The much publicised superannuation reforms are set to commence from 1 July 2017. While these may not have a significant impact for some, they will require careful planning by others to ensure compliance.
Outlined below is a summary of some of the more significant changes that will commence on 1 July 2017.
- Deductible personal contributions. All individuals under 65, and persons between 65 and 75 who meet the work test, which requires them to be gainfully employed for at least 40 hours within a 30 day period during the financial year, can claim deductions for personal contributions that they make to superannuation, subject to their concessional contributions cap.
- High income earners threshold. The threshold at which high income earners will pay additional contributions tax (under Division 293) will be lowered from $300,000 to $250,000.
- Reduction of concessional contribution cap. The concessional contribution cap will be reduced to $25,000 for everyone.
- Reduction of non-concessional contribution cap. The non-concessional contribution cap will be reduced from $180,000 to $100,000. Individuals with a balance of $1.6M (as at 30 June in the previous financial year) will not be able to make any non-concessional contributions and individuals with an account balance of less than $1.6M can only make contributions to bring their account balance up to $1.6M.
The 3 year bring forward rule remains for persons under 65, allowing individuals to contribute up to $300,000 non-concessional contributions in one year, provided they do not make any further non-concessional contributions in the following 2 years.
If a person triggers the 3 year bring forward rule during the 2016/2017 financial year, they will still be able to contribute up to $540,000 on or before 30 June 2017. Any balance of the bring forward amount not used as at 1 July 2017 will be adjusted to reflect the reduced non-concessional contribution cap.
In addition to amounts able to be contributed under the non-concessional cap, the Government has announced in the 2017-18 Budget that from 1 July 2018 individuals over 65 can contribute up to $300,000 of the proceeds of sale of their principal residence as a non-concessional contribution. To be eligible, the residence must have been owned for at least 10 years and the contribution is able to be made by both members of a couple in respect of the same home. Contributions can be made even if the individual's account balance exceeds $1.6M.
- Catch-up concessional contributions. Individuals with a superannuation account balance of less than $500,000 at the end of the previous financial year will be able to carry forward up to 5 years of unused concessional contributions. This only applies prospectively to unused balances from the 2017/2018 year onwards.
- Transition to retirement pensions. Income from assets supporting transition to retirement pensions will no longer qualify for tax exemptions. Instead, income from these assets will be taxed at normal concessional rates.
- Spouse contributions. The amount of income that a spouse can earn before the tax offset for spouse contributions reduces to $0 will be increased to $40,000 (from $10,800).
- Transfer balance cap. Commencing 1 July 2017 individuals will have a lifetime transfer balance cap of $1.6M. This cap will be indexed, but only for individuals who have not previously fully used or exceeded their transfer balance cap. Indexation will apply proportionately where an individual has used part of their transfer balance cap.
Each individual will have a transfer balance account from the first time that they commence a retirement phase superannuation income stream. Transition to retirement income streams do not count towards the cap.
Amounts are credited to the account when they are transferred from accumulation phase into a retirement phase income stream and are debited when they are commuted and either paid out as a lump sum or transferred back into accumulation phase. Pension draw downs do not count as a debit to the account balance.
Increases and decreases in the account balance after the pension has commenced which are attributable to earnings, capital growth or capital losses referrable to the capital supporting the pension do not count as credits or debits. As a result, the value of the pension can grow to exceed $1.6M without breaching the transfer balance cap.
The Government has announced in the 2017-18 Budget, however, that the outstanding balance of a Limited Recourse Borrowing Arrangement (LRBA) will be included in a member’s annual total superannuation balance and the transfer balance cap, with repayments of the principal and interest of an LRBA from a member’s accumulation account being credited to the member’s transfer balance account.
For individuals who have existing pensions as at 1 July 2017 the transfer balance account is the value of the superannuation interest on 30 June 2017. Where individuals have more than one superannuation income stream either in the one fund or across different funds, the balance is the sum of the value of all of these superannuation income streams.
