The Federal Government’s decision to take an axe to superannuation concessions will severely dent the aspirations of Middle Australia who view their retirement savings as the key vehicle to achieve self-sufficiency in retirement. The announcements were particularly surprising given both political parties said in the run-up to the 2013 federal election that they were ruling out any significant changes to superannuation. This is clearly NOT the case!
SMSFs, in particular, are used by those people who are prepared to take responsibility for their superannuation and likely to be seriously impacted by the changes proposed in the 2016 Federal Budget.
Key measures announced
Effective Immediately
Effective 1 July 2017
Lifetime cap of $500,000 into super
A lifetime non-concessional contribution cap of $500,000 will apply to each individual taxpayer for all contributions made after 7:30pm (EST) on Tuesday 3rd May 2016. This figure will take into consideration any contributions made on or after 1 July 2007.
A non-concessional contribution is effectively a non-taxed contribution. It is usually a payment made into super using after tax money and referred to as a personal contribution.
Essentially what this measure means, is that every individual tax payer that has ever made or wants to make an additional contribution to super above and beyond what is paid into their fund by their employer or as a personal contribution, is affected. These individuals will need to find out what the current total of their non-concessional contributions made to superannuation has been in order to work out what the remaining balance is they can contribute over their lifetime.
Practically speaking, there are two ways to do this. The first, is to review every single superannuation statement you’ve received and manually calculate (which few are likely to have on hand). The second, is to phone the Australian Taxation Office and ask them – as essentially they’re the only people likely to have to the information in its entirety (providing all lodgements are up-to-date).
I’ve just spent the best part of an hour on the phone to the ATO myself to find out that figure for myself personally. Essentially anybody else who wants to make additional contributions to super will need to go through the same process.
A reduced annual cap on concessional contributions of $25,000
This announcement did not come as a surprise, however, it is yet another detrimental change to the superannuation system as it restricts the ability for tax payers to contribute to their super accounts.
Concessional contributions are known as taxable contributions as they are taxed at 15% when paid into your super. Any amounts you receive from your employer or pay via salary sacrifice are concessional contributions – and salary sacrifice arrangements are generally utilised by people trying to boost their super and minimise personal income tax using this strategy.
This reduction from the current limits (of $30,000 for those under age 50 and $35,000 for those aged 50 and over) will take effect in the 2017/18 financial year.
Historically concessional contribution caps have been higher. In 2008/2009 people aged 50 and over could contribute $100,000 per taxpayer! So slowly, over the years, it’s becoming harder and harder to get money into super – yet the Government continue to advocate the need to be self-funded in retirement.
$1.6 million limit on assets in pension phase
From 1 July 2017, the Government proposes to introduce a limit on the total amount a taxpayer can move from accumulation mode into pension or ‘retirement’ phase.
One of the key benefits of superannuation is that all income and capital gains become tax exempt once a super member moves into pension mode. By putting a limit on the proportion of a member’s balance that can move into pension phase, the Government will effectively start taxing super benefits for people that are in retirement phase (with a balance in excess of $1.6 million), and eliminate one of the key benefits of investing in super!
The removal of tax exempt status of transition to retirement pensions (TTR)
The latest ATO statistics have identified that the greatest number of SMSF members are in the transition to retirement (TTR) age bracket of 55-64. This means approximately 250,000 members will become eligible for a pension over the next 10 years and are ready to consider a TTR strategy.
TTRs are used in two ways:
The Government have announced in their budget proposal that from 1 July 2017, the tax free status of transition to retirement pensions will be removed, and individuals will no longer be allowed to treat certain income streams as lump sums for tax purposes.
Yet another significant blow for those nearing retirement, though we expect as many SMSF members as possible will continue to enjoy the TTR benefits for the 2015/16 and 2016/17 financial years – while they last!
Additional contributions tax for high income earners
A further 15% tax on concessional contributions for members with personal income greater than $250,000 will apply from 1 July 2017. This has been reduced from the previous income threshold of $300,000.
Good news for taxpayers aged 65 – 74
Finally some good news for super! From 1 July 2017, the Government proposes to remove minimum working requirements for people aged 65-74 allowing for people in this age bracket to continue to contribute to super.
Good news for people with interrupted work history
From 1 July 2017, taxpayers with a super account balance of $500,000 or less will be able to ‘catch up’ on concessional contributions they have not maximised by allowing unused amounts to be carried forward on a rolling basis for up to 5 consecutive years.
We have long campaigned for some level of compassion to be demonstrated to people with interrupted work history (particularly women), and we are delighted to see some relief will be provided in this regard. However, we are disappointed the Government has restricted it to people with super balances of $500,000 or less, and not available to all taxpayers.
Good news 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 which effectively abolishes the previous ‘10% rule’.
Summary
Whilst there were several other relatively minor changes to super – this year’s Federal Budget represents the most significant amount of change we’ve seen since 2006. All research shows that people wait until later in their working lives to top up their superannuation. This is when they have the financial capacity to do so, and in one fell swoop the Government is making this that much harder. The proposed changes make it harder for individuals to self-fund their retirement, they make managing superannuation whether via SMSF, retail or industry fund, even more complex to administer and manage. There are however a handful of useful concessions, particularly for those members with a lower income or broken work patterns.
If you have any questions in relation to your specific situation, please call your Client Manager.
SMSFs, in particular, are used by those people who are prepared to take responsibility for their superannuation and likely to be seriously impacted by the changes proposed in the 2016 Federal Budget.
Key measures announced
Effective Immediately
- A $500,000 lifetime non-concessional cap into super.
