Following extensive consultation, the Government has released an amended Superannuation package.
Some measures remain largely unchanged while others, such as the lifetime $500,000 non-concessional cap and the removal of the work test for over-65s, have been replaced or scrapped altogether.
Once legislated, most measures will take effect from 1 July 2017. There are still many unanswered questions around the practical operation of many of the measures as we await draft legislation for further details.
Note: These changes are not yet legislated and still have to be introduced to, and make it through, Parliament.
Objective of superannuation
The primary objective of superannuation is to provide income in retirement to substitute or supplement the age pension.
Non-concessional contributions (NCCs)
From 1 July 2017:
$1.6 million eligibility threshold
The $1.6 million eligibility threshold will be tested at 30 June of the previous financial year.
This means if the individual’s balance at the start of the financial year is more than $1.6 million, they will not be able to make any further NCCs.
Individuals with balances close to $1.6 million 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.
Under transitional arrangements, if an individual has not fully utilised their NCC bring-forward cap before 1 July 2017, the remaining bring forward amount will be reassessed on 1 July 2017 to reflect the new annual caps.
The $1.6 million eligibility cap will be indexed in $100,000 increments in line with the consumer price index (CPI), i.e. the same as the $1.6 million pension cap.
Broadly commensurate treatment will apply to members of defined benefit schemes.
Currently the work test will continue to apply for individuals aged between 65 and 74. This was previously proposed to be removed.
Individuals aged between 65 and 74 will be eligible to make annual NCCs of $100,000 from 1 July 2017 if they meet the work test (i.e. gainfully employed for 40 hours in 30 consecutive days) but cannot use the bring forward option.
Example 1: Bring-forward rule
Kylie’s (age 58) superannuation balance is $500,00. She sells an investment property and makes a $200,00 NCC in October 2017.
As Kylie has triggered the bring-forward option, she can make a further $100,000 NCC in 2018/19.
Kylie’s NCCs would reset 2020/21 and she could make further contributions from then.
Example 2: Bring-forward rule
Molly (age 40) has a superannuation balance of $200,000.
In September 2016, she receives an inheritance of $250,000, which she contributes to superannuation, triggering the $540,000 three-year bring forward option.
From 1 July 2017, Molly can make a $110,000 NCC in 2017/18 and $20,000 in 2018/19. She can then access the new bring-forward option from 2019/20 and contribute up to $300,000 in NCCs.
Note: This may mean an individual under age 65 in 2016/17 can trigger the current bring-forward option (subject to eligibility) and contribute an entire $540,000 in NCCs. It is unclear exactly how the remaining bring-forward cap will apply 1 July 2017 where less than $540,000 is contributed.
Example 3: Work test
Gary (age 72) a retiree, works around 40 hours in September every year and has a superannuation balance of $450,000.
As Gary meets the work test, he can make a $100,000 NCC in 2017/18.
However, as Gary is over age 65, he cannot access the three-year bring forward option.
Example 4: $1.6 million eligibility threshold
Eamon (age 52) has a total superannuation balance of $1.45 million. He can make a $200,000 NCC in 2017/18.
He cannot access the full three-year bring forward option as this would take his balance over $1.6 million.
Eamon would also not be able to make any further NCCs.
Separate to the NCC cap, the current CGT cap of $1,415,000 (2016/17) continues to apply for small business owners.
Concessional contributions (CCs), contributions tax and catch up CCs
The annual concessional contributions (CCs) cap will be reduced to $25,000 (currently $30,000 and $35,000 if age 50 or over) from 1 July 2017 for all individuals.
The cap will index in line with Average Weekly Ordinary Time Earnings (AWOTE).
Individuals with adjusted taxable income of $250,000 (currently $300,000) will incur 30 per cent tax on their concessional super contributions from 1 July 2017.
This measure has been pushed out a further 12 months.
From 1 July 2018, unused CC cap amounts can be carried forward over five year periods accrued from 1 July 2018 where total super balance is under $500,000.
Example 5: Catch-up CCs
Anne has a superannuation balance of $200,000 but did not make any concessional superannuation contributions in 2018/19 as she took time off work to care for her child.
In 2019/20 she has the ability to contribute $50,000 into superannuation ($25,000 under the annual concessional cap and $25,000 from her unused 2018/19 cap, which has been rolled over).
Tax deduction for personal super contributions
Individuals under age 75 and not just the wholly or substantially self-employed will be able to claim a tax deduction for their personal super contributions from 1 July 2017. This means more people will be able to make concessional contributions and it provides an alternative to salary sacrifice.
Example 6: Tax deduction for personal contributions
Chris has started his own online merchandise business but continues to work part-time at an accounting firm earning $10,000 as his business is growing.
His business earns $80,000 in his first year and he would like to contribute $15,000 of his $90,000 combined income to his superannuation.
Chris could claim a tax deduction for his $15,000 of superannuation contributions.
$1.6 million pension cap
A $1.6 million cap will apply on the amount that can be transferred into the superannuation pension phase from 1 July 2017. There will be no restriction on subsequent earnings.
Accumulated super in excess of $1.6 million can be retained in a member’s accumulation account (with earnings taxed at 15 per cent) or moved outside super.
The cap will index in $100,000 increments in line with the consumer price index (CPI) and is expected to be around $1.7 million in 2020/21.
Transition to retirement (TTR)
Individuals who have reached preservation age can still access a transition to retirement (TTR) income stream but earnings on the amount supporting it will be taxed at 15 per cent.
Innovative new retirement income stream products, such as deferred lifetime annuities and self-annuitisation products become eligible for the earnings tax exemption.
Individuals will no longer be able to elect to draw lump sums from their TTR pension to reduce tax.
The tax treatment of income stream payments remains unchanged, i.e. for recipients aged 60 or over, the payments will be tax free, or taxed at the individual’s marginal tax rate less a 15 per cent tax offset between preservation age and age 60.
Spouse contributions and tax offset
As currently, individuals can only make spouse contributions where the receiving spouse is under age 65 or age 65-70 and working.
The income threshold of a low income spouse for the purposes of the spouse contribution tax offset will increase from $13,800 to $40,000 from 1 July 2017.
Low income superannuation tax offset (LISTO)
The low income super contribution (LISC) will be replaced with the Low Income Superannuation Tax Offset (LISTO) from 1 July 2017.
The LISTO will automatically refund tax paid on low-income earners’ concessional contributions. The offset is capped at $500 where taxable income is less than $37,000.
Without the offset, low income earners would pay more tax than if they earned the income differently.
The anti-detriment will be abolished from 1 July 2017 as previously announced.
For more information about superannuation and how you can best manage yours, contact the team at Oncore Wealth Solutions by emailing firstname.lastname@example.org or calling 1300 654 484.