substitute or supplement the Age Pension”.

How does it work?

  • From 1 July 2017, a statement of compatibility must be prepared for any Bill or regulation relating to Superannuation which sets out how the proposed legislation or regulation is consistent with the objective of Superannuation. This will ensure that all proposed changes to Superannuation in the future are better aligned with the objective of the Superannuation system.
  • The Government has also identified subsidiary objectives to support the primary objective of the Superannuation system. The subsidiary objectives provide a framework for assessing the compatibility of a Bill or regulation with the objective of the Superannuation system.
  • The Financial System Inquiry recommended the Government seek broad agreement and legislate the primary objective of the Superannuation system.

What is it?

  • From 1 July 2017, there will be a $1.6 million transfer balance cap on the total amount of accumulated Superannuation an individual can transfer into the tax-free retirement phase. Subsequent earnings on balances in the retirement phase will not be capped or restricted.
  • Savings beyond this can remain in an accumulation account (where earnings are taxed at 15 %) or outside the Superannuation system.
  • People who have already retired will have to bring their retirement phase balances under $1.6 million before 1 July 2017.
  • The transfer balance cap will be indexed and will grow in line with CPI (consumer prices index), meaning the cap will be around $1.7 million in 2020-21.

How does it work?

  • Agnes, 62, retires on 1 November 2017. Her accumulated Superannuation balance is $2 million. Agnes can transfer $1.6 million into a retirement phase account. The remaining $400,000 can remain in an accumulation account where earnings will be taxed at 15 %.
  • Alternatively, Agnes may choose to remove all or part of the extra $400,000 from Superannuation.
  • Subsequent earnings on balances in the retirement phase will not be capped or restricted. The minimum drawdown will apply.

What is it?

  • From 1 July 2017, the threshold at which high income earners pay additional contributions tax (Division 293) will be lowered from $300,000 to $250,000.
  • The Government will also reduce the annual cap on concessional (before‑tax) Superannuation contributions to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).

How does it work?

  • In 2017-18, Madeline earns $260,000 in salary and wages. In the same year she has concessional Superannuation contributions of $30,000. Madeline’s fund will pay 15 % tax on these contributions. Madeline will pay an additional 15 % tax on $25,000 of the concessional contributions, resulting in these amounts effectively being taxed at 30 %.
  • The $5,000 of contributions in excess of the cap will be treated as income taxed at her marginal rate. Madeline pays $1,600 income tax on her excess contribution. Madeline can choose to leave this excess in her Superannuation (as a non-concessional contribution) or remove it from Super.

What is it?

  • From 1 July 2017, the Government will lower the annual non-concessional contributions cap to $100,000 and will introduce a new constraint, that individuals with a balance of more than $1.6 million will no longer be eligible to make non-concessional contributions. As is currently the case, individuals under age 65 will be eligible to bring forward 3 years of non-concessional contributions.
  • This is in place of the $500,000 lifetime non-concessional contributions cap announced in the 2016-17 Budget.

How does it work?

  • The $1.6 million eligibility threshold will be based on an individual’s balance as at 30 June the previous year. This means that if the individual’s balance at the start of the financial year (the contribution year) is more than $1.6 million they will not be able to make any further non-concessional contributions. Individuals with balances close to $1.6 million will only be able to access the number of years of bring forward to take their balance up to $1.6 million.
  • Transitional arrangements will apply. If an individual has not fully used their non-concessional bring forward before 1 July 2017, the remaining bring forward amount will be reassessed on 1 July 2017 to reflect the new annual caps.
  • Individuals aged between 65 and 74 will be eligible to make annual non-concessional contributions of $100,000 if they meet the work test (that is they work 40 hours within a 30 day period each income year). As per current arrangements, they will not be able to access the three year bring forward of contributions.

What is it?

  • From 1 July 2017, the Government will allow all individuals under the age of 65, and those aged 65 to 74 who meet the work test, to claim a tax deduction for personal contributions to eligible Superannuation funds up to the concessional contributions cap.

How does it work?