Effective 1 July 2017
- A reduced annual cap on concessional contributions for all tax payers of $25,000;
- A $1.6 million limit on assets in retirement phase that will have tax exempt earnings;
- The removal of tax exempt status of transition to retirement pensions (TTR);
- Additional contributions tax for high income earners;
- Removal of the ‘work test’ for tax payers wanting to make contributions to super aged between 65 and 74;
- The ability for spouses aged over 70 to receive spouse super contributions;
- Allowing carry-forward of unused concessional caps over a 5 year period for people with balances under $500,000;
- Tax deductions for personal super contributions;
- The income threshold lifted on the low income spouse tax offset.
Lifetime cap of $500,000 into super
A lifetime non-concessional contribution cap of $500,000 will apply to each individual taxpayer for all contributions made after 7:30pm (EST) on Tuesday 3rd May 2016. This figure will take into consideration any contributions made on or after 1 July 2007.
A non-concessional contribution is effectively a non-taxed contribution. It is usually a payment made into super using after tax money and referred to as a personal contribution.
Essentially what this measure means, is that every individual tax payer that has ever made or wants to make an additional contribution to super above and beyond what is paid into their fund by their employer or as a personal contribution, is affected. These individuals will need to find out what the current total of their non-concessional contributions made to superannuation has been in order to work out what the remaining balance is they can contribute over their lifetime.
Practically speaking, there are two ways to do this. The first, is to review every single superannuation statement you’ve received and manually calculate (which few are likely to have on hand). The second, is to phone the Australian Taxation Office and ask them – as essentially they’re the only people likely to have to the information in its entirety (providing all lodgements are up-to-date).
I’ve just spent the best part of an hour on the phone to the ATO myself to find out that figure for myself personally. Essentially anybody else who wants to make additional contributions to super will need to go through the same process.
A reduced annual cap on concessional contributions of $25,000
This announcement did not come as a surprise, however, it is yet another detrimental change to the superannuation system as it restricts the ability for tax payers to contribute to their super accounts.
Concessional contributions are known as taxable contributions as they are taxed at 15% when paid into your super. Any amounts you receive from your employer or pay via salary sacrifice are concessional contributions – and salary sacrifice arrangements are generally utilised by people trying to boost their super and minimise personal income tax using this strategy.
This reduction from the current limits (of $30,000 for those under age 50 and $35,000 for those aged 50 and over) will take effect in the 2017/18 financial year.
Historically concessional contribution caps have been higher. In 2008/2009 people aged 50 and over could contribute $100,000 per taxpayer! So slowly, over the years, it’s becoming harder and harder to get money into super – yet the Government continue to advocate the need to be self-funded in retirement.
$1.6 million limit on assets in pension phase
From 1 July 2017, the Government proposes to introduce a limit on the total amount a taxpayer can move from accumulation mode into pension or ‘retirement’ phase.
One of the key benefits of superannuation is that all income and capital gains become tax exempt once a super member moves into pension mode. By putting a limit on the proportion of a member’s balance that can move into pension phase, the Government will effectively start taxing super benefits for people that are in retirement phase (with a balance in excess of $1.6 million), and eliminate one of the key benefits of investing in super!
The removal of tax exempt status of transition to retirement pensions (TTR)
The latest ATO statistics have identified that the greatest number of SMSF members are in the transition to retirement (TTR) age bracket of 55-64. This means approximately 250,000 members will become eligible for a pension over the next 10 years and are ready to consider a TTR strategy.
TTRs are used in two ways:
- Keep working full time and boost super balances by salary sacrificing pre-tax earnings straight into super; and
- To reduce work hours when nearing retirement, and soften the loss of income by being able to draw down some of your superannuation balance.
The Government have announced in their budget proposal that from 1 July 2017, the tax free status of transition to retirement pensions will be removed, and individuals will no longer be allowed to treat certain income streams as lump sums for tax purposes.
Yet another significant blow for those nearing retirement, though we expect as many SMSF members as possible will continue to enjoy the TTR benefits for the 2015/16 and 2016/17 financial years – while they last!
Additional contributions tax for high income earners
A further 15% tax on concessional contributions for members with personal income greater than $250,000 will apply from 1 July 2017. This has been reduced from the previous income threshold of $300,000.
Good news for taxpayers aged 65 – 74
Finally some good news for super! From 1 July 2017, the Government proposes to remove minimum working requirements for people aged 65-74 allowing for people in this age bracket to continue to contribute to super.
Good news for people with interrupted work history
From 1 July 2017, taxpayers with a super account balance of $500,000 or less will be able to ‘catch up’ on concessional contributions they have not maximised by allowing unused amounts to be carried forward on a rolling basis for up to 5 consecutive years.
We have long campaigned for some level of compassion to be demonstrated to people with interrupted work history (particularly women), and we are delighted to see some relief will be provided in this regard. However, we are disappointed the Government has restricted it to people with super balances of $500,000 or less, and not available to all taxpayers.
Good news 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 which effectively abolishes the previous ‘10% rule’.
Summary
Whilst there were several other relatively minor changes to super – this year’s Federal Budget represents the most significant amount of change we’ve seen since 2006. All research shows that people wait until later in their working lives to top up their superannuation. This is when they have the financial capacity to do so, and in one fell swoop the Government is making this that much harder. The proposed changes make it harder for individuals to self-fund their retirement, they make managing superannuation whether via SMSF, retail or industry fund, even more complex to administer and manage. There are however a handful of useful concessions, particularly for those members with a lower income or broken work patterns.
If you have any questions in relation to your specific situation, please call your Client Manager.
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