Individuals who have current superannuation income streams the value of which exceeds the transfer balance cap will need to commute part of their income streams and either draw down the excess or transfer it back into accumulation phase by 30 June 2017.
Individuals who have a transfer balance cap on 1 July 2017 of more than $1.6M, but less than $1.7M, will have a 6 month transition period to bring their account balance down to $1.6M without penalty.
Individuals who exceed their transfer balance cap at any time will have an excess transfer balance and will have to commute part of their income stream to remove the excess plus the notional earnings derived on the excess during the period of the breach.
If the excess continues for more than 1 day, then the individual is subject to excess transfer balance tax for the period of the excess. The tax is payable on the notional earnings (calculated daily) derived from the excess during the excess period and is payable at 15% for breaches occurring during the 2017-18 income year. In later years, the tax rate is 15% for the first breach and 30% for any subsequent breaches.
- Tax exemptions for assets supporting pensions. From 1 July 2017, where any member of an SMSF has a total superannuation balance (i.e. pension and accumulation) of more than $1.6M, the fund can no longer use the segregated current pension asset method and must use the proportionate method. Actuarial certificates will not be required if the only superannuation interests paid by the fund are account based interests.
The current tax exemptions continue to apply up to 30 June 2017. Accordingly, any income (including capital gains) derived from segregated current pension assets up until this time are still tax exempt.
Transitional CGT relief is available so that assets with current capital growth do not need to be disposed of by funds to get the benefit of current tax exemptions on increases in value to date.
Where an asset that is currently a segregated current pension asset ceases to be a segregated current pension asset as a result of the commutation of benefits back to accumulation phase to comply with the new legislation, provided certain criteria are met, the fund can elect to trigger a capital gain as at the date that the asset ceased to be a segregated current pension asset via a notional disposal and re-acquisition of the asset. Any capital gain resulting from the election will be tax free and the cost base of the asset will be reset to its market value as at the date of the notional re-acquisition so that any future capital gain or capital loss made in respect of the asset is calculated based on any increase or decrease in value from that date only. In addition, the 12 month qualification period for the general CGT discount will be reset.
Where a fund is currently using the proportionate method it can also elect to trigger a capital gain based on the value of the assets as at that date. As above, this will reset the cost base of the asset and the 12 month qualification period. The capital gain made as a result of the election will be partly taxable and partly tax free and the fund can choose to defer the tax payable on the taxable portion of the capital gain until a subsequent realisation event occurs in respect of the asset, e.g. a subsequent disposal of the asset.
The anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 can apply to the election.
What do You Need to do?
- If you currently have a pension with a capital value of more than $1.6M:
- you will need to make arrangements to ensure that the value of the pension as at 30 June 2017 is $1.6M or less. This reduction may be effected via a number of alternative means, including via a draw down of the pension or a commutation of the pension or part of it back to accumulation phase. The most appropriate method will depend on your individual circumstances.
- consideration should also be had as to whether the fund is eligible to trigger the transitional CGT relief and whether triggering this relief would be beneficial for the fund in respect of some or all of its assets.
- if you wish to make non-concessional contributions to superannuation, you should do so before 30 June 2017 as the new rules will not allow you to make any non-concessional contributions after 1 July 2017.
- If you currently have a pension with a capital value of less than $1.6M:
- you do not need to do anything pre 30 June 2017 to ensure that the lifetime transfer balance cap is not breached, unless one of the assets supporting the pension is subject to a LRBA which, when the outstanding balance of the LRBA is taken into account under the new provisions announced as part of the Budget, will result in your transfer balance cap being breached.
- if you have funds to make non-concessional contributions, you should make this contribution before 30 June 2017, and trigger the 3 year bring forward where possible, to maximise the amount of contributions that can be made. This is particularly important if your current superannuation account balance is close to $1.6M.
