This article provides an overview to the new superannuation rules and changes that have been passed as part of the 2016 Federal Budget. These changes are quite significant and will affect almost all Australians in some way or another.
The largest changes are around retirement income streams and contribution caps; however many of the new rules do not take effect until 1 July 2017, so there is still time to benefit from the existing rules until then.
Note that figures used throughout the article apply to per person.
New Superannuation Rules and Changes 2017/2018
Listed below are the changes to the superannuation rules in no particular order.
Change to Concessional Contribution Cap 2017/2018
Up until 1 July 2017, the Concessional Contribution cap is $35,000 for individuals 49 years and over and $30,000 for individuals below age 49. As of 1 July 2017, the Concessional Contribution Cap will be a universal $25,000 for all.
A Concessional Contribution is a contribution made to superannuation whereby the contributor has claimed a tax deduction. For example, employer, SG contributions, salary sacrifice contributions and personal deductible contributions (self employed).
As of 1 July 2018, individuals with superannuation balances below $500,000 will be able to utilise the Concessional Contribution ‘catch-up’ provisions. That is, any unused amount of the $25,000 annual Concessional Contribution cap can be carried forward, accrued and used at any time for a maximum period of 5 years. After 5 years, the unused amount of the cap will expire. Only unused amounts from 1 July 2018 may be carried forward; therefore, unused amounts can be utilised from 1 July 2019.
Introduction of a Balance Transfer Cap
Superannuation has two phases:- Accumulation Phase and Pension Phase. Accumulation Phase is where your retirement savings are held as you accumulate wealth for retirement. All contributions are made into an Accumulation account. Pension (or Drawdown) Phase is where you convert some or all of your Accumulation balance into an income stream.
Up until 1 July 2017, the amount that you can transfer to or hold in Pension Phase is not limited. However, as of 1 July 2017, the maximum that can be transferred from Accumulation Phase to Pension Phase is capped at $1.6 million, per person. Any additional savings must remain in Accumulation Phase.
Click here to read an article dedicated to the Balance Transfer Cap.
Click here to read an article on how Defined Benefit Pensions will be treated after the new rule changes are implemented from 1 July 2017.
If you have an existing Pension account with a balance that exceeds $1.6 million, you are required to transfer the excess amount above $1.6 million back into an Accumulation account prior to 1 July 2017.
Should the $1.6 million transfer balance cap be breached, the Commissioner of Taxation will order the income stream provider to transfer the excess back to the individual’s Accumulation account and will apply an excess transfer balance tax on the notional earnings of the excess amount in order to net-off any benefit received.
However, there is some relief via transitional arrangements for individuals already in Pension Phase as of 1 July 2017: If you breach the $1.6 million balance transfer cap by less than $100,000 on 1 July 2017, you will not be penalised. You will have 6 months to rectify the breach.
This $1.6 million transfer balance cap will increase by indexation in $100,000 increments.
Change to Non-Concessional Contribution Cap 2017/2018
The Non-Concessional Contribution cap prior to 1 July 2017 is $180,000 per year.
As of 1 July 2017, the Non-Concessional Contribution cap will be $100,000 p.a.
Non-Concessional Contributions are contributions made to superannuation where a tax deduction has not been claimed.
No additional Non-Concessional Contributions are able to be made by individuals with superannuation balances exceeding $1.6 million.
Individuals under age 65 are able to ‘bring forward’ 2 additional years of the Non-Concessional cap – effectively contributing the sum of 3 years’ worth of the cap at any stage over three years (e.g. $300,000 over 3 years as of 1 July 2017 – based on the new cap). Click here to read about the transitional arrangements where the Bring Forward Rule was triggered in the 2015/16 or 2016/17 financial years.
However, due to the significant change in contribution caps, the Government has outlined how the ‘bring forward’ rule will be applied during the transition period, as follows (source: Superannuation Fact Sheet 4):
|More than $460K||Nil Contributions||End of transition period $100k or 3yr bring forward||-|
|More than $180K but less than $460k||Cannot exceed $460k from 2015-16 to 2017-18||End of transition period $100k or 3yr bring forward||-|
|-||More than $380k||Nil Contributions||Nil Contributions||End of transition period $100k or 3 yr bring forward|
|-||More than $80k but less than $380k||Cannot exceed $380k from 2016-17 to 2018-19||End of transition period $100k or 3yr bring forward|
For example, if you make a contribution to access the bring forward rule in 2016-17, the bring forward amount available in later years is $380,000 (see example 1 and 2). If you made a contribution in the 2015-16 financial year, the bring forward amount will be $460,000 (see example 3).
All contributions exceeding the relevant caps will be treated as Excess Contributions and dealt with accordingly.
Withdrawal of Tax Exemption on Transition to Retirement (TTR) Pension Earnings
Up until 1 July 2017, all earnings (i.e. income, interest and capital gains) received from assets held within Pension Phase are received completely tax free.
note: this relates to earnings from investments within the account – not income drawdowns from the account
As of 1 July 2017, Transition to Retirement (TTR) Pensions will no longer received earnings tax free. Instead, all earnings will be taxed in the same manner as earnings within Accumulation Phase are taxed; 15% on income and capital gains. Capital gains realised from assets sold where the asset was owned for longer than 12 months will receive a 1/3rd discount (i.e. will only be taxed at 10%).
Contributions Tax for High Income Earners
Up until 1 July 2017, Division 293 tax means that individuals with income for surcharge purposes (disregarding reportable super contributions) and their low-tax contributions exceeds $300,000 are required to pay an additional 15% Contributions Tax on Concessional Contributions on top of the general 15% Contributions Tax – i.e. 30% total Contributions Tax. The intention of this is to reduce the effective concession received on Concessional Contributions from 30% to 15%.
From 1 July 2017, Division 293 tax will apply to individuals with incomes above $250,000.
Click here for the calculation of the Division 293 Tax, remembering that the income amount will reduce from $300,000 to $250,000 as of 1 July 2017.
Personal Deductible Contributions
Prior to 1 July 2017, only self-employed persons or individuals meeting the substantially self-employed 10% rule are able to make personal Concessional Contributions. A personal Concessional Contribution is a contribution made directly from an individual to their super fund and then claiming a tax deduction in their personal tax return for 100% of the amount. Employed persons (not meeting the 10% rule) are unable to make personal Concessional contributions. An employed person is only able to make Concessional Contributions via a salary sacrifice arrangement with their employer.
However, as of 1 July 2017, employed persons under age 75 will also be able to make personal Concessional Contributions and will not be limited to salary sacrificing into super. The reason behind this change is predominately due to some employers not supporting salary sacrifice arrangements.
Removal of Anti Detriment Provision
Until 1 July 2017, a superannuation fund is able to make a lump sum payment to a deceased member’s beneficiaries and effectively recoup the member’s contributions tax paid throughout their life by grossing-up the contributions tax paid and utilise the grossed-up amount as a tax deduction until completely used up. E.g. if total contributions tax of $30,000 was paid, the superannuation fund could pay an anti detriment payment of $30,000 to the member’s beneficiaries and be entitled to a tax deduction of $200,000.
As of 1 July 2017, the anti detriment provisions will no longer apply, but can continue to be implemented under transitional arrangements in some cases.
Pension Lump Sum Treated As Income
Prior to 1 July 2017, the taxable component of lump sum payments from a pension account are able to be received tax free by recipients under age 60 by utilising the current $195,000 lifetime lump sum tax free cap.
As of 1 July 2017, all lump sum payments received from an income stream will be treated as income for tax purposes and the lifetime tax free cap will not apply.