How the New Super Changes will effect You and What You Need To Do Now...Before it's Too Late!
Significant changes to superannuation were proposed in the 2016/17 Federal Budget designed to improve the superannuation system. While some of the changes are positive, some were negative and others controversial. Let's take a look at the main changes and their impact including how you can to take advantage of the new rules before 30th June 2017.
Changes to Concessional Contributions
These are amounts you can claim a tax deduction on which your superfund pays contributions tax of 15%. Currently, if you are 49 years of age or over you can claim a tax deduction up to $35,000. If you are under the age of 49 you can cliam up to $30,000. From the 1/7/2017 the maximum amount will be reduced to $25,000 regardless of age.
- Tax Tip #1: For the 2017 financial year, if you are 49 years of age or over you can still contribute up to $35,000 and up to $30,000 if you are under the age of 49. This amount is tax deductible. For those on the marginal tax rate of 47% a concessional contribution of $35,000 could save you $11,200 in tax and help you privide for your retirement.
Catch-up Concessional Contributions
From 1/7/2018, individuals with super balances of $500,000 or less will be able to accrue their unused concessional contribution amounts (i.e. $25,000 p.a.) on a rolling basis for a period of up to five years and then make a larger "one off" contribution anytime during those five years. This is an advantage for individuals who have fluctuating levels of income which may result in periods of no, or limited contributions to superannuation.
- Tax Tip #2: If from the 1/7/2018 if you are out of the workforce or your income is lower than usual you can accumulate your contribution cap amount of $25,000 p.a. and then contribute up to $125,000 as a one off superannuation contribution and claim a tax deduction.For those on the marginal tax rate of 47%, a concessional contribution of $125,000 could save you $40,000 in tax and help you provide for your retirement.
Reduction of Non- Concessional Contributions (NCC's)
These are amounts that you can't claim as a tax deduction and your superfund pays no contributions tax. From the 1/7/2017 the amount that can be contributed as NCC’s will be reduced from $180,000 p.a. or $540,000 over three years, to $100,000 p.a. or $300,000 over three years.
Individuals with superannuation balances of more than $1.6 million will no longer be able to make (NCC’s) after the 1/7/2017. They will however, still be entitled to make concessional contributions of up to $25,000 p.a.
From 1/7/2017, when determining if an individual satisfies the $1.6 million eligibility threshold, it will be based on the taxpayers super balance (from all superannuation accounts) as at 30th June in the previous financial year. This means that after the 1/7/2017, if a person’s super balance is less than the $1.6 million threshold, they will only be able to bring forward the annual cap amount for the number of years that would take their balance to $1.6 million. For example; If you super balance was $1.4 million on the 30th June 2017, you could contribute up to $200k as a bring forward (NCC's) in the 2018 income year or alternatively contribute $100,000 p.a. for 2018, 2019. Once your superfund balance is $1.6million, you will not be able to make any further (NCC’s).
- Tax Tip #3: Because the new rules apply from the 1/7/2017, the current rules still apply for the 2017 financial year. This provides individuals with a great opportunity to maximise their (NCC's) cap of $180,000 or $540,000 under the bring forward rule for those under 65. But they must make this contribution before the 30th June 2017. This will also be the last opportunity for individuals, with super balances of more than $1.6 million to make (NCC’s) before the 30/6/2017. We strongly recommend you check how much you have previously contributed in (NCC's) to ensure you do not exceed your contribution cap.
New $1.6 million Transfer Balance Cap
From the 1/7/2017. Currently, when a person reaches a condition of release they can choose to use some or all of their super balance to commence an income stream such as an "Account Based Pension" (ABP) or a "Transition to Retirement Income Stream" (TRIS). Currently, all income from assets that are used to support an income stream are tax-free in the super fund and there has essentially been no limit as to how much income of the fund can enjoy tax-free.
In order to better target tax concessions and reduce the extent that superannuation is used for tax minimisation the government will introduce a new $1.6 million transfer cap from the 1/7/2017 indexed in $100,000 increments.The purpose of this cap is to limit the total amount of superannuation balance that can be transferred from concessionally taxed “accumulation account” to a tax-free “pension account”.
This legislation is retrospective in nature and will have a detrimental effect individuals currently in receipt of an (ABP) or (TRIS), who have more than $1.6 million in assets in their “pension account”.