  • Currently, an income tax deduction for personal Superannuation contributions is only available to people who earn less than 10 % of their income from salary or wages. This limits the ability for people in certain work arrangements to benefit from concessional contributions to their Superannuation. Under the new arrangements, more individuals will be able to make concessional personal contributions up to the annual cap.
  • Chris has started his own online merchandise business, but continues to work part-time at an accounting firm earning $10,000 as his business is growing. His business earns $80,000 in his first year and he would like to contribute $15,000 of his $90,000 income to his Superannuation. He currently could not claim a tax deduction for any personal contributions. Under the changes, Chris could claim a tax deduction for his $15,000 of Superannuation contributions.

What is it?

  • From 1 July 2018, the Government will help people ‘catch‑up’ their Superannuation contributions by allowing individuals with account balances of $500,000 or less to rollover their unused concessional caps (for up to 5 years) to use if they have the capacity and choose to do so.

How does it work?

  • Cassandra has a Superannuation balance of $200,000 but did not make any concessional Superannuation contributions in 2018-19 as she took time off work to care for her child. In 2019‑20 she has the ability to contribute $50,000 into Superannuation ($25,000 under the annual concessional cap and $25,000 from her un-used 2018-19 cap which has been rolled-over).

What is it?

  • The Government will make the current spouse tax offset available to more couples so they can support each other in saving for retirement.

How does it work?

  • Currently, a tax offset of up to $540 is available for individuals who make Superannuation contributions to their spouses with incomes up to $10,800. The Government will allow more people to access the offset by extending eligibility to those whose recipient spouses earn up to $40,000.
  • There are no changes to the current aged based contribution rules. The spouse receiving the contribution must be under age 70 and meet a work test if they are aged between 65 to 69.

What is it?

  • From 1 July 2017, the Government will extend the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self‑annuitisation products.

How does it work?

  • Extending the tax exemption to deferred or pooled income stream products will encourage providers to offer a wider range of products. This will provide more flexibility and choice for retirees and help them to manage consumption and risk in retirement better – particularly longevity risk, to avoid people outliving their savings.

What is it?

  • The Government will remove the tax exempt status of income from assets supporting TRIS. These earnings will now be taxed concessionally at 15 %. Individuals will also no longer be allowed to treat certain Superannuation income stream payments as a lump sum for tax purposes.
  • This will help ensure that TRIS are fit for purpose and not used as a tax minimisation strategy.

How does it work?

  • Sebastian is 57 years old and has reduced his working hours. As a result, his earnings fall from $80,000 to $60,000. Sebastian commences a TRIS that pays him $20,000 per year. Currently, Sebastian pays tax on his income ($60,000) but his Superannuation fund pays no tax on the earnings on assets supporting his TRIS. Under the Government’s changes, the earnings on Sebastian’s Superannuation assets supporting TRIS will be taxed at 15 %.
  • The tax treatment of income streams in the hands of the individual will not be changed. For most individuals this will mean they are tax free, or taxed at the individual’s marginal tax rate less a 15 % offset.

What is it?

  • From 1 July 2017, the Government will remove the anti-detriment provision which allows Superannuation funds to claim a tax deduction for a portion of the death benefits paid to eligible dependants. This provision is outdated and inconsistent with other parts of the tax law.

How does it work?

  • An anti-detriment payment is an amount that can be included when a lump sum death benefit is paid to a dependant. The payment represents a refund of the 15 % tax on contributions that has been paid by the deceased member over their lifetime.
  • Superannuation funds will no longer be able to claim a tax deduction for anti‑detriment payments made to eligible dependants.

Conclusion

In this article we have summarised the latest proposals to change Super.

Given the far reaching changes proposed it is vital to ensure you have the best retirement savings strategy to match your needs coupled with effective investment management.

You should take stock of your retirement plans and make sure that you are on track for the retirement you want.

To arrange your no obligation retirement planning discussion contact your AAM Financial Planner or email wealthsolutions@aam-advisory.com now.

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd

Sources:
http://www.treasury.gov.au/Policy-Topics/SuperannuationAndRetirement/Superannuation-Reforms

Disclaimer:
This article is an op-ed piece by Ian Black. The views expressed in this article are those of the author and do not necessarily reflect the views of AAM Advisory Pte Ltd. This document/article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any securities/products mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment product before making a commitment to purchase the investment product. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of future performance. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this document is subject to change without notice. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data.