Federal Budget Update – November 2016

The May 2016 Federal Budget was notable for the number of significant changes proposed to the superannuation system by the Coalition Government.

However, many proposals were not supported by the other parties. With the Government not in control of both houses of parliament, this led to various revisions, concessions and amendments, resulting in the announcement of ‘proposals for the proposals’ in September 2016.

These revised proposals were passed by both houses of parliament on 23 November 2016. Once the formality of Royal Assent is received, these proposals will become law.

The major superannuation changes are summarised below:

• The amount that can be transferred into the ‘tax-free earnings’ pension phase is to be capped at $1.6 million from 1 July 2017. 

Effective from 1 July 2017, a $1.6 million superannuation transfer balance cap on the total amount of superannuation that an individual can transfer into retirement phase accounts. The cap will be applied to both current retirees and to individuals yet to enter their retirement phase. This cap will be indexed in $100,000 increments, in line with increases in the consumer price index (rate of inflation).

The financial consequence for current retirees is if they have more than $1.6 million in pension phase, they will need to withdraw the excess balance or revert the excess amount to accumulation phase (which is then subject to 15% earning tax) by July 2017. Subsequent earnings on this pension balance, from July 2017, will not be required to be withdrawn. Note that special rules apply to defined benefit pensions.

• The ‘tax free earnings’ status of Transition to Retirement Pensions (TtRPs) will be removed from 1 July 2017 onwards.

The tax efficacy and usefulness of TtRPs has certainly been diluted with the removal of the tax exemption on earnings, particularly for those under age 60. Pre-retirees currently receiving a TtRP will need to review their current arrangement to decide whether such a strategy is still financially viable from July 2017.

• Non-concessional contributions will be limited to $100,000 pa (or $300,000 under the three year bring forward provisions). Further, non-concessional contributions will be limited to those with super balances of less than $1,600,000.

The planned introduction of a lifetime cap taking immediate effect (from 7.30 pm on 3 May 2016), was a big surprise considering that under the current rules, an individual under the age of 65 can make up to $540,000 in non-concessional contributions over a three-year period. The government has seen the error of its ways and has scrapped the $500,000 lifetime cap, and replaced it with an annual $100,000 non-concessional cap, taking effect from 1 July 2017.

Note that under the new rule, you can only make non-concessional contributions if you have less than $1.6 million in your super account. 

• The concessional superannuation cap is to be reduced to $25,000 per annum. 

From 1 July 2017, the general concessional contributions cap will be lowered to $25,000 from $30,000 and the over-50s cap of $35,000 will also be removed.

A concessional contribution is a before-tax super contribution and can include an employer’s Superannuation Guarantee contribution, a salary sacrificed super contribution, or for the self-employed or not employed, a tax-deductible super contribution.

The annual $25,000 concessional contributions cap, taking effect from 1 July 2017, will be indexed periodically, in $2,500 increments, rounded down to the nearest multiple of $2,500, in line with the annual increase in full-time average weekly ordinary times earnings (AWOTE).

• The threshold for the 15% ‘extra’ superannuation contributions tax for high income earners will reduce from $300,000 to $250,000.

From 1 July 2017, Australians with adjusted taxable income of $250,000 or more will pay extra contributions tax, 30% rather than 15% tax on all concessional contributions. Previously exempt fund members, in certain public sector funds, will also be subject to this extra tax. While this additional tax will make superannuation less attractive for high income earners, it is still lower than the top marginal tax rate of 49% including Medicare levy and the temporary budget repair levy. 

• A concessional contributions catch-up facility will be introduced allowing catch-up contributions for a period of up to five years.

Whereas concessional contributions presently operate on a ‘use-it-or-lose-it’ basis, this change will allow those out of the workforce to catch-up for lost years. Alternatively and depending upon the situation, larger capital gains could potentially be mitigated. From July 2018, if you fail to use your annual concessional contributions cap of $25,000, then you can carry forward the unused portion for up to five years, provided you have a total superannuation balance of less than $500,000.

• Personal tax deductions for contributions to superannuation will be allowed regardless of employment status.

From 1 July 2017, the Coalition government intends to allow all individuals under the age of 75 to claim tax deductions for personal super contributions. Such a measure will assist individuals who may be partly self-employed and partly employed, or individuals who work for employers who don’t accommodate salary sacrificing. 

The work test still remains in place and works as follows: if a person aged 65 years or over wishes to make a super contribution, then he or she must work 40 hours in a 30-day period in the financial year in which he or she plans to make the super contribution. 

How will the superannuation changes impact me?