From 1/7/2017 any amounts above 1.6 million in the “pension account” will need to be transferred back to the individuals “accumulation account” which is taxed at 15% on income and 10% on capital gains for assets held for more than 12 months (previously, these amounts were tax-free).
There is no limitations as to the number of transfers that can be made into the “pension account” providing the individual has cap space. The amount of the cap space is determined by a proportionate method, which measures the percentage of the cap previously utilised.
For example, if an individual has previously transferred $1.2million (being 75% of the $1.6million cap) into their “pension account” then they will have access to 25% of the current cap (which would be $400,000). If the cap is subsequently indexed then the available cap will be calculated by applying the remaining percentage to the existing cap. So, if the cap has been indexed to $1.7 million, then the available cap would be $425,000 (being 25% of $1.7 million) instead.
- Tax Tip #4 : Where the values of the underlying pension accounts subsequently grow, any increase is not taken into account when calculating how much of the $1.6 million cap has been used. As such income arising from any subsequent increase in the balance will remain tax free. WARNING: Unfortunately, the same does not apply with respect to a decline in assets or a reduction due to pension payments. Additional amounts cannot be transferred into the “pension account” to top-up the pension balance where the entire $1.6 million transfer balance cap has been fully utilised.
Significant Changes to Transiton to Retirement Income Streams (TRIS)
These were originally introduced to help people in moving towards retirement by reducing their work hours while using their superannuation to supplement their income. However,(TRIS) have been increasingly used for tax minimisation purposes, rather than their intended purpose. At present, a person can commence a (TRIS) once they have reached their preservation age (being 56 in the 2017 year) increasing until they reach 60. Any income earned by assets in pension phase are currently tax free within a superannuation fund.
- Tax –free earnings from assets supporting a (TRIS) in their superfund.
- Ability to reduce their tax liability by sacrificing their salary into super.
- Drawing down a tax –effective income stream. If the person is under 60 – get the benefit of a 15% tax offset.
- If the person is age 60 and over they benefits are even greater, as (TRIS) payments from super are completely tax-free!
From 1/7/2017 income form assets supporting a (TRIS) will no longer be tax-free and will instead be taxed in the superfund.
- Tax Tip #5: The removal of tax benefits associated with a (TRIS) will besignificanly reduced the benefits particularly for high income earners under the age of 60. This is because from 1/7/2017 superfunds will now pay 15% tax on their income and 10% on capital gains (for assets held more than twelve months). Most Australians currently receiving a (TRIS) will now need to review such an arrangement to decide whether such a strategy is still financially viable from July 2017. We expect many individuals receiving a (TRIS) to cease them and revert to accumulation phase.
- Tax Tip #6 : If you are 60 years of age and retired, the tax benefits of an "account based pension" (ABP) are worth considering because the superfund will continue to be tax free for up to $1.6 million in "pension account assets" and the income paid to the taxpayer under an (ABP) is completely tax-free. This could be an opportunity for those nearing retirement to take advanatge of the tax free income on up to $1.6 million of pension assets.
Division 293 Income Threshold Reduction
Currently, high income earners are subject to an addition 15% tax on their concessional contributions where the total of the income and concessional contributions exceeds $300,000. From 1/7/2017 the threshold will be reduced to $250,000. This will result in more individuals being subject to additional tax.
- Tax Tip #7: If you are a high income earner you should aim to divert investment income where possible to someone with a lower marginal tax rate. You should also maximise all your legal tax deductions so as to reduce your taxable income. This will mimimise the additional tax imposed on your superannuation contributions.
Removal of the 10% Test
Currently a deduction for concessional contributions of super cannot be claimed for a personal concessional contribution unless (less than 10%) of a persons assessable income is form salary and reportable employer super contributions. This requirement may prevent individuals who are partially self employed and partially salaried from being able to claim super as a tax deduction and provide for their own retirement. From the 1/7/2017 the government is removing the 10% test which will allow greater flexibility of the superannuation system by allowing more individuals to contribute to superannuation.
- Tax Tip # 8: If you are self employed and also earn a salary you should take advantage of the amounts you can contribute into super as a concessional contribution and claim a tax deduction.For the 2017 financial year, if you are 49 years of age or over you can still contribute up to $35,000 and $30,000 if you are under the age of 49 and claim a tax deduction.