The Coalition Government has released their third Federal Budget and first under Malcolm Turnbull and Scott Morrison.
This budget has delivered the biggest raft of superannuation rule changes since 2007, when the then Treasurer Peter Costello significantly increased the attractiveness of superannuation.
Our initial reaction to this budget is that super is still very attractive, just with more rules, regulation, and pitfalls than ever. This of course highlights the need for ongoing financial advice.
Note that these changes are proposed at this stage.
Current Rules: Non-concessional contributions are made with after tax money and typically follow clients receiving money from a property sale, work payout, or inheritance. At present, people can contribute up to $180,000 in any one year, capped at $540,000 over a 3 year period. So in effect, every three years, there is a fresh $540,000 cap allowance to be planned around.
The Change: A lifetime limit will be imposed on all non-concessional contributions of $500,000 effective from 7:30 pm, 3 May 2016. This will count all contributions since 1 July 2007. People who have already exceeded the limit will be deemed to have reached their cap with no further action.
Note that this replaces the annual non-concessional cap and 3 year bring forward rule.
Comment: This change will require extra planning and tracking mechanisms (2007 is 9 years ago now!). This is the only rule effective immediately and we suspect might get tweaked a little before becoming law. Some clients will be immediately affected and we will of course be in touch.
Note that all of the following changes will take effect from 1 July 2017.
Current Rules: People aged 50 or over can contribute $35,000 to superannuation as concessional contributions and those under 50, $30,000. Concessional contributions come from employer superannuation guarantee, salary sacrifice and deductible self-employed contributions.
The Change: A new limit for all workers of $25,000 per annum will be introduced effective from 1 July 2017.
Comment: This is the most disappointing change the government has made. It will limit the amount people can save in a tax effective manner for their retirement. Many of our clients still working will need to revise their contribution strategy.
Current Rules: Concessional caps are currently on a "use it or lose it" basis and expire at the end of each year.
The Change: For clients with super balances less than $500,000, from 1 July 2017 there will be provision to make additional concessional contributions using the previous year of unused caps. Say for example, in 2017/18, you only used $10,000 of your limit, $15,000 will be available in the subsequent year, giving a cap of $40,000 for 18/19. A maximum of 5 years' worth of caps can be carried forward on a rolling basis.
Comment: This is a good measure and will enable some flexibility around concessional cap planning over a 5 year period.
Current Rules: The earnings on the assets used to back transition to retirement pensions are currently tax free. In contrast, assets in superannuation accumulation mode earnings are taxed at between 10% and 15%. Note that these are the internally taxed superannuation earnings, not how the pensions are taxed ultimately in the clients hands (no changes apply here).
The Change: Transition to retirement pensions will lose their tax free status on the asset earnings base come 1 July 2017.
Comment: For a lot of clients the tax free earnings status on transition to retirement strategies is the primary driver of the strategy. Hence its removal will mean a revision to many strategies.
Current Rules: There is currently no limit on the amount that clients can use to commence a retirement income stream.
The Change: From 1 July 2017 a "superannuation transfer balance cap" of $1.6 million will be introduced on the total amount of funds a retiree can use to purchase a tax free income stream. Note that this does not limit the amount you can accumulate in super, just the amount you can commence an income stream with. Importantly, those with balances above $1.6 million will be required to bring their account balance back below $1.6 million by 1 July 2017.
Comment: With decreased contribution limits it will be difficult to obtain an account balance of $1.6 million for an individual. Strategies such as spouse splitting in order to equalise balances between spouses will become an important planning strategy.
The Change: From 1 July 2017, in order to make a superannuation contribution, the requirement to meet a work test will be removed for those in the 65-74 year age bracket.
Comment: This will provide increased flexibility for those wishing to re-arrange their finances and are aged 65-74.
Current Rules: To make a deductible contribution to superannuation, an employee must make a salary sacrifice contribution. Alternatively, those who are substantially self-employed can claim a tax deduction on their personal superannuation contributions via their tax returns.
The Change: From 1 July 2017, employees will now be able to make after tax contributions to superannuation and claim these as a personal tax deduction at tax time. For example, if your employer makes $15,000 worth of contributions for you during the year, you can then make a further $10,000 personal contribution to super and claim this at tax time (providing your overall contribution does not exceed $25,000).
Comment: This is a six in one hand, half a dozen in the other strategy and won't really benefit too many. Most clients will make their contributions via salary sacrifice throughout the year.
Current Rules: Currently those with adjusted taxable income of $300,000 are required to pay an additional 15% contributions tax on their concessional contributions, bringing total superannuation contributions tax paid up to 30%.
The Change: From 1 July 2017, the additional 15% contributions tax will apply to those on adjusted taxable income of $250,000.
Comment: In recent years, we have found this tax catching a lot of people who have received redundancy payments. For example, your normal wage might be $100,000, but if you get a payout of $150,000 in addition, you will be caught by this tax.
Current Rules: Clients who pass away are able to claim back the amount of superannuation contributions tax paid throughout their lifetime.
The Change: From 1 July 2017, the government will remove the ability to make this claim.
Comment: It is a shame this one is being removed as we have used it for a few clients over the years and it results in a tidy refund in many cases.
Current Rules: If you make a superannuation contribution for your spouse of up to $3,000, you can receive a $540 rebate provided your spouses' income is below $10,800.
The Change: From 1 July 2017, the income level for the receiving spouse will be increased up to $37,000.
Comment: This will dramatically extend the potential use of this rebate strategy for many clients.
Current Rules: All concessional superannuation contributions are taxed at a minimum rate of 15%.
The Change: A new Low Income Superannuation Tax Offset (LISTO) will be introduced from 1 July 2017. This will be payable to superannuation funds on behalf of members earning less than $37,000 and will help offset contributions tax up to $500 per annum.
Comment: This is a good measure that ensures lower income earnings will pay no more tax by contributing to super compared to keeping the money outside of superannuation.
These are by far the most comprehensive changes to the superannuation system of the last 5 years. Thankfully, most changes do not come into effect until 1 July 2017. Over the next 12 months, we will be reviewing the situation of our clients to determine how best to structure their affairs in light of the new rules.
If you have any questions in relation to this at all, please do not hesitate to contact me